[Senate Report 108-266]
[From the U.S. Government Publishing Office]



                                                       Calendar No. 516
108th Congress                                                   Report
                                 SENATE
 2d Session                                                     108-266

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

 
        NATIONAL EMPLOYEE SAVINGS AND TRUST EQUITY GUARANTEE ACT

                                _______
                                

                  May 14, 2004.--Ordered to be printed

                                _______
                                

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

                              R E P O R T

                             together with

                            ADDITIONAL VIEWS

                         [To accompany S. 2424]

    The Committee on Finance, having considered an original 
bill (S. 2424) 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, reports favorably 
thereon and recommends that the bill do pass.

                                Contents

                                                                   Page
  I. Legislative Background......................................     4
  II Explanation of the Bill.....................................     5
     Title I. Diversification of Pension Plan Assets.............     5
          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)................     5
          B. Notice of Freedom To Divest Employer Securities or 
              Real Property (sec. 102 of the bill, new sec. 4980H 
              of the Code, and new sec. 104(d) of ERISA).........    14
     Title II. Information To Assist Pension Plan Participants...    16
          A. Periodic Pension Benefit Statements and Investment 
              Education (secs. 201-202 of the bill, new sec. 
              4980I of the Code, and secs. 104 and 105(a) of 
              ERISA).............................................    16
          B. Material Information Relating to Investment in 
              Employer Securities (sec. 203 of the bill, new sec. 
              4980H of the Code, and secs. 104 and 502 of ERISA).    22
          C. Fiduciary Rules for Plan Sponsors Designating 
              Independent Investment Advisors (sec. 204 of the 
              bill and new sec. 404(e) of ERISA).................    24
          D. Employer-Provided Qualified Retirement Planning 
              Services (sec. 205 of the bill and sec. 132 of the 
              Code)..............................................    26
     Title III. Protection of Pension Plan Participants..........    28
          A. Notice to Participants or Beneficiaries of Blackout 
              Periods (sec. 301 of the bill, new sec. 4980J of 
              the Code, and sec. 101(i) of ERISA)................    28
     Title IV. Other Provisions Relating to Pensions.............    32
          A. Provisions Relating to Pension Plan Funding.........    32
              1. Replacement of interest rate on 30-year Treasury 
                  securities used for certain pension plan 
                  purposes (secs. 401-408 of the bill, secs. 
                  401(a)(36), 404, 412, 415(b), and 417(e) of the 
                  Code, and secs. 205(g), 206, 302, and 4006 of 
                  ERISA).........................................    32
              2. Updating deduction rules for combination of 
                  plans (sec. 409 of the bill and secs. 404(e)(7) 
                  and 4972 of the Code)..........................    45
          B. Improvements in Portability and Distribution 
              Provisions.........................................    47
              1. Purchase of permissive service credit (sec. 411 
                  of the bill and secs. 403(b)(13), 415(n)(3), 
                  and 457(e)(17) of the Code)....................    47
              2. Rollover of after-tax amounts (sec. 412 of the 
                  bill and sec. 402(c)(2) of the Code)...........    49
              3. Application of minimum distribution rules to 
                  governmental plans (sec. 413 of the bill)......    50
              4. Waiver of 10-percent early withdrawal tax on 
                  certain distributions from pension plans for 
                  public safety employees (sec. 414 of the bill 
                  and sec. 72(t) of the Code)....................    51
              5. Rollovers by nonspouse beneficiaries of certain 
                  retirement plan distributions (sec. 415 of the 
                  bill and and secs. 402, 403(a)(4), 403(b)(8), 
                  and 457(e)(16) of the Code)....................    52
              6. Faster vesting of employer nonelective 
                  contributions (sec. 416 of the bill, sec. 411 
                  of the Code, and sec. 203 of ERISA)............    54
              7. Allow direct rollovers from retirement plans to 
                  Roth IRAs (sec. 417 of the bill and sec. 
                  408A(e) of the Code)...........................    55
              8. Elimination of higher early withdrawal tax on 
                  certain SIMPLE plan distributions (sec. 418 of 
                  the bill and sec. 72(t) of the Code)...........    57
              9. SIMPLE plan portability (sec. 419 of the bill 
                  and secs. 402(c) and 408(d) of the Code).......    58
              10. Eligibility for participation in eligible 
                  deferred compensation plans (sec. 420 of the 
                  bill)..........................................    59
              11. Benefit transfers to the PBGC (sec. 421 of the 
                  bill, sec. 401(a)(31) of the Code, and sec. 
                  4050 of ERISA).................................    60
          C. Administrative Provisions...........................    62
              1. Improvement of Employee Plans Compliance 
                  Resolution System (sec. 431 of the bill).......    62
              2. Extension to all governmental plans of 
                  moratorium on application of certain 
                  nondiscrimination rules (sec. 432 of the bill, 
                  sec. 1505 of the Taxpayer Relief Act of 1997, 
                  and secs. 401(a) and 401(k) of the Code).......    63
              3. Notice and consent period regarding 
                  distributions (sec. 433 of the bill, sec. 
                  417(a) of the Code, and sec. 205(c) of ERISA)..    64
              4. Pension plan reporting simplification (sec. 434 
                  of the bill)...................................    65
              5. Missing participants (sec. 435 of the bill and 
                  sec. 4050 of ERISA)............................    66
              6. Reduced PBGC premiums for small and new plans 
                  (secs. 436 and 437 of the bill and sec. 4006 of 
                  ERISA).........................................    68
              7. Authorization for PBGC to pay interest on 
                  premium overpayment refunds (sec. 438 of the 
                  bill and sec. 4007(b) of ERISA)................    69
              8. Rules for substantial owner benefits in 
                  terminated plans (sec. 439 of the bill and 
                  secs. 4021, 4022, 4043, and 4044 of ERISA).....    70
              9. Voluntary early retirement incentive and 
                  employment retention plans maintained by local 
                  educational agencies and other entities (sec. 
                  440 of the bill, secs. 457(e)(11) and 457(f) of 
                  the Code, sec. 3(2)(B) of ERISA, and sec. 
                  4(l)(1) of the ADEA)...........................    71
              10. Two-year extension of transition rule to 
                  pension funding requirements (sec. 769(c) of 
                  the Retirement Protection Act of 1994).........    73
              11. Acceleration of PBGC computation of benefits 
                  attributable to recoveries from employers (sec. 
                  441 of the bill and secs. 4022(c) and 4062(c) 
                  of ERISA)......................................    75
              12. Multiemployer plan funding and solvency notices 
                  (sec. 442 of the bill and sec. 101 of ERISA)...    77
              13. No reduction in unemployment compensation as a 
                  result of pension rollovers (sec. 443 of the 
                  bill and sec. 3304(a)(15) of the Code).........    79
              14. Withholding on certain distributions from 
                  governmental eligible deferred compensation 
                  plans (sec. 444 of the bill and sec. 457 of the 
                  Code)..........................................    80
              15. Minimum cost requirement for excess asset 
                  transfers (sec. 445 of the bill and sec. 420 of 
                  the Code)......................................    80
              16. Social Security coverage under divided 
                  retirement system for public employees in 
                  Kentucky.......................................    83
          D. Studies (secs. 451 and 452 of the bill).............    84
          E. Other Provisions....................................    86
              1. Additional IRA catch-up contributions for 
                  certain individuals (sec. 461 of the bill and 
                  sec. 408 of the Code)..........................    86
              2. Distributions by an S corporation to an employee 
                  stock ownership plan (sec. 462 of the bill and 
                  sec. 4975 of the Code).........................    87
              3. Permit qualified transfers of excess pension 
                  assets to retiree health accounts by 
                  multiemployer plan (sec. 463 of the bill, sec. 
                  420 of the Code and secs. 101, 403 and 408 of 
                  ERISA).........................................    89
          F. Plan Amendments (sec. 471 of the bill)..............    90
     Title V. Provisions Relating to Executives and Stock Options.   92
          A. Repeal of Limitation on Issuance of Treasury 
              Guidance Regarding Nonqualified Deferred 
              Compensation (sec. 501 of the bill)................    92
          B. Taxation of Nonqualified Deferred Compensation (sec. 
              502 of the bill and new sec. 409A of the Code).....    96
          C. Denial of Deferral of Certain Stock Option and 
              Restricted Stock Gains (sec. 503 of the bill and 
              sec. 83 of the Code)...............................   103
          D. Increase in Withholding from Supplemental Wage 
              Payments in Excess of $1 Million (sec. 504 of the 
              bill and sec. 13273 of the Revenue Reconciliation 
              Act of 1993).......................................   105
          E. Exclusion of Incentive Stock Options and Employee 
              Stock Purchase Plan Stock Options From Wages (sec. 
              511 of the bill and secs. 421(b), 423(c), 3121(a), 
              3231, and 3306(b) of the Code).....................   106
          F.  Capital Gain Treatment on Sale of Stock Acquired 
              From Exercise of Statutory Stock Options To Comply 
              With Conflict of Interest Requirements (sec. 512 of 
              the bill and sec. 421 of the Code).................   107
     Title VI. Women's Pension Protection........................   108
          A Study of Spousal Consent for Distributions From 
              Defined Contribution Plans (sec. 601 of the bill)..   108
          B. Division of Pension Benefits Upon Divorce (sec. 611 
              of the bill).......................................   110
          C. Protection of Rights of Former Spouses Under the 
              Railroad Retirement System (secs. 621 and 622 of 
              the Act and secs. 2 and 5 of the Railroad 
              Retirement Act of 1974)............................   112
          D. Modifications of Joint and Survivor Annuity 
              Requirements (sec. 631 of the bill and secs. 401 
              and 417 of the Code and sec. 205 of ERISA).........   113
     Title VII. Tax Court Pension and Compensation Modernization.   115
          A. Judges of the Tax Court (secs. 701-707 and 713 of 
              the bill and secs. 7443, 7447, 7448, and 7472 of 
              the Code)..........................................   115
          B. Special Trial Judges of the Tax Court (secs. 708-713 
              of the bill, and sec. 7448 and new secs. 7443A, 
              7443B, and 7443C of the Code)......................   117
     Title VIII. Other Provisions................................   120
          A. Temporary Exclusion for Education Benefits Provided 
              by Employers to Children of Employees (sec. 801 of 
              the bill and sec. 127 of the Code).................   120
          B. Exclusion From Gross Income for Amounts Paid Under 
              National Health Service Corps Loan Repayment 
              Program (sec. 802 of the bill and sec. 108 of the 
              Code)..............................................   121
          C. Temporary Exclusion for Group Legal Services 
              Benefits (sec. 803 of the bill and secs. 120 and 
              501(c)(20) of the Code)............................   122
          D. Transfer of Funds from Black Lung Trust Fund to 
              Combined Benefit Fund (sec. 804 of the bill and 
              secs. 501(c)(21) and 9705 of the Code).............   122
          E. Extension of Provision Permitting Qualified 
              Transfers of Excess Pension Assets to Retiree 
              Health Accounts (sec. 420 of the Code, and secs. 
              101, 403 and 408 of ERISA).........................   124
          F. Application of Basis Rules to Nonresident Aliens 
              (sec. 811 of the bill and new sec. 72(w) of the 
              Code)..............................................   126
          G. Modify Qualification Rules for Tax-Exempt Property 
              and Casualty Insurance Companies and Modify 
              Definition of Insurance Company for Property and 
              Casualty Insurance Company (secs. 501(c)(15) and 
              831(b) and (c) of the Code)........................   130
          H. Tax Treatment of Company-Owned Life Insurance 
              (``COLI'') (secs. 812 and 813 of the bill and new 
              secs. 101(j) and 6039I of the Code)................   134
          I. Reporting of Taxable Mergers and Acquisitions (sec. 
              813 of the bill and new sec. 6043A of the Code)....   139
III. Budget Effects of the Bill..................................   140
 IV. Votes of the Committee......................................   145
   V Regulatory Impact and Other Matters.........................   145
 VI. Additional Views............................................   148
VII. Changes in Existing Law Made by the Bill as Reported........   153

                       I. LEGISLATIVE BACKGROUND


Overview

    The Senate Committee on Finance marked up an original bill, 
the ``National Employee Savings and Trust Equity Guarantee 
Act,'' on September 17, 2003, and ordered the bill favorably 
reported by voice vote. On October 1, 2003, the Finance 
Committee by unanimous consent recalled the bill and amended it 
to make the company-owned life insurance (``COLI'') provision 
effective on date of enactment instead of date of committee 
action and agreed to a further markup of the COLI and related 
provisions of the bill. On February 2, 2004, the Committee 
marked up a modification to the bill and ordered the bill 
favorably reported by voice vote.

Recent legislation

    The bill as approved by the Committee contained several 
provisions that are identical or substantially similar to 
provisions in recently enacted legislation and therefore are 
not contained in the bill as reported.
    The Pension Equity Funding Act of 2004\1\ contains 
provisions relating to:
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    \1\ Pub. L. No. 108-218 (April 10, 2004). The Pension Equity 
Funding Act of 2004 also includes provisions relating to issues that 
are addressed by provisions in the bill, including the interest rate 
used for certain pension purposes and relief from the deficit reduction 
contribution requirements.
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     Two-year extension of transition rule to pension 
funding requirements;
     Extension of provision permitting qualified 
transfers of excess pension assets to retiree health accounts;
     Modification of qualification rules for tax-exempt 
property and casualty insurance companies; and
     Definition of insurance company for property and 
casualty insurance company tax rules.
    The Social Security Protection Act of 2004\2\ contains a 
provision allowing Social Security coverage under a divided 
retirement system for public employees in Kentucky.
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    \2\ Pub. L. No. 108-203 (March 2, 2004).
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Hearings

    During the 108th Congress, the Committee held hearings on 
various topics relating to the provisions of the bill, as 
follows.
    The Committee held a hearing on April 8, 2003, on 
compensation-related issues addressed in the Joint Committee on 
Taxation staff investigation and report relating to Enron 
Corporation. The Committee also held a hearing on March 11, 
2003, on issues relating to the funding of defined benefit 
plans.
    The Committee held a hearing on COLI on October 23, 2003.

Activity during the 107th Congress

    During the 107th Congress, the Committee reported a bill, 
S. 1971 (the ``National Employee Savings and Trust Equity 
Guarantee Act''), which addressed many of the same issues 
addressed by the current bill. Many of the provisions in the 
current bill are substantially the same as those previously 
reported by the Committee in S. 1971 (107th Cong.)
    During the 107th Congress, the Committee held hearings on 
various topics relating to the provisions of S. 1971 (107th 
Cong.). 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

    Defined contribution plans may permit both employees and 
employers to make contributions to the plan. Under a qualified 
cash or deferred arrangement (commonly referred to as a 
``section 401(k) plan''), employees may elect to make pretax 
contributions to a plan, referred to as elective deferrals. 
Employees may also be permitted to make after-tax contributions 
to a plan. In addition, a plan may provide for employer 
nonelective contributions or matching contributions. 
Nonelective contributions are employer contributions that are 
made without regard to whether the employee makes elective 
deferrals or after-tax contributions. Matching contributions 
are employer contributions that are made only if the employee 
makes elective deferrals or after-tax contributions.
    Under the Internal Revenue Code (the ``Code''), \3\ 
elective deferrals, after-tax employee contributions, and 
employer matching contributions are subject to special 
nondiscrimination tests. Certain employer nonelective 
contributions may be used to satisfy these special 
nondiscrimination tests. In addition, plans may satisfy the 
special nondiscrimination tests by meeting certain safe harbor 
contribution requirements.
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    \3\ All references to the ``Code'' are to the Internal Revenue 
Code. All section references and descriptions of present law refer to 
the Code unless otherwise indicated.
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    The Code requires employee stock ownership plans 
(``ESOPs'') to offer certain plan participants the right to 
diversify investments in employer securities. The Employee 
Retirement Income Security Act of 1974 (``ERISA'') limits the 
amount of employer securities and employer real property that 
can be acquired or held by certain employer-sponsored 
retirement plans. The extent to which the ERISA limits apply 
depends on the type of plan and the type of contribution 
involved.

Diversification requirements applicable to ESOPs under the Code

    An ESOP is a defined contribution plan that is designated 
as an ESOP and is designed to invest primarily in qualifying 
employer securities and that meets certain other requirements 
under the Code. For purposes of ESOP investments, a 
``qualifying employer security'' is defined as: (1) publicly 
traded common stock of the employer or a member of the same 
controlled group; (2) if there is no such publicly traded 
common stock, common stock of the employer (or member of the 
same controlled group) that has both voting power and dividend 
rights at least as great as any other class of common stock; or 
(3) noncallable preferred stock that is convertible into common 
stock described in (1) or (2) and that meets certain 
requirements. In some cases, an employer may design a class of 
preferred stock that meets these requirements and that is held 
only by the ESOP.
    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. For example, an ESOP may 
include a qualified cash or deferred arrangement that permits 
employees to make elective deferrals.\4\
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    \4\ Such an ESOP design is sometimes referred to as a ``KSOP.''
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    Under the Code, 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.\5\ The diversification 
requirement applies to a participant for six years, starting 
with the year in which the individual first 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.
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    \5\ Sec. 401(a)(28). The present-law diversification requirements 
do not apply to employer securities held by an ESOP that were acquired 
before January 1, 1987.
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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).\6\
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    \6\ IRS Notice 88-56, 1988-1 C.B. 540, Q&A-16.
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ERISA limits on investments in employer securities and real property

    ERISA imposes restrictions on the investment of retirement 
plan assets in employer securities or employer real 
property.\7\ A retirement plan may hold only a ``qualifying'' 
employer security and only ``qualifying'' employer real 
property.
---------------------------------------------------------------------------
    \7\ ERISA sec. 407.
---------------------------------------------------------------------------
    Under ERISA, any stock issued by the employer or an 
affiliate of the employer is a qualifying employer security.\8\ 
Qualifying employer securities also include certain publicly 
traded partnership interests and certain marketable obligations 
(i.e., a bond, debenture, note, certificate or other evidence 
of indebtedness). Qualifying employer real property means 
parcels of employer real property: (1) if a substantial number 
of the parcels are dispersed geographically; (2) if each parcel 
of real property and the improvements thereon are suitable (or 
adaptable without excessive cost) for more than one use; (3) 
even if all of the real property is leased to one lessee (which 
may be an employer, or an affiliate of an employer); and (4) if 
the acquisition and retention of such property generally comply 
with the fiduciary rules of ERISA (with certain specified 
exceptions).
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    \8\ Certain additional requirements apply to employer stock held by 
a defined benefit pension plan or a money purchase pension plan (other 
than certain plans in existence before the enactment of ERISA).
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    ERISA also prohibits defined benefit pension plans and 
money purchase pension plans (other than certain plans in 
existence before the enactment of ERISA) from acquiring 
employer securities or employer real property if, after the 
acquisition, more than 10 percent of the assets of the plan 
would be invested in employer securities and real property. 
Except as discussed below with respect to elective deferrals, 
this 10-percent limitation generally does not apply to defined 
contribution plans other than money purchase pension plans.\9\ 
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 or employer real 
property in a defined contribution plan.\10\
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    \9\ The 10-percent limitation also applies to a defined 
contribution plan that is part of an arrangement under which benefits 
payable to a participant under a defined benefit pension plan are 
reduced by benefits under the defined contribution plan (i.e., a 
``floor-offset'' arrangement).
    \10\ Under ERISA, a defined contribution plan is generally referred 
to as an individual account plan. 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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    The 10-percent limitation on the acquisition of employer 
securities and real property 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 or real property 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 and 
real property 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

    Recent events have focused public attention on the 
investment of retirement plan assets in employer securities. 
The bankruptcies of several large publicly-traded companies, 
such as the Enron Corporation, have been accompanied by the 
loss of employees' pension benefits because defined 
contribution plan assets were heavily invested in employer 
securities. In many cases, employees lost not only their jobs, 
but also their retirement savings, upsetting their plans for 
retirement.
    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 defined contribution 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 certain contributions to 
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 participants should be 
provided with a greater opportunity to diversify plan 
investments in employer securities.
    In addition, at the request of the Committee, the staff of 
the Joint Committee on Taxation (``Joint Committee staff'') 
undertook an investigation relating to Enron Corporation and 
related entities, including a review of the compensation 
arrangements of Enron employees, e.g., qualified retirement 
plans, nonqualified deferred compensation arrangements, and 
other arrangements. The Joint Committee staff issued an 
official report of its investigation,\11\ including findings 
and recommendations resulting from its review of Enron's 
pension plans and compensation arrangements. The Joint 
Committee staff's findings support the Committee's views 
regarding the need for greater diversification in the 
investment of defined contribution plan assets. The Joint 
Committee staff found that participants in Enron's Savings Plan 
lost considerable amounts of retirement savings due to the high 
level of investment in Enron stock and that Enron's plan is not 
alone in its high concentration of investment in employer 
stock.\12\ The Joint Committee staff recommended legislative 
changes to allow participants greater opportunities to invest 
their accounts in diversified investments, rather than in 
employer securities.\13\
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    \11\ Joint Committee on Taxation, Report of Investigation of Enron 
Corporation and Related Entities Regarding Federal Tax and Compensation 
Issues, and Policy Recommendations (JCS-3-03), February 2003.
    \12\ Id. at Vol. I. 12-13, 39-40, 515-540.
    \13\ Id. at Vol. I, 19, 39-40, 538-540.
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    The Committee believes that allowing participants greater 
opportunity to diversify plan investments in employer 
securities will help participants achieve their retirement 
security goals, while continuing to allow employers and 
employees the freedom to choose their own investments. The 
Committee bill therefore requires certain defined contribution 
plans that hold employer securities that are publicly traded to 
permit 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.
    Recent issues relating to investments in employer 
securities have arisen in the context of publicly-traded 
companies. Although similar issues may arise with respect to 
investments in employer securities by retirement plans of 
privately-held companies, the Committee understands that such 
investments often play a different role than in the case of 
publicly-traded companies. For example, it is more common for 
an ESOP of a privately-held company to hold a controlling 
interest in the employer. In addition, because of the lack of a 
public market for the securities, diversification could put an 
undue financial strain on the employer. Thus, the 
diversification requirements in the bill apply only to defined 
contribution plans holding employer securities of publicly 
traded companies.
    The Committee believes that the current role of ESOPs 
should be preserved in order to encourage this form of 
ownership. 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.
    Investment of defined contribution plan assets in employer 
real property may present similar issues as to adequate 
diversification, particularly if plan assets are also invested 
in employer securities. Accordingly, the diversification 
requirements apply to both employer securities and employer 
real property in the case of a plan that holds publicly-traded 
employer securities.

                        EXPLANATION OF PROVISION

In general

    Under the provision, in order to satisfy the plan 
qualification requirements of the Code and the vesting 
requirements of ERISA, certain defined contribution plans are 
required to provide diversification rights with respect to 
amounts invested in employer securities or employer real 
property. Such a plan is required to permit applicable 
individuals to direct that the portion of the individual's 
account held in employer securities or employer real property 
be invested in alternative investments. Under the provision, 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 or employer real property.

Plans subject to requirements

    The diversification requirements generally apply to an 
``applicable defined contribution plan,'' \14\ which means a 
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 \15\ that 
are readily tradable on an established securities market).
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    \14\ Under ERISA, the diversification requirements apply to an 
``applicable individual account plan.''
    \15\ 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.
---------------------------------------------------------------------------
    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 a class of stock that is a publicly-traded employer 
security. This treatment does not apply if neither the employer 
nor any parent corporation \16\ of the employer has 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 publicly-traded 
employer security. For example, a controlled group that 
generally consists of corporations that have not issued 
publicly-traded securities, may include a member that has 
issued publicly-traded stock (the ``publicly-traded member''). 
In the case of a plan maintained by an employer that is another 
member of the controlled group, the diversification 
requirements do not apply to the plan, provided that neither 
the employer nor a parent corporation of the employer has 
issued any publicly-traded security or any special class of 
stock that grants particular rights to, or bears particular 
risks for, the holder or issuer with respect to the member that 
has issued 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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    \16\ 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 requirementsunder the 
provision. The diversification rights applicable under the provision 
are broader than those applicable under the Code's present-law ESOP 
diversification rules. Thus, an ESOP that is subject to the new 
requirements is excepted from the present-law rules.\17\
---------------------------------------------------------------------------
    \17\ An ESOP will not be treated as failing to be designed to 
invest primarily in qualifying employer securities merely because the 
plan provides diversification rights as required under the provision or 
greater diversification rights than required under the provision.
---------------------------------------------------------------------------
    The diversification requirements under the provision also 
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 one individual (or the 
individual and his or her spouse) and the individual owns 100 
percent of the plan sponsor (i.e., the employer maintaining the 
plan), whether or not incorporated, or covered only one or more 
partners (or partners and their spouses) in the plan sponsor; 
(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. It is intended that, for this purpose, a 
``partner'' includes an owner of a business that is treated as 
a partnership for tax purposes. In addition, it includes a two-
percent shareholder of an S corporation.\18\
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    \18\ Under section 1372, a two-percent shareholder of an S 
corporation is treated as a partner for fringe benefit purposes.
---------------------------------------------------------------------------

Elective deferrals and after-tax 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 or employer real property, 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 contributions other 
than elective deferrals and after-tax employees contributions 
(i.e., nonelective employer contributions and employer matching 
contributions) that are invested in employer securities or 
employer real property, an applicable individual who is a 
participant with three years of service,\19\ 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.
---------------------------------------------------------------------------
    \19\ 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 or employer real property acquired before 
the first plan year for which the new 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. The 
applicable percentage applies separately to each class of 
employer security and to employer real property in an 
applicable individual's 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, 2003.

TABLE 1.--APPLICABLE PERCENTAGE FOR EMPLOYER SECURITIES OR EMPLOYER REAL
                     PROPERTY HELD ON EFFECTIVE DATE
------------------------------------------------------------------------
                                                              Applicable
        Plan year for which diversification applies           percentage
------------------------------------------------------------------------
First year.................................................           33
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 common 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.

Rules relating to the election of investment alternatives

    A plan subject to the diversification requirements is 
required to give applicable individuals a choice of at least 
three investment options, other than employer securities or 
employer real property, each of which is diversified and has 
materially different risk and return characteristics. It is 
intended that other investment options generally offered by the 
plan also must be available to applicable individuals.
    A plan does not fail to meet the diversification 
requirements merely because the plan limits the times when 
divestment and reinvestment can be made to periodic, reasonable 
opportunities that occur at least quarterly. It is intended 
that applicable individuals generally be given the opportunity 
to make investment changes with respect to employer securities 
or employer real property on the same basis as the opportunity 
to make other investment changes, except in unusual 
circumstances. Thus, in general, applicable individuals must be 
given the opportunity to request changes with respect to 
investments in employer securities or employer real property 
with the same frequency as the opportunity to make other 
investment changes and that such changes are implemented in the 
same timeframe as other investment changes, unless 
circumstances require different treatment. For example, in the 
case of a plan that provides diversification rights with 
respect to investments in employer real property, if the 
property mustbe sold in order to implement an applicable 
individual's request to divest his or her account of employer real 
property, a longer period may be needed to implement the individual's 
request than the time needed to implement other investment changes. 
Providing a longer period is permissible in those circumstances.
    Except as provided in regulations, a plan may not impose 
restrictions or conditions with respect to the investment of 
employer securities or employer real property 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). For example, such a restriction or 
condition includes a provision under which a participant who 
divests his or her account of employer securities or employer 
real property receives less favorable treatment (such as a 
lower rate of employer contributions) than a participant whose 
account remains invested in employer securities or employer 
real property. On the other hand, such a restriction does not 
include the imposition of fees with respect to other investment 
options under the plan, merely because fees are not imposed 
with respect to investments in employer securities.

                             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.
    A special effective date applies with respect to employer 
matching and nonelective contributions (and earnings thereon) 
that are invested in employer securities that, as of September 
17, 2003: (1) consist of preferred stock; and (2) are held 
within an ESOP, under the terms of which the value of the 
preferred stock is subject to a guaranteed minimum. Under the 
special rule, the diversification requirements apply to such 
preferred stock for plan years beginning after the earlier of 
(1) December 31, 2006; or (2) the first date as of which the 
actual value of the preferred stock equals or exceeds the 
guaranteed minimum. When the new diversification requirements 
become effective for the plan under the special rule, the 
applicable percentage of employer securities or employer real 
property held on the effective date that is subject to 
diversification is determined without regard to the special 
rule. For example, if, under the general effective date, the 
diversification requirements would first apply to the plan for 
the first plan year beginning after December 31, 2003, and, 
under the special rule, the diversification requirements first 
apply to the plan for the first plan year beginning after 
December 31, 2006, the applicable percentage for that year is 
100 percent.

  B. Notice of Freedom to Divest Employer Securities or Real Property


(Sec. 102 of the bill, new sec. 4980H of the Code, and new sec. 104(d) 
        of ERISA)

                              PRESENT LAW

    Under ERISA, a plan administrator is required to furnish 
participants with certain notices and information about the 
plan. This information includes, for example, a summary plan 
description that includes certain information, including 
administrative information about the plan, the plan's 
requirements as to eligibility for participation and benefits, 
the plan's vesting provisions, and the procedures for claiming 
benefits under the plan. Under ERISA, if a plan administrator 
fails or refuses to furnish to a participant information 
required to be provided to the participant within 30 days of 
the participant's written request, the participant generally 
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.
    The Code contains a variety of notice requirements with 
respect to qualified plans. Such requirements are generally 
enforced by an excise tax. For example, in case of a failure to 
provide notice of a significant reduction in benefit accruals, 
an excise tax of $100 a day is generally imposed on the 
employer. If the employer exercised reasonable diligence in 
meeting the requirements, the excise tax with respect to a 
taxable year is limited to no more than $500,000.

                           REASONS FOR CHANGE

    The bill provides participants with new rights to diversify 
the investment of their defined contribution plan accounts. 
After the new diversification requirements become effective, 
information about these rights will be provided to participants 
in accordance with present law, for example, as part of the 
summary plan description. However, under present law, such 
information is not required to be provided at the time the new 
diversification requirements become effective. Moreover, with 
respect to future participants, such information may be 
provided when an employee first becomes a participant in the 
plan, generally after one year of service, whereas, in some 
cases, a participant becomes eligible for diversification after 
three years of service. The Committee believes that 
participants should receive a specific notice of their 
diversification rights shortly before they first become 
eligible to exercise such rights. Such notice will better 
enable participants to exercise and benefit from the new 
diversification rights.

                        EXPLANATION OF PROVISION

In general

    The provision requires a new notice under the Code and 
ERISA in connection with the right of an applicable individual 
to divest his or her account under an applicable defined 
contribution plan of employer securities or employer real 
property, as required under the diversification provision of 
the bill. Not later than 30 days before the first date on which 
an applicable individual is eligible to exercise such right 
with respect to any type of contribution, the administrator of 
the plan must provide the individual with a notice setting 
forth such rightand describing the importance of diversifying 
the investment of retirement account assets. Under the diversification 
provision of the bill, an applicable individual's right to divest his 
or her account of employer securities or employer real property 
attributable to elective deferrals and employee after-tax contributions 
and the right to divest his or her account of employer securities or 
employer real property attributable to other contributions (i.e., 
nonelective employer contributions and employer matching contributions) 
may become exercisable at different times. Thus, to the extent the 
applicable individual is first eligible to exercise such rights at 
different times, separate notices are required.
    The notice must be written in a manner calculated to be 
understood by the average plan participant and may be delivered 
in written, electronic, or other appropriate form to the extent 
that such form is reasonably accessible to the applicable 
individual. The Secretary of Labor is directed to prescribe a 
model notice to be used for this purpose within 180 days of 
enactment of the provision.

Sanctions for failure to provide notice

            Excise tax
    Under the provision, an excise tax generally applies in the 
case of a failure to provide notice of diversification rights 
as required under the Code. The excise tax is generally imposed 
on the employer if notice is not provided.\20\ The excise tax 
is $100 per day for each participant or beneficiary with 
respect to whom the failure occurs, until notice is provided or 
the failure is otherwise corrected. If the employer exercises 
reasonable diligence to meet the notice requirement, the total 
excise tax imposed during a taxable year will not exceed 
$500,000.
---------------------------------------------------------------------------
    \20\ In the case of a multiemployer plan, the excise tax is imposed 
on the plan.
---------------------------------------------------------------------------
    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 
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.
            ERISA civil penalty
    In the case of a failure to provide notice of 
diversification rights as required under ERISA, the Secretary 
of Labor may assess a civil penalty against the plan 
administrator of up to $100 a day from the date of the failure. 
For this purpose, each violation with respect to any single 
applicable individual is treated as a separate violation.

                             EFFECTIVE DATE

    The provision generally applies on the date of enactment of 
the provision. Under a transition rule, if notice under the 
provision would otherwise be required before 90 days after the 
date of enactment, notice is not required until 90 days after 
the date of enactment.

       TITLE II. INFORMATION TO ASSIST PENSION PLAN PARTICIPANTS


    A. Periodic Pension Benefit Statements and Investment Education


(Secs. 201-202 of the bill, new sec. 4980I of the Code, and sec. 104 
        and 105(a) of ERISA)

                              PRESENT LAW

In general

    Under ERISA, a plan administrator is required to furnish 
participants with certain notices and information about the 
plan.\21\ If a plan administrator fails or refuses to furnish 
to a participant information required to be provided to the 
participant within 30 days of the participant's written 
request, the participant generally 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.
---------------------------------------------------------------------------
    \21\ Governmental plans and church plans are exempt from ERISA, 
including requirements to provide notices or information to 
participants.
---------------------------------------------------------------------------
    The Code contains a variety of notice requirements with 
respect to qualified plans. Such requirements are generally 
enforced by an excise tax. For example, in case of a failure to 
provide notice of a significant reduction in benefit accruals, 
an excise tax of $100 a day is generally imposed on the 
employer. If the employer exercised reasonable diligence in 
meeting the requirements, the excise tax with respect to a 
taxable year is limited to no more than $500,000.

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. 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.

Statements to participants on separation from service

    A plan administrator must furnish a 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. The 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 statement no later than 180 days after the end of 
the plan year in which the separation from service occurs.

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.
    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.
    At the request of the Committee, the Joint Committee staff 
undertook an investigation relating to Enron Corporation and 
related entities, including a review of the compensation 
arrangements of Enron employees, e.g., qualified retirement 
plans, nonqualified deferred compensation arrangements, and 
other arrangements. The Joint Committee staff issued an 
official report of its investigation,\22\ including findings 
and recommendations resulting from its review of Enron's 
pension plans and compensation arrangements. The Joint 
Committee staff's findings support the Committee's views 
regarding participants' need for investment education. The 
Joint Committee staff found that significant amounts of plan 
assets were invested in Enron stock even though the plan 
offered approximately 20 other investment options.\23\ The 
Joint Committee staff recommended legislative changes to 
require plans to provide participants with notices regarding 
investment principles and investment education.\24\
---------------------------------------------------------------------------
    \22\ Joint Committee on Taxation, Report of Investigation of Enron 
Corporation and Related Entities Regarding Federal Tax and Compensation 
Issues, and Policy Recommendations (JCS-3-03), February 2003.
    \23\ Id. at Vol. I, 12, 522-523, 526-535, 536.
    \24\ Id. at Vol. I, 19, 39, 538.
---------------------------------------------------------------------------

                        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. The 
benefit statement requirements do not apply to a one-
participant retirement plan.\25\
---------------------------------------------------------------------------
    \25\ The term ``one-participant retirement plan'' is defined as 
under the provision requiring plans to provide diversification rights 
with respect to employer securities and employer real property.
---------------------------------------------------------------------------
            Requirements for defined contribution plans
    Under the provision, the administrator of a defined 
contribution plan is required under the Code and ERISA to 
provide a benefit statement (1) to a participant or beneficiary 
who has the right to direct the investment of the assets in his 
or her account, at least quarterly, (2) to any other 
participant or other beneficiary who has his or her own account 
under the plan, at least annually, and (3) to other 
beneficiaries, upon written request, but limited to one request 
during any 12-month period.\26\
---------------------------------------------------------------------------
    \26\ In the case of a tax-sheltered annuity (sec. 403(b)) that is 
not a plan established or maintained by the employer, the benefit 
statement generally must be provided by the issuer of the annuity 
contract.
---------------------------------------------------------------------------
    The benefit statement is required to indicate, on the basis 
of the latest available information: (1) the total benefits 
accrued; (2) the vested accrued benefit or the earliest date on 
which the accrued benefit will become vested; and (3) an 
explanation of any offset that may be applied in determining 
accrued benefits under a plan that provides for permitted 
disparity or that is part of a floor-offset arrangement (i.e., 
an arrangement under which benefits payable to a participant 
under a defined benefit pension plan are reduced by benefits 
under a defined contribution plan). With respect to information 
on vested benefits, the Secretary of Labor is required to 
provide that the requirements of the provision are met if, at 
least annually, the plan: (1) updates the information on vested 
benefits that is provided in the benefit statement; or (2) 
provides in a separate statement information as is necessary to 
enable participants and beneficiaries to determine their vested 
benefits.
    The benefit statement must also include the value of each 
investment to which assets in the individual's account are 
allocated (determined as of the plan's most recent valuation 
date), including the value of any assets held in the form or 
employer securities or employer real property (without regard 
to whether the securities or real property were contributed by 
the employer or acquired at the direction of the individual). A 
quarterly benefit statement provided to a participant or 
beneficiary who has the right to direct investments must also 
provide: (1) an explanation of any limitations or restrictions 
on any right of the individual to direct an investment; and (2) 
a notice that investments in any individual account may not be 
adequately diversified if the value of any investment in the 
account exceeds 20 percent of the fair market value of all 
investments in the account.
            Requirements for defined benefit pension plans
    Under the provision, the administrator of a defined benefit 
pension plan is required under the Code and ERISA either: (1) 
to furnish a benefit statement at least once every three years 
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 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. It is intended that the annual notice of the 
availability of a benefit statement may be included with other 
communications to the participant if done in a manner 
reasonably designed to attract the attention of the 
participant.
    The administrator of a defined benefit pension 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.
    The benefit statement is required to indicate, on the basis 
of the latest available information: (1) the total benefits 
accrued; (2) the vested accrued benefit or the earliest date on 
which the accrued benefit will become vested; and (3) an 
explanation of any offset that may be applied in determining 
accrued benefits under a plan that provides for permitted 
disparity or that is part of a floor-offset arrangement (i.e., 
an arrangement under which benefits payable to a participant 
under a defined benefit pension plan are reduced by benefits 
under a defined contribution plan). With respect to information 
on vested benefits, the Secretary of Labor is required to 
provide that the requirements of the provision are met if, at 
least annually, the plan: (1) updates the information on vested 
benefits that is provided in the benefit statement; or provides 
in a separate statement information as is necessary to enable 
participants and beneficiaries to determine their vested 
benefits. 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 in consultation with the 
Pension Benefit Guaranty Corporation.
            Form of benefit statement
    The benefit statement must be written in a manner 
calculated to be understood by the average plan participant. It 
may be delivered in written, electronic, or other appropriate 
form to the extent that such form is reasonably accessible to 
the recipient. 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, within 180 days after 
the date of enactment of the provision, 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 isoptional. 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 Social 
Security 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 administrator of a defined 
contribution plan (other than a one-participant retirement 
plan) is required under the Code and ERISA to provide at least 
once a year a model form relating to basic investment 
guidelines to each participant or beneficiary who has the right 
to direct the investment of the assets in his or her account 
under the plan.\27\
---------------------------------------------------------------------------
    \27\ In the case of a tax-sheltered annuity (sec. 403(b)) that is 
not a plan established or maintained by the employer, the model form 
generally must be provided by the issuer of the annuity contract.
---------------------------------------------------------------------------
            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. The guidelines in the 
model form are to 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. For example, information on 
how investment fees may affect the return on an investment is 
appropriate other information that the Secretary may determine 
must be included in the investment guidelines.
    The model form must also include addresses for Internet 
sites, and a worksheet, that a participant or beneficiary may 
use to calculate: (1) the retirement age value of the 
individual's vested benefits under the plan (expressed as an 
annuity amount and 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 annually 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 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. In addition, the Secretary of 
Labor is 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 model form must be written in a manner calculated to be 
understood by the average plan participant and may be delivered 
in written, electronic, or other appropriate form to the extent 
that such form is reasonably accessible to the recipient.

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. The 
excise tax is generally imposed on the employer if a required 
benefit statement or model form is not provided.\28\ 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 applies separately to 
failures to provide required benefit statements and failures to 
provide the model form.
---------------------------------------------------------------------------
    \28\ In the case of a multiemployer plan, the excise tax is imposed 
on the plan. In the case of a tax-sheltered annuity (sec. 403(b)) that 
is not a plan established or maintained by the employer, the tax is 
generally imposed on the issuer of the annuity contract.
---------------------------------------------------------------------------
    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.
            ERISA enforcement
    The ERISA remedies that apply in the case of a failure or 
refusal to provide a participant with information under present 
law apply if the plan administrator fails to furnish a benefit 
statement required under the provision. 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.
    In the case of a failure to provide a model form relating 
to basic investment guidelines required under the provision, 
the Secretary of Labor may assess a civil penalty against the 
plan administrator of up to $100 a day from the date of the 
failure. For this purpose, each violation with respect to any 
single participant or beneficiary is treated as a separate 
violation.

Exception for governmental and church plans

    The provision contains an exception from the benefit 
statement and investment notice requirements under the Code for 
a governmental plan or a church plan. In addition, such plans 
are generally exempt from ERISA. Accordingly, the benefit 
statement and investment notice requirements do not apply to a 
governmental plan or a church plan.

                             EFFECTIVE DATE

    The provision is generally effective for plan years 
beginning after December 31, 2004. 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, 2005, 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, 2006.

 B. Material Information Relating to Investment in Employer Securities


(Sec. 203 of the bill, new sec. 4980H of the Code, and secs. 104 and 
        502 of ERISA)

                              PRESENT LAW

    The Code and ERISA require that certain information be 
provided to participants and beneficiaries under employer-
sponsored retirement plans. Present law does not specifically 
require that participants in defined contribution plans which 
permit participants to direct the investment of the assets in 
their accounts in employer securities be provided with the 
reports, statements, and communications which are required to 
be provided to investors in connection with investing in 
securities under applicable securities laws.
    The Code contains a variety of notice requirements with 
respect to qualified plans. Such requirements are generally 
enforced by an excise tax. For example, in case of a failure to 
provide notice of a significant reduction in benefit accruals, 
an excise tax of $100 a day is generally imposed on the 
employer. If the employer exercised reasonable diligence in 
meeting the requirements, the excise tax with respect to a 
taxable year is limited to no more than $500,000.
    Under ERISA, if a plan administrator fails or refuses to 
furnish to a participant information required to be provided to 
the participant within 30 days of the participant's written 
request, the participant generally 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.

                           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 administrators should be required to provide this 
information.

                        EXPLANATION OF PROVISION

In general

    The provision creates a new requirement in connection with 
defined contribution plans which permit participants to direct 
the investment of the assets in their accounts in employer 
securities. The provision amends the Code and ERISA to require 
administrators of such plans to provide participants with all 
reports, proxy statements, and other communications regarding 
investment of such assets in employer securities to the extent 
that such reports, statements, and communications are required 
to be provided by the plan sponsor to investors in connection 
with investment employer securities under applicable securities 
laws. Any such information which is maintained by the plan 
sponsor must be provided to the plan administrator.
    The reports, statements, and communications may be 
delivered in written, electronic, or other appropriate form to 
the extent that such form is reasonably accessible to 
participants.

Sanctions for failure to provide information

            Excise tax
    Under the provision, an excise tax generally applies in the 
case of a failure to provide the information as required under 
the Code. The excise tax is generally imposed on the employer 
if notice is not provided.\29\ The excise tax is $100 per day 
for each participant or beneficiary with respect to whom the 
failure occurs, until the information is provided or the 
failure is otherwise corrected. If the employer exercises 
reasonable diligence to meet the requirement, the total excise 
tax imposed during a taxable year will not exceed $500,000.
---------------------------------------------------------------------------
    \29\ In the case of a multiemployer plan, the excise tax is imposed 
on the plan.
---------------------------------------------------------------------------
    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 requirement. In 
addition, no tax is imposed if the employer exercises 
reasonable diligence to comply and provides the required 
information 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.
            ERISA civil penalty
    In the case of a failure or refusal to provide the 
information as required under the provision, the Secretary of 
Labor may assess a civil penalty against the plan administrator 
of up to $1,000 a day from the date of the failure or refusal 
until it is corrected.
            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 proposal 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.

C. Fiduciary Rules for Plan Sponsors Designating Independent Investment 
                                Advisors


(Sec. 204 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 
investment advice 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 an 
individual account plan \30\ that permits a participant or 
beneficiary to direct the investment of 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.
---------------------------------------------------------------------------
    \30\ An ``individual account plan'' is the term generally used 
under ERISA for a defined contribution plan.
---------------------------------------------------------------------------

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 
\31\) 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,\32\ (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.
---------------------------------------------------------------------------
    \31\ See, 15 U.S.C. 80b-3a. Nothing in the provision 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.
    \32\ 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 
any fees or other compensation to be received by the investment 
adviser for the provision of investment advice and any fees or 
other compensation to be received as a result of a 
participant's investment choices, and (3) its registration with 
the Securities and Exchange Commission or other documentation 
of its status as 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 of the provision.

      D. Employer-Provided Qualified Retirement Planning Services


(Sec. 205 of the bill and sec. 132 of the Code)

                              PRESENT LAW

    Under present law, certain employer-provided fringe 
benefits are excludable from gross income and wages for 
employment tax purposes.\33\ These excludable fringe benefits 
include qualified retirement planning services provided to an 
employee and his or her spouse by an employer maintaining a 
qualified employer plan. A qualified employer plan includes a 
qualified retirement plan or annuity, a tax-sheltered annuity, 
a simplified employee pension, a SIMPLE retirement account, or 
a governmental plan, including an eligible deferred 
compensation plan maintained by a governmental employer.
---------------------------------------------------------------------------
    \33\ Secs. 132 and 3121(a)(20).
---------------------------------------------------------------------------
    Qualified retirement planning services are retirement 
planning advice and information. The exclusion is not limited 
to information regarding the qualified employer plan, and, 
thus, for example, applies to advice and information regarding 
retirement income planning for an individual and his or her 
spouse and how the employer's plan fits into the individual's 
overall retirement income plan. On the other hand, the 
exclusion does not apply to services that may be related to 
retirement planning, such as tax preparation, accounting, legal 
or brokerage services.
    The exclusion does not apply with respect to highly 
compensated employees unless the services are available on 
substantially the same terms to each member of the group of 
employees normally provided education and information regarding 
the employer's qualified plan.

                           REASONS FOR CHANGE

    The Committee believes that it is important for all 
employees to have access to retirement planning advice and 
information. In order to plan adequately for retirement, 
individuals must anticipate retirement income needs and 
understand how their retirement income goals can be achieved. 
The Committee believes that allowing employees to purchase 
qualified retirement planning services on a salary-reduction 
basis will help many more employees obtain advice and 
assistance when making retirement decisions.

                        EXPLANATION OF PROVISION

    The provision permits employers to offer employees a choice 
between cash compensation and eligible qualified retirement 
planning services. The maximum amount for which such a choice 
can be provided is limited to $1,000 per individual, per year. 
The provision only applies to qualified retirement planning 
services provided by an eligible investment adviser.
    Under the provision, an ``eligible investment adviser'' is 
defined as a person who is (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 \34\) 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 the 
Treasury. 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,\35\ (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 the Treasury.
---------------------------------------------------------------------------
    \34\ See, 15 U.S.C. 80b-3a.
    \35\ An individual who is registered as an investment adviser under 
the laws of a State is an eligible investment adviser only if the State 
has an examination requirement to qualify for such registration.
---------------------------------------------------------------------------
    As under present law, the provision applies only to amounts 
for retirement planning advice and information and does not 
apply to services that may be related to retirement planning, 
such as tax preparation, accounting, legal or brokerage 
services.
    Under the provision, no amount is includible in gross 
income or wages merely because the employee is offered the 
choice of cash in lieu of eligible qualified retirement 
planning services. Also, no amount is includible in income or 
wages merely because the employee is offered a choice among 
eligible qualified retirement planning services. The amount of 
cash offered is includible in income and wages only to the 
extent the employee elects cash. The exclusion does not apply 
to highly compensated employees unless the salary reduction 
option is available on substantially the same terms to all 
employees normally provided education and information about the 
plan.
    Under the provision, salary reduction amounts used to 
provide eligible qualified retirement planning services are 
generally treated for pension plan purposes the same as other 
salary reduction contributions. Thus, such amounts are included 
in compensation for purposes of applying the limits on 
contributions and benefits, and an employer is able to elect 
whether or not to include such amounts in compensation for 
nondiscrimination testing.

                             EFFECTIVE DATE

    The provision is effective for taxable years beginning 
after December 31, 2004, and before January 1, 2010.

           TITLE III. PROTECTION OF PENSION PLAN PARTICIPANTS


     A. Notice to Participants or Beneficiaries of Blackout Periods


(Sec. 301 of the bill, new sec. 4980J of the Code, and sec. 101(i) of 
        ERISA)

                              PRESENT LAW

In general

    The Sarbanes-Oxley Act of 2002 \36\ amended ERISA to 
require that the plan administrator of an individual account 
plan \37\ provide advance notice of a blackout period (a 
``blackout notice'') to plan participants and beneficiaries to 
whom the blackout period applies.\38\ Generally, notice must be 
provided at least 30 days before the beginning of the blackout 
period. In the case of a blackout period that applies with 
respect to employer securities, the plan administrator must 
also provide timely notice of the blackout period to the 
employer (or the affiliate of the employer that issued the 
securities, if applicable).
---------------------------------------------------------------------------
    \36\ Pub. L. No. 107-204 (2002).
    \37\ An ``individual account plan'' is the term generally used 
under ERISA for a defined contribution plan.
    \38\ ERISA sec. 101(i), as enacted by section 306(b) of the 
Sarbanes-Oxley Act of 2002. Under section 306(a), a director or 
executive officer of a publicly-traded corporation is prohibited from 
trading in employer stock during blackout periods in certain 
circumstances. Section 306 is effective 180 days after enactment.
---------------------------------------------------------------------------
    The blackout notice requirement does not apply to a one-
participant retirement plan, which is defined as a plan that 
(1) on the first day of the plan year, covered only the 
employer (and the employer's spouse) and the employer owns the 
entire business (whether or not incorporated) or covers only 
one or more partners (and their spouses) in a business 
partnership (including partners in an S or C corporation as 
defined in section 1361(a) of the Code), (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 employer (and the 
employer's spouse) or the partners (and their spouses), (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 leases employees.\39\
---------------------------------------------------------------------------
    \39\ Governmental plans and church plans are exempt from ERISA. 
Accordingly, the blackout notice requirement does not apply to these 
plans.
---------------------------------------------------------------------------

Definition of blackout period

    A blackout period is any period during which any ability of 
participants or beneficiaries under the plan, which is 
otherwise available under the terms of the plan, to direct or 
diversify assets credited to their accounts, or to obtain loans 
or distributions from the plan, is temporarily suspended, 
limited, or restricted if the suspension, limitation, or 
restriction is for any period of more than three consecutive 
business days. However, a blackout period does not include a 
suspension, limitation, or restriction that (1) occurs by 
reason of the application of securities laws, (2) is a change 
to the plan providing for a regularly scheduled suspension, 
limitation, or restriction that is disclosed through a summary 
of material modifications to the plan or materials describing 
specific investment options under the plan, or changes thereto, 
or (3) applies only to one or more individuals, each of whom is 
a participant, alternate payee, or other beneficiary under a 
qualified domestic relations order.

Timing of notice

    Notice of a blackout period is generally required at least 
30 days before the beginning of the period. The 30-day notice 
requirement does not apply if (1) deferral of the blackout 
period would violate the fiduciary duty requirements of ERISA 
and a plan fiduciary so determines in writing, or (2) the 
inability to provide the 30-day advance notice is due to events 
that were unforeseeable or circumstances beyond the reasonable 
control of the plan administrator and a plan fiduciary so 
determines in writing. In those cases, notice must be provided 
as soon as reasonably practicable under the circumstances 
unless notice in advance of the termination of the blackout 
period is impracticable.
    Another exception to the 30-day period applies in the case 
of a blackout period that applies only to one or more 
participants or beneficiaries in connection with a merger, 
acquisition, divestiture, or similar transaction involving the 
plan or the employer and that occurs solely in connection with 
becoming or ceasing to be a participant or beneficiary under 
the plan by reason of the merger, acquisition, divestiture, or 
similar transaction. Under the exception, the blackout notice 
requirement is treated as met if notice is provided to the 
participants or beneficiaries to whom the blackout period 
applies as soon as reasonably practicable.
    The Secretary of Labor may provide additional exceptions to 
the notice requirement that the Secretary determines are in the 
interests of participants and beneficiaries.

Form and content of notice

    A blackout notice must be written in a manner calculated to 
be understood by the average plan participant and must include 
(1) the reasons for the blackout period, (2) an identification 
of the investments and other rights affected, (3) the expected 
beginning date and length of the blackout period, and (4) in 
the case of a blackout period affecting investments, a 
statement that the participant or beneficiary should evaluate 
the appropriateness of current investment decisions in light of 
the inability to direct or diversify assets during the blackout 
period, and (5) other matters as required by regulations. If 
the expected beginning date or length of the blackout period 
changes after notice has been provided, the plan administrator 
must provide notice of the change (and specify any material 
change in other matters related to the blackout) to affected 
participants and beneficiaries as soon as reasonably 
practicable.
    Notices provided in connection with a blackout period (or 
changes thereto) must be provided in writing and may be 
delivered in electronic or other form to the extent that the 
form is reasonably accessible to the recipient. The Secretary 
of Labor is required to issue guidance regarding the notice 
requirement and a model blackout notice.

Penalty for failure to provide notice

    In the case of a failure to provide notice of a blackout 
period, the Secretary of Labor may assess a civil penalty 
against a plan administrator of up to $100 per day for each 
failure to provide a blackout notice. For this purpose, each 
violation with respect to a single participant or beneficiary 
is treated as a separate violation.

Code requirements

    The Code does not contain a notice requirement with respect 
to blackouts. However, the Code contains a variety of other 
notice requirements with respect to qualified plans. Such 
requirements are generally enforced by an excise tax. For 
example, in the case of a failure to provide notice of a 
significant reduction in benefit accruals, an excise tax of 
$100 a day is generally imposed on the employer. If the 
employer exercised reasonable diligence in meeting the 
requirements, the excise tax with respect to a taxable year is 
limited to no more than $500,000.

                           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. Present 
law requires advance notice of a blackout period to plan 
participants and beneficiaries to whom the blackout period 
applies. The Committee believes that such blackout notices 
serve an important purpose by allowing plan participants to 
prepare for any restrictions that will occur during a blackout 
period. The Committee believes that modifying the blackout 
notice requirement to better match plan operations will improve 
the notices. Additionally, enhancing enforcement of the 
blackout notice requirement will ensure that all participants 
receive blackout notices, and thus, have the opportunity to 
prepare for any restrictions that will occur during a blackout 
period.
    At the request of the Committee, the Joint Committee staff 
undertook an investigation relating to Enron Corporation and 
related entities, including a review of the compensation 
arrangements of Enron employees, e.g., qualified retirement 
plans, nonqualified deferred compensation arrangements, and 
other arrangements. The Joint Committee staff issued an 
official report of its investigation,\40\ including findings 
and recommendations resulting from its review of Enron's 
pension plans and compensation arrangements. The Joint 
Committee staff found that Enron provided a variety of advance 
notices to plan participants explaining the proposed blackout; 
however, the Joint Committee staff determined that not all 
participants received the same notices. In particular, certain 
active employees received additional reminders of the blackout 
that were not sent to other participants.\41\ The Joint 
Committee staff's findings support the Committee's views 
regarding the need for plan participants to receive notice of 
blackouts sufficient to allow them to make appropriate 
decisions in anticipation of a blackout.
---------------------------------------------------------------------------
    \40\ Joint Committee on Taxation, Report of Investigation of Enron 
Corporation and Related Entities Regarding Federal Tax and Compensation 
Issues, and Policy Recommendations (JCS-3-03), February 2003.
    \41\ Id. at Vol. I, 12-13, 38-38, 493-515.
---------------------------------------------------------------------------

                        EXPLANATION OF PROVISION

In general

    The provision amends the Code to include a blackout notice 
requirement similar to the present law ERISA requirement and 
makes certain modifications to the ERISA notice requirement. 
The blackout notice requirement under the Code does not apply 
to a one-participant retirement plan, a governmental plan, or a 
church plan.\42\
---------------------------------------------------------------------------
    \42\ In the case of a tax-sheltered annuity (sec. 403(b)) that is 
not a plan established or maintained by the employer, the blackout 
notice generally must be provided by the issuer of the annuity 
contract.
---------------------------------------------------------------------------

Definition of blackout period

    The provision also revises the definition of blackout 
period under the Code and ERISA. The definition of blackout 
period is revised to include a suspension, limitation, or 
restriction of any ability of participants or beneficiaries to 
direct or diversify assets credited to their accounts, or to 
obtain loans or distributions from the plan, that is otherwise 
available under the plan, without regard to whether the ability 
is specifically provided for in the terms of the plan.

Definition of one-participant retirement plan

    The provision clarifies the definition of a one-participant 
retirement plan not subject to the blackout notice requirement. 
Under the provision, for purposes of the blackout notice 
requirements under the Code and ERISA, the definition is 
conformed to the definition that applies under the provision 
relating to diversification, thus clarifying that such a plan 
covers only an individual (or the individual and his or her 
spouse) who owns 100 percent of the plan sponsor (i.e., the 
employer maintaining the plan), whether or not incorporated, or 
covers only one or more partners (or partners and their 
spouses) in the plan sponsor. For this purpose, a partner 
includes an owner of a business that is treated as a 
partnership for tax purposes and a two-percent shareholder of 
an S corporation.

Excise tax for failure to provide notice

    Under the provision, an excise tax is generally imposed on 
the employer if a blackout notice is not provided as required 
under the Code.\43\ 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. 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.
---------------------------------------------------------------------------
    \43\ In the case of a multiemployer plan, the excise tax is imposed 
on the plan. In the case of a tax-sheltered annuity (sec. 403(b)) that 
is not a plan established or maintained by the employer, the excise tax 
generally is imposed on the issuer of the annuity contract.
---------------------------------------------------------------------------

                             EFFECTIVE DATE

    The amendments to the Code apply to failures to provide the 
required notice after the date of enactment. The amendments to 
ERISA made by the provision are effective as if included in 
section 306 of the Sarbanes-Oxley Act of 2002.

            TITLE IV. OTHER PROVISIONS RELATING TO PENSIONS


             A. Provisions Relating to Pension Plan Funding


1. Replacement of interest rate on 30-year Treasury securities used for 
        certain pension plan purposes (secs. 401-408 of the bill, secs. 
        401(a)(36), 404, 412, 415(b), and 417(e) of the Code, and secs. 
        205(g), 206, 302, and 4006 of ERISA)

                            PRESENT LAW \44\
---------------------------------------------------------------------------

    \44\ Present law refers to the law in effect on the dates of 
Committee action on the bill. It does not reflect the changes made by 
the Pension Funding Equity Act of 2004 (``PFEA 2004''), Pub. L. No. 
108-218 (April 10, 2004). Section 101 of PFEA 2004 changes the interest 
rates used for certain pension purposes for 2004 and 2005. 
Specifically, it provides for the use of an interest rate based on 
amounts invested conservatively in long-term corporate bonds for 
purposes of determining current liability and PBGC variable rate 
premiums for plan years beginning in 2004 and 2005. In addition, in the 
case of plan years beginning in 2004 or 2005, in applying the limits on 
benefits payable under a defined benefit pension plan to certain forms 
of benefit, such as a lump sum, the interest rate used must be not less 
than the greater of: (1) 5.5 percent; or (2) the interest rate 
specified in the plan. Under section 102 of PFEA 2004, if certain 
requirements are met, reduced contributions under the deficit reduction 
contribution rules apply for plan years beginning after December 27, 
2003, and before December 28, 2005, in the case of plans maintained by 
commercial passenger airlines, employers primarily engaged in the 
production or manufacture of a steel mill product or in the processing 
of iron ore pellets, or a certain labor organization.
---------------------------------------------------------------------------

In general

    Under present law, the interest rate on 30-year Treasury 
securities is used for several purposes related to defined 
benefit pension plans. Specifically, the interest rate on 30-
year Treasury securities is used: (1) in determining current 
liability for purposes of the funding and deduction rules; (2) 
in determining unfunded vested benefits for purposes of Pension 
Benefit Guaranty Corporation (``PBGC'') variable rate premiums; 
and (3) in determining the minimum required value of lump-sum 
distributions from a defined benefit pension plan and maximum 
lump-sum values for purposes of the limits on benefits payable 
under a defined benefit pension plan.
    The IRS publishes the interest rate on 30-year Treasury 
securities on a monthly basis. The Department of the Treasury 
does not currently issue 30-year Treasury securities. As of 
March 2002, the IRS publishes the average yield on the 30-year 
Treasury bond maturing in February 2031 as a substitute.

Funding rules

            In general
    The Internal Revenue Code (the ``Code'') and the Employee 
Retirement Income Security Act of 1974 (``ERISA'') impose 
minimum funding requirements with respect to defined benefit 
pension plans.\45\ Under the funding rules, the amount of 
contributions required for a plan year is generally the plan's 
normal cost for the year (i.e., the cost of benefits allocated 
to the year under the plan's funding method) 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.
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    \45\ Code sec. 412; ERISA sec. 302. The Code also imposes limits on 
deductible contributions, as discussed below.
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            Additional contributions for underfunded plans
    Under special funding rules (referred to as the ``deficit 
reduction contribution'' rules),\46\ an additional contribution 
to a plan is generally required if the plan's funded current 
liability percentage is less than 90 percent.\47\ A plan's 
``funded current liability percentage'' is the actuarial value 
of plan assets \48\ as a percentage of the plan's current 
liability. In general, a plan's current liability means all 
liabilities to employees and their beneficiaries under the 
plan.
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    \46\ The deficit reduction contribution rules apply to single-
employer plans, other than single-employer plans with no more than 100 
participants on any day in the preceding plan year. Single-employer 
plans with more than 100 but not more than 150 participants are 
generally subject to lower contribution requirements under these rules.
    \47\ Under an alternative test, a plan is not subject to the 
deficit reduction contribution rules for a plan year if (1) the plan's 
funded current liability percentage for the plan year is at least 80 
percent, and (2) the plan's funded current liability percentage was at 
least 90 percent for each of the two immediately preceding plan years 
or each of the second and third immediately preceding plan years.
    \48\ The actuarial value of plan assets is the value determined 
under an actuarial valuation method that takes into account fair market 
value and meets certain other requirements. The use of an actuarial 
valuation method allows appreciation or depreciation in the market 
value of plan assets to be recognized gradually over several plan 
years. Sec. 412(c)(2); Treas. reg. sec. 1.412(c)(2)-1.
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    The amount of the additional contribution required under 
the deficit reduction contribution rules is the sum of two 
amounts: (1) the excess, if any, of (a) the deficit reduction 
contribution (as described below), over (b) the contribution 
required under the normal funding rules; and (2) the amount (if 
any) required with respect to unpredictable contingent 
eventbenefits.\49\ The amount of the additional contribution cannot 
exceed the amount needed to increase the plan's funded current 
liability percentage to 100 percent.
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    \49\ A plan may provide for unpredictable contingent event 
benefits, which are benefits that depend on contingencies that are not 
reliably and reasonably predictable, such as facility shutdowns or 
reductions in workforce. An additional contribution is generally not 
required with respect to unpredictable contingent event benefits unless 
the event giving rise to the benefits has occurred.
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    The deficit reduction contribution is the sum of (1) the 
``unfunded old liability amount,'' (2) the ``unfunded new 
liability amount,'' and (3) the expected increase in current 
liability due to benefits accruing during the plan year.\50\ 
The ``unfunded old liability amount'' is the amount needed to 
amortize certain unfunded liabilities under 1987 and 1994 
transition rules. The ``unfunded new liability amount'' is the 
applicable percentage of the plan's unfunded new liability. 
Unfunded new liability generally means the unfunded current 
liability of the plan (i.e., the amount by which the plan's 
current liability exceeds the actuarial value of plan assets), 
but determined without regard to certain liabilities (such as 
the plan's unfunded old liability and unpredictable contingent 
event benefits). The applicable percentage is generally 30 
percent, but is reduced if the plan's funded current liability 
percentage is greater than 60 percent.
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    \50\ If the Secretary of the Treasury prescribes a new mortality 
table to be used in determining current liability, as described below, 
the deficit reduction contribution may include an additional amount.
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            Required interest rate and mortality table
    Specific interest rate and mortality assumptions must be 
used in determining a plan's current liability for purposes of 
the special funding rule. The interest rate used to determine a 
plan's current liability must be within a permissible range of 
the weighted average \51\ of the interest rates on 30-year 
Treasury securities for the four-year period ending on the last 
day before the plan year begins. The permissible range is 
generally from 90 percent to 105 percent.\52\ 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.\53\
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    \51\ The weighting used for this purpose is 40 percent, 30 percent, 
20 percent and 10 percent, starting with the most recent year in the 
four-year period. Notice 88-73, 1988-2 C.B. 383.
    \52\ If the Secretary of the Treasury determines that the lowest 
permissible interest rate in this range is unreasonably high, the 
Secretary may prescribe a lower rate, but not less than 80 percent of 
the weighted average of the 30-year Treasury rate.
    \53\ Code sec. 412(b)(5)(B)(iii)(II); ERISA sec. 
302(b)(5)(B)(iii)(II). Under Notice 90-11, 1990-1 C.B. 319, the 
interest rates in the permissible range are deemed to be consistent 
with the assumptions reflecting the purchase rates that would be used 
by insurance companies to satisfy the liabilities under the plan.
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    The Job Creation and Worker Assistance Act of 2002 \54\ 
amended the permissible range of the statutory interest rate 
used in calculating a plan's current liability for purposes of 
applying the additional contribution requirements. Under this 
provision, the permissible range is from 90 percent to 120 
percent for plan years beginning after December 31, 2001, and 
before January 1, 2004.
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    \54\ Pub. L. No. 107-147.
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    The Secretary of the Treasury is required to prescribe 
mortality tables and to periodically review (at least every 
five years) and update such tables to reflect the actuarial 
experience of pension plans and projected trends in such 
experience.\55\ The Secretary of the Treasury has required the 
use of the 1983 Group Annuity Mortality Table.\56\
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    \55\ Code sec. 412(l)(7)(C)(ii); ERISA sec. 302(d)(7)(C)(ii).
    \56\ Rev. Rul. 95-28, 1995-1 C.B. 74. The IRS and the Treasury 
Department have announced that they are undertaking a review of the 
applicable mortality table and have requested comments on related 
issues, such as how mortality trends should be reflected. Notice 2003-
62, 2003-38 I.R.B. 576; Announcement 2000-7, 2000-1 C.B. 586.
---------------------------------------------------------------------------
            Full funding limitation
    No contributions are required under the minimum funding 
rules in excess of the full funding limitation. In 2004 and 
thereafter, the full funding limitation is the excess, if any, 
of (1) the accrued liability under the plan (including normal 
cost), over (2) the lesser of (a) the market value of plan 
assets or (b) the actuarial value of plan assets.\57\ However, 
the full funding limitation may not be less than the excess, if 
any, of 90 percent of the plan's current liability (including 
the current liability normal cost) over the actuarial value of 
plan assets. In general, current liability is all liabilities 
to plan participants and beneficiaries accrued to date, whereas 
the accrued liability under the full funding limitation may be 
based on projected future benefits, including future salary 
increases.
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    \57\ For plan years beginning before 2004, the full funding 
limitation was generally defined as the excess, if any, of (1) the 
lesser of (a) the accrued liability under the plan (including normal 
cost) or (b) a percentage (170 percent for 2003) of the plan's current 
liability (including the current liability normal cost), over (2) the 
lesser of (a) the market value of plan assets or (b) the actuarial 
value of plan assets, but in no case less than the excess, if any, of 
90 percent of the plan's current liability over the actuarial value of 
plan assets. Under the Economic Growth and Tax Relief Reconciliation 
Act of 2001 (``EGTRRA''), the full funding limitation based on 170 
percent of current liability is repealed for plan years beginning in 
2004 and thereafter. The provisions of EGTRRA generally do not apply 
for years beginning after December 31, 2010.
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            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.\58\ 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.\59\
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    \58\ Code sec. 412(m); ERISA sec. 302(e).
    \59\ In connection with the expanded interest rate range available 
for 2002 and 2003, special rules apply in determining current liability 
for the preceding plan year for purposes of applying the quarterly 
contributions requirements to plan years beginning in 2002 (when the 
expanded range first applies) and 2004 (when the expanded range no 
longer applies). In each of those years (``present year''), current 
liability for the preceding year is redetermined, using the permissible 
range applicable to the present year. This redetermined current 
liability will be used for purposes of the plan's funded current 
liability percentage for the preceding year, which may affect the need 
to make quarterly contributions, and for purposes of determining the 
amount of any quarterly contributions in the present year, which is 
based in part on the preceding year.
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            Funding waivers
    Within limits, the IRS is permitted to waive all or a 
portion of the contributions required under the minimum funding 
standard for a plan year.\60\ A waiver may be granted if the 
employer (or employers) responsible for the contribution could 
not make the required contribution without temporary 
substantial business hardship and if requiring the contribution 
would be adverse to the interests of plan participants in the 
aggregate. Generally, no more than three waivers may be granted 
within any period of 15 consecutive plan years.
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    \60\ Code sec. 412(d); ERISA sec. 303.
---------------------------------------------------------------------------
    If a funding waiver is in effect for a plan, subject to 
certain exceptions, no plan amendment may be adopted that 
increases the liabilities of the plan by reason of any increase 
in benefits, any change in the accrual of benefits, or any 
change in the rate at which benefits vest under the plan. In 
addition, the IRS is authorized to require security to be 
granted as a condition of granting a funding waiver if the sum 
of the plan's accumulated funding deficiency and the balance of 
any outstanding waived funding deficiencies exceeds $1 million.
            Excise tax
    An employer is generally subject to an excise tax if it 
fails to make minimum required contributions and fails to 
obtain a waiver from the IRS.\61\ The excise tax is generally 
10 percent of the amount of the funding deficiency. In 
addition, a tax of 100 percent may be imposed if the funding 
deficiency is not corrected within a certain period.
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    \61\ Code sec. 4971.
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Deductions for contributions

    Employer contributions to qualified retirement plans are 
deductible, subject to certain limits. In the case of a defined 
benefit pension plan, the employer generally may deduct the 
greater of: (1) the amount necessary to satisfy the minimum 
funding requirement of the plan for the year; or (2) the amount 
of the plan's normal cost for the year plus the amount 
necessary to amortize certain unfunded liabilities over 10 
years, but limited to the full funding limitation for the 
year.\62\ However, the maximum amount of deductible 
contributions is generally not less than the plan's unfunded 
current liability.\63\
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    \62\ Code sec. 404(a)(1).
    \63\ Code sec. 404(a)(1)(D). In the case of a plan that terminates 
during the year, the maximum deductible amount is generally not less 
than the amount needed to make the plan assets sufficient to fund 
benefit liabilities as defined for purposes of the PBGC termination 
insurance program (sometimes referred to as ``termination liability'').
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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. The PBGC generally insures the benefits 
owed under defined benefit pension plans (up to certain limits) 
in the event a plan is terminated with insufficient assets. 
Employers pay premiums to the PBGC for this insurance coverage.
    PBGC premiums include a flat-rate premium and, in the case 
of an underfunded plan, a variable rate premium based on the 
amount of unfunded vested benefits.\64\ In determining the 
amount of unfunded vested benefits, the interest rate used is 
85 percent of the annual yield on 30-year Treasury securities 
for the month preceding the month in which the plan year 
begins.
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    \64\ ERISA sec. 4006.
---------------------------------------------------------------------------
    Under the Job Creation and Worker Assistance Act of 2002, 
for plan years beginning after December 31, 2001, and before 
January 1, 2004, 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 annual 
yield on 30-year Treasury securities for the month preceding 
the month in which the plan year begins.

Lump-sum distributions

    Accrued benefits under a defined benefit pension plan 
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. Defined benefit pension 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 pension 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.
    Statutory assumptions must be used in determining the 
minimum value of certain optional forms of benefit, such as a 
lump sum.\65\ 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 IRS) and an applicable interest rate.
---------------------------------------------------------------------------
    \65\ Code sec. 417(e)(3); ERISA sec. 205(g)(3).
---------------------------------------------------------------------------
    The applicable interest rate is the annual rate of interest 
on 30-year Treasury securities, determined as of the time that 
is permitted under regulations. The regulations provide various 
options for determining the interest rate to be used under the 
plan, such as the period for which the interest rate will 
remain constant (``stability period'') and the use of 
averaging.

Limits on benefits

    Annual benefits payable under a defined benefit pension 
plan generally may not exceed the lesser of (1) 100 percent of 
average compensation, or (2) $165,000 (for 2004).\66\ The 
dollar limit generally applies to a benefit payable in the form 
of a straight life annuity beginning no earlier than age 62. 
The limit is reduced if benefits are paid before age 62. In 
addition, if the benefit is not in the form of a straight life 
annuity, the benefit generally is adjusted to an equivalent 
straight life annuity. In making these reductions and 
adjustments, the interest rate used generally must be not less 
than the greater of: (1) five percent; or (2) the interest rate 
specified in the plan. However, for purposes of adjusting a 
benefit in a form that is subject to the minimum value rules 
(including the use of the interest rate on 30-year Treasury 
securities), such as a lump-sum benefit, the interest rate used 
must be not less than the greater of: (1) the interest rate on 
30-year Treasury securities; or (2) the interest rate specified 
in the plan.
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    \66\ Code sec. 415(b).
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                           REASONS FOR CHANGE

    The Treasury Department no longer issues 30-year Treasury 
securities, making it necessary to provide a replacement rate 
for pension purposes. The Committee considers interest rates on 
high-quality corporate bonds to be an appropriate replacement. 
However, the Committee believes that a more accurate 
calculation would result from matching interest rates to the 
timing of expected payments than using a single long-term 
interest rate. Accordingly, a yield curve that reflects the 
rates of interest on corporate bonds of varying maturities 
should be used for pension purposes.
    The Committee recognizes that a change in interest rates 
used to calculate lump sum payments to participants and 
beneficiaries must be phased in gradually so participants are 
not forced to make hasty decisions about the timing of 
retirement. A deferred effective date followed by a phase-in 
period for the yield curve would give participants adequate 
time to review the impact of the change in interest rates.
    The Committee believes that the deficit reduction 
contribution rules play an important role in assuring that 
pension plans are adequately funded. However, in recent years, 
a combination of sharp declines in plan asset values and 
unusually low interest rates has resulted in large additional 
contribution requirements in the case of plans that were not 
previously subject to the deficit reduction contribution rules. 
Making such additional contributions may have the effect of 
diverting funds from other business uses, which could force 
some companies into bankruptcy or to consider freezing or 
terminating their pension plans, thereby further weakening the 
pension system and the financial status of the PBGC. The 
Committee thus believes that employers should be provided 
temporary relief from such additional contributions. The 
Committee also believes that the deductible contribution limit 
should be increased to allow plan sponsors to contribute more 
in good times and thereby be able to contribute less in bad 
times.
    The Committee is also concerned about seriously underfunded 
plans maintained by employers experiencing ongoing financial 
uncertainty. Such plans present a risk to employees, as well as 
to the PBGC insurance program and to other PBGC premium payors. 
The Committee believes that appropriate restrictions should 
apply to limit the risk presented by such plans.

                        EXPLANATION OF PROVISION

Interest rate used to determine current liability and PBGC premiums

            In general
    The provision changes the interest rate used in determining 
current liability for funding and deduction purposes and in 
determining PBGC variable rate premiums for plan years 
beginning after December 31, 2003. The interest rate used for 
these purposes is based on rates of interest on high-quality 
corporate bonds. For plan years beginning before January 1, 
2007, the interest rate is based on amounts invested in high-
quality long-term corporate bonds. For subsequent years, 
interest rates are determined using a yield curve method that 
matches interest rates drawn from a yield curve based on high-
quality corporate bonds with the timing of expected benefit 
payments under the plan. The yield curve method is phased in 
over five years.
            Current liability for 2004-2006
    For purposes of determining a plan's current liability for 
plan years beginning in 2004, 2005, and 2006, the interest rate 
used must be within a permissible range of the weighted average 
of conservative long-term corporate bond rates during the four-
year period ending on the last day before the plan year begins. 
The permissible range for these years is from 90 percent to 100 
percent. For purposes of determining the four-year weighted 
average, the weighting applicable under present law applies 
(i.e., 40 percent, 30 percent, 20 percent and 10 percent, 
starting with the most recent year in the four-year period).
    The Secretary of the Treasury is directed to prescribe by 
regulation a method for periodically determining conservative 
long-term corporate bond rates for this purpose. The rates are 
to reflect rates of interest on amounts invested in high-
quality long-term corporate bonds and are to be based on the 
use of one or more indices as determined from time to time by 
the Secretary. For this purpose, it is intended that high-
quality corporate bonds are generally those in the top two 
quality levels available, but may include the third quality 
level as the Secretary deems appropriate.
            Current liability after 2006
    For plan years beginning after 2006, current liability is 
determined using the yield curve method, which is phased in 
over five years.
    The yield curve method is a method under which current 
liability is determined: (1) using interest rates drawn from a 
yield curve prescribed by the Secretary of the Treasury that 
reflects interest rates on high-quality corporate bonds of 
varying maturities; and (2) by matching the timing of the 
expected benefit payments under the plan to the interest rates 
on the yield curve (i.e., for bonds with maturity dates 
comparable to the times when benefits are expected to be paid). 
The Secretary of the Treasury is directed to publish any yield 
curve prescribed under the provision and the method of 
determining the yield curve, including the period of time for 
which interest rates are taken into account in determining the 
yield curve and the frequency with which a new yield curve is 
prescribed. For example, the Secretary may prescribe the yield 
curve on a monthly basis, to be applied for plan years 
beginning in the following month.
    Under the phase-in yield curve method applicable for plan 
years beginning in 2007-2010, current liability for a plan year 
equals the sum of two amounts: (1) the applicable percentage of 
current liability determined under the yield curve method; and 
(2) current liability determined using an interest rate in the 
permissible range of the weighted four-year average of 
conservative long-term corporate bond rates (i.e., the interest 
rate applicable for plan years beginning in 2004-2006), 
multiplied by a percentage equal to 100 percent minus the 
applicable percentage for the plan year. For this purpose, the 
applicable percentage for a plan year is determined in 
accordance with the following table.

  TABLE 2.--APPLICABLE PERCENTAGE FOR PLAN YEARS BEGINNING IN 2007-2010
------------------------------------------------------------------------
                                                              Applicable
                  Plan years beginning in:                    percentage
------------------------------------------------------------------------
2007.......................................................           20
2008.......................................................           40
2009.......................................................           60
2010.......................................................           80
------------------------------------------------------------------------

    Thus, for example, for plan years beginning in 2008, 
current liability under the phase-in yield curve method is the 
sum of: (1) 40 percent of current liability determined under 
the yield curve method, and (2) 60 percent of current liability 
determined using an interest rate in the permissible range of 
the weighted four-year average of conservative long-term 
corporate bond rates.
    The Secretary of the Treasury is directed to prescribe one 
or more simplified methods, in lieu of the yield curve method, 
for use in determining current liability. Such a simplified 
method may be used by a plan (other than a multiemployer plan) 
if, on each day during the preceding plan year, the plan had no 
more than 100 participants.\67\ A simplified method may apply 
for purposes of both the yield curve method and the phase-in 
yield curve method.
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    \67\ All defined benefit pension plans maintained by the same 
employer are treated as a single plan for this purpose.
---------------------------------------------------------------------------
            PBGC variable rate premiums
    For plan years beginning in 2004, 2005, or 2006, the 
interest rate used in determining the amount of unfunded vested 
benefits is the conservative long-term corporate bond rate (as 
determined by the Secretary of the Treasury) for the month 
preceding the month in which the plan year begins. For years 
after 2006, the interest rate or method applicable in 
determining current liability for a plan year also applies in 
determining the amount of unfunded vested benefits for the plan 
year for purposes of determining PBGC variable rate premiums. 
Thus, the phase-in yield curve method applies for plan years 
beginning in 2007 through 2010, and the yield curve method 
applies for plan years beginning after 2010. In addition, any 
simplified method prescribed by the Secretary of the Treasury 
may be used instead of the phase-in yield curve method or the 
yield curve method in determining the amount of unfunded vested 
benefits (without regard to the number of participants covered 
by the plan).

Interest rate used to determine minimum lump-sum benefits

    For plan years beginning in 2007 through 2010, the phase-in 
yield curve method generally applies in determining the amount 
of a benefit in a form that is subject to the minimum value 
rules, such as a lump-sum benefit, except that the annual rate 
of interest on 30-year Treasury securities is substituted for 
the conservative long-term corporate bond rate. Thus, for 
example, for plan years beginning in 2008, a lump-sum benefit 
payable under a plan may not be less than the sum of: (1) 40 
percent of the minimum lump-sum benefit determined under the 
yield curve method, and (2) 60 percent of the minimum lump-sum 
benefit determined using the annual rate of interest on 30-year 
Treasury securities.
    For plan years beginning after 2010, the yield curve method 
generally applies in determining the amount of a benefit in a 
form that is subject to the minimum value rules.
    Any simplified method prescribed by the Secretary of the 
Treasury to be used instead of the yield curve method in 
determining current liability may also be used in determining 
minimum lump-sum benefits (without regard to the number of 
participants covered by the plan). It is intended that, for 
this purpose, the Secretary may prescribe a factor to be used 
that combines the required interest rate and mortality 
assumptions applicable under the minimum value rules. If a plan 
provides for the use of a simplified method for purposes of 
calculating lump-sum benefits, the simplified method must apply 
consistently to all participants and to all lump sums.A plan 
may be amended to change the method used to determine lump-sum benefits 
(e.g., from the yield curve method to a simplified method or from one 
simplified method to another), subject to the anticutback rules 
generally prohibiting the elimination of optional forms of benefit, as 
well as the nondiscrimination rules regarding the timing of plan 
amendments.
    Under the provision of the bill relating to plan amendments 
(sec. 471 of the bill), a plan amendment made pursuant to a 
provision of the bill generally will not violate the 
anticutback rule if certain requirements are met (e.g., the 
plan amendment is made on or before the last day of the first 
plan year beginning on or after January 1, 2006). Thus, subject 
to those requirements, a plan amendment will not violate the 
anticutback rule merely because it provides for the use of the 
phase-in yield curve method and the yield curve method, or a 
simplified method, rather than the interest rate on 30-year 
Treasury securities, in determining benefits subject to the 
minimum value rules.

Interest rate used to apply benefit limits to lump sums

    Under the provision, in adjusting a form of benefit that is 
subject to the minimum value rules, such as a lump-sum benefit, 
for purposes of applying the limits on benefits payable under a 
defined benefit pension plan (sec. 415), the interest rate used 
must be not less than the greater of: (1) 5.5 percent; or (2) 
the interest rate specified in the plan.\68\
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    \68\ In the case of a plan that provides lump-sum benefits 
determined solely as required under the minimum value rules (rather 
than using an interest rate that results in larger lump-sum benefits), 
the interest rate specified in the plan is the interest rate or method 
applicable under the minimum value rules. Thus, for purposes of 
applying the benefit limits to lump-sum benefits under the plan, the 
interest rate used must be not less than the greater of: (1) 5.5 
percent; or (2) the interest rate or method applicable under the 
minimum value rules.
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    Under the provision of the bill relating to plan amendments 
(sec. 471 of the bill), a plan amendment made pursuant to a 
provision of the bill generally will not violate the 
anticutback rule if certain requirements are met (e.g., the 
plan amendment is made on or before the last day of the first 
plan year beginning on or after January 1, 2006). Thus, subject 
to those requirements, a plan amendment made pursuant to the 
provision relating to the interest rate used to apply the 
benefit limits to lump-sum benefits generally will not violate 
the anticutback rule.\69\
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    \69\ A special transition rule, described below, applies for 2004 
and 2005.
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Deficit reduction contribution relief

    Under the provision, if a plan was not subject to the 
deficit reduction contribution rules for the plan year 
beginning in 2000, the deficit reduction contribution rules do 
not apply to the plan for plan years beginning in 2004, 2005, 
or 2006.\70\ Thus, with respect to such a plan, no additional 
contributions are required under the deficit reduction 
contribution rules for these years.
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    \70\ Whether a plan was subject to the deficit reduction 
contribution rules for the plan year beginning in 2000 is determined 
without regard to the rule that allows the temporary conservative long-
term corporate bond rate to be used for lookback rule purposes, as 
discussed below.
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Deduction limits for plan contributions

    The provision increases the limit on deductions for 
contributions to a defined benefit pension plan. Under the 
provision, the maximum amount otherwise deductible is not less 
than the excess (if any) of (1) 130 percent of the plan's 
current liability, over (2) the value of plan assets.

Benefit limitations for financially distressed plans

    Under the provision, certain limitations apply to a defined 
benefit pension plan that is subject to the deficit reduction 
contribution rules if the plan is a financially distressed plan 
for a plan year.\71\
---------------------------------------------------------------------------
    \71\ The provision does not apply to plans that are not subject to 
the deficit reduction contribution rules, i.e., multiemployer plans and 
single-employer plans with no more than 100 participants on any day in 
the preceding plan year.
---------------------------------------------------------------------------
    A plan is a financially distressed plan for a plan year if: 
(1) the plan sponsor during any two of the five immediately 
preceding plan years has an outstanding debt instrument that is 
rated speculative grade or lower by one or more nationally 
recognized statistical rating organizations for corporate 
bonds; and (2) the funded liability percentage of the plan as 
of the beginning of the preceding plan year is less than 50 
percent.\72\ Once a plan is a financially distressed plan, the 
plan continues to be treated as a financially distressed plan 
for subsequent plan years that begin before the first plan year 
beginning after: (1) a five-consecutive-year period during 
which the plan sponsor has no outstanding debt instrument that 
is rated speculative grade or lower; or (2) a five-consecutive-
year period during which the funded liability percentage of the 
plan as of the beginning of the preceding plan year is at least 
50 percent. The Secretary of the Treasury is directed to 
prescribe rules for applying the definition of a financially 
distressed plan in cases in which a plan sponsor's outstanding 
debt instruments are not rated.
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    \72\ For this purpose, funded liability percentage is determined 
taking into account only vested benefits and using the interest rate 
applicable in determining PBGC variable rate premiums and the fair 
market value of the plan assets.
---------------------------------------------------------------------------
    Under the provision, if the plan is a financially 
distressed plan for a plan year, the following limitations 
apply:
    (1) Restrictions on benefit increases.--No plan amendment 
may take effect during the plan year if the amendment increases 
plan liabilities by reason of any increase in benefits, any 
change in the accrual of benefits, or any change in the rate at 
which benefits vest under the plan. If a plan amendment is 
adopted in violation of this limitation, the provisions of the 
plan are to be applied without regard to the amendment.
    (2) Freezing and elimination of benefits.--Each 
participant's accrued benefit, any death or disability 
benefits, and any social security supplement\73\ under the plan 
must be frozen as of the end of the preceding year. Such 
benefits are determined without regard to any plan amendment 
adopted during the preceding plan year that increased benefits 
and are determined after the application of this limitation if 
it applied for the preceding year. In addition, all other 
benefits provided under the plan must be eliminated. Freezing 
or elimination of benefits is required only to the extent that 
the implementation of the benefit freeze or elimination by a 
plan amendment adopted at the end of the preceding plan year 
would have been permitted under the anticutback rules.
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    \73\ For this purpose, social security supplement has the meaning 
as described in Code section 411(a)(9).
---------------------------------------------------------------------------
    (3) Restrictions on distributions.--In the case of a 
participant or beneficiary whose annuity starting date occurs 
in the plan year, the plan may not make: (a) any payment in 
excess of the monthly amount paid under a single life annuity 
(plus any social security supplement provided under the plan); 
(b) any payment for the purchase of an irrevocable commitment 
from an insurer to pay benefits (e.g., an annuity contract); or 
(c) any other payment specified by the Secretary of the 
Treasury by regulations.\74\ This restriction continues to for 
the period during which the plan is a financially distressed 
plan.
---------------------------------------------------------------------------
    \74\ Permissible distributions are determined by reference to Code 
section 401(a)(32)(B) and ERISA section 206(e)(2) (relating to payments 
if a plan has a liquidity shortfall).
---------------------------------------------------------------------------
    If a plan is a financially distressed plan for a plan year, 
but the plan's funded current liability percentage as of the 
beginning of the preceding plan year is at least 50 percent, 
the requirement that benefits be frozen or eliminated as 
described in (2) above no longer applies. Thus, benefits under 
the plan are determined without regard to any freezing or 
elimination of benefits that was required as a result of 
financially distressed plan status. In addition, a plan 
amendment that increases plan liabilities by reason of any 
increase in benefits, any change in the accrual of benefits, or 
any change in the rate at which benefits vest under the plan 
may take effect, but only if the funded current liability 
percentage as of the end of the plan year is projected to be at 
least 50 percent (taking into account the effect of the 
amendment).
    These limitations generally apply for the first plan year 
for which a plan is a financially distressed plan. However, in 
the case of a plan maintained pursuant to a collective 
bargaining agreement that is in effect before the beginning of 
the first plan year for which a plan is a financially 
distressed plan, the limitations do not apply to plan benefits 
pursuant to, and individuals covered by, the agreement for plan 
years beginning before the date on which the agreement 
terminates (determined without regard to any extension of the 
agreement).
    If a plan is a financially distressed plan for a plan year, 
the employer must, at least 45 days before the beginning of the 
plan year, provide notice to each plan participant and 
beneficiary, each labor organization representing such 
participants or beneficiaries, and the PBGC. The notice must 
explain: (1) that the plan is treated as a financially 
distressed plan and the reasons why it is so treated; and (2) 
the restrictions applicable to the plan for the plan year as a 
result of financially distressed status. The notice must be 
provided in a form and manner as prescribed by the Secretary of 
the Treasury. The Secretary may provide for the coordination of 
this notice requirement with the notice required if a plan is 
amended to provide for a significant reduction in the rate of 
future benefit accrual. The notice must be written in a manner 
so as to be understood by the average plan participant and may 
be provided in written, electronic, or other appropriate form 
to the extent that such form is reasonably accessible to the 
person to whom notice is required to be provided. An employer 
that fails to provide the required notice to a participant, 
beneficiary, or the PBGC may (in the discretion of a court) be 
liable to the participant, beneficiary, or PBGC in the amount 
of up to $100 a day from the date of the failure, and the court 
may in its discretion order such other relief as it deems 
proper.

Treasury recommendations

    The Secretary of the Treasury is required by December 31, 
2004, to submit recommendations for future changes to the 
funding rules to strengthen the funded status of plans, 
including recommendations relating to the disclosure of funded 
status. Such recommendations are to be submitted to the Senate 
Committees on Finance and Health, Education, Labor, and 
Pensions and to the House Committees on Ways and Means and 
Education and the Workforce.

                             EFFECTIVE DATE

Interest rate used to determine current liability and PBGC premiums

    The provision is generally effective for plan years 
beginning after December 31, 2003. For purposes of applying 
certain rules (``lookback rules'') to plan years beginning 
after December 31, 2003, the amendments made by the provision 
may be applied as if they had been in effect for all years 
beginning before the effective date. For purposes of the 
provision, ``lookback rules'' means: (1) the rule under which a 
plan is not subject to the additional funding requirements for 
a plan year if the plan's funded current liability percentage 
was at least 90 percent for each of the two immediately 
preceding plan years or each of the second and third 
immediately preceding plan years; and (2) the rule under which 
quarterly contributions are required for a plan year if the 
plan's funded current liability percentage was less than 100 
percent for the preceding plan year. The Secretary of the 
Treasury may prescribe simplified assumptions that may be used 
in applying the provision for prior plan years for purposes of 
the lookback rules. The amendments made by the provision may be 
applied for purposes of the lookback rules, regardless of the 
funded current liability percentage reported for the plan on 
the plan's annual reports (i.e., Form 5500) for preceding 
years.

Interest rate used to determine minimum lump-sum benefits

    The provision is effective for plan years beginning after 
December 31, 2006.
    The provision provides a special rule that allows a plan 
amendment to change the interest rate used to determine certain 
optional forms of benefit. Under the special rule, a plan 
amendment will not violate the anticutback rule if: (1) for the 
last plan year beginning in 2003, the plan provides that the 
annual rate of interest on 30-year Treasury securities is used 
indetermining the amount of a benefit (other than the accrued 
benefit) that is not subject to the minimum value rules; (2) the plan 
is amended to provide that a different rate of interest is used in 
determining the amount of such benefit; and (3) the first plan year for 
which such amendment is effective begins no later than January 1, 2007. 
The provision of the bill relating to plan amendments (sec. 471 of the 
bill) applies to a plan amendment made pursuant to the special rule.

Interest rate used to apply benefit limits to lump sums

    The provision is generally effective for years beginning 
after December 31, 2003. In the case of years beginning in 2004 
or 2005, the provision does not apply if a greater benefit is 
permitted by applying the benefit limits without regard to the 
provision.

Deficit reduction contribution relief

    The provision is effective on the date of enactment.

Deduction limits for plan contributions

    The provision is effective for years beginning after 
December 31, 2003.

Benefit limitations for certain financially distressed plans

    The provision relating to benefit limitations for 
financially distressed plans is generally effective for plan 
years beginning after December 31, 2006. The Secretary of the 
Treasury is directed to issue rules implementing this provision 
by December 31, 2005.
    In the case of a plan maintained pursuant to one or more 
collective bargaining agreements ratified by the date of 
enactment, the provision does not apply to employees covered by 
such an agreement for plan years beginning before the later of 
(1) the date on which the last of such agreements terminates 
(determined without regard to any extension thereof on or after 
the date of enactment), or (2) January 1, 2007.

Treasury recommendations

    The provision directing the Secretary of the Treasury to 
submit recommendations relating to the funding rules is 
effective on the date of enactment.

2. Updating deduction rules for combination of plans (sec. 409 of the 
        bill and secs. 404(e)(7) and 4972 of the Code)

                              PRESENT LAW

    Employer contributions to qualified retirement plans are 
deductible subject to certain limits.\75\ In general, the 
deduction limit depends on the kind of plan.
---------------------------------------------------------------------------
    \75\ Sec. 404
---------------------------------------------------------------------------
    In the case of a defined benefit pension plan, the employer 
generally may deduct the greater of: (1) the amount necessary 
to satisfy the minimum funding requirement of the plan for the 
year; or (2) the amount of the plan's normal cost for the year 
plus the amount necessary to amortize certain unfunded 
liabilities over ten years, but limited to the full funding 
limitation for the year. However, the maximum amount of 
deductible contributions is generally not less than the plan's 
unfunded current liability.\76\
---------------------------------------------------------------------------
    \76\ In the case of a plan that terminates during the year, the 
maximum deductible amount is generally not less than the amount needed 
to make the plan assets sufficient to fund benefit liabilities as 
defined for purposes of the PBGC termination insurance program.
---------------------------------------------------------------------------
    In the case of a defined contribution plan, the employer 
generally may deduct contributions in an amount up to 25 
percent of compensation paid or accrued during the employer's 
taxable year.
    If an employer sponsors one or more defined benefit plans 
and one or more defined contribution plans that cover at least 
one of the same employees, an overall deduction limit applies 
to the total contributions to all plans for a plan year.\77\ 
The overall deduction limit generally is the greater of (1) 25 
percent of compensation, or (2) the amount necessary to meet 
the minimum funding requirements of the defined benefit plan 
for the year (or the amount of either the plan's unfunded 
current liability or the plan's unfunded termination liability 
in the case of a terminating plan).
---------------------------------------------------------------------------
    \77\ Sec. 404(a)(7).
---------------------------------------------------------------------------
    Under EGTRRA, elective deferrals are not subject to the 
limits on deductions and are not taken into account in applying 
the limits to other employer contributions.\78\ The combined 
deduction limit of 25 percent of compensation for defined 
benefit and defined contribution plans does not apply if the 
only amounts contributed to the defined contribution plan are 
elective deferrals.
---------------------------------------------------------------------------
    \78\ Sec. 404(n). The provisions of EGTRRA generally do not apply 
for years beginning after December 31, 2010.
---------------------------------------------------------------------------
    Subject to certain exceptions, an employer that makes 
nondeductible contributions to a plan is subject to an excise 
tax equal to 10 percent of the amount of the nondeductible 
contributions for the year.\79\ Certain contributions to a 
defined contribution plan that are nondeductible solely because 
of the overall deduction limit are disregarded in determining 
the amount of nondeductible contributions for purposes of the 
excise tax. Contributions that are disregarded are the greater 
of (1) the amount of contributions not in excess of six percent 
of the compensation of the employees covered by the defined 
contribution plan, or (2) the sum of matching contributions and 
elective deferrals.
---------------------------------------------------------------------------
    \79\ Sec. 4972.
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    The Committee understands that many employers are required 
to make substantial contributions to their defined benefit 
pension plans and that in such cases the overall limit on 
employer deductions for contributions to combinations of 
defined benefit and defined contribution plans can operate to 
reduce the deduction attributable to contributions to defined 
contribution plans. The Committee believes that stability in 
the ability to make deductible defined contribution plan 
contributions up to certain levels is desirable.

                        EXPLANATION OF PROVISION

    Under the provision, the overall limit on employer 
deductions for contributions to combinations of defined benefit 
and defined contribution plans applies to contributions to one 
or more defined contribution plans only to the extent that such 
contributions exceed six percent of compensation otherwise paid 
or accrued during the taxable year to the beneficiaries under 
the plans.
    In addition, under the provision, for purposes of 
determining the excise tax on nondeductible contributions, 
matching contributions to a defined contribution plan that are 
nondeductible solely because of the overall deduction limit are 
disregarded.

                             EFFECTIVE DATE

    The provision is effective for contributions for taxable 
years beginning after December 31, 2004.

       B. Improvements in Portability and Distribution Provisions


1. Purchase of permissive service credit (sec. 411 of the bill and 
        secs. 403(b)(13), 415(n)(3), and 457(e)(17) of the Code)

                              PRESENT LAW

In general

    Present law imposes limits on contributions and benefits 
under qualified plans.\80\ The limits on contributions and 
benefits under qualified plans are based on the type of plan. 
Under a defined benefit plan, the maximum annual benefit 
payable at retirement is generally the lesser of (1) a certain 
dollar amount ($165,000 for 2004) or (2) 100 percent of the 
participant's average compensation for his or her high three 
years.
---------------------------------------------------------------------------
    \80\ Sec. 415.
---------------------------------------------------------------------------
    A qualified retirement plan maintained by a State or local 
government employer may provide that a participant may make 
after-tax employee contributions in order to purchase 
permissive service credit, subject to certain limits.\81\
---------------------------------------------------------------------------
    \81\ Sec. 415(n)(3).
---------------------------------------------------------------------------
    In the case of any repayment of contributions and earnings 
to a governmental plan with respect to an amount previously 
refunded upon a forfeiture of service credit under the plan (or 
another plan maintained by a State or local government employer 
within the same State), any such repayment is not taken into 
account for purposes of the section 415 limits on contributions 
and benefits. Also, service credit obtained as a result of such 
a repayment is not considered permissive service credit for 
purposes of the section 415 limits.

Permissive service credit

            Definition of permissive service credit
    Permissive service credit means credit for a period of 
service recognized by the governmental plan which the 
participant has not received under the plan and which the 
employee receives only if the employee voluntarily contributes 
to the plan an amount (as determined by the plan) that does not 
exceed the amount necessary to fund the benefit attributable to 
the period of service and that is in addition to the regular 
employee contributions, if any, under the plan.
    The IRS has ruled that credit is not permissive service 
credit where it is purchased to provide enhanced retirement 
benefits for a period of service already credited under the 
plan, as the enhanced benefit is treated as credit for service 
already received.\82\
---------------------------------------------------------------------------
    \82\ Priv. Ltr. Rul. 200229051 (April 26, 2002).
---------------------------------------------------------------------------
            Nonqualified service
    Service credit is not permissive service credit if more 
than five years of permissive service credit is purchased for 
nonqualified service or if nonqualified service is taken into 
account for an employee who has less than five years of 
participation under the plan. Nonqualified service is service 
other than service (1) as a Federal, State or local government 
employee, (2) as an employee of an association representing 
Federal, State or local government employees, (3) as an 
employee of an educational institution which provides 
elementary or secondary education, as determined under State 
law, or (4) for military service. Service under (1), (2) and 
(3) is nonqualified service if it enables a participant to 
receive a retirement benefit for the same service under more 
than one plan.
            Trustee-to-trustee transfers to purchase permissive service 
                    credit
    Under EGTRRA, a participant is not required to include in 
gross income a direct trustee-to-trustee transfer to a 
governmental defined benefit plan from a section 403(b) annuity 
or a section 457 plan if the transferred amount is used (1) to 
purchase permissive service credit under the plan, or (2) to 
repay contributions and earnings with respect to an amount 
previously refunded under a forfeiture of service credit under 
the plan (or another plan maintained by a State or local 
government employer within the same State).\83\
---------------------------------------------------------------------------
    \83\ Secs. 403(b)(13) and 457(e)(17).
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    The Committee believes that allowing employees to use their 
section 403(b) annuity and governmental section 457 plan 
benefits to purchase permissive service credits or make 
repayments with respect to forfeitures of service credit 
results in more significant retirement benefits for employees 
who would not otherwise be able to afford such credits or 
repayments. The Committee believes that it is appropriate to 
modify the provisions regarding such transfers in order to 
facilitate such purchases or repayments. The Committee also 
believes that it is appropriate to expand the definition of 
permissive service credit and to allow participants to purchase 
credit for other periods deemed appropriate by the public 
retirement systems.

                        EXPLANATION OF PROVISION

Permissive service credit

    The provision modifies the definition of permissive service 
credit by providing that permissive service credit means 
service credit which relates to benefits to which the 
participant is not otherwise entitled under such governmental 
plan, rather than service credit which such participant has not 
received under the plan. Credit qualifies as permissive service 
credit if it is purchased to provide an increased benefit for a 
period of service already credited under the plan (e.g., if a 
lower level of benefit is converted to a higher benefit level 
otherwise offered under the same plan) as long as it relates to 
benefits to which the participant is not otherwise entitled.
    The provision allows participants to purchase credit for 
periods regardless of whether service is performed, subject to 
the limits on nonqualified service.
    Under the provision, service as an employee of an 
educational organization providing elementary or secondary 
education can be determined under the law of the jurisdiction 
in which the service was performed. Thus, for example, 
permissive service credit can be granted for time spent 
teaching outside of the United States without being considered 
nonqualified service credit.

Trustee-to-trustee transfers to purchase permissive service credit

    The provision provides that the limits regarding 
nonqualified service are not applicable in determining whether 
a trustee-to-trustee transfer from a section 403(b) annuity or 
a section 457 plan to a governmental defined benefit plan is 
for the purchase of permissive service credit. Thus, failure of 
the transferee plan to satisfy the limits does not cause the 
transferred amounts to be included in the participant's income. 
As under present law, the transferee plan must satisfy the 
limits in providing permissive service credit as a result of 
the transfer.
    The provision provides that trustee-to-trustee transfers 
under sections 457(e)(17) and 403(b)(13) may be made regardless 
of whether the transfer is made between plans maintained by the 
same employer. The provision also provides that amounts 
transferred from a section 403(b) annuity or a section 457 plan 
to a governmental defined benefit plan to purchase permissive 
service credit are subject to the distribution rules applicable 
under the Internal Revenue Code to the defined benefit plan.

                             EFFECTIVE DATE

    The provision is generally effective as if included in the 
amendments made by section 1526(a) of the Taxpayer Relief Act 
of 1997, except that the provision regarding trustee-to-trustee 
transfers is effective as if included in the amendments made by 
section 647 of the Economic Growth and Tax Relief 
Reconciliation Act of 2001.

2. Rollover of after-tax amounts (sec. 412 of the bill and sec. 
        402(c)(2) of the Code)

                              PRESENT LAW

    Employee after-tax contributions may be rolled over from a 
tax-qualified retirement plan into another tax-qualified 
retirement plan, if the plan to which the rollover is made is a 
defined contribution plan, the rollover is accomplished through 
a direct rollover, and the plan to which the rollover is made 
provides for separate accounting for such contributions (and 
earnings thereon). After-tax contributions can also be rolled 
over from a tax-sheltered annuity (a ``section 403(b) 
annuity'') to another tax-sheltered annuity if the rollover is 
a direct rollover, and the annuity to which the rollover is 
made provides for separate accounting for such contributions 
(and earnings thereon). After-tax contributions may also be 
rolled over to an IRA. If the rollover is to an IRA, the 
rollover need not be a direct rollover and the IRA owner has 
the responsibility to keep track of the amount of after-tax 
contributions.\84\
---------------------------------------------------------------------------
    \84\ Sec. 402(c)(2); IRS Notice 2002-3, 2002-2 I.R.B. 289.
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    Under present law, tax-sheltered annuities may provide for 
after-tax contributions, but are not permitted to receive 
rollovers of after-tax contributions from qualified retirement 
plans. Under present law, after-tax contributions cannot be 
rolled over into a defined benefit plan. The Committee wishes 
to expand opportunities for portability with respect to after-
tax contributions.

                        EXPLANATION OF PROVISION

    The provision allows after-tax contributions to be rolled 
over from a qualified retirement plan to another qualified 
retirement plan (either a defined contribution or a defined 
benefit plan) or to a tax-sheltered annuity. As under present 
law, the rollover must be a direct rollover, and the plan to 
which the rollover is made must separately account for after-
tax contributions (and earnings thereon).

                             EFFECTIVE DATE

    The provision is effective for taxable years beginning 
after December 31, 2004.

3. Application of minimum distribution rules to governmental plans 
        (sec. 413 of the bill)

                              PRESENT LAW

    Minimum distribution rules apply to tax-favored retirement 
arrangements, including governmental plans. In general, under 
these rules, distribution of minimum benefits must begin no 
later than the required beginning date. Minimum distribution 
rules also apply to benefits payable with respect to a plan 
participant who has died. Failure to comply with the minimum 
distribution rules results in an excise tax imposed on the plan 
participant equal to 50 percent of the required minimum 
distribution not distributed for the year. The excise tax may 
be waived in certain cases.
    In the case of distributions prior to the death of the plan 
participant, the minimum distribution rules are satisfied if 
either (1) the participant's entire interest in the plan is 
distributed by the required beginning date, or (2) the 
participant's interest in the plan is to be distributed (in 
accordance with regulations) beginning not later than the 
required beginning date, over a permissible period. The 
permissible periods are (1) the life of the participant, (2) 
the lives of the participant and a designated beneficiary, (3) 
the life expectancy of the participant, or (4) the joint life 
and last survivor expectancy of the participant and a 
designated beneficiary. In calculating minimum required 
distributions from account-type arrangements (e.g., a defined 
contribution plan or an individual retirement arrangement), 
life expectancies of the participant and the participant's 
spouse generally may be recomputed annually.
    The required beginning date generally is April 1 of the 
calendar year following the later of (1) the calendar year in 
which the participant attains age 70\1/2\ or (2) the calendar 
year in which the participant retires.
    The minimum distribution rules also apply to distributions 
to beneficiaries of deceased participants. In general, if the 
participant dies after minimum distributions have begun, 
theremaining interest must be distributed at least as rapidly as under 
the minimum distribution method being used as of the date of death. If 
the participant dies before minimum distributions have begun, then the 
entire remaining interest must generally be distributed within five 
years of the participant's death. The five-year rule does not apply if 
distributions begin within one year of the participant's death and are 
payable over the life of a designated beneficiary or over the life 
expectancy of a designated beneficiary. A surviving spouse beneficiary 
is not required to begin distributions until the date the deceased 
participant would have attained age 70\1/2\. In addition, if the 
surviving spouse makes a rollover from the plan into a plan or IRA of 
his or her own, the minimum distribution rules apply separately to the 
surviving spouse.

                           REASONS FOR CHANGE

    The Committee believes that governmental plans should be 
provided greater flexibility in complying with the minimum 
distribution requirements to accommodate plan designs commonly 
used by governmental plans.

                        EXPLANATION OF PROVISION

    The provision directs the Secretary of the Treasury to 
issue regulations under which a governmental plan is treated as 
complying with the minimum distribution requirements, for all 
years to which such requirements apply, if the plan complies 
with a reasonable, good faith interpretation of the statutory 
requirements. It is intended that the regulations apply for 
periods before the date of enactment.

                             EFFECTIVE DATE

    The provision is effective on the date of enactment.

4. Waiver of 10-percent early withdrawal tax on certain distributions 
        from pension plans for public safety employees (sec. 414 of the 
        bill and sec. 72(t) of the Code)

                              PRESENT LAW

    Under present law, a taxpayer who receives a distribution 
from a qualified retirement plan prior to age 59\1/2\, death, 
or disability generally is subject to a 10-percent early 
withdrawal tax on the amount includible in income, unless an 
exception to the tax applies. Among other exceptions, the early 
distribution tax does not apply to distributions made to an 
employee who separates from service after age 55, or to 
distributions that are part of a series of substantially equal 
periodic payments made for the life (or life expectancy) of the 
employee or the joint lives (or life expectancies) of the 
employee and his or her beneficiary.

                           REASONS FOR CHANGE

    The Committee recognizes that public safety employees often 
retire earlier than workers in other professions. The Committee 
believes that public safety employees who separate from service 
after age 50 should be permitted to receive distributions from 
defined benefit pension plans without the imposition of the 
early withdrawal tax.

                        EXPLANATION OF PROVISION

    Under the provision, the 10-percent early withdrawal tax 
does not apply to distributions from a governmental defined 
benefit pension plan to a qualified public safety employee who 
separates from service after age 50. A qualified public safety 
employee is an employee of a State or political subdivision of 
a State if the employee provides police protection, 
firefighting services, or emergency medical services for any 
area within the jurisdiction of such State or political 
subdivision.

                             EFFECTIVE DATE

    The provision is effective for distributions made after the 
date of enactment.

5. Rollovers by nonspouse beneficiaries of certain retirement plan 
        distributions (sec. 415 of the bill and and secs. 402, 
        403(a)(4), 403(b)(8), and 457(e)(16) of the Code)

                              PRESENT LAW

Tax-free rollovers

    Under present law, a distribution from a qualified 
retirement plan, a tax-sheltered annuity ``section 403(b) 
annuity''), an eligible deferred compensation plan of a State 
or local government employer (a ``governmental section 457 
plan''), or an individual retirement arrangement (an ``IRA'') 
generally is included in income for the year distributed. 
However, eligible rollover distributions may be rolled over tax 
free within 60 days to another plan, annuity, or IRA.\85\
---------------------------------------------------------------------------
    \85\ The IRS has the authority to waive the 60-day requirement if 
failure to waive the requirement would be against equity or good 
conscience, including cases of casualty, disaster, or other events 
beyond the reasonable control of the individual. Sec. 402(c)(3)(B).
---------------------------------------------------------------------------
    In general, an eligible rollover distribution includes any 
distribution to the plan participant or IRA owner other than 
certain periodic distributions, minimum required distributions, 
and distributions made on account of hardship.\86\ 
Distributions to a participant from a qualified retirement 
plan, a tax-sheltered annuity, or a governmental section 457 
plan generally can be rolled over to any of such plans or an 
IRA.\87\ Similarly, distributions from an IRA to the IRA owner 
generally are permitted to be rolled over into a qualified 
retirement plan, a tax-sheltered annuity, a governmental 
section 457 plan, or another IRA.
---------------------------------------------------------------------------
    \86\ Sec. 402(c)(4). Certain other distributions also are not 
eligible rollover distributions, e.g., corrective distributions of 
elective deferrals in excess of the elective deferral limits and loans 
that are treated as deemed distributions.
    \87\ Some restrictions or special rules may apply to certain 
distributions. For example, after-tax amounts distributed from a plan 
can be rolled over only to a plan of the same type or to an IRA.
---------------------------------------------------------------------------
    Similar rollovers are permitted in the case of a 
distribution to the surviving spouse of the plan participant or 
IRA owner, but not to other persons.
    If an individual inherits an IRA from the individual's 
deceased spouse, the IRA may be treated as the IRA of the 
surviving spouse. This treatment does not apply to IRAs 
inherited from someone other than the deceased spouse. In such 
cases, the IRA is not treated as the IRA of the beneficiary. 
Thus, for example, the beneficiary may not make contributions 
to the IRA and cannot roll over any amounts out of the 
inherited IRA. Like the original IRA owner, no amount is 
generally included in income until distributions are made from 
the IRA. Distributions from the inherited IRA must be made 
under the rules that apply to distributions to beneficiaries, 
as described below.

Minimum distribution rules

    Minimum distribution rules apply to tax-favored retirement 
arrangements. In the case of distributions prior to the death 
of the participant, distributions generally must begin by the 
April 1 of the calendar year following the later of the 
calendar year in which the participant (1) attains age 70\1/2\ 
or (2) retires.\88\ The minimum distribution rules also apply 
to distributions following the death of the participant. If 
minimum distributions have begun prior to the participant's 
death, the remaining interest generally must be distributed at 
least as rapidly as under the minimum distribution method being 
used prior to the date of death. If the participant dies before 
minimum distributions have begun, then either (1) the entire 
remaining interest must be distributed within five years of the 
death, or (2) distributions must begin within one year of the 
death over the life (or life expectancy) of the designated 
beneficiary. A beneficiary who is the surviving spouse of the 
participant is not required to begin distributions until the 
date the deceased participant would have attained age 70\1/2\. 
In addition, if the surviving spouse makes a rollover from the 
plan into a plan or IRA of his or her own, the minimum 
distribution rules apply separately to the surviving spouse.
---------------------------------------------------------------------------
    \88\ In the case of five-percent owners and distributions from an 
IRA, distributions must begin by April 1 of the calendar year following 
the year in which the individual attains age 70\1/2\.
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    The Committee understands that, in practice, many plans 
provide that distributions to a beneficiary who is not the 
surviving spouse of the participant are paid out soon after the 
death of participant in a lump sum, even though the minimum 
distribution rules would permit a longer payout period. The 
Committee understands that many beneficiaries would like to 
avoid the adverse tax consequences of an immediate lump sum, as 
well as take advantage of the opportunity to receive periodic 
payments for life or over the beneficiary's lifetime. The 
Committee wishes to provide beneficiaries with additional 
flexibility regarding timing of distributions, consistent with 
the minimum distribution rules applicable to nonspouse 
beneficiaries. To accomplish this result, the Committee bill 
allows nonspouse beneficiaries to roll over benefits received 
after the death of the participant to an IRA and to receive 
distributions in a manner consistent with the minimum 
distribution rules for nonspouse beneficiaries.

                        EXPLANATION OF PROVISION

    The provision provides that benefits of a beneficiary other 
than a surviving spouse may be transferred directly to an IRA. 
The IRA is treated as an inherited IRA of the nonspouse 
beneficiary. Thus, for example, distributions from the 
inherited IRA are subject to the distribution rules applicable 
to beneficiaries. The provision applies to amounts payable to a 
beneficiary under a qualified retirement plan, governmental 
section 457 plan, or a tax-sheltered annuity. To the extent 
provided by the Secretary, the provision applies to benefits 
payable to a trust maintained for a designated beneficiary to 
the same extent it applies to the beneficiary.

                             EFFECTIVE DATE

    The provision is effective for distributions made after 
December 31, 2004.

6. Faster vesting of employer nonelective contributions (sec. 416 of 
        the bill, sec. 411 of the Code, and sec. 203 of ERISA)

                              PRESENT LAW

    Under present law, in general, a plan is not a qualified 
plan unless a participant's employer-provided benefit vests at 
least as rapidly as under one of two alternative minimum 
vesting schedules. A plan satisfies the first schedule if a 
participant acquires a nonforfeitable right to 100 percent of 
the participant's accrued benefit derived from employer 
contributions upon the completion of five years of service. A 
plan satisfies the second schedule if a participant has a 
nonforfeitable right to at least 20 percent of the 
participant's accrued benefit derived from employer 
contributions after three years of service, 40 percent after 
four years of service, 60 percent after five years of service, 
80 percent after six years of service, and 100 percent after 
seven years of service.\89\
---------------------------------------------------------------------------
    \89\ The minimum vesting requirements are also contained in Title I 
of the Employee Retirement Income Security Act of 1974 (``ERISA'').
---------------------------------------------------------------------------
    Faster vesting schedules apply to employer matching 
contributions. Employer matching contributions are required to 
vest at least as rapidly as under one of the following two 
alternative minimum vesting schedules. A plan satisfies the 
first schedule if a participant acquires a nonforfeitable right 
to 100 percent of employer matching contributions upon the 
completion of three years of service. A plan satisfies the 
second schedule if a participant has a nonforfeitable right to 
20 percent of employer matching contributions for each year of 
service beginning with the participant's second year of service 
and ending with 100 percent after six years of service.

                           REASONS FOR CHANGE

    For many employees, a defined contribution plan is the only 
type of retirement plan offered by their employer. Providing 
faster vesting for all employer contributions to such plans 
will enable shorter-service employees to accumulate greater 
retirement savings.
    In addition, providing the same vesting rule for all 
employer contributions to defined contribution plans will 
provide simplification.

                        EXPLANATION OF PROVISION

    The provision applies the present-law vesting schedule for 
matching contributions to all employer contributions to defined 
contribution plans.

                             EFFECTIVE DATE

    The provision is effective for contributions (including 
allocations of forfeitures) for plan years beginning after 
December 31, 2004, with a delayed effective date for plans 
maintained pursuant to a collective bargaining agreement. The 
provision does not apply to any employee until the employee has 
an hour of service after the effective date. In applying the 
new vesting schedule, service before the effective date is 
taken into account.

7. Allow direct rollovers from retirement plans to Roth IRAs (sec. 417 
        of the bill and sec. 408A(e) of the Code)

                              PRESENT LAW

IRAs in general

    There are two general types of individual retirement 
arrangements (``IRAs''): traditional IRAs, to which both 
deductible and nondeductible contributions may be made, and 
Roth IRAs.

Traditional IRAs

    An individual may make deductible contributions to an IRA 
up to the lesser of a dollar limit (generally $3,000 for 2004) 
\90\ or the individual's compensation if neither the individual 
nor the individual's spouse is an active participant in an 
employer-sponsored retirement plan.\91\ If the individual (or 
the individual's spouse) is an active participant in an 
employer-sponsored retirement plan, the deduction limit is 
phased out for taxpayers with adjusted gross income (``AGI'') 
over certain levels for the taxable year. A different, higher, 
income phaseout applies in the case of an individual who is not 
an active participant in an employer sponsored plan but whose 
spouse is.
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    \90\ The dollar limit is scheduled to increase until it is $5,000 
beginning in 2008-2010. Individuals age 50 and older may make 
additional, catch-up contributions.
    \91\ In the case of a married couple, deductible IRA contributions 
of up to the dollar limit can be made for each spouse (including, for 
example, a homemaker who does not work outside the home), if the 
combined compensation of both spouses is at least equal to the 
contributed amount.
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    To the extent an individual cannot or does not make 
deductible contributions to an IRA or contributions to a Roth 
IRA, the individual may make nondeductible contributions to a 
traditional IRA.
    Amounts held in a traditional IRA are includible in income 
when withdrawn (except to the extent the withdrawal is a return 
of nondeductible contributions). Includible amounts withdrawn 
prior to attainment of age 59\1/2\ are subject to an additional 
10-percent early withdrawal tax, unless the withdrawal is due 
to death or disability, is made in the form of certain periodic 
payments, or is used for certain specified purposes.

Roth IRAs

    Individuals with AGI below certain levels may make 
nondeductible contributions to a Roth IRA. The maximum annual 
contributions that can be made to all of an individual's IRAs 
(both traditional and Roth) cannot exceed the maximum 
deductible IRA contribution limit. The maximum annual 
contribution that can be made to a Roth IRA is phased out for 
taxpayers with income above certain levels.
    Amounts held in a Roth IRA that are withdrawn as a 
qualified distribution are not includible in income, or subject 
to the additional 10-percent tax on early withdrawals. A 
qualified distribution is a distribution that (1) is made after 
the five-taxable year period beginning with the first taxable 
year for which the individual made a contribution to a Roth 
IRA, and (2) which is made after attainment of age 59\1/2\, on 
account of death or disability, or is made for first-time 
homebuyer expenses of up to $10,000.
    Distributions from a Roth IRA that are not qualified 
distributions are includible in income to the extent 
attributable to earnings, and subject to the 10-percent early 
withdrawal tax (unless an exception applies). The same 
exceptions to the early withdrawal tax that apply to IRAs apply 
to Roth IRAs.

Rollover contributions

    If certain requirements are satisfied, a participant in a 
tax-qualified retirement plan, a tax-sheltered annuity (sec. 
403(b)), or a governmental section 457 plan may roll over 
distributions from the plan or annuity into a traditional IRA. 
Distributions from such plans may not be rolled over into a 
Roth IRA.
    Taxpayers with modified AGI of $100,000 or less generally 
may roll over amounts in a traditional IRA into a Roth IRA. The 
amount rolled over is includible in income as if a withdrawal 
had been made, except that the 10-percent early withdrawal tax 
does not apply. Married taxpayers who file separate returns 
cannot roll over amounts in a traditional IRA into a Roth IRA. 
Amounts that have been distributed from a tax-qualified 
retirement plan, a tax-sheltered annuity, or a governmental 
section 457 plan may be rolled over into a traditional IRA, and 
then rolled over from the traditional IRA into a Roth IRA.

                           REASONS FOR CHANGE

    Under present law if an individual wishes to roll over 
amounts from a qualified retirement plan or similar arrangement 
to a Roth IRA, they may do so, but only by first making a 
rollover into a traditional IRA and then converting the amounts 
in the traditional IRA into a Roth IRA. The Committee believes 
it unnecessary to impose such complications on rollovers from 
qualified retirement plans to Roth IRAs.

                        EXPLANATION OF PROVISION

    The provision allows distributions from tax-qualified 
retirement plans, tax-sheltered annuities, and governmental 457 
plans to be rolled over directly from such plan into a Roth 
IRA, subject to the present law rules that apply to rollovers 
from a traditional IRA into a Roth IRA. For example, a rollover 
from a tax-qualified retirement plan into a Roth IRA is 
includible in gross income (except to the extent it represents 
a return of after-tax contributions), and the 10-percent early 
distribution tax does not apply. Similarly, an individual with 
AGI of $100,000 or more could not roll over amounts from a tax-
qualified retirement plan directly into a Roth IRA.

                             EFFECTIVE DATE

    The provision is effective for distributions made after 
December 31, 2004.

8. Elimination of higher early withdrawal tax on certain SIMPLE plan 
        distributions (sec. 418 of the bill and sec. 72(t) of the Code)

                              PRESENT LAW

SIMPLE plans

    Under present law, certain small businesses can establish a 
simplified retirement plan called the savings incentive match 
plan for employees (``SIMPLE'') retirement plan. SIMPLE plans 
can be adopted by employers: (1) that employ 100 or fewer 
employees who received at least $5,000 in compensation during 
the preceding year; and (2) that do not maintain another 
employer-sponsored retirement plan. A SIMPLE plan can be either 
an individual retirement arrangement (an ``IRA'') \92\ for each 
employee or part of a qualified cash or deferred arrangement (a 
``section 401(k) plan'').\93\ The rules applicable to SIMPLE 
IRAs and SIMPLE section 401(k) plans are similar, but not 
identical.
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    \92\ A SIMPLE IRA may not be in the form of a Roth IRA. References 
herein to IRAs do not refer to Roth IRAs.
    \93\ Because State or local governments generally are not permitted 
to maintain section 401(k) plans, they also generally are not permitted 
to maintain SIMPLE section 401(k) plans. However, a State or local 
governments with a pre-May 6, 1986, grandfathered section 401(k) plan 
may adopt a SIMPLE section 401(k) plan.
---------------------------------------------------------------------------
    If established in IRA form, a SIMPLE plan is not subject to 
the nondiscrimination rules generally applicable to qualified 
retirement plans (including the top-heavy rules) and simplified 
reporting requirements apply. If established as part of a 
section 401(k) plan, the SIMPLE does not have to satisfy the 
special nondiscrimination tests applicable to section 401(k) 
plans and is not subject to the top-heavy rules. The other 
qualified retirement plan rules apply to SIMPLE section 401(k) 
plans.
    Elective deferrals under a section 401(k) plan generally 
may not be distributable before the occurrence of certain 
specified events, such as severance of employment, death, 
disability, attainment of age 59\1/2\, or financial hardship. 
This restriction on distributions applies to elective deferrals 
made under a SIMPLE section 401(k) plan, but not elective 
deferrals made under a SIMPLE IRA.

Early withdrawal tax

    Taxable distributions made from an IRA or from certain 
employer-sponsored retirement plans (including a section 401(k) 
plan) before age 59\1/2\, death, or disability generally are 
subject to an additional 10-percent income tax. Early 
withdrawals from a SIMPLE plan generally are subject to the 
additional 10-percent tax. However, in the case of a SIMPLE 
IRA, early withdrawals during the two-year period beginning on 
the date the employee first participated in the SIMPLE IRA are 
subject to an additional 25-percent tax.

                           REASONS FOR CHANGE

    The Committee believes that early withdrawals from SIMPLE 
IRAs should be subject to the same additional tax as other 
early withdrawals.

                        EXPLANATION OF PROVISION

    The provision eliminates the 25-percent tax on early 
withdrawals from a SIMPLE IRA during the two-year period 
beginning on the date the employee first participated in the 
SIMPLE IRA. Thus, such withdrawals are subject to the 10-
percent early withdrawal tax.

                             EFFECTIVE DATE

    The provision is effective for years beginning after 
December 31, 2004.

9. SIMPLE plan portability (sec. 419 of the bill and secs. 402(c) and 
        408(d) of the Code)

                              PRESENT LAW

    Under present law, certain small businesses can establish a 
simplified retirement plan called the savings incentive match 
plan for employees (``SIMPLE'') retirement plan. SIMPLE plans 
can be adopted by employers: (1) that employ 100 or fewer 
employees who received at least $5,000 in compensation during 
the preceding year; and (2) that do not maintain another 
employer-sponsored retirement plan. A SIMPLE plan can be either 
an individual retirementarrangement (an ``IRA'') \94\ for each 
employee or part of a qualified cash or deferred arrangement (a 
``section 401(k) plan'').\95\ The rules applicable to SIMPLE IRAs and 
SIMPLE section 401(k) plans are similar, but not identical.
---------------------------------------------------------------------------
    \94\ A SIMPLE IRA may not be in the form of a Roth IRA. References 
herein to IRAs do not refer to Roth IRAs.
    \95\ Because State or local governments generally are not permitted 
to maintain seciton 401(k) plans, they also generally are not permitted 
to maintain SIMPLE section 401(k) plans. However, a State or local 
government with a pre-May 6, 1986, grandfathered section 401(k) plan 
may adopt a SIMPLE section 401(k) plan.
---------------------------------------------------------------------------
    If established in IRA form, a SIMPLE plan is not subject to 
the nondiscrimination rules generally applicable to qualified 
retirement plans (including the top-heavy rules) and simplified 
reporting requirements apply. If established as part of a 
section 401(k) plan, the SIMPLE does not have to satisfy the 
special nondiscrimination tests applicable to section 401(k) 
plans and is not subject to the top-heavy rules. The other 
qualified retirement plan rules apply to SIMPLE section 401(k) 
plans.
    Distributions from employer-sponsored retirement plans and 
IRAs (including SIMPLE plans) are generally includible in gross 
income, except to the extent the amount distributed represents 
a return of after-tax contributions (i.e., basis). If certain 
requirements are satisfied, distributions from a tax-favored 
retirement arrangement (i.e., a qualified retirement plan, a 
tax-sheltered annuity, a governmental section 457 plan, or an 
IRA) may generally be rolled over on a nontaxable basis to 
another tax-favored retirement arrangement. However, a 
distribution from a SIMPLE IRA during the two-year period 
beginning on the date the employee first participated in the 
SIMPLE IRA may be rolled over only to another SIMPLE IRA.

                           REASONS FOR CHANGE

    The Committee believes that allowing rollovers between 
SIMPLE IRAs and other tax-favored retirement arrangements will 
help preserve retirement savings.

                        EXPLANATION OF PROVISION

    The provision allows distributions from a SIMPLE IRA to be 
rolled over to another tax-favored retirement arrangement 
(i.e., an IRA, a qualified retirement plan, a tax-sheltered 
annuity, or a governmental section 457 plan) and distributions 
from another tax-favored retirement arrangement to be rollover 
over to a SIMPLE IRA.

                             EFFECTIVE DATE

    The provision is effective for years beginning after 
December 31, 2004.

10. Eligibility for participation in eligible deferred compensation 
        plans (sec. 420 of the bill)

                              PRESENT LAW

    A section 457 plan is an eligible deferred compensation 
plan of a State or local government or tax-exempt employer that 
meets certain requirements. In some cases, different rules 
apply under section 457 to governmental plans and plans of tax-
exempt employers.
    Amounts deferred under an eligible deferred compensation 
plan of a non-governmental tax-exempt organization are 
includible in gross income for the year in which amounts are 
paid or made available. Under present law, if the amount 
payable to a participant does not exceed $5,000, a plan may 
allow a distribution up to $5,000 without such amount being 
treated as made available if the distribution can be made only 
if no amount has been deferred under the plan by the 
participant during the two-year period ending on the date of 
the distribution and there has been no prior distribution under 
the plan. Prior to the Small Business Job Protection Act of 
1996, under former section 457(e)(9), benefits were not treated 
as made available because a participant could elect to receive 
a lump sum payable after separation from service and within 60 
days of the election if (1) the total amount payable under the 
plan did not exceed $3,500 and (2) no additional amounts could 
be deferred under the plan.

                           REASONS FOR CHANGE

    The Committee believes that individuals should not be 
precluded from participating in an eligible deferred 
compensation plan by reason of certain prior distributions.

                        EXPLANATION OF PROVISION

    Under the provision, an individual is not precluded from 
participating in an eligible deferred compensation plan by 
reason of having received a distribution under section 
457(e)(9) as in effect before the Small Business Job Protection 
Act of 1996.

                             EFFECTIVE DATE

    The provision is effective on the date of enactment.

11. Benefit transfers to the PBGC (sec. 421 of the bill, sec. 
        401(a)(31) of the Code, and sec. 4050 of ERISA)

                              PRESENT LAW

Involuntary distributions and automatic rollovers

    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, theparticipant's spouse, if 
the present value of the benefit does not exceed $5,000.\96\ Generally, 
a participant may roll over an involuntary distribution from a 
qualified plan to an individual retirement arrangement (an ``IRA'') or 
to another qualified plan.
---------------------------------------------------------------------------
    \96\ 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.
---------------------------------------------------------------------------
    In the case of an involuntary distribution that exceeds 
$1,000 and that is an eligible rollover distribution from a 
qualified retirement plan, the plan administrator must roll the 
distribution over to an IRA (an ``automatic rollover'') in 
certain cases.\97\ That is, the plan administrator must make a 
direct trustee-to-trustee transfer of the distribution to an 
IRA, unless the participant affirmatively elects to have the 
distribution transferred to a different IRA or a qualified plan 
or to receive it directly.
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    \97\ Sec. 401(a)(31)(B). This provision was enacted by section 657 
of EGTRRA and applies to distributions after the issuance of final 
regulations by the Department of Labor providing safe harbos for 
satisfying fiduciary requirements related to automatic rollovers. 
Proposed regulations providing such a safe harbor were issued by the 
Department of Labor, to be effective six months after the issuance of 
final regulations. 69 Fed. Reg. 9900 (March 2, 2004). The provisions of 
EGTRRA generally do not apply for years beginning after December 31, 
2010.
---------------------------------------------------------------------------
    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. In the case of an automatic 
rollover to an IRA, the written explanation provided by the 
plan administrator is required to explain that an automatic 
rollover will be made unless the participant elects otherwise. 
The plan administrator is also required to notify the 
participant in writing (as part of the general written 
explanation or separately) that the distribution may be 
transferred to another IRA.

Missing participant benefits

    In the case of a defined benefit pension plan that is 
subject to the plan termination insurance program under Title 
IV of the Employee Retirement Income Security Act of 1974 
(``ERISA''), is maintained by a single employer, and terminates 
under a standard termination, the plan administrator generally 
must purchase annuity contracts from a private insurer to 
provide the benefits to which participants are entitled and 
distribute the annuity contracts to the participants.
    If the plan administrator of a terminating single employer 
plan cannot locate a participant after a diligent search (a 
``missing participant''), the plan administrator may satisfy 
the distribution requirement only by purchasing an annuity from 
an insurer 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.\98\
---------------------------------------------------------------------------
    \98\ Secs. 4041(b)(3)(A) and 4050 of ERISA.
---------------------------------------------------------------------------
    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 believes that allowing plan administrators to 
make automatic rollovers to the PBGC will facilitate automatic 
rollovers and reduce administrative burdens while providing 
adequate participant protections.

                        Explanation of Provision

    The provision provides an alternative to the automatic 
rollover to an IRA of an involuntary distribution that exceeds 
$1,000. Under the provision, unless the participant elects to 
have the distribution transferred to an IRA or a qualified 
retirement plan or to receive it directly, the plan may provide 
for the transfer of the distribution to the PBGC, instead of to 
an IRA.\99\ The written explanation provided to the participant 
by the plan administrator before the involuntary distribution 
must explain that a transfer to the PBGC will be made unless 
the participant elects otherwise.
---------------------------------------------------------------------------
    \99\ The provision applies to all automatic rollovers, not just 
those for missing participants.
---------------------------------------------------------------------------
    The provision extends the provisions relating to the PBGC 
missing participant program to involuntary distributions that 
are transferred to the PBGC. Benefits transferred to the PBGC 
under the provision are to be distributed by the PBGC to the 
participant upon application filed by the participant with the 
PBGC in such form and manner as prescribed by the PBGC in 
regulations. Benefits are to be distributed in a single sum 
(plus interest) or in another form as specified in PBGC 
regulations.
    The transfer of an involuntary distribution to the PBGC is 
treated as a transfer to an IRA (i.e., the amount transferred 
is not included in the participant's income). An amount 
distributed by the PBGC is generally treated as a distribution 
from an IRA.

                             EFFECTIVE DATE

    The provision is generally effective as if included in the 
amendments made by section 657 of EGTRRA, i.e., after the 
issuance of final regulations by the Department of Labor. The 
extension of the PBGC missing participant program to 
involuntary distributions that are transferred to the PBGC is 
effective for distributions made after the issuance of final 
regulations implementing such extension. The PBGC is directed 
to issue such regulations not later than December 31, 2004.

                      C. Administrative Provisions


1. Improvement of Employee Plans Compliance Resolution System (sec. 431 
        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), section 403(b), section 408(k), or section 408(p) as 
applicable.\100\ EPCRS permits employers to correct compliance 
failures and continue to provide their employees with 
retirement benefits on a tax-favored basis.
---------------------------------------------------------------------------
    \100\ Rev. Proc. 2003-44, 2003-25 I.R.B. 1051.
---------------------------------------------------------------------------
    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 and procedures 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'') 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 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.
    Under the provision, 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.

2. Extension to all governmental plans of moratorium on application of 
        certain nondiscrimination rules (sec. 432 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 requirements concerning 
nondiscrimination (sec. 401(a)(4)) and minimum participation 
(sec. 401(a)(26)). A qualified retirement plan maintained by a 
State or local government is also treated as meeting the 
participation and nondiscrimination requirements applicable to 
a qualified cash or deferred arrangement (sec. 401(k)(3)). 
Other governmental plans are subject to these 
requirements.\101\
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    \101\ The IRS has announced that governmental plans that are 
subject to the nondiscrimination requirements are deemed to satisfy 
such requirements pending the issuance of final regulations addressing 
this issue. Notice 2003-6, 2003-3 I.R.B. 298; Notice 2001-46, 2001-2 
C.B. 122.
---------------------------------------------------------------------------

                           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. The provision also treats all governmental 
plans as meeting the participation and nondiscrimination 
requirements applicable to a qualified cash or deferred 
arrangement.

                             EFFECTIVE DATE

    The provision is effective for plan years beginning after 
December 31, 2004.

3. Notice and consent period regarding distributions (sec. 433 of the 
        bill, sec. 417(a) of the Code, and sec. 205(c) 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,\102\ 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 individual retirement arrangement 
(``IRA''), and (3) the rules concerning the taxation of a 
distribution. If the joint and survivor annuity requirements 
are applicable, 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.
---------------------------------------------------------------------------
    \102\ 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.
---------------------------------------------------------------------------

                           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 provision and the modifications required to be made 
under the provision apply to years beginning after December 31, 
2004. 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.

4. Pension plan reporting simplification (sec. 434 of the bill)

                              PRESENT LAW

    A plan administrator of a pension, annuity, stock bonus, 
profit-sharing or other funded plan of deferred compensation 
generally must file with the Secretary of the Treasury an 
annual return for each plan year containing certain information 
with respect to the qualification, financial condition, and 
operation of the plan. Title I of ERISA also may require the 
plan administrator to file annual reports concerning the plan 
with the Department of Labor and the Pension Benefit Guaranty 
Corporation (``PBGC''). The plan administrator must use the 
Form 5500 series as the format for the required annual 
return.\103\ The Form 5500 series annual return/report, which 
consists of a primary form and various schedules, includes the 
information required to be filed with all three agencies. The 
plan administrator satisfies the reporting requirement with 
respect to each agency by filing the Form 5500 series annual 
return/report with the Department of Labor, which forwards the 
form to the Internal Revenue Service and the PBGC.
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    \103\ Treas. Reg. sec. 301.6058-1(a).
---------------------------------------------------------------------------
    The Form 5500 series consists of 2 different forms: Form 
5500 and Form 5500-EZ. Form 5500 is the more comprehensive of 
the forms and requires the most detailed financial information. 
The plan administrator of a ``one-participant plan'' generally 
may file Form 5500-EZ, which consists of only one page. For 
this purpose, a plan is a one-participant plan if: (1) the only 
participants in the plan are the sole owner of a business that 
maintains the plan (and such owner's spouse), or partners in a 
partnership that maintains the plan (and such partners' 
spouses); (2) the plan is not aggregated with another plan in 
order to satisfy the minimum coverage requirements of section 
410(b); (3) the plan does not provide benefits to anyone other 
than the sole owner of the business (or the sole owner and 
spouse) or the partners in the business (or the partners and 
spouses); (4) the employer is not a member of a related group 
of employers; and (5) the employer does not use the services of 
leased employees. In addition, the plan administrator of a one-
participant plan is not required to file a return if the plan 
does not have an accumulated funding deficiency and the total 
value of the plan assets as of the end of the plan year and all 
prior plan years beginning on or after January 1, 1994, does 
not exceed $100,000.
    With respect to a plan that does not satisfy the 
eligibility requirements for Form 5500-EZ, the characteristics 
and the size of the plan determine the amount of detailed 
financial information that the plan administrator must provide 
on Form 5500. If the plan has more than 100 participants at the 
beginning of the plan year, the plan administrator generally 
must provide more information.

                           REASONS FOR CHANGE

    The Committee believes that simplification of the reporting 
requirements applicable to plans of small employers will 
encourage such employers to provide retirement benefits for 
their employees.

                        EXPLANATION OF PROVISION

    The Secretary of the Treasury and the Secretary of Labor 
are directed to modify the annual return filing requirements 
with respect to a one-participant plan to provide that if the 
total value of the plan assets of such a plan as of the end of 
the plan year does not exceed $250,000, the plan administrator 
is not required to file a return. In addition, the provision 
directs the Secretary of the Treasury and the Secretary of 
Labor to provide simplified reporting requirements for plan 
years beginning after December 31, 2004, for certain plans with 
fewer than 25 employees.

                             EFFECTIVE DATE

    The provision relating to one-participant retirement plans 
is effective for plan years beginning on or after January 1, 
2004. The provision relating to simplified reporting for plans 
with fewer than 25 employees is effective on the date of 
enactment.

5. Missing participants (sec. 435 of the bill and sec. 4050 of ERISA)

                              PRESENT LAW

    In the case of a defined benefit pension plan that is 
subject to the plan termination insurance program under Title 
IV of the Employee Retirement Income Security Act of 1974 
(``ERISA''), is maintained by a single employer, and terminates 
under a standard termination, the plan administrator generally 
must purchase annuity contracts from a private insurer to 
provide the benefits to which participants are entitled and 
distribute the annuity contracts to the participants.
    If the plan administrator of a terminating single employer 
plan cannot locate a participant after a diligent search (a 
``missing participant''), the plan administrator may satisfy 
the distribution requirement only by purchasing an annuity from 
an insurer 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.\104\
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    \104\ Secs. 4041(b)(3)(A) and 4050 of ERISA.
---------------------------------------------------------------------------
    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 rules for terminating 
multiemployer plans 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 pension plans that 
have no more than 25 active participants and are maintained by 
professional service employers, and the portion of defined 
benefit pensionplans 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.

6. Reduced PBGC premiums for small and new plans (secs. 436 and 437 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 are funded in 
part by premium payments from employers who sponsor defined 
benefit pension 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 plans of small employers will help encourage the 
establishment of 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 would be 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 pension 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 pension 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 pension plan is defined as described 
above under the flat-rate premium provision of the provision 
relating to 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 to be taken into account. In the case of a plan to which 
more than one unrelated contributing sponsor contributed, 
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.

                             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 apply to plans first effective after December 31, 
2004. The reduction of the variable-rate premium for small 
plans applies to plan years beginning after December 31, 2004.

7. Authorization for PBGC to pay interest on premium overpayment 
        refunds (sec. 438 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.

8. Rules for substantial owner benefits in terminated plans (sec. 439 
        of the bill and secs. 4021, 4022, 4043, 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 
apply 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, 2004.

9. Voluntary early retirement incentive and employment retention plans 
        maintained by local educational agencies and other entities 
        (sec. 440 of the bill, secs. 457(e)(11) and 457(f) of the Code, 
        sec. 3(2)(B) of ERISA, and sec. 4(l)(1) of the ADEA)

                              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, the amount that can be 
deferred annually under section 457 cannot exceed a certain 
dollar limit ($13,000 for 2004). 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, 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 retirement plans or 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 
depend 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. 
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. However, certain defined benefit pension plans may 
lawfully provide payments that constitute the subsidized 
portion of an early retirementbenefit or social security 
supplements pursuant to ADEA \105\, and employers may lawfully provide 
a voluntary early retirement incentive plan that is consistent with the 
purposes of ADEA.\106\
---------------------------------------------------------------------------
    \105\ See ADEA sec. 4(I)(1).
    \106\ See ADEA sec. 4(f)(2).
---------------------------------------------------------------------------

                           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 pension plan. If provided under a defined benefit 
pension 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 of State-
maintained defined benefit pension 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 pension 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 pension 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 addresses the treatment of certain voluntary 
early retirement incentive plans under section 457, ERISA, and 
ADEA.
            Code section 457
    Under the provision, special rules apply under section 457 
to a voluntary early retirement incentive plan that is 
maintained by a local educational agency or a tax-exempt 
education association which principally represents employees of 
one or more such agencies and that makes payments or 
supplements as an early retirement benefit, a retirement-type 
subsidy, or a social security supplement in coordination with a 
defined benefit pension plan maintained by a State or local 
government or by such an association. Such a voluntary early 
retirement incentive plan is treated as a bona fide severance 
plan for purposes of section 457, and therefore is not subject 
to the limits under section 457, to the extent the payments or 
supplements could otherwise be provided under the defined 
benefit pension plan. For purposes of the provision, the 
payments or supplements that could otherwise be provided under 
the defined benefit pension plan are to be determined by 
applying the accrual and vesting rules for defined benefit 
pension plans.\107\
---------------------------------------------------------------------------
    \107\ 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 pension plan; however, government 
plans are exempt from these rules.
---------------------------------------------------------------------------
            ERISA
    In addition, such voluntary early retirement incentive 
plans are treated as a welfare benefit plan for purposes of 
ERISA (other than a governmental plan that is exempt from 
ERISA).
            ADEA
    The provision also addresses the treatment under ADEA of 
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 that 
constitute the subsidized portion of an early retirement 
benefit or a social security supplement and that are made in 
coordination with a defined benefit pension plan maintained by 
a State or local government or by such an association. Under 
the provision, for purposes of ADEA, such a plan is treated as 
part of the defined benefit pension plan and the payments or 
supplements under the plan 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 addresses 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 or 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 annual dollar limit on 
deferrals under section 457 ($13,000 for 2004). 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 benefit 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. Nothing 
in the provision alters or affects the construction of the 
Code, ERISA, or ADEA as applied to any plan, arrangement, or 
conduct to which the provision does not apply.

10. Two-year extension of transition rule to pension funding 
        requirements (sec. 769(c) of the Retirement Protection Act of 
        1994)

                           PRESENT LAW \108\
---------------------------------------------------------------------------

    \108\ Present law refers to the law in effect on the dates of 
Committee action on the bill. It does not reflect the changes made by 
the Pension Equity Funding Act of 2004, Pub. L. No. 108-218 (April 10, 
2004).
---------------------------------------------------------------------------
    Under present law, defined benefit plans are required to 
meet certain minimum funding rules. In some cases, additional 
contributions are required if a defined benefit 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. 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 PBGC insures benefits under most single-employer 
defined benefit 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 the amount of unfunded vested 
benefits under the plan. A specified interest rate and a 
specified mortality table apply in determining unfunded vested 
benefits for this purpose.
    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 given 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 bill does not include the provision relating to the 
special funding rules for plans sponsored by a company engaged 
primarily in interurban or interstate passenger bus service as 
approved by the Committee because an identical provision was 
enacted into law in the Pension Funding Equity Act of 2004 
(Pub. L. No. 108-218) subsequent to Committee action on the 
bill. The following discussion describes the Committee action.]
    The provision approved by the Committee would have modified 
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 would 
be treated as at least 90 percent for purposes of determining 
the amount of required contributions (100 percent for purposes 
of determining whether quarterly contributions are required). 
As a result, for these years, additional contributions and 
quarterly contributions would not be required with respect to 
the plan. In addition, for these years, the mortality table 
used under the plan would be used in determining the amount of 
unfunded vested benefits under the plan for purposes of 
calculating PBGC variable rate premiums.

                             EFFECTIVE DATE

    The provision approved by the Committee would have been 
effective with respect to plan years beginning after December 
31, 2003.

11. Acceleration of PBGC computation of benefits attributable to 
        recoveries from employers (sec. 441 of the bill and secs. 
        4022(c) and 4062(c) of ERISA)

                              PRESENT LAW

In general

    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 promised 
benefits.\109\ The guaranteed benefits are funded in part by 
premium payments from employers who sponsor defined benefit 
plans. In general, the PBGC guarantees 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. For plans 
terminating in 2004, the maximum guaranteed benefit for an 
individual retiring at age 65 is $3,698.86 per month, or 
$44,386.32 per year.
---------------------------------------------------------------------------
    \109\ The PBGC termination insurance program does not cover plans 
of professional service employers that have fewer than 25 participants.
---------------------------------------------------------------------------
    The PBGC pays plan benefits, subject to the guarantee 
limits, when it becomes trustee of a terminated plan. The PBGC 
also pays amounts in addition to the guarantee limits 
(``additional benefits'') if there are sufficient plan assets, 
including amounts recovered from the employer for unfunded 
benefit liabilities and contributions owed to the plan. The 
employer (including members of its controlled group) is 
statutorily liable for these amounts.

Plan underfunding recoveries

    The PBGC's recoveries on its claims for unfunded benefit 
liabilities are shared between the PBGC and plan participants. 
The amounts recovered are allocated partly to the PBGC to help 
cover its losses for paying unfunded guaranteed benefits and 
partly to participants to help cover the loss of benefits that 
are above the PBGC's guarantees and are not funded. In 
determining the portion of the recovered amounts that will be 
allocated to participants, present law specifies the use of an 
average recovery ratio, rather than the actual amount recovered 
for each specific plan. The average recovery ratio that applies 
to a plan includes the PBGC's actual recovery experience for 
plan terminations in the five-year period immediately preceding 
the year the particular plan is terminated.
    The average recovery ratio is used for all but very large 
plans taken over by the PBGC. For a very large plan (i.e., a 
plan for which participants' benefit losses exceed $20 million) 
actual recovery amounts with respect to the specific plan are 
used to determine the portion of the amounts recovered that 
will be allocated to participants.

Recoveries for due and unpaid employer contributions

    Amounts recovered from an employer for contributions owed 
to the plan are treated as plan assets and are allocated to 
plan benefits in the same manner as other assets in the plan's 
trust on the plan termination date. The amounts recovered are 
determined on a plan-specific basis rather than based on an 
historical average recovery ratio.

                           REASONS FOR CHANGE

    The Committee wishes to modify the rules for calculating 
certain recoveries by the PBGC to accelerate the time by which 
such recoveries can be determined, thereby accelerating the 
time by which benefits may be paid to participants in 
terminated plans.

                        EXPLANATION OF PROVISION

    The provision makes two amendments to the PBGC insurance 
provisions of ERISA. First, it changes the five-year period 
used to determine the average recovery ratio for unfunded 
benefit liabilities so that the period begins two years 
earlier. For example, the average recovery ratio for a plan 
terminating in 2004 is based on recovery experience for plan 
terminations in 1997-2001, rather than 1999-2003.
    In addition, the provision creates an average recovery 
ratio for determining amounts recovered for contributions owed 
to the plan, based on the PBGC's recovery experience over the 
same five-year period.
    The provision does not apply to very large plans (i.e., 
plans for which participants' benefit losses exceed $20 
million). As under present law, in the case of a very large 
plan, actual amounts recovered for unfunded benefit liabilities 
and for contributions owed to the plan are used to determine 
the amount available to provide additional benefits to 
participants.

                             EFFECTIVE DATE

    The provision is effective for any plan termination for 
which notices of intent to terminate are provided (or, in the 
case of a termination by the PBGC, a notice of determination 
that the plan must be terminated is issued) on or after the 
date that is 30 days after the date of enactment.

12. Multiemployer plan funding and solvency notices (sec. 442 of the 
        bill and sec. 101 of ERISA)

                           PRESENT LAW \110\
---------------------------------------------------------------------------

    \110\ Present law refers to the law in effect on the dates of 
Committee action on the bill. It does not reflect the changes made by 
the Pension Funding Equity Act of 2004 (``PFEA 2004''), Pub. L. No. 
108-218 (April 10, 2004). Section 103 of PFEA 2004 requires all 
multiemployer plans to provide an annual notice that contains certain 
information relating to the plan and its funding status and certain 
information relating to PBGC coverage of multiemployer plan benefits. A 
civil penalty is assessable for failures to provide the required 
notice. Section 103 of PFEA 2004 is effective for plan years beginning 
after December 31, 2004.
---------------------------------------------------------------------------
    Under present law, defined benefit plans are generally 
required to meet certain minimum funding rules. These rules are 
designed to help ensure that such plans are adequately funded. 
Both single-employer plans and multiemployer plans are subject 
to minimum funding requirements; however, the requirements are 
different for each type of plan.
    Similarly, the Pension Benefit Guaranty Corporation 
(``PBGC'') insures certain benefits under both single-employer 
and multiemployer defined benefit plans, but the rules relating 
to the guarantee vary for each type of plan. In the case of 
multiemployer plans, the PBGC guarantees against plan 
insolvency. Under its multiemployer program, PBGC provides 
financial assistance through loans to plans that are insolvent 
(that is, plans that are unable to pay basic PBGC-guaranteed 
benefits when due).
    Employers maintaining single-employer defined benefit plans 
are required to provide certain notices to plan participants 
relating to the funding status of the plan. For example, ERISA 
requires an employer which sponsors a single-employer defined 
benefit plan to notifyplan participants if the employer fails 
to make required contributions (unless a request for a funding waiver 
is pending).\111\ In addition, in the case of an underfunded plan for 
which variable rate PBGC premiums are required, the plan administrator 
generally must notify plan participants of the plan's funding status 
and the limits on the PBGC benefit guarantee if the plan terminates 
while underfunded.\112\
---------------------------------------------------------------------------
    \111\ ERISA sec. 101(d).
    \112\ ERISA sec. 4011. Multiemployer plans are not required to pay 
variable rate premiums.
---------------------------------------------------------------------------
    Employers maintaining multiemployer defined benefit plans 
which are in reorganization status are required to provide plan 
participants with certain information if the plan becomes 
insolvent. If such a plan becomes insolvent, employers must 
notify plan participants that certain benefit payments will be 
suspended but that basic benefits will continue to be 
paid.\113\
---------------------------------------------------------------------------
    \113\ Code sec. 418E; ERISA sec. 4245.
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    The Committee believes that participants in multiemployer 
plans should be furnished with information about the plan's 
funded status and the limitations on the guarantee of benefits 
by the PBGC, including the circumstances in which the guarantee 
would come into effect. The Committee also believes that such 
participants should be provided with information about the 
value of the plan's assets and the amount of benefit payments 
as well as the rules governing insolvent multiemployer plans. 
Requiring administrators of multiemployer plans to provide 
participants with annual notices regarding plan funding and 
solvency will help keep participants in multiemployer plans 
adequately informed about their retirement benefits.

                        EXPLANATION OF PROVISION

In general

    Under the provision, the administrator of a multiemployer 
plan which is a defined benefit pension plan is required to 
provide: (1) an annual funding notice; and (2) if the value of 
the plan's assets as of the end of the plan year is less than 
five times the amount of benefits paid by the plan for the 
year, a solvency notice, to (1) each participant and 
beneficiary; (2) each labor organization representing such 
participants and beneficiaries; and (3) each employer that has 
an obligation to contribute under the plan.
    Both notices are required to include (1) identifying 
information, including the name of the plan, the address and 
phone number of the plan administrator and the plan's principal 
administrative officer, each plan sponsor's employer 
identification number, and the plan identification number; (2) 
a general description of the benefits under the plan that are 
eligible to be guaranteed by the PBGC, an explanation of the 
limitations on the guarantee of benefits by the PBGC, and the 
circumstances in which the guarantee would come into effect; 
and (3) any additional information which the plan administrator 
elects to include.
    The notices must be provided no later than two months after 
the due date (including extensions) for filing the plan's 
annual report for the plan year to which the notices relate and 
may be issued together, and may be issued with another 
document, including the required summary annual report. The 
notices must be provided in a form and manner prescribed in 
PBGC regulations and must be written so as to be understood by 
the average plan participant and may be provided in written, 
electronic, or other appropriate form to the extent that it is 
reasonably accessible by plan participants and beneficiaries.

Additional information to be included

            Funding notice
    In addition to the information described above, the 
required annual funding notice must also include a statement as 
to whether the plan's funded current liability percentage for 
the plan year to which the notice relates is at least 100 
percent (and if not, a statement of the percentage).
            Solvency notice
    In addition to the information described above, a solvency 
notice must include (1) a statement of the value of the plan's 
assets, the amount of benefit payments, and the ratio of the 
assets to the payments for the plan year to which the notice 
relates and (2) a summary of the rules governing insolvent 
multiemployer plans, including the applicable limitation on 
benefit payments and potential benefit reductions and 
suspensions, and their potential effect on the plan.

Sanction for failure to provide notice

    In the case of a failure to provide either of the required 
notices, the Secretary of Labor may assess a civil penalty 
against a plan administrator of up to $100 per day for each 
failure to provide a notice. For this purpose, each violation 
with respect to a single participant or beneficiary is treated 
as a separate violation.

                             EFFECTIVE DATE

    The provision applies to plan years beginning after 
December 31, 2005.

13. No reduction in unemployment compensation as a result of pension 
        rollovers (sec. 443 of the bill and sec. 3304(a)(15) of the 
        Code)

                              PRESENT LAW

    Under present law, unemployment compensation payable by a 
State to an individual generally is reduced by the amount of 
retirement benefits received by the individual. Distributions 
from certain employer-sponsored retirement plans or IRAs that 
are transferred to a similar retirement plan or IRA (``rollover 
distributions'') generally are not includible in income. Some 
States currently reduce the amount of an individual's 
unemployment compensation by the amount of a rollover 
distribution.

                           REASONS FOR CHANGE

    Unlike an individual's unemployment compensation, rollover 
distributions are not intended to meet current living expenses. 
To the extent that a reduction of an individual's unemployment 
compensation results in that individual liquidating a portion 
of a rollover distribution to meet current living expenses, the 
Committee believes that the purpose of the rules permitting 
rollover distributions, which are designed to ensure that the 
amounts contributed to employer-sponsored retirement plans or 
IRAs are used for retirement purposes, are defeated.

                        EXPLANATION OF PROVISION

    The proposal amends the Code so that the reduction of 
unemployment compensation payable to an individual by reason of 
the receipt of retirement benefits does not apply in the case 
of a rollover distribution.

                             EFFECTIVE DATE

    The proposal is effective for weeks beginning on or after 
the date of enactment.

14. Withholding on certain distributions from governmental eligible 
        deferred compensation plans (sec. 444 of the bill and sec. 457 
        of the Code)

                              PRESENT LAW

    Before the Economic Growth and Tax Relief Reconciliation 
Act of 2001 \114\ (``EGTRRA''), distributions from an eligible 
deferred compensation plan under section 457 (a ``section 457 
plan'') were subject to the withholding rules for wages, rather 
than the withholding rules for distributions from qualified 
retirement plans. Under the wage withholding rules, graduated 
withholding applies based on the amount of the wages. Under the 
withholding rules for qualified retirement plans, an individual 
may generally elect not to have taxes withheld from 
distributions. However, withholding is required at a 20-percent 
rate in the case of an eligible rollover distribution that is 
not automatically rolled over into another retirement plan. 
Eligible rollover distributions include distributions that are 
payable over a period of less than 10 years.
---------------------------------------------------------------------------
    \114\ Pub. L. No. 107-16.
---------------------------------------------------------------------------
    EGTRRA conformed the rollover rules and withholding rules 
for governmental section 457 plans to the rules for qualified 
retirement plans.\115\ The EGTRRA changes are effective for 
distributions after December 31, 2001. As a result, as of 2002, 
required withholding at a 20-percent rate applies to 
distributions made from a governmental section 457 plan for a 
period of less than 10 years, including distributions that 
began before the effective date of the EGTRRA changes.
---------------------------------------------------------------------------
    \115\ EGTRRA sec. 641.
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    The Committee believes that distributions that have already 
begun from governmental section 457 plans under the prior-law 
rules should not have to be modified to conform to the EGTRRA 
withholding provisions.

                        EXPLANATION OF PROVISION

    Under the provision, the pre-EGTRRA withholding rules may 
be applied to distributions from a governmental section 457 
plan if the distribution is part of a series of distributions 
which began before January 1, 2002, and is payable for less 
than 10 years.

                             EFFECTIVE DATE

    The provision is effective as if included in EGTRRA.

15. Minimum cost requirement for excess asset transfers (sec. 445 of 
        the bill and sec. 420 of the Code)

                              PRESENT LAW

    Defined benefit plan assets generally may not revert to an 
employer prior to termination of the plan and satisfaction of 
all plan liabilities. In addition, a reversion may occur only 
if the plan so provides. A reversion prior to plan termination 
may constitute a prohibited transaction and may result in plan 
disqualification. Any assets that revert to the employer upon 
plan termination are includible in the gross income of the 
employer and subject to an excise tax. The excise tax rate is 
20 percent if the employer maintains a replacement plan or 
makes certain benefit increases in connection with the 
termination; if not, the excise tax rate is 50 percent. Upon 
plan termination, the accrued benefits of all plan participants 
are required to be 100-percent vested.
    A pension plan may provide medical benefits to retired 
employees through a separate account that is part of such plan. 
A qualified transfer of excess assets of a defined benefit plan 
to such a separate account within the plan may be made in order 
to fund retiree health benefits.\116\ A qualified transfer does 
not result in plan disqualification, is not a prohibited 
transaction, and is not treated as a reversion. Thus, 
transferred assets are not includible in the gross income of 
the employer and are not subject to the excise tax on 
reversions. No more than one qualified transfer may be made in 
any taxable year. No qualified transfer may be made after 
December 31, 2013.\117\
---------------------------------------------------------------------------
    \116\ Sec. 420.
    \117\ Under present law in effect on the dates of Committee action 
on the bill, no qualified transfer could be made after December 31, 
2005.
---------------------------------------------------------------------------
    Excess assets generally means the excess, if any, of the 
value of the plan's assets \118\ over the greater of (1) the 
accrued liability under the plan (including normal cost) or (2) 
125 percent of the plan's current liability.\119\ In addition, 
excess assets transferred in a qualified transfer may not 
exceed the amount reasonably estimated to be the amount that 
the employer will pay out of such account during the taxable 
year of the transfer for qualified current retiree health 
liabilities. No deduction is allowed to the employer for (1) a 
qualified transfer or (2) the payment of qualified current 
retiree health liabilities out of transferred funds (and any 
income thereon).
---------------------------------------------------------------------------
    \118\ The value of plan assets for this purpose is the lesser of 
fair market value or actuarial value.
    \119\ In the case of plan years beginning before January 1, 2004, 
excess assets generally means the excess, if any, of the value of the 
plan's assets over the greater of (1) the lesser of (a) the accrued 
liability under the plan (including normal cost) or (b) 170 percent of 
the plan's current liability (for 2003), or (2) 125 percent of the 
plan's current liability. The current liability full funding limit was 
repealed for years beginning after 2003. Under the general sunset 
provision of EGTRRA, the limit is reinstated for years after 2010.
---------------------------------------------------------------------------
    Transferred assets (and any income thereon) must be used to 
pay qualified current retiree health liabilities for the 
taxable year of the transfer. Transferred amounts generally 
must benefit pension plan participants, other than key 
employees, who are entitled upon retirement to receive retiree 
medical benefits through the separate account. Retiree health 
benefits of key employees may not be paid out of transferred 
assets.
    Amounts not used to pay qualified current retiree health 
liabilities for the taxable year of the transfer are to be 
returned to the general assets of the plan. These amounts are 
not includible in the gross income of the employer, but are 
treated as an employer reversion and are subject to a 20-
percent excise tax.
    In order for a transfer to be qualified, accrued retirement 
benefits under the pension plan generally must be 100-percent 
vested as if the plan terminated immediately before the 
transfer (or in the case of a participant who separated in the 
one-year period ending on the date of the transfer, immediately 
before the separation).
    In order to for a transfer to be qualified, the transfer 
must meet the minimum cost requirement. To satisfy the minimum 
cost requirement, an employer generally must maintain retiree 
health benefits at the same level for the taxable year of the 
transfer and the following four years (referred to as the cost 
maintance period). The applicable employer cost during the cost 
maintenance period cannot be less than the higher of the 
applicable employer costs for each of the two taxable years 
preceding the taxable year of the transfer. The applicable 
employer cost is generally determined by dividing the current 
retiree health liabilities by the number of individuals 
provided coverage for applicable health benefits during the 
year. The Secretary is directed to prescribe regulations as may 
be necessary to prevent an employer who significantly reduces 
retiree health coverage during the period from being treated as 
satisfying the minimum cost requirement.
    Under Treasury regulations,\120\ the minimum cost 
requirement is not satisfied if the employer significantly 
reduces retiree health coverage during the cost maintenance 
period. Under the regulations, an employer significantly 
reduces retiree health coverage for a year (beginning after 
2001) during the cost maintenance period if either (1) the 
employer-initiated reduction percentage for that taxable year 
exceeds 10 percent, or (2) the sum of the employer-initiated 
reduction percentages for that taxable year and all prior 
taxable years during the cost maintenance period exceeds 20 
percent.\121\ The employer-initiated reduction percentage is 
percentage of the number of individuals receiving coverage for 
applicable health benefits as of the day before the first day 
of the taxable year over the total number of such individuals 
whose coverage for applicable health benefits ended during the 
taxable year by reason of employer action.\122\
---------------------------------------------------------------------------
    \120\ Treas. Reg. sec. 1.420-1(a).
    \121\ Treas. Reg. sec. 1.420-1(b)(1).
    \122\ Treas. Reg. sec. 1.420-1(b)(2).
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    The Committee believes that it is appropriate to provide 
greater flexibility in complying with the minimum cost 
requirement. The Committee believes that the requirement should 
not be violated if the reduction in health cost is not more 
that the allowable reduction in retiree health coverage.

                        EXPLANATION OF PROVISION

    The provision provides that an employer does not fail the 
minimum cost requirement if, in lieu of any reduction of health 
coverage permitted by Treasury regulations, the employer 
reduces applicable employer cost by an amount not in excess of 
the reduction in costs which would have occurred if the 
employer had made the maximum permissible reduction in retiree 
health coverage under such regulations.
    In applying such regulations to any subsequent taxable 
year, any reduction in applicable employer cost under the 
proposal shall be treated as if it were an equivalent reduction 
in retiree health coverage.

                             EFFECTIVE DATE

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

16. Social Security coverage under divided retirement system for public 
        employees in Kentucky

                           PRESENT LAW \123\

    Under Section 218 of the Social Security Act, a State may 
choose whether or not its State and local government employees 
who are covered by an employer-sponsored pension plan may also 
participate in the Social Security Old-Age, Survivors, and 
Disability Insurance program. (In this context, the term 
``employer-sponsored pension plan'' refers to a pension, 
annuity, retirement, or similar fund or system established by a 
State or a political subdivision of a State such as a town. 
Under present law, State or local government employees not 
covered by an employer-sponsored pension plan already are, with 
a few exceptions, mandatorily covered by Social Security.)
---------------------------------------------------------------------------
    \123\ Present law refers to the law in effect on the dates of 
Committee action on the bill. It does not reflect the changes made by 
the Social Security Protection Act of 2004, Pub. L. No. 108-203 (March 
2, 2004).
---------------------------------------------------------------------------
    Social Security coverage for employees covered under a 
State or local government employer-sponsored pension plan is 
established through an agreement between the State and the 
Federal Government. In most States, before the agreement can be 
made, employees who are members of the employer-sponsored 
pension plan must agree to Social Security coverage by majority 
vote in referendum. If the majority vote is in favor of Social 
Security coverage, then the entire group, including those 
voting against such coverage, will be covered by Social 
Security. If the majority vote is against Social Security 
coverage, then the entire group, including those voting in 
favor of such coverage and employees hired after the 
referendum, will not be covered by Social Security.
    In certain States, however, if employees who already are 
covered in an employer-sponsored pension plan are not in 
agreement about whether to participate in the Social Security 
system, coverage can be extended only to those who choose it, 
provided that all newly hired employees of the system are 
mandatorily covered under Social Security. To establish such a 
divided retirement system, the state must conduct a referendum 
among members of the employer-sponsored pension plan. After the 
referendum, the retirement system is divided into two groups, 
one composed of members who elected Social Security coverage 
and those hired after the referendum, and the other composed of 
the remaining members of the employer-sponsored pension plan. 
Under Section 218(d)(6)(c) of the Social Security Act, 21 
States currently have authority to operate a divided retirement 
system.

                           REASONS FOR CHANGE

    The Committee believes that it is appropriate to allow the 
State of Kentucky to offer a divided retirement system.

                        EXPLANATION OF PROVISION

    [The bill does not include the provision relating to 
allowing the State of Kentucky to offer a divided retirement 
system as approved by the Committee because an identical 
provision was enacted into law in the Social Security 
Protection Act of 2004 (Pub. L. No. 108-203) subsequent to 
Committee action on the bill. The following discussion 
describes the Committee action.]
    The provision approved by the Committee would have 
permitted the State of Kentucky to join the 21 other States in 
being able to offer a divided retirement system. This system 
would permit current state and local government workers in an 
employer-sponsored pension plan to elect Social Security 
coverage on an individual basis. Those who do not wish to be 
covered by Social Security would continue to participate 
exclusively in the employer-sponsored pension plan.
    The governments of the City of Louisville and Jefferson 
County were to have been merged in January 2003 and a new 
retirement system was to be formed. Under the provision, each 
employee under the new system could choose whether or not to 
participate in the Social Security system in addition to their 
employer-sponsored pension plan. As under present law, all 
employees newly hired to the system after the divided system is 
in place would be covered automatically under Social Security.

                             EFFECTIVE DATE

    The provision approved by the Committee would have been 
effective on January 1, 2003.

                               D. Studies


(Secs. 451 and 452 of the bill)

                              PRESENT LAW

    Qualified retirement plans are broadly classified into two 
categories under the Code, defined benefit plans and defined 
contribution plans, based on the nature of the benefits 
provided. Under a defined benefit plan, benefits are determined 
under a plan formula, such as a formula based on the 
participant's compensation and years of service. Subject to 
certain limits, benefits under a defined benefit plan are 
guaranteed by the PBGC.
    Under a defined contribution plan, benefits are based 
solely on contributions allocated to separate accounts for each 
plan participant (as adjusted by gains, losses, and expenses). 
Benefits under defined contribution plans are not insured by 
the PBGC.
    Under ERISA, defined contribution plans are referred to as 
``individual account plans.'' Individual account plans may 
provide that plan participants may direct the investment of 
assets allocated to their accounts. If certain requirements are 
satisfied, ERISA fiduciary liability does not apply to 
investment decisions made by plan participants under an 
individual account plan.\124\
---------------------------------------------------------------------------
    \124\ ERISA sec. 404(c).
---------------------------------------------------------------------------
    ERISA generally prohibits qualified retirement plans from 
acquiring employer securities if, after the acquisition, more 
than 10 percent of the assets of the plan would be invested in 
employer securities.\125\ This 10-percent limitation does not 
apply to eligible individual account plans.
---------------------------------------------------------------------------
    \125\ ERISA sec. 407. The 10-percent limitation also applies to 
employer real property.
---------------------------------------------------------------------------
    A floor-offset arrangement is an arrangement under which 
benefits payable to a participant under a defined benefit plan 
are reduced by benefits under an individual account plan. The 
10-percent limitation on the acquisition of employer securities 
applies to an individual account plan that is part of a floor-
offset arrangement, unless the floor-offset arrangement was 
established on or before December 17, 1987.
    An employee stock ownership plan (an ``ESOP'') is an 
individual account plan that is designed to invest primarily in 
employer securities and which meets certain other requirements. 
ESOPs are not subject to the 10-percent limit on the 
acquisition of employer securities, unless the ESOP is part of 
a floor-offset arrangement (as described above).

                           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 such plans to determine 
ways in which retirement security may be enchanced.

                        EXPLANATION OF PROVISION

Study on revitalizing defined benefit plans

    The Department of Treasury, the Department of Labor, and 
the PBGC are directed to jointly undertake a study on ways to 
revitalize employer interest in defined benefit plans. In 
conducting the study, the Treasury and Labor Departments and 
the PBGC are 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.
    Within two years after the date of enactment, the results 
of the study, together with any recommendations for legislative 
changes, are to be reported to the Senate Committees on Finance 
and Health, Education, Labor, and Pensions and to the House 
Committees on Ways and Means and Education and the Workforce.

Study on floor-offset ESOPs

    The Department of the Treasury and the PBGC are directed 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 the PBGC. The 
study is to consider legislative proposals to address the risks 
posed by floor-offset ESOPs.
    Within one year after the date of enactment, the Department 
of Treasury and the PBGC are to report the results of the 
study, together with any recommendations for legislative 
changes, to the Senate Committees on Finance and Health, 
Education, Labor, and Pensions and the House Committees on Ways 
and Means and Education and the Workforce.

                             EFFECTIVE DATE

    The provisions are effective on the date of enactment.

                          E. Other Provisions


1. Additional IRA catch-up contributions for certain individuals (sec. 
        461 of the bill and sec. 408 of the Code)

                              PRESENT LAW

    Under present law, favored tax treatment applies to 
qualified retirement plans maintained by employers and to 
individual retirement arrangements (``IRAs'').
    Qualified defined contribution plans may permit both 
employees and employers to make contributions to the plan. 
Under a qualified cash or deferred arrangement (commonly 
referred to as a ``section 401(k) plan''), employees may elect 
to make pretax contributions to a plan, referred to as elective 
deferrals. Employees may also be permitted to make after-tax 
contributions to a plan. In addition, a plan may provide for 
employer nonelective contributions or matching contributions. 
Nonelective contributions are employer contributions that are 
made without regard to whether the employee makes elective 
deferrals or after-tax contributions. Matching contributions 
are employer contributions that are made only if the employee 
makes elective deferrals or after-tax contributions. Matching 
contributions are sometimes made in the form of employer stock.
    Under present law, an individual may generally make 
contributions to an IRA for a taxable year up to the lesser of 
a certain dollar amount or the individual's compensation. The 
maximum annual dollar limit on IRA contributions to IRAs is 
$3,000 for 2004, $4,000 for 2005-2007, and $5,000 for 2008, 
with indexing thereafter. Individuals who have attained age 50 
may make additional ``catch-up'' contributions to an IRA for a 
taxable year of up to $500 in 2004-2005 and $1,000 in 2006 and 
thereafter.

                           REASONS FOR CHANGE

    The Committee recognizes that, if employer matching 
contributions are made in the form of employer stock, the 
employer's bankruptcy may cause employees to lose a substantial 
portion of their retirement savings. The Committee believes 
that employees should be permitted to make up for such losses 
by making additional IRA contributions.

                        EXPLANATION OF PROVISION

    Under the provision, an eligible individual would be 
permitted to make additional contributions to an IRA up to 
$1,500 per year in 2004 and 2005, and $3,000 per year in 2006-
2008. To be eligible to make these additional contributions, an 
individual must have been a participant in a section 401(k) 
plan under which the employer matched at least 50 percent of 
the employee's contribution to the plan with stock of the 
employer. In addition, (1) the employer must have filed for 
bankruptcy, (2) the employer or any other person must have been 
subject to an indictment or conviction resulting from business 
transactions related to the bankruptcy, and (3) the individual 
was a participant in the section 401(k) plan on the date six 
months before the employer filed for bankruptcy. An individual 
eligible to make these additional contributions is not 
permitted to make IRA catch-up contributions that apply to 
individuals age 50 and older.

                             EFFECTIVE DATE

    The provision is effective for taxable years beginning 
after December 31, 2003, and before January 1, 2009.

2. Distributions by an S corporation to an employee stock ownership 
        plan (sec. 462 of the bill and sec. 4975 of the Code)

                              PRESENT LAW

    An employee stock ownership plan (an ``ESOP'') is a defined 
contribution plan that is designated as an ESOP and is designed 
to invest primarily in qualifying employer securities. For 
purposes of ESOP investments, a ``qualifying employer 
security'' is defined as: (1) publicly traded common stock of 
the employer or a member of the same controlled group; (2) if 
there is no such publicly traded common stock, common stock of 
the employer (or member of the same controlled group) that has 
both voting power and dividend rights at least as great as any 
other class of common stock; or (3) noncallable preferred stock 
that is convertible into common stock described in (1) or (2) 
and that meets certain requirements. In some cases, an employer 
may design a class of preferred stock that meets these 
requirements and that is held only by the ESOP. Special rules 
apply to ESOPs that do not apply to other types of qualified 
retirement plans, including a special exemption from the 
prohibited transaction rules.
    Certain transactions between an employee benefit plan and a 
disqualified person, including the employer maintaining the 
plan, are prohibited transactions that result in the imposition 
of an excise tax.\126\ Prohibited transactions include, among 
other transactions, (1) the sale, exchange or leasing of 
property, (2) the lending of money or other extension of 
credit, and (3) the transfer to, or use by or for the benefit 
of, the income or assets of the plan. However, certain 
transactions are exempt from prohibited transaction treatment, 
including certain loans to enable an ESOP to purchase 
qualifying employer securities.\127\ In such a case, the 
employer securities purchased with the loan proceeds are 
generally pledged as security for the loan. Contributions to 
the ESOP and dividends paid on employer stock held by the ESOP 
are used to repay the loan. The employer stock is held in a 
suspense account and released for allocation to participants' 
accounts as the loan is repaid.
---------------------------------------------------------------------------
    \126\ Sec. 4975.
    \127\ Sec. 4975(d)(3). An ESOP that borrows money to purchase 
employer stock is referred to as a ``leveraged'' ESOP.
---------------------------------------------------------------------------
    A loan to an ESOP is exempt from prohibited transaction 
treatment if the loan is primarily for the benefit of the 
participants and their beneficiaries, the loan is at a 
reasonable rate of interest, and the collateral given to a 
disqualified person consists of only qualifying employer 
securities. No person entitled to payments under the loan can 
have the right to any assets of the ESOP other than (1) 
collateral given for the loan, (2) contributions made to the 
ESOP to meet its obligations on the loan, and (3) earnings 
attributable to the collateral and the investment of 
contributions described in (2).\128\ In addition, the payments 
made on the loan by the ESOP during a plan year cannot exceed 
the sum of those contributions and earnings during the current 
and prior years, less loan payments made in prior years.
---------------------------------------------------------------------------
    \128\ Treas. reg. sec. 54.4975-7(b)(5).
---------------------------------------------------------------------------
    An ESOP of a C corporation is not treated as violating the 
qualification requirements of the Code or as engaging in a 
prohibited transaction merely because, in accordance with plan 
provisions, a dividend paid with respect to qualifying employer 
securities held by the ESOP is used to make payments on a loan 
(including payments of interest as well as principal) that was 
used to acquire the employer securities (whether or not 
allocated to participants).\129\ In the case of a dividend paid 
with respect to any employer security that is allocated to a 
participant, this relief does not apply unless the plan 
provides that employer securities with a fair market value of 
not less than the amount of the dividend is allocated to the 
participant for the year which the dividend would have been 
allocated to the participant.\130\
---------------------------------------------------------------------------
    \129\ Sec. 404(k)(5)(B).
    \130\ Sec. 404(k)(2)(B).
---------------------------------------------------------------------------
    Effective for taxable years beginning after December 31, 
1997, a qualified retirement plan (including an ESOP) may be a 
shareholder of an S corporation.\131\ As a result, an S 
corporation may maintain an ESOP.
---------------------------------------------------------------------------
    \131\ Sec. 1361(c)(6).
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    The Committee believes that distributions made with respect 
to S corporation stock that is held by an ESOP and that was 
purchased with an exempt loan should be permitted to be used to 
repay the loan, subject to the same conditions that apply to C 
corporation dividends used to repay an exempt loan.

                        EXPLANATION OF PROVISION

    Under the provision, an ESOP maintained by an S corporation 
is not treated as violating the qualification requirements of 
the Code or as engaging in a prohibited transaction merely 
because, in accordance with plan provisions, a distribution 
made with respect to S corporation stock that constitutes 
qualifying employer securities held by the ESOP is used to 
repay a loan that was used to acquire the securities (whether 
or not allocated to participants). This relief does not apply 
in the case of a distribution with respect to S corporation 
stock that is allocated to a participant unless the plan 
provides that stock with a fair market value of not less than 
the amount of such distribution is allocated to the participant 
for the year which the distribution would have been allocated 
to the participant.

                             EFFECTIVE DATE

    The provision is effective January 1, 1998.

3. Permit qualified transfers of excess pension assets to retiree 
        health accounts by multiemployer plan (sec. 463 of the bill, 
        sec. 420 of the Code and secs. 101, 403 and 408 of ERISA)

                              PRESENT LAW

    Defined benefit plan assets generally may not revert to an 
employer prior to termination of the plan and satisfaction of 
all plan liabilities. In addition, a reversion may occur only 
if the plan so provides. A reversion prior to plan termination 
may constitute a prohibited transaction and may result in plan 
disqualification. Any assets that revert to the employer upon 
plan termination are includible in the gross income of the 
employer and subject to an excise tax. The excise tax rate is 
20 percent if the employer maintains a replacement plan or 
makes certain benefit increases in connection with the 
termination; if not, the excise tax rate is 50 percent. Upon 
plan termination, the accrued benefits of all plan participants 
are required to be 100-percent vested.
    A pension plan may provide medical benefits to retired 
employees through a separate account that is part of such plan. 
A qualified transfer of excess assets of a defined benefit plan 
to such a separate account within the plan may be made in order 
to fund retiree health benefits.\132\ A qualified transfer does 
not result in plan disqualification, is not a prohibited 
transaction, and is not treated as a reversion. Thus, 
transferred assets are not includible in the gross income of 
the employer and are not subject to the excise tax on 
reversions. No more than one qualified transfer may be made in 
any taxable year. A qualified transfer may not be made from a 
multiemployer plan. No qualified transfer may be made after 
December 31, 2013.\133\
---------------------------------------------------------------------------
    \132\ Sec. 420.
    \133\ Under present law in effect on the dates of Committee action 
on the bill, no qualified transfer could be made after December 31, 
2005.
---------------------------------------------------------------------------
    Excess assets generally means the excess, if any, of the 
value of the plan's assets \134\ over the greater of (1) the 
accrued liability under the plan (including normal cost) or (2) 
125 percent of the plan's current liability.\135\ In addition, 
excess assets transferred in a qualified transfer may not 
exceed the amount reasonably estimated to be the amount that 
the employer will pay out of such account during the taxable 
year of the transfer for qualified current retiree health 
liabilities. No deduction is allowed to the employer for (1) a 
qualified transfer or (2) the payment of qualified current 
retiree health liabilities out of transferred funds (and any 
income thereon).
---------------------------------------------------------------------------
    \134\ The value of plan assets for this purpose is the lesser of 
fair market value or actuarial value.
    \135\ In the case of plan years beginning before January 1, 2004, 
excess assets generally means the excess, if any, of the value of the 
plan's assets over the greater of (1) the lesser of (a) the accrued 
liability under the plan (including normal cost) or (b) 170 percent of 
the plan's current liability (for 2003), or (2) 125 percent of the 
plan's current liability. The current liability full funding limit was 
repealed for years beginning after 2003. Under the general sunset 
provision of EGTRRA, the limit is reinstated for years after 2010.
---------------------------------------------------------------------------
    Transferred assets (and any income thereon) must be used to 
pay qualified current retiree health liabilities for the 
taxable year of the transfer. Transferred amounts generally 
must benefit pension plan participants, other than key 
employees, who are entitled upon retirement to receive retiree 
medical benefits through the separate account. Retiree health 
benefits of key employees may not be paid out of transferred 
assets.
    Amounts not used to pay qualified current retiree health 
liabilities for the taxable year of the transfer are to be 
returned to the general assets of the plan. These amounts are 
not includible in the gross income of the employer, but are 
treated as an employer reversion and are subject to a 20-
percent excise tax.
    In order for the transfer to be qualified, accrued 
retirement benefits under the pension plan generally must be 
100-percent vested as if the plan terminated immediately before 
the transfer (or in the case of a participant who separated in 
the one-year period ending on the date of the transfer, 
immediately before the separation).
    In order to a transfer to be qualified, the employer 
generally must maintain retiree health benefits at the same 
level for the taxable year of the transfer and the following 
four years.
    In addition, the Employee Retirement Income Security Act of 
1974 (``ERISA'') provides that, at least 60 days before the 
date of a qualified transfer, the employer must notify the 
Secretary of Labor, the Secretary of the Treasury, employee 
representatives, and the plan administrator of the transfer, 
and the plan administrator must notify each plan participant 
and beneficiary of the transfer.\136\
---------------------------------------------------------------------------
    \136\ ERISA sec. 101(e). ERISA also provides that a qualified 
transfer is not a prohibited transaction under ERISA or a prohibited 
reversion.
---------------------------------------------------------------------------
    Under present law, special deduction rules apply to a 
multiemployer defined benefit plan established before January 
1, 1954, under an agreement between the Federal government and 
employee representatives in a certain industry.\137\
---------------------------------------------------------------------------
    \137\ Code sec. 404(c).
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    The Committee believes that it is appropriate to allow the 
multiemployer defined benefit plan to which special deduction 
rules apply to make qualified transfers of excess benefit plan 
assets.

                        EXPLANATION OF PROVISION

    The provision allows qualified transfers of excess defined 
benefit plan assets to be made by the multiemployer defined 
benefit plan to which special deduction rules apply (or a 
continuation or spin-off thereof) that primarily covers 
employees in the building and construction industry.

                             EFFECTIVE DATE

    The provision is effective for transfers made in taxable 
years beginning after December 31, 2004.

                           F. Plan Amendments


(Sec. 471 of the bill)

                              PRESENT LAW

    Present law provides a remedial amendment period during 
which, under certain circumstances, a plan may be amended 
retroactively in order to comply with the qualification 
requirements.\138\ In general, plan amendments to reflect 
changes in 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. The Secretary of the Treasury may extend the time 
by which plan amendments need to be made.
---------------------------------------------------------------------------
    \138\ Sec. 401(b).
---------------------------------------------------------------------------
    The Code and ERISA provide that, in general, accrued 
benefits cannot be reduced by a plan amendment.\139\ This 
prohibition on the reduction of accrued benefits is commonly 
referred to as the ``anticutback rule.''
---------------------------------------------------------------------------
    \139\ Code sec. 411(d)(6)l ERISA sec. 204(g).
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

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

                        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 \140\ (``EGTRRA''), 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 
anticutback rule. 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, 2006, 
or such later date as provided by the Secretary of the 
Treasury. Governmental plans are given an additional two years 
in which to make required plan amendments. 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 EGTRRA (or applicable regulations) may be made 
retroactively effective as of the first day the plan is 
operated in accordance with the amendment.
---------------------------------------------------------------------------
    \140\ Pub. L. No. 107-16.
---------------------------------------------------------------------------
    A plan amendment will not be considered to be pursuant to 
the bill or EGTRRA (or applicable regulations) if it has an 
effective date before the effective date of the provision of 
the bill or EGTRRA (or regulations) to which it relates. 
Similarly, the provision does not provide relief from the 
anticutback rule for periods prior to the effective date of the 
relevant provision (or regulations) or the plan amendment.
    The Secretary of the Treasury 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 
EGTRRA. 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 EGTTRA.\141\ 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, in that case, 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 EGTRRA. 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 EGTRRA, the plan is not 
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 EGTRRA.
---------------------------------------------------------------------------
    \141\ 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 
EGTRRA, in the case of a plan that incorporated the section 415 limits 
by reference on June 7, 2001, the date of enactment of EGTRRA.
---------------------------------------------------------------------------

                             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.\142\ 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.
---------------------------------------------------------------------------
    \142\ 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 
individual's 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. 
Arequirement 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.\143\ 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.
---------------------------------------------------------------------------
    \143\ 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.\144\ 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.\145\ 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.\146\ In these situations, deferred compensation 
amounts were held to be includible in income when actually 
received or otherwise made available.
---------------------------------------------------------------------------
    \144\ The seminal ruling dealing with nonqualified deferred 
compensation is Rev. Rul. 60-31, 1960-1 C.B. 174.
    \145\ Rev. Rul. 69-650, 1969-2 C.B. 106; Rev. Rul. 69-49, 1969-1 
C.B. 138.
    \146\ 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 payable but for his 
exercise of such option, the amount shall be treated as 
received by the taxpayer in such earlier taxable year.\147\
---------------------------------------------------------------------------
    \147\ 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 \148\ 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.\149\
---------------------------------------------------------------------------
    \148\ Pub. L. No. 95-600.
    \149\ 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 the popular use of deferred 
compensation arrangements by executives to defer current 
taxation of substantial amounts of income. Executives often use 
arrangements that 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 report issued by the staff of the Joint Committee on 
Taxation on their investigation of Enron Corporation,\150\ 
which was mandated by the Committee, detailed how executives 
deferred millions of dollars in Federal income taxes through 
nonqualified deferred compensation arrangements. The staff of 
the Joint Committee on Taxation found that the restriction 
imposed by section 132 of the Revenue Act of 1978 may have 
prevented Treasury from issuing more guidance on nonqualified 
deferred compensation and may have contributed to aggressive 
interpretations of present law. Especially given the lack of 
statutory rules in this area, the lack of administrative 
guidance allows taxpayers latitude to create and promote 
arrangements that push the limit of what is allowed under the 
law. The Joint Committee staff recommended the repeal of 
section 132.
---------------------------------------------------------------------------
    \150\ Joint Committee on Taxation, Report of Investigation of Enron 
Corporation and Related Entities Regarding Federal Tax and Compensation 
Issues, and Policy Recommendations (JCS-3-03), February 2003.
---------------------------------------------------------------------------
    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. The Committee intends 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 consistent with the 
other provisions of the bill.
    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.
    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 any 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 Nonqualified Deferred Compensation


(Sec. 502 of the bill and new sec. 409A of the Code)

                              PRESENT LAW

In general

    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,\151\ 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)).
---------------------------------------------------------------------------
    \151\ See, e.g., Sproull v. Commissioner, 16 T.C. 244 (1951), aff'd 
per curiam, 194 F.2d 541 (6th Cir. 1952); Rev. Rul. 60-31, 1960-1 C.B. 
174.
---------------------------------------------------------------------------
    In general, the time for income 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.
    Nonqualified deferred compensation is generally subject to 
social security and Medicare taxes when the compensation is 
earned (i.e., when services are performed), unless the 
nonqualified deferred compensation is subject to a substantial 
risk of forfeiture. If nonqualified deferred compensation is 
subject to a substantial risk of forfeiture, it is subject to 
social security and Medicare tax when the risk of forfeiture is 
removed (i.e., when the right to the nonqualified deferred 
compensation vests). This treatment is not affected by whether 
the arrangement is funded or unfunded, which is relevant in 
determining when amounts are includible in income (and subject 
to income tax withholding).
    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.\152\ 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 if 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.
---------------------------------------------------------------------------
    \152\ 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.\153\ 
Income is constructively received when it is credited to an 
individual's account, set apart, or otherwise made available so 
that it may 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.
---------------------------------------------------------------------------
    \153\ Treas. Reg. secs. 1.451-1 and 1.451-2.
---------------------------------------------------------------------------

Rabbi trusts

    Arrangements have developed in an effort to provide 
employees with security for nonqualified deferred compensation, 
while still allowing deferral of income inclusion. 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, except that 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 insolvency or 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 insolvency or 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.\154\ 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.
---------------------------------------------------------------------------
    \154\ 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 IRS has issued guidance setting forth model rabbi trust 
provisions.\155\ 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 in the event of the company's 
insolvency or bankruptcy.
---------------------------------------------------------------------------
    \155\ Rev. Proc. 92-64, 1992-2 C.B. 422, modified in part by Notice 
2000-56, 2000-2 C.B. 393.
---------------------------------------------------------------------------
    Since the concept of rabbi trusts was developed, 
arrangements have developed which attempt to protect the assets 
from creditors despite the terms of the trust. Arrangements 
also have developed which effectively allow deferred amounts to 
be available to individuals, while still meeting the safe 
harbor requirements set forth by the IRS.

                           REASONS FOR CHANGE

    The report issued by the staff of the Joint Committee on 
Taxation on their investigation of Enron Corporation,\156\ 
which was mandated by the Committee, detailed how executives 
deferred millions of dollars in Federal income taxes through 
nonqualified deferred compensation arrangements. Over $150 
million in compensation was deferred by the 200-highest 
compensated employees for the years 1998 through 2001.
---------------------------------------------------------------------------
    \156\ Joint Committee on Taxation, Report of Investigation of Enron 
Corporation and Related Entities Regarding Federal Tax and Compensation 
Issues, and Policy Recommendations (JCS-3-03), February 2003.
---------------------------------------------------------------------------
    The Committee is also aware of the popular use of deferred 
compensation arrangements by executives of many other companies 
to defer current taxation of substantial amounts of income. The 
Committee believes that many nonqualified deferred compensation 
arrangements have developed that allow improper deferral of 
income. As in the case of Enron, executives often use 
arrangements that allow deferral of income, but also provide 
security of future payment to the executive. For example, 
nonqualified deferred compensation arrangements often contain 
provisions that allow participants to receive distributions 
upon request, subject to forfeiture of a minimal amount (i.e., 
a ``haircut'' provision).
    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.
    The Committee believes that certain arrangements that allow 
participants inappropriate levels of control or access to 
amounts deferred should not result in deferral of income 
inclusion. The Committee also believes that certain 
arrangements, such as offshore trusts, which effectively 
protect assets from creditors, should be treated as funded and 
not result in deferral of income inclusion.
    The finding of the staff of Joint Committee on Taxation 
support the Committee's views regarding the need for statutory 
changes in the deferred compensation area.\157\ The Joint 
Committee staff recommended changes to the present-law rules 
regarding the taxation of nonqualified deferred compensation.
---------------------------------------------------------------------------
    \157\ Id. at Vol. I, 592-637.
---------------------------------------------------------------------------

                        EXPLANATION OF PROVISION

    Under the provision, all amounts deferred under a 
nonqualified deferred compensation plan \158\ for all taxable 
years are currently includible in gross income to the extent 
not subject to a substantial risk of forfeiture \159\ and not 
previously included in gross income, unless certain 
requirements are satisfied. If the requirements of the 
provision are not satisfied, in addition to current income 
inclusion, interest at the underpayment rate is imposed on the 
underpayments that would have occurred had the compensation 
been includible in income when first deferred, or if later, 
when not subject to a substantial risk of forfeiture. In 
addition, the amount required to be included in income is 
subject to an additional ten percent tax. Actual or notional 
earnings on amounts deferred are also subject to the provision.
---------------------------------------------------------------------------
    \158\ A plan includes an agreement or arrangement, including an 
agreement or arrangement that includes one person.
    \159\ As under section 83, the rights of a person to compensation 
are subject to a substantial risk of forfeiture if the person's rights 
to such compensation are conditioned upon the performance of 
substantial services by any individual.
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    Under the provision, distributions from a nonqualified 
deferred compensation plan may not be distributed earlier than 
upon separation from service, death, a specified time (or 
pursuant to a fixed schedule), change in control, occurrence of 
an unforeseeable emergency, or if the participant becomes 
disabled. A nonqualified deferred compensation plan may not 
allow distributions other than upon the permissible 
distribution events and may not permit the acceleration of the 
time or schedule of any payment under the plan, except as 
provided in regulations by the Secretary.
    In the case of a specified employee, distributions upon 
separation from service may not be made earlier than six months 
after the date of the separation from service. Specified 
employees are key employees (as defined in section 416(i)) of 
publicly-traded corporations.
    Amounts payable at a specified time or pursuant to a fixed 
schedule must be specified under the plan at the time of 
deferral. Amounts payable upon the occurrence of an event are 
not treated as amounts payable at a specified time. For 
example, amounts payable when an individual attains age 65 are 
payable at a specified time, while amounts payable when an 
individual's child begins college are payable upon the 
occurrence of an event.
    Distributions upon a change in the ownership or effective 
control of a corporation, or in the ownership of a substantial 
portion of the assets of a corporation, may only be made to the 
extent provided by the Secretary. It is intended that the 
Secretary use a similar, but more restrictive, definition of 
change in control as used for purposes of the golden parachute 
provisions of section 280G consistent with the purposes of the 
provision. In the case of an individual who, with respect to a 
corporation, is subject to the requirements of section 16(a) of 
the Securities Act of 1934, distributions upon a change in 
control may not be made earlier than one year after the date of 
the change in control. Such individuals include officers (as 
defined bysection 16(a)),\160\ directors, or 10-percent owners 
of publicly-held corporations. Under the provision, distributions made 
to such individuals within one year of the change in control 
(``applicable payments'') are treated as excess parachute payments 
under section 280G (even if the payment would not otherwise be treated 
as an excess parachute payment) and therefore subject to the excise tax 
under section 4999. As under present law, no deduction is allowed for 
any amount treated as an excess parachute payment.
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    \160\ An officer is defined as the president, principal financial 
officer, principal accounting officer (or, if there is no such 
accounting officer, the controller), any vice-president in charge of a 
principal business unit, division or function (such as sales, 
administration or finance), any other officer who performs a policy-
making function, or any other person who performs similar policy-making 
functions.
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    If, absent the provision, an applicable payment is a 
payment in the nature of compensation contingent on a change in 
control, section 280G shall be applied as if the provision had 
not been enacted (i.e., the applicable payments shall continue 
to be taken into account under section 280G). Any resulting 
excess parachute payment also shall be subject to the excise 
tax under section 4999 (in addition to the tax imposed by the 
provision). Under the provision, an applicable payment that, 
absent the provision, is not a payment in the nature of 
compensation contingent on a change in control is required to 
be taken into account in determining if the present value of 
the payments in the nature of compensation contingent on a 
change in control equal or exceed three times the base amount. 
Any resulting excess parachute payment also shall be subject to 
the excise tax under section 4999 (in addition to the tax 
imposed by the provision). Applicable payments do not include 
payments made upon death or if the participant becomes 
disabled. Treasury regulations shall prescribe rules to prevent 
a deduction from being disallowed more than once.
    Unforeseeable emergency is defined as severe financial 
hardship of the participant or beneficiary resulting from a 
sudden and unexpected illness or accident of the participant or 
beneficiary, the participant's or beneficiary's spouse or the 
participant's or beneficiary's dependent (as defined in 
152(a)); loss of the participant's or beneficiary's property 
due to casualty; or other similar extraordinary and 
unforeseeable circumstances arising as a result of events 
beyond the control of the participant or beneficiary. The 
amount of the distribution must be limited to the amount needed 
to satisfy the emergency plus taxes. Distributions can not be 
allowed to the extent that the hardship may be relieved through 
reimbursement or compensation by insurance or otherwise, or by 
liquidation of the participant's or beneficiary's assets (to 
the extent such liquidation would not itself cause severe 
financial hardship).
    A participant is considered disabled if he or she (i) is 
unable to engage in any substantial gainful activity by reason 
of any medically determinable physical or mental impairment 
which can be expected to result in death or can be expected to 
last for a continuous period of not less than 12 months; or 
(ii) is, by reason on any medically determinable physical or 
mental impairment which can be expected to result in death or 
can be expected to last for a continuous period of not less 
than 12 months, receiving income replacement benefits for a 
period of not less than three months under an accident and 
health plan covering employees of the individual's employer.
    Under the provision, investment options (including phantom 
or notional investment options) which a participant may elect 
under the nonqualified deferred compensation plan must be 
comparable to those which may be elected by participants of the 
qualified defined contribution plan of the employer that has 
the fewest investment options. It is intended that the 
investment options of the nonqualified deferred compensation 
plan may be less favorable or more limited than those of the 
qualified defined contribution employer plan. The Committee 
intends that open brokerage windows, hedge funds, and 
investments in which the employer guarantees a rate of return 
above what is commercially available are prohibited. If there 
is no qualified defined contribution employer plan, the 
investment options of the nonqualified deferred compensation 
plan must meet the requirements prescribed by the Secretary 
regarding permissible investment options. It is intended that 
in cases where there is no such qualified defined contribution 
employer plan, the Secretary issue rules limiting the available 
investment options.
    The provision requires that the plan must provide that 
compensation for services performed during a taxable year may 
be deferred at the participant's election only if the election 
to defer is made no later than during the preceding taxable 
year, or at such other time as provided in Treasury 
regulations. In the first year that an employee becomes 
eligible for participation in a nonqualified deferred 
compensation plan, the election may be made within 30 days 
after the date that the employee is initially eligible.
    Under the provision, a plan may allow changes in the time 
and form of distributions subject to certain requirements. A 
nonqualified deferred compensation plan may allow subsequent 
elections to delay the timing or form of distributions only if 
(1) the plan requires that the election may not take effect 
until at least 12 months after the date on which the election 
is made; (2) except in the case of elections relating to 
disability, death, or unforeseeable emergency, the plan 
requires that the first payments with respect to which such 
election is made be deferred for a period of not less than 5 
years from the date such payment would otherwise have been 
made; and (3) the plan requires that any election related to a 
payment upon a specified time may not be made less than 12 
months prior to the date of the first scheduled payment. An 
individual cannot be permitted to make more than one subsequent 
election with respect to an amount deferred. As previously 
discussed, no accelerations of distributions may be allowed 
(except as provided in regulations by the Secretary). For 
example, changes in the form of a distribution from an annuity 
to a lump sum are not permitted.
    If impermissible distributions or elections are made, or if 
the nonqualified deferred compensation plan allows 
impermissible distributions or elections, all amounts deferred 
under the plan (including amounts deferred in prior years) are 
currently includible in income to the extent not subject to a 
substantial risk of forfeiture and not previously included in 
income. In addition, interest at the underpayment rate is 
imposed on the underpayments that would have occurred had the 
compensation been includible in income when first deferred, or 
if later, when not subject to a substantial risk of forfeiture. 
An additional ten percent tax also applies to the amount 
required to be included in income.
    Under the provision, assets set aside (directly or 
indirectly) in a trust (or other similar arrangement) for the 
purpose of paying nonqualified deferred compensation are 
treated as property transferred in connection with the 
performance of services under section 83 (whether or not such 
assets are available to satisfy the claims of general 
creditors) (1) at the time set aside ifsuch assets are located 
outside of the United States, or (2) at the time transferred if such 
assets are subsequently transferred outside of the United States. Any 
increases in the value of, or any earnings with respect to, such assets 
are treated as additional transfers of property. Interest at the 
underpayment rate is imposed on the underpayments that would have 
occurred had the amounts been includible in income for the taxable year 
in which first deferred or, if later, the first taxable year in which 
such amounts are not subject to a substantial risk of forfeiture. The 
amount required to be included in income is also subject to an 
additional ten percent tax. 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 arrangements. The Secretary has 
authority to exempt arrangements from the provision if the arrangements 
do not result in an improper deferral of U.S. tax and will not result 
in assets being effectively beyond the reach of creditors.
    Under the provision, a transfer of property in connection 
with the performance of services under section 83 also occurs 
if a nonqualified deferred compensation plan provides that, 
upon a change in the employer's financial health, assets will 
be restricted to the payment of nonqualified deferred 
compensation. The transfer of property occurs as of the earlier 
of when the assets are so restricted or when the plan provides 
that assets will be restricted. Any increases in the value of, 
or any earnings with respect to, such assets are treated as 
additional transfers of property. Interest at the underpayment 
rate is imposed on the underpayments that would have occurred 
had the amounts been includible in income for the taxable year 
in which first deferred or, if later, the first taxable year in 
which such amounts are not subject to a substantial risk of 
forfeiture. The amount required to be included in income is 
also subject to an additional ten percent tax.
    A nonqualified deferred compensation plan is any plan that 
provides for the deferral of compensation other than a 
qualified employer plan or any bona fide vacation leave, sick 
leave, compensatory time, disability pay, or death benefit 
plan. A qualified employer plan means a qualified retirement 
plan, tax-deferred annuity, simplified employee pension, and 
SIMPLE.\161\ A governmental eligible deferred compensation plan 
(sec. 457) is also a qualified employer plan under the 
provision.
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    \161\ A qualified employer plan also includes a section 501(c)(18) 
trust.
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    Interest imposed under the provision is treated as interest 
on an underpayment of tax. Income (whether actual or notional) 
attributable to nonqualified deferred compensation is treated 
as additional deferred compensation and is subject to the 
provision. The provision does not prevent the inclusion of 
amounts in gross income under any provision or rule of law 
earlier than the time provided in the provision. Any amount 
required to be included in gross income under the provision 
shall not be required to be included in gross income under any 
other rule of law later than the time provided in the 
provision. The provision does not affect the rules regarding 
the timing of an employer's deduction for nonqualified deferred 
compensation.
    The provision requires annual reporting to the IRS of 
amounts deferred. Such amounts are required to be reported on 
an individual's Form W-2 for the year deferred even if the 
amount is not currently includible in income for that taxable 
year. Under the provision, the Secretary is authorized, through 
regulations, to establish a minimum amount of deferrals below 
which the reporting requirements do not apply.
    The provision provides the Secretary of the Treasury 
authority to prescribe regulations as are necessary to carry 
out the purposes of provision, including regulations: (1) 
providing for amounts of deferral in the case of defined 
benefit plans; (2) relating to changes in the ownership and 
control of a corporation or assets of a corporation; (3) 
exempting from the provisions providing for transfers of 
property arrangements that will not result in an improper 
deferral of U.S. tax and will not result in assets being 
effectively beyond the reach of creditors; (4) defining 
financial health; and (5) disregarding a substantial risk of 
forfeiture in cases where necessary to carry out the purposes 
of the provision.
    It is intended that substantial risk of forfeitures may not 
be used to manipulate the timing of income inclusion. It is 
intended that substantial risks of forfeiture should be 
disregarded in cases in which they are illusory or are 
principally used to postpone the timing of income inclusion. 
For example, if an executive is effectively able to control the 
acceleration of the lapse of a substantial risk of forfeiture, 
such risk of forfeiture should be disregarded and income 
inclusion should not be postponed on account of such 
restriction.

                             EFFECTIVE DATE

    The provision is effective for amounts deferred in taxable 
years beginning after December 31, 2004.
    The provision applies to earnings on deferred compensation 
only to the extent that the provision applies to such 
compensation.
    Not later than 90 days after the date of enactment, the 
Secretary is directed to issue guidance on what constitutes a 
change in ownership or effective control.
    Not later than 90 days after the date of enactment, the 
Secretary is directed to issue guidance providing a limited 
period during which an individual participating in a 
nonqualified deferred compensation plan adopted before December 
31, 2004, may, without violating the provision, terminate 
participation or cancel an outstanding deferral election with 
regard to amounts earned after December 31, 2004, if such 
amounts are includible in income as earned.

  C. Denial of Deferral of Certain Stock Option and Restricted Stock 
                                 Gains


(Sec. 503 of the bill and sec. 63 of the Code)

                              PRESENT LAW

    Section 83 applies to transfers of property in connection 
with the performance of services. Under section 83, if, in 
connection with the performance of services, property is 
transferred to any person other than the person for whom such 
services are performed, the excess of the fair market value of 
such property over the amount (if any) paid for the property is 
includible in income at the first time that the property is 
transferable or not subject to substantial risk of forfeiture.
    Stock granted to an employee (or other service provider) is 
subject to the rules that apply under section 83. When stock is 
vested and transferred to an employee, the excess of the fair 
market value of the stock over the amount, if any, the employee 
pays for the stock is includible in the employee's income for 
the year in which the transfer occurs.
    The income taxation of a nonqualified stock option is 
determined under section 83 and depends on whether the option 
has a readily ascertainable fair market value. If the 
nonqualified option does not have a readily ascertainable fair 
market value at the time of grant, no amount is includible in 
the gross income of the recipient with respect to the option 
until the recipient exercises the option. The transfer of stock 
on exercise of the option is subject to the general rules of 
section 83. That is, if vested stock is received on exercise of 
the option, the excess of the fair market value of the stock 
over the option price is includible in the recipient's gross 
income as ordinary income in the taxable year in which the 
option is exercised. If the stock received on exercise of the 
option is not vested, the excess of the fair market value of 
the stock at the time of vesting over the option price is 
includible in the recipient's income for the year in which 
vesting occurs unless the recipient elects to apply section 83 
at the time of exercise.
    Other forms of stock-based compensation are also subject to 
the rules of section 83.

                           REASONS FOR CHANGE

    The Committee is aware of the use of certain programs that 
allow executives to defer taxes attributable to stock option 
gains and restricted stock gains by exchanging their interest 
in the property for a future payment of such gain. The report 
issued by the staff of the Joint Committee on Taxation on their 
investigation of Enron Corporation,\162\ which was mandated by 
the Committee, showed that executives at Enron Corporation 
deferred Federal income taxes under such programs. The 
Committee does not believe that such practices should be 
allowed to continue as they result in inappropriate deferred 
income.
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    \162\ Joint Committee on Taxation, Report of Investigation of Enron 
Corporation and Related Entities Regarding Federal Tax and Compensation 
Issues, and Policy Recommendations (JCS-3-03), February 2003.
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                        EXPLANATION OF PROVISION

    Under the provision, gains attributable to stock options 
(including exercises of stock options), vesting of restricted 
stock, and other compensation based on employer securities 
(including employer securities) cannot be deferred by 
exchanging such amounts for a right to receive a future 
payment. Except as provided by the Secretary, if a taxpayer 
exchanges (1) an option to purchase employer securities, (2) 
employer securities, or (3) any other property based on 
employer securities for a right to receive future payments, an 
amount equal to the present value of such right (or such other 
amount as the Secretary specifies) is required to be included 
in gross income for the taxable year of the exchange. The 
provision applies even if the future right to payment is 
treated as an unfunded and unsecured promise to pay. The 
provision applies when there is in substance an exchange, even 
if the transaction is not formally structured as an exchange.
    The provision is not intended to imply that such practices 
result in permissive deferral of income under present law.

                             EFFECTIVE DATE

    The provision applies to exchanges after December 31, 2004.

D. Increase in Withholding From 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,\163\ based on the third lowest 
income tax rate under the Code (25 percent for 2004).\164\
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    \163\ Sec. 13273 of the Revenue Reconciliation Act of 1993.
    \164\ 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 (35 percent for 
2004), 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 payments made 
after December 31, 2003.

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


(Sec. 511 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.\165\
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    \165\ Sec. 421.
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    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.\166\ The applicable Code provisions 
\167\ 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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    \166\ Secs. 3101, 3111 and 3301.
    \167\ Secs. 3121 and 3306.
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    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 
\168\ 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.
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    \168\ Notice 2002-47, 2002-28 I.R.B. 97.
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                           REASONS FOR CHANGE

    The Committee 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.\169\ The 
provision also provides that such remuneration is not taken 
into account for purposes of determining Social Security 
benefits.
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    \169\ The provision also provides a similar exclusion for wages 
under the Railroad Retirement Tax Act.
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    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.

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


(Sec. 512 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.\170\
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    \170\ 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. The gain upon 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.\171\ 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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    \171\ 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 allowed 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 the date of 
enactment.

                  TITLE VI. WOMEN'S PENSION PROTECTION


A. Study of Spousal Consent for Distributions From Defined Contribution 
                                 Plans


(Sec. 601 of the bill)

                              PRESENT LAW

    Qualified retirement plans are generally subject to 
requirements regarding the form in which benefits may be paid 
without spousal consent.\172\ The extent to which the 
requirements apply depends on the type of plan.
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    \172\ Code secs. 401(a)(11) and 417; ERISA sec. 205.
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    Defined benefit pension plans and money purchase pension 
plans \173\ are generally required to provide benefits 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 
that 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. In addition, if 
a married participant dies before the commencement of 
retirement benefits, the surviving spouse must be provided with 
a qualified preretirement survivor annuity (``QPSA''), which 
generally must provide the surviving spouse with a benefit that 
is not less than the benefit that would have been provided 
under the survivor portion of a QJSA.\174\
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    \173\ A money purchase pension plan is a type of defined 
contribution plan that provides for a set level of required employer 
contributions, generally as a specified percentage of participants' 
compensation, and for the distribution of benefits in the form of an 
annuity.
    \174\ In the case of a money purchase pension plan, a QPSA means an 
annuity for the life of the surviving spouse that has an actuarial 
value of at least 50 percent of the participant's vested account 
balance as of the date of death.
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    The participant and his or her spouse may waive the right 
to a QJSA and QPSA if certain requirements are satisfied. In 
general, these requirements include providing the participant 
with a written explanation of the terms and conditions of the 
survivor annuity, the right to make, and the effect of, a 
waiver of the annuity, the rights of the spouse to waive the 
survivor annuity, and the right of the participant to revoke 
the waiver. In addition, the spouse must provide a written 
consent to the waiver, witnessed by a plan representative or a 
notary public, which acknowledges the effect of the waiver.
    Defined contribution plans other than money purchase 
pension plans are generally not subject to the QJSA and QPSA 
rules unless the plan offers benefits in the form of an annuity 
and the participant elects an annuity. However, such defined 
contribution plans must provide that the participant's 
surviving spouse is the beneficiary of the participant's entire 
vested account balance under the plan, unless the spouse 
consents to designation of another beneficiary. In addition, 
the plan must not have received a transfer of assets from a 
plan to which the QJSA and QPSA requirements applied or must 
separately account for the transferred assets.

                           REASONS FOR CHANGE

    Present law requires defined benefit pension plans and 
money purchase pension plans to provide annuity benefits to a 
participant's surviving spouse unless the spouse consents to 
waive the annuity. The spousal consent rules provide important 
protections for spouses, particularly nonworking spouses. These 
rules also assist married employees and their spouses in 
determining how to meet their retirement income needs by 
requiring distributions in the form of a QJSA unless the 
participant and spouse consent to another form.
    Most defined contribution plans do not offer benefits in 
the form of an annuity and thus are not subject to the QJSA and 
QPSA rules under present law. Requiring such plans to offer 
annuities (unless the participant and spouse elect otherwise) 
represents a significant policy change and is likely to 
increase administrative burdens for such plans. However, for 
many employees, a defined contribution plan is the only type of 
retirement plan offered by their employer. The Committee 
believes a study should be conducted on the feasibility and 
desirability of extending the spousal consent requirements to 
defined contribution plans.

                        EXPLANATION OF PROVISION

    The Secretary of Labor and the Secretary of Treasury are 
required to conduct a joint study of the feasibility and 
desirability of extending the spousal consent requirements to 
defined contribution plans to which the requirements do not 
apply under present law 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 Senate 
Committees on Finance and on Health, Education, Labor and 
Pensions. In conducting the study, the Secretary of Labor and 
the Secretary of Treasury are required to consider: (1) any 
modifications of the spousal consent requirements that are 
necessary to apply the requirements to defined contribution 
plans; and (2) the feasibility of providing notice and spousal 
consent in electronic form that are capable of authentication.

                             EFFECTIVE DATE

    The provision is effective on the date of enactment.

              B. Division of Pension Benefits Upon Divorce


(Sec. 611 of the bill)

                              PRESENT LAW

    Benefits provided under a qualified retirement plan for a 
participant may not be assigned or alienated to creditors of 
the participant, except in very limited circumstances.\175\ One 
exception to the prohibition on assignment or alienation is a 
qualified domestic relations order (``QDRO'').\176\ A QDRO is a 
domestic relations order that creates or recognizes a right of 
an alternate payee, including a former spouse, to any plan 
benefit payable with respect to a participant and that meets 
certain procedural requirements. In addition, a QDRO generally 
may not require the plan to provide any type or form of 
benefit, or any option, not otherwise provided under the plan, 
or to provide increased benefits.
---------------------------------------------------------------------------
    \175\ Code sec. 401(a)(13); ERISA sec. 206(d).
    \176\ Code secs. 401(a)(13)(B) and 414(p); ERISA sec. 206(d)(3).
---------------------------------------------------------------------------
    Present law also provides that a QDRO may not require the 
payment of benefits to an alternate payee that are required to 
be paid to another alternate payee under a domestic relations 
order previously determined to be a QDRO. This rule implicitly 
recognizes that a domestic relations order issued after a QDRO 
may also qualify as a QDRO. However, present law does not 
otherwise provide specific rules for the treatment of a 
domestic relations order as a QDRO if the order is issued after 
another domestic relations order or a QDRO (including an order 
issued after a divorce decree) or revises another domestic 
relations order or a QDRO.
    Present law provides specific rules that apply during any 
period in which the status of a domestic relations order as a 
QDRO is being determined (by the plan administrator, by a 
court, or otherwise). During such a period, the plan 
administrator is required to account separately for the amounts 
that would have been payable to the alternate payee during the 
period if the order had been determined to be a QDRO (referred 
to as ``segregated amounts''). If, within the 18-month period 
beginning with the date on which the first payment would be 
required to be made under the order, the order (or modification 
thereof) is determined to be a QDRO, the plan administrator is 
required to pay the segregated amounts (including any interest 
thereon) to the person or persons entitled thereto. If, within 
the 18-month period, the order is determined not to be a QDRO, 
or its status as a QDRO is not resolved, the plan administrator 
is required to pay the segregated amounts (including any 
interest) to the person or persons who would be entitled to 
such amounts if there were no order. In such a case, any 
subsequent determination that the order is a QDRO is applied 
prospectively only.

                           REASONS FOR CHANGE

    The Committee understands that uncertainty exists under 
present law as to the treatment of certain domestic relations 
orders as QDROs, such as those that are issued subsequent to 
divorce or that revise a previous domestic relations order or 
QDRO. The Committee understands that issues as to whether a 
subsequent domestic relations order is a QDRO have arisen even 
in cases involving the same former spouse, such as a domestic 
relations order that deals with benefits not dealt with in a 
QDRO previously issued to the same former spouse. The Committee 
believes the treatment of such domestic relations orders should 
be clarified.

                        EXPLANATION OF PROVISION

    The Secretary of Labor is directed to issue, not later than 
one year after the date of enactment of the provision, 
regulations to clarify the status of certain domestic relations 
orders. In particular, the regulations are to clarify that a 
domestic relations order otherwise meeting the QDRO 
requirements will not fail to be treated as a QDRO solely 
because of the time it is issued or because it is issued after 
or revises another domestic relations order or another QDRO. 
The regulations are also to clarify that such a domestic 
relations order is in all respects subject to the same 
requirements and protections that apply to QDROs. For example, 
as under present law, such a domestic relations order may not 
require the payment of benefits to an alternate payee that are 
required to be paid to another alternate payee under an earlier 
QDRO. In addition, the present-law rules regarding segregated 
amounts that apply while the status of a domestic relations 
order as a QDRO is being determined continue to apply.

                             EFFECTIVE DATE

    The provision is effective on the date of enactment.

C. Protection of Rights of Former Spouses Under the Railroad Retirement 
                                 System


(Secs. 621 and 622 of the Act and secs. 2 and 5 of the Railroad 
        Retirement Act of 1974)

                              PRESENT LAW

In general

    The Railroad Retirement System has two main components. 
Tier I of the system is financed by taxes on employers and 
employees equal to the Social Security payroll tax and provides 
qualified railroad retirees (and their qualified spouses, 
dependents, widows, or widowers) with benefits that are roughly 
equal to Social Security. Covered railroad workers and their 
employers pay the Tier I tax instead of the Social Security 
payroll tax, and most railroad retirees collect Tier I benefits 
instead of Social Security. Tier II of the system replicates a 
private pension plan, with employers and employees contributing 
a certain percentage of pay toward the system to finance 
defined benefits to eligible railroad retirees (and qualified 
spouses, dependents, widows, or widowers) upon retirement; 
however, the Federal Government collects the Tier II payroll 
contribution and pays out the benefits.

Former spouses of living railroad employees

    Generally, a former spouse of a railroad employee who is 
otherwise eligible for any Tier I or Tier II benefit cannot 
receive either benefit until the railroad employee actually 
retires and begins receiving his or her retirement benefits. 
This is the case regardless of whether a State divorce court 
has awarded such railroad retirement benefits to the former 
spouse.

Former spouses of deceased railroad employees

    The former spouse of a railroad employee may be eligible 
for survivors benefits under Tier I of the Railroad Retirement 
System. However, a former spouse loses eligibility for any 
otherwise allowable Tier II benefits upon the death of the 
railroad employee.

                           REASONS FOR CHANGE

    The Committee wishes to provide more equitable treatment of 
former spouses of railroad employees.

                        EXPLANATION OF PROVISION

Former spouses of living railroad employees

    The bill eliminates the requirement that a railroad 
employee actually receive railroad retirement benefits for the 
former spouse to be entitled to any Tier I benefit or Tier II 
benefit awarded under a State divorce court decision.

Former spouses of deceased railroad employees

    The bill provides that a former spouse of a railroad 
employee does not lose eligibility for otherwise allowable Tier 
II benefits upon the death of the railroad employee.

                             EFFECTIVE DATE

    The railroad retirement provisions are effective one year 
after the date of enactment.

      D. Modifications of Joint and Survivor Annuity Requirements


(Sec. 631 of the bill and secs. 401 and 417 of the Code and sec. 205 of 
        ERISA)

                              PRESENT LAW

    Defined benefit pension plans and money purchase pension 
plans are required to provide benefits 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.\177\ 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.\178\ In the 
case of a married participant who dies before the commencement 
of retirement benefits, the surviving spouse must be provided 
with a qualified preretirement survivor annuity (``QPSA''), 
which must provide the surviving spouse with a benefit that is 
not less than the benefit that would have been provided under 
the survivor portion of a QJSA.
---------------------------------------------------------------------------
    \177\ Code secs. 401(a)(11) and 417; ERISA sec. 205.
    \178\ Thus, a plan could provide an annuity for the life of the 
participant, with a survivor annuity for the life of the spouse equal 
to 75 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 and QPSA provided certain requirements are satisfied. 
In general, these conditions include providing the participant 
with a written explanation of the terms and conditions of the 
survivor annuity, the right to make, and the effect of, a 
waiver of the annuity, the rights of the spouse to waive the 
survivor annuity, and the right of the participant to revoke 
the waiver. In addition, the spouse must provide a written 
consent to the waiver, witnessed by a plan representative or a 
notary public, which acknowledges the effect of the waiver.
    Defined contribution plans other than money purchase 
pension plans are not required to provide a QJSA or QPSA if the 
participant does not elect an annuity as the form of payment, 
the surviving spouse is the beneficiary of the participant's 
entire vested account balance under the plan (unless the spouse 
consents to designation of another beneficiary),\179\ and, with 
respect to the participant, the plan has not received a 
transfer from a plan to which the QJSA and QPSA requirements 
applied (or separately accounts for the transferred assets). In 
the case of a defined contribution plan subject to the QJSA and 
QPSA requirements, a QPSA means an annuity for the life of the 
surviving spouse that has an actuarial value of at least 50 
percent of the participant's vested account balance as of the 
date of death.
---------------------------------------------------------------------------
    \179\ Waiver and election rules apply to the waiver of the right of 
the spouse to be the beneficiary under a defined contribution plan that 
is not required to provide a QJSA.
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    The Committee believes that it is appropriate to allow 
participants greater choice in selecting their form of 
benefits. The Committee believes that participants should have 
moreoptions regarding their form of benefits so that they can 
determine the most appropriate option depending on the participant's 
individual circumstances. For example, some couples may prefer an 
option that pays a smaller benefit to the couple while they are both 
alive with a larger benefit to the surviving spouse.

                        EXPLANATION OF PROVISION

    The provision revises the minimum survivor annuity 
requirements to require that, at the election of the 
participant, benefits will be paid in the form of a ``qualified 
optional survivor annuity.'' A qualified optional survivor 
annuity means an annuity for the life of the participant with a 
survivor annuity for the life of the spouse which is equal to 
the applicable percentage of the amount of the annuity which is 
payable during the joint lives of the participant and the 
spouse and which is the actuarial equivalent of a single 
annuity for the life of the participant.
    If the survivor annuity under plan's qualified joint and 
survivor annuity is less than 75 percent of the annuity payable 
during the joint lives of the participant and spouse, the 
applicable percentage is 75 percent. If the survivor annuity 
under plan's qualified joint and survivor annuity is greater 
than or equal to 75 percent of the annuity payable during the 
joint lives of the participant and spouse, the applicable 
percentage is 50 percent. Thus, for example, if the survivor 
annuity under the plan's qualified joint and survivor annuity 
is 50 percent, the survivor annuity under the qualified 
optional survivor annuity must be 75 percent.
    The written explanation required to be provided to 
participants explaining the terms and conditions of the 
qualified joint and survivor annuity must also include the 
terms and conditions of the qualified optional survivor 
annuity.
    Under the provision of the bill relating to plan 
amendments, a plan amendment made pursuant to a provision of 
the bill generally will not violate the anticutback rule if 
certain requirements are met (e.g., the plan amendment is made 
on or before the last day of the first plan year beginning on 
or after January 1, 2006). Thus, a plan is not treated as 
having decreased the accrued benefit of a participant solely by 
reason of the adoption of a plan amendment pursuant to the 
provision requiring that the plan offer a qualified optional 
survivor annuity. The elimination of a subsidized qualified 
joint and survivor annuity is not protected by the anticutback 
provision in the bill unless an equivalent or greater subsidy 
is retained in one of the forms offered under the plan as 
amended. For example, if a plan that offers a subsidized 50 
percent qualified joint and survivor annuity is amended to 
provide an unsubsidized 50 percent qualified joint and survivor 
annuity and an unsubsidized 75 percent joint and survivor 
annuity as its qualified optional survivor annuity, the 
replacement of the subsidized 50 percent qualified joint and 
survivor annuity with the unsubsidized 50 percent qualified 
joint and survivor annuity is not protected by the anticutback 
protection.

                             EFFECTIVE DATE

    The provision applies generally to plan years beginning 
after December 31, 2004. In the case of a plan maintained 
pursuant to one or more collective bargaining agreements, the 
provision applies to plan years beginning on or after the 
earlier of (1) the later of January 1, 2005, and the last date 
on which an applicable collective bargaining agreement 
terminates (without regard to extensions), and (2) January 1, 
2006.

      TITLE VII. TAX COURT PENSION AND COMPENSATION MODERNIZATION


                       A. Judges of the Tax Court


(Secs. 701-707 and 713 of the bill and secs. 7443, 7447, 7448, and 7472 
        of the Code)

                              PRESENT LAW

    The Tax Court is established by the Congress pursuant to 
Article I of the U.S. Constitution.\180\ The salary of a Tax 
Court judge is the same salary as received by a U.S. District 
Court judge.\181\ Present law also provides Tax Court judges 
with some benefits that correspond to benefits provided to U.S. 
District Court judges, including specific retirement and 
survivor benefit programs for Tax Court judges.\182\
---------------------------------------------------------------------------
    \180\ Sec. 7441.
    \181\ Sec. 7443(c).
    \182\ Secs. 7447 and 7448.
---------------------------------------------------------------------------
    Under the retirement program, a Tax Court judge may elect 
to receive retirement pay from the Tax Court in lieu of 
benefits under another Federal retirement program. A Tax Court 
judge may also elect to participate in a plan providing annuity 
benefits for the judge's surviving spouse and dependent 
children (the ``survivors' annuity plan''). Generally, benefits 
under the survivors' annuity plan are payable only if the judge 
has performed at least five years of service. Cost-of-living 
increases in benefits under the survivors' annuity plan are 
generally based on increases in pay for active judges.
    Tax Court judges participate in the Federal Employees Group 
Life Insurance program (the ``FEGLI'' program). Retired Tax 
Court judges are eligible to participate in the FEGLI program 
as the result of an administrative determination of their 
eligibility, rather than a specific statutory provision.
    Tax Court judges are not covered by the leave system for 
Federal executive branch employees. As a result, an individual 
who works in the Federal executive branch before being 
appointed to the Tax Court does not continue to accrue annual 
leave under the same leave program and may not use leave 
accrued prior to his or her appointment to the Tax Court.
    Tax Court judges are not eligible to participate in the 
Thrift Savings Plan.
    Tax Court judges are subject to limitations on outside 
earned income under the Ethics in Government Act of 1978.

                           REASONS FOR CHANGE

    Tax Court judges receive compensation at the same rate as 
U.S. District Court judges. In addition, the benefit programs 
for Tax Court judges are intended to accord with similar 
programsapplicable to U.S. District Court judges.\183\ However, 
subsequent legislative changes in the benefits provided to U.S. 
District Court judges have not applied to Tax Court judges, thus 
creating disparities between the treatment of Tax Court judges and the 
treatment of U.S. District Court judges. The Committee believes that 
parity should exist between the benefits provided to Tax Court judges 
and those provided to U.S. District Court judges.
---------------------------------------------------------------------------
    \183\ See, e.g., S. Rep. No. 91-552, at 303 (1969).
---------------------------------------------------------------------------

                        EXPLANATION OF PROVISION

Survivor annuities for assassinated judges

    Under the provision, benefits under the survivors' annuity 
plan are payable if a Tax Court judge is assassinated before 
the judge has performed five years of service.

Cost-of-living adjustments for survivor annuities

    The provision provides that cost-of-living increases in 
benefits under the survivors' annuity plan are generally based 
on cost-of-living increases in benefits paid under the Civil 
Service Retirement System.

Life insurance coverage

    Under the provision, a judge or retired judge of the Tax 
Court is deemed to be an employee continuing in active 
employment for purposes of participation in the Federal 
Employees Group Life Insurance program. In addition, in the 
case of a Tax Court judge age 65 or over, the Tax Court is 
authorized to pay on behalf of the judge any increase in 
employee premiums under the FEGLI program that occur after 
April 24, 1999,\184\ including expenses generated by such 
payment, as authorized by the chief judge of the Tax Court in a 
manner consistent with payments authorized by the Judicial 
Conference of the United States (i.e., the body with policy-
making authority over the administration of the courts of the 
Federal judicial branch).
---------------------------------------------------------------------------
    \184\ This date relates to changes in the FEGLI program, including 
changes to premium rates to reflect employees' ages.
---------------------------------------------------------------------------

Accrued annual leave

    Under the provision, in the case of a judge who is employed 
by the Federal executive branch before appointment to the Tax 
Court, the judge is entitled to receive a lump-sum payment for 
the balance of his or her accrued annual leave on appointment 
to the Tax Court.

Thrift Savings Plan participation

    Under the provision, Tax Court judges are permitted to 
participate in the Thrift Savings Plan. A Tax Court judge is 
not eligible for agency contributions to the Thrift Savings 
Plan.

Exemption for teaching compensation from outside earned income 
        limitations

    Under the provision, compensation earned by a retired Tax 
Court judge for teaching is not treated as outside earned 
income for purposes of limitations under the Ethics in 
Government Act of 1978.

                             EFFECTIVE DATE

    The provisions are effective on the date of enactment, 
except that: (1) the provision relating to cost-of-living 
increases in benefits under the survivors' annuity plan applies 
with respect to increases in Civil Service Retirement benefits 
taking effect after the date of enactment; (2) the provision 
relating to payment of accrued annual leave applies to any Tax 
Court judge with an outstanding leave balance as of the date of 
enactment and to any individual appointed to serve as a Tax 
Court judge after such date; (3) the provision relating to 
participation by Tax Court judges in the Thrift Savings Plan 
applies as of the next open season; and (4) the provision 
relating to teaching compensation of a retired Tax Court judge 
applies to any individual serving as a retired Tax Court judge 
on or after the date of enactment.

                B. Special Trial Judges of the Tax Court


(Secs. 708-713 of the bill, and sec. 7448 and new Secs. 7443A, 7443B, 
        and 7443C of the Code)

                              PRESENT LAW

    The Tax Court is established by the Congress pursuant to 
Article I of the U.S. Constitution.\185\ The chief judge of the 
Tax Court may appoint special trial judges to handle certain 
cases.\186\ Special trial judges serve for an indefinite term. 
Special trial judges receive a salary of 90 percent of the 
salary of a Tax Court judge and are generally covered by the 
benefit programs that apply to Federal executive branch 
employees, including the Civil Service Retirement System or the 
Federal Employees' Retirement System.
---------------------------------------------------------------------------
    \185\ Sec. 7441.
    \186\ Sec. 7443A.
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    Special trial judges of the Tax Court perform a role 
similar to that of magistrate judges in courts established 
under Article III of the U.S. Constitution (``Article III'' 
courts). However, disparities exist between the positions of 
magistrate judges of Article III courts and special trial 
judges of the Tax Court. For example, magistrate judges of 
Article III courts are appointed for a specific term, are 
subject to removal only in limited circumstances, and are 
eligible for coverage under special retirement and survivor 
benefit programs. The Committee believes that special trial 
judges of the Tax Court and magistrate judges of Article III 
courts should receive comparable treatment as to the status of 
the position, salary, and benefits.

                        EXPLANATION OF PROVISION

Magistrate judges of the Tax Court

    Under the provision, the position of special trial judge of 
the Tax Court is renamed as magistrate judge of the Tax Court. 
Magistrate judges are appointed (or reappointed) to serve for 
eight-year terms and are subject to removal in limited 
circumstances.
    Under the provision, a magistrate judge receives a salary 
of 92 percent of the salary of a Tax Court judge.
    The provision exempts magistrate judges from the leave 
program that applies to employees of the Federal executive 
branch and provides rules for individuals who are subject to 
such leave program before becoming exempt.

Survivors' annuity plan

    Under the provision, magistrate judges of the Tax Court may 
elect to participate in the survivors' annuity plan for Tax 
Court judges. An election to participate in the survivors' 
annuity plan must be filed not later than the latest of six 
months after: (1) the date of enactment of the provision; (2) 
the date the judge takes office; or (3) the date the judge 
marries.

Retirement annuity program for magistrate judges

    The provision establishes a new retirement annuity program 
for magistrate judges of the Tax Court, under which a 
magistrate judge may elect to receive a retirement annuity from 
the Tax Court in lieu of benefits under another Federal 
retirement program. A magistrate judge may elect to be covered 
by the retirement program within five years of appointment or 
five years of date of enactment. A magistrate judge who elects 
to be covered by the retirement program generally receives a 
refund of contributions (with interest) made to the Civil 
Service Retirement System or the Federal Employees' Retirement 
System.
    A magistrate judge may retire at age 65 with 14 years of 
service and receive an annuity equal to his or her salary at 
the time of retirement. For this purpose, service may include 
service performed as a special trial judge or a magistrate 
judge, provided the service is performed no earlier than 9\1/2\ 
years before the date of enactment of the provision. The 
provision also provides for payment of a reduced annuity in the 
case a magistrate judge with at least eight years of service or 
in the case of disability or failure to be reappointed.
    A magistrate judge receiving a retirement annuity is 
entitled to cost-of-living increases based on cost-of-living 
increases in benefits paid under the Civil Service Retirement 
System. However, such an increase cannot cause the retirement 
annuity to exceed the current salary of a magistrate judge.
    Contributions of one percent of salary are withheld from 
the salary of a magistrate judge who elects to participate in 
the retirement annuity program. Such contributions must be made 
also with respect to prior service for which the magistrate 
judge elects credit under the retirement annuity program. No 
contributions are required after 14 years of service. A lump 
sum refund of the magistrate judge's contributions (with 
interest) is made if no annuity is payable, for example, if the 
magistrate judge dies before retirement.
    A magistrate judge's right to a retirement annuity is 
generally suspended or reduced in the case of employment 
outside the Tax Court.
    The provision includes rules under which annuity payments 
may be made to a person other than the magistrate judge in 
certain circumstances, such as divorce or legal separation, 
under a court decree, a court order, or court-approved property 
settlement.
    The provision establishes the Tax Court Judicial Officers' 
Retirement Fund (the ``Fund''). Amounts in the Fund are 
authorized to be appropriated for the payment of annuities, 
refunds, and other payments under the retirement annuity 
program. Contributions withheld from a magistrate judge's 
salary are deposited in the Fund. In addition, the provision 
authorizes to be appropriated to the Fund amounts required to 
reduce the Fund's unfunded liability to zero. For this purpose, 
the Fund's unfunded liability means the estimated excess, 
actuarially determined on an annual basis, of the present value 
of benefits payable from the Fund over the sum of (1) the 
present value of contributions to be withheld from the future 
salary of the magistrate judges and (2) the balance in the Fund 
as of the date the unfunded liability is determined.
    Under the provision, a magistrate judge who elects to 
participate in the retirement annuity program is also permitted 
to participate in the Thrift Savings Plan. Such a magistrate 
judge is not eligible for agency contributions to the Thrift 
Savings Plan.

Retirement annuity rule for incumbent magistrate judges

    The provision provides a transition rule for magistrate 
judges in active service on the date of enactment of the 
provision. Under the transition rule, such a magistrate judge 
is entitled to an annuity under the Civil Service Retirement 
System or the Federal Employees' Retirement System based on 
prior service that is not credited under the magistrate judges' 
retirement annuity program. If the magistrate judge made 
contributions to the Civil Service Retirement System or the 
Federal Employees' Retirement System with respect to service 
that is credited under the magistrate judges' retirement 
annuity program, such contributions are refunded (with 
interest).
    A magistrate judge who elects the transition rule is also 
entitled to the annuity payable under the magistrate judges' 
retirement program in the case of retirement with at least 
eight years of service or on failure to be reappointed. This 
annuity is based on service as a magistrate judge or special 
trial judge of the Tax Court that is performed no earlier than 
9\1/2\ years before the date of enactment of the provision and 
for which the magistrate judge makes contributions of one 
percent of salary.

Recall of retired magistrate judges

    The provision provides rules under which a retired 
magistrate judge may be recalled to perform services for a 
limited period.

                             EFFECTIVE DATE

    The provisions are effective on date of enactment.

                      TITLE VIII. OTHER PROVISIONS


A. Temporary Exclusion for Education Benefits Provided by Employers to 
                         Children of Employees


(Sec. 801 of the bill and sec. 127 of the Code)

                              PRESENT LAW

    Up to $5,250 annually of employer-paid educational expenses 
are excludable from the gross income and wages of an employee 
if provided under a section 127 educational assistance 
plan.\187\ The exclusion does not apply with respect to 
education provided to an individual other than the employee, 
e.g., a child of the employee.
---------------------------------------------------------------------------
    \187\ Employer-paid educational expenses of the employee that do 
not qualify for the section 127 exclusion may be excludable from gross 
income if the education (1) maintains or improves a skill required in a 
trade or business currently engaged in by the taxpayer, or (2) meets 
the express requirements of the taxpayer's employer, applicable law or 
regulations imposed as a condition of continued employment.
---------------------------------------------------------------------------
    In order for the exclusion to apply, certain requirements 
must be satisfied. The educational assistance must be provided 
pursuant to a separate written plan of the employer. The 
educational assistance program must not discriminate in favor 
of highly compensated employees. In addition, not more than 
five percent of the amounts paid or incurred by the employer 
during the year for educational assistance under a qualified 
educational assistance plan can be provided for the class of 
individuals consisting of more than five-percent owners of the 
employer (and their spouses and dependents).

                           REASONS FOR CHANGE

    The Committee believes that education is key to enabling 
Americans to remain competitive in the workforce and that 
employers should be encouraged to pay for the educational 
expenses of children of employees.

                        EXPLANATION OF PROVISION

    The provision provides that post-secondary educational 
benefits provided to children of employees are excludable from 
the gross income of the employee under section 127. The maximum 
amount excludable for a taxable year with respect to a child of 
an employee may not exceed $1,000. In addition, the aggregate 
annual amount excludable from an employee's income for a year 
with respect to education of the employee and education of the 
employee's children cannot exceed $5,250. The exclusion does 
not apply for employment tax purposes. The exclusion expires 
with respect to years beginning after December 31, 2005.

                             EFFECTIVE DATE

    The provision is effective for taxable years beginning 
after December 31, 2004, and before January 1, 2006.

 B. Exclusion From Gross Income for Amounts Paid Under National Health 
                  Service Corps Loan Repayment Program


(Sec. 802 of the bill and sec. 108 of the Code)

                              PRESENT LAW

    The National Health Service Corps Loan Repayment Program 
(the ``NHSC Loan Repayment Program'') provides education loan 
repayments to participants on condition that the participants 
provide certain services. In the case of the NHSC Loan 
Repayment Program, the recipient of the loan repayment is 
obligated to provide medical services in a geographic area 
identified by the Public Health Service as having a shortage of 
health-care professionals. Loan repayments may be as much as 
$35,000 per year of service plus a tax assistance payment of 39 
percent of the repayment amount.
    States may also provide for education loan repayment 
programs for persons who agree to provide primary health 
services in health professional shortage areas. Under the 
Public Health Service Act, such programs may receive Federal 
grants with respect to such repayment programs if certain 
requirements are satisfied.
    Generally, gross income means all income from whatever 
source derived including income for the discharge of 
indebtedness. However, gross income does not include discharge 
of indebtedness income if: (1) the discharge occurs in a Title 
11 case; (2) the discharge occurs when the taxpayer is 
insolvent; (3) the indebtedness discharged is qualified farm 
indebtedness; or (4) except in the case of a C corporation, the 
indebtedness discharged is qualified real property business 
indebtedness.
    Because the loan repayments provided under the NHSC Loan 
Repayment Program or similar State programs under the Public 
Health Service Act are not specifically excluded from gross 
income, they are gross income to the recipient. There is also 
no exception from employment taxes (FICA and FUTA) for such 
loan repayments.

                           REASONS FOR CHANGE

    The Committee believes that elimination of the tax on loan 
repayments provided under the NHSC Loan Repayment Program and 
similar State programs will free up NHSC resources which are 
currently being used to pay for services that will be provided 
by medical professionals as a condition of loan repayment and 
improve the ability of the NHSC to attract medical 
professionals to underserved areas.

                        EXPLANATION OF PROVISION

    The provision excludes from gross income and employment 
taxes education loan repayments provided under the NHSC Loan 
Repayment Program and State programs eligible for funds under 
the Public Health Service Act.

                             EFFECTIVE DATE

    The provision is effective with respect to amounts received 
in taxable years beginning after December 31, 2004.

        C. Temporary Exclusion for Group Legal Services Benefits


(Sec. 803 of the bill and secs. 120 and 501(c)(20) of the Code)

                              PRESENT LAW

    For taxable years beginning before July 1, 1992, certain 
amounts contributed by an employer to a qualified group legal 
services plan for an employee (or the employee's spouse or 
dependents) or the value of legal services provided (or amounts 
paid for legal services) under such a plan with respect to an 
employee (or the employee's spouse or dependents) are 
excludable from an employee's gross income for income and 
employment tax purposes.\188\ The exclusion is limited to an 
annual premium value of $70.
---------------------------------------------------------------------------
    \188\ Sec. 120.
---------------------------------------------------------------------------
    Additionally, for taxable years beginning before July 1, 
1992, an organization the exclusive function of which is to 
provide legal services or indemnification against the cost of 
legal services as part of a qualified group legal services plan 
is exempt from tax.\189\
---------------------------------------------------------------------------
    \189\ Sec. 501(c)(20).
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    The Committee believes that it is appropriate to 
temporarily restore the exclusion for employer-provided group 
legal services without limiting the amount of the exclusion and 
to temporarily provide tax-exempt status for organizations 
which provide qualified group legal services.

                        EXPLANATION OF PROVISION

    The provision restores the exclusion for employer-provided 
group legal services for taxable years beginning after December 
31, 2004, and before January 1, 2006. The amount of the 
exclusion is not limited. Additionally, for taxable years 
beginning after December 31, 2004, and before January 1, 2006, 
the provision provides tax-exempt status for organizations 
which provide qualified group legal services.

                             EFFECTIVE DATE

    The provision applies to taxable years beginning after 
December 31, 2004, and before January 1, 2006.

  D. Transfer of Funds From Black Lung Trust Fund to Combined Benefit 
                                  Fund


(Sec. 804 of the bill and secs. 501(c)(21) and 9705 of the Code)

                              PRESENT LAW

Qualified black lung benefit trusts

    A qualified black lung benefit trust is exempt from Federal 
income taxation. Contributions to a qualified black lung 
benefit trust generally are deductible to the extent such 
contributions are necessary to fund the trust.
    Under present law, no assets of a qualified black lung 
benefit trust may be used for, or diverted to, any purpose 
other than (1) to satisfy liabilities, or pay insurance 
premiums to cover liabilities, arising under the Black Lung 
Acts, (2) to pay administrative costs of operating the trust, 
(3) to pay accident and health benefits or premiums for 
insurance exclusively covering such benefits (including 
administrative and other incidental expenses relating to such 
benefits) for retired coal miners and their spouses and 
dependents (within certain limits) or (4) investment in 
Federal, State, or local securities and obligations, or in time 
demand deposits in a bank or insured credit union. 
Additionally, trust assets may be paid into the national Black 
Lung Disability Trust Fund, or into the general fund of the 
U.S. Treasury.
    The amount of assets in qualified black lung benefit trusts 
available to pay accident and health benefits or premiums for 
insurance exclusively covering such benefits (including 
administrative and other incidental expenses relating to such 
benefits) for retired coal miners and their spouses and 
dependents may not exceed a yearly limit or an aggregate limit, 
whichever is less. The yearly limit is the amount of trust 
assets in excess of 110 percent of the present value of the 
liability for black lung benefits determined as of the close of 
the preceding taxable year of the trust. The aggregate limit is 
the excess of the sum of the yearly limit as of the close of 
the last taxable year ending before October 24, 1992, plus 
earnings thereon as of the close of the taxable year preceding 
the taxable year involved over the aggregate payments for 
accident of health benefits for retired coal miners and their 
spouses and dependents made from the trust since October 24, 
1992. Each of these determinations is required to be made by an 
independent actuary.
    In general, amounts used to pay retiree accident or health 
benefits are not includible in the income of the company, nor 
is a deduction allowed for such amounts.

United Mine Workers of America Combined Benefit Fund

    The United Mine Workers of America (``UMWA'') Combined 
Benefit Fund was established by the Coal Industry Retiree 
Health Benefit Act of 1992 to assume responsibility of payments 
for medical care expenses of retired miners and their 
dependents who were eligible for heath care from the private 
1950 and 1974 UMWA Benefit Plans. The UMWA Combined Benefit 
Fund is financed by assessments on current and former 
signatories to labor agreements with the UMWA, past transfers 
from an overfunded United Mine Workers pension fund, and 
transfers from the Abandoned Mine Reclamation Fund.

                           REASONS FOR CHANGE

    The Committee believes that better than expected market 
performance of black lung trust assets and fewer black lung 
claims have resulted in a situation where some coal companies 
have significant unanticipated excess assets in their black 
lung trusts. Removing the aggregate limit on the amount of 
black lung benefit trusts available to pay accident and health 
benefits or premiums for insurance exclusively covering such 
benefits for retired coal miners will allow coal companies to 
use greater amounts of their excess black lung trust assets to 
fund such benefits. Depositing the revenue raised by 
eliminating the aggregate limit into the UMWA Combined Benefit 
Fund will help to fund retired coal miners' health benefits.

                        EXPLANATION OF PROVISION

    The provision eliminates the aggregate limit on the amount 
of excess black lung benefit trust assets that may be used to 
pay accident and health benefits or premiums for insurance 
exclusively covering such benefits (including administrative 
and other incidental expenses relating to such benefits) for 
retired coal miners and their spouses and dependents. In 
addition, under the provision, each fiscal year, the Secretary 
of the Treasury will transfer to the UMWA Combined Benefit Fund 
an amount which the Secretary estimates to be the additional 
amounts received in the Treasury for that fiscal year by reason 
of the elimination of the aggregate limit. The Secretary will 
adjust the amount transferred for any year to the extent 
necessary to correct errors in any estimate for any prior year. 
Any amount transferred to the UMWA Combined Benefit Fund under 
the provision will be used to proportionately reduce the 
unassigned beneficiary premium of each assigned operator for 
the plan year in which transferred.

                             EFFECTIVE DATE

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

  E. Extension of Provision Permitting Qualified Transfers of Excess 
               Pension Assets to Retiree Health Accounts


(Sec. 420 of the Code, and secs. 101, 403 and 408 of ERISA)

                            PRESENT LAW\190\
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    \190\ Present law refers to the law in effect on the dates of 
Committee action on the bill. It does not reflect the changes made by 
the Pension Equity Funding Act of 2004, Pub. L. No. 108-218 (April 10, 
2004).
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    Defined benefit plan assets generally may not revert to an 
employer prior to termination of the plan and satisfaction of 
all plan liabilities. In addition, a reversion may occur only 
if the plan so provides. A reversion prior to plan termination 
may constitute a prohibited transaction and may result in plan 
disqualification. Any assets that revert to the employer upon 
plan termination are includible in the gross income of the 
employer and subject to an excise tax. The excise tax rate is 
20 percent if the employer maintains a replacement plan or 
makes certain benefit increases in connection with the 
termination; if not, the excise tax rate is 50 percent. Upon 
plan termination, the accrued benefits of all plan participants 
are required to be 100-percent vested.
    A pension plan may provide medical benefits to retired 
employees through a separate account that is part of such plan. 
A qualified transfer of excess assets of a defined benefit plan 
to such a separate account within the plan may be made in order 
to fund retiree health benefits.\191\ A qualified transfer does 
not result in plan disqualification, is not a prohibited 
transaction, and is not treated as a reversion. Thus, 
transferred assets are not includible in the gross income of 
the employer and are not subject to the excise tax on 
reversions. No more than one qualified transfer may be made in 
any taxable year. A qualified transfer may not be made from a 
multiemployer plan.
---------------------------------------------------------------------------
    \191\ Sec. 420.
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    Excess assets generally means the excess, if any, of the 
value of the plan's assets\192\ over the greater of (1) the 
accrued liability under the plan (including normal cost) or (2) 
125 percent of the plan's current liability.\193\ In addition, 
excess assets transferred in a qualified transfer may not 
exceed the amount reasonably estimated to be the amount that 
the employer will pay out of such account during the taxable 
year of the transfer for qualified current retiree health 
liabilities. No deduction is allowed to the employer for (1) a 
qualified transfer or (2) the payment of qualified current 
retiree health liabilities out of transferred funds (and any 
income thereon).
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    \192\ The value of plan assets for this purpose is the lesser of 
fair market value or actuarial value.
    \193\ In the case of plan years beginning before January 1, 2004, 
excess assets generally means the excess, if any, of the value of the 
plan's assets over the greater of (1) the lesser of (a) the accrued 
liability under the plan (including normal cost) or (b) 170 percent of 
the plan's current liability (for 2003), or (2) 125 percent of the 
plan's current liability. The current liability full funding limit was 
repealed for years beginning after 2003. Under the general sunset 
provision of EGTRRA, the limit is reinstated for years after 2010.
---------------------------------------------------------------------------
    Transferred assets (and any income thereon) must be used to 
pay qualified current retiree health liabilities for the 
taxable year of the transfer. Transferred amounts generally 
must benefit pension plan participants, other than key 
employees, who are entitled upon retirement to receive retiree 
medical benefits through the separate account. Retiree health 
benefits of key employees may not be paid out of transferred 
assets.
    Amounts not used to pay qualified current retiree health 
liabilities for the taxable year of the transfer are to be 
returned to the general assets of the plan. These amounts are 
not includible in the gross income of the employer, but are 
treated as an employer reversion and are subject to a 20-
percent excise tax.
    In order for the transfer to be qualified, accrued 
retirement benefits under the pension plan generally must be 
100-percent vested as if the plan terminated immediately before 
the transfer (or in the case of a participant who separated in 
the one-year period ending on the date of the transfer, 
immediately before the separation).
    In order to a transfer to be qualified, the employer 
generally must maintain retiree health benefits at the same 
level for the taxable year of the transfer and the following 
four years.
    In addition, the Employee Retirement Income Security Act of 
1974 (``ERISA'') provides that, at least 60 days before the 
date of a qualified transfer, the employer must notify the 
Secretary of Labor, the Secretary of the Treasury, employee 
representatives, and the plan administrator of the transfer, 
and the plan administrator must notify each plan participant 
and beneficiary of the transfer.\194\
---------------------------------------------------------------------------
    \194\ ERISA sec. 101(e). ERISA also provides that a qualified 
transfer is not a prohibited transaction under ERISA or a prohibited 
reversion.
---------------------------------------------------------------------------
    No qualified transfer may be made after December 31, 2005.

                           REASONS FOR CHANGE

    The Committee believes it is appropriate to extend the 
ability of employers to transfer assets set aside for pension 
benefits to a section 401(h) account for retiree health 
benefits as long as the security of employees' pension benefits 
is not thereby threatened.

                        EXPLANATION OF PROVISION

    [The bill does not include the provision relating to 
qualified transfers of excess defined benefit assets as 
approved by the Committee because an identical provision was 
enacted into law in the Pension Funding Equity Act of 2004 
(Pub. L. No. 108-218) subsequent to Committee action on the 
bill. The following discussion describes the Committee action.]
    The provision approved by the Committee would have allowed 
qualified transfers of excess defined benefit plan assets 
through December 31, 2013.\195\
---------------------------------------------------------------------------
    \195\ A separate provision of the bill allows qualified transfers 
for a certain multiemployer plan.
---------------------------------------------------------------------------

                             EFFECTIVE DATE

    The provision approved by the Committee would have been 
effective on the date of enactment.

          F. Application of Basis Rules to Nonresident Aliens


(Sec. 811 of the bill and new sec. 72(w) of the Code)

                              PRESENT LAW

Distributions from retirement plans

    Distributions from retirement plans are includible in gross 
income under the rules relating to annuities\196\ and, thus, 
are generally includible in income, except to the extent the 
amount received represents investment in the contract (i.e., 
the participant's basis). The participant's basis includes 
amounts contributed by the participant on an after-tax basis, 
together with certain amounts contributed by the employer, 
minus the aggregate amount (if any) previously distributed to 
the extent that such amount was excludable from gross income. 
Amounts contributed by the employer are included in the 
calculation of the participant's basis only to the extent that 
such amounts were includible in the gross income of the 
participant, or to the extent that such amounts would have been 
excludable from the participant's gross income if they had been 
paid directly to the participant at the time they were 
contributed.\197\
---------------------------------------------------------------------------
    \196\ Secs. 72 and 402.
    \197\ Sec. 72(f).
---------------------------------------------------------------------------
    Employer contributions to retirement plans and other 
payments for labor or personal services performed outside the 
United States by a nonresident alien generally are not treated 
as U.S. source income. Such contributions, therefore, generally 
would not be includible in the nonresident alien's gross income 
if they had been paid directly to the nonresident alien at the 
time they were contributed. Consequently, the amounts of such 
contributions generally are includible in the employee's basis 
and are not taxed by the United States if a distribution is 
made when the employee is a U.S. citizen or resident.\198\
---------------------------------------------------------------------------
    \198\ Rev. Rul. 58-236, 1958-1 C.B. 37.
---------------------------------------------------------------------------
    Earnings on contributions are not included in basis unless 
previously includible in income. In general, in the case of a 
nonexempt trust, earnings are includible in income when 
distributed or made available.\199\ In the case of highly 
compensated employees, the amount of the vested accrued benefit 
under the trust (other than the employee's investment in the 
contract) is generally required to be included in income 
annually (i.e., earnings are taxed as they accrue).\200\
---------------------------------------------------------------------------
    \199\ Sec. 402(b)(2).
    \200\ Sec. 402(b)(4).
---------------------------------------------------------------------------

U.S. income tax treaties

    Under the 1996 U.S. Model Income Tax Treaty (``U.S. 
Model'') and some U.S. income tax treaties in force, retirement 
plan distributions beneficially owned by a resident of a treaty 
country in consideration for past employment generally are 
taxable only by the individual recipient's country of 
residence. Under the U.S. Model treaty and some U.S. income tax 
treaties, this exclusive residence-based taxation rule is 
limited to the taxation of amounts that were not previously 
included in taxable income in the other country. For example, 
if a treaty country had imposed tax on a resident individual 
with respect to some portion of a retirement plan's earnings, 
subsequent distributions to that person while a resident of the 
United States would not be taxable in the United States to the 
extent the distributions were attributable to such previously 
taxed amounts.

Compensation of employees of foreign governments or international 
        organizations

    Under section 893, wages, fees, and salaries of any 
employee of a foreign government or international organization 
(including a consular or other officer or a nondiplomatic 
representative) received as compensation for official services 
to the foreign government or international organization 
generally are excluded from gross income when (1) the employee 
is not a citizen of the United States, or is a citizen of the 
Republic of the Philippines (whether or not a citizen of the 
United States); (2) in the case of an employee of a foreign 
government, the services are of a character similar to those 
performed by employees of the United States in foreign 
countries; and (3) in the case of an employee of a foreign 
government, the foreign government grants an equivalent 
exemption to employees of the United States performing similar 
services in such foreign country. The Secretary of State 
certifies the names of the foreign countries which grant an 
equivalent exclusion to employees of the United States 
performing services in those countries, and the character of 
those services.
    The exclusion does not apply to employees of controlled 
commercial entities or employees of foreign governments whose 
services are primarily in connection with commercial activity 
(whether within or outside the United States) of the foreign 
government.

                           REASONS FOR CHANGE

    The Committee believes the present-law rules governing the 
calculation of basis provide an inflated basis in assets in 
retirement and similar arrangements for many individuals who 
become U.S. residents after accruing benefits under such 
arrangements. The Committee believes the ability of former 
nonresident aliens to receive tax-free distributions from such 
arrangements of amounts which have not been previously taxed is 
inconsistent with the taxation of benefits paid to individuals 
who both accrue and receive distributions of benefits from such 
arrangements as U.S. residents (i.e., basis generally includes 
only previously-taxed amounts). The Committee believes that the 
present-law statutory rule which allows basis in contributions 
to such arrangements for individuals who become U.S. residents 
after they accrue benefits is inappropriate. While there is no 
comparable statutory provision providing basis for earnings, 
the Committee is aware that some taxpayers take the position 
that there is basis in the earnings on such contributions, even 
though such amounts have not been subject to tax. The Committee 
believes it is appropriate to provide more equitable taxation 
with respect to the distributions of both contributions and 
earnings from such arrangements.

                        EXPLANATION OF PROVISION

    The provision modifies the present-law rules under which 
certain contributions and earnings that have not been 
previously taxed are treated as basis. Under the provision, 
employee or employer contributions are not included in basis 
if: (1) the employee was a nonresident alien at the time the 
services were performed with respect to which the contribution 
was made; (2) the contribution is with respect to compensation 
for labor or personal services from sources without the United 
States; and (3) the contribution was not subject to income tax 
under the laws of the United States or any foreign country.
    Similarly, under the provision, earnings on employer or 
employee contributions are not included in basis if: (1) the 
earnings are paid or accrued with respect to any employer or 
employee contributions which were made with respect to 
compensation for labor or personal services; (2) the employee 
was a nonresident alien at the time the earnings were paid or 
accrued; and (3) the earnings were not subject to income tax 
under the laws of the United States or any foreign country. No 
inference is intended that under present law there is basis for 
earning not previously subject to tax.
    The provision does not change the rules applicable to 
calculation of basis with respect to contributions or earnings 
while an employee is a U.S. resident. For example, suppose 
employer contributions were made to a retirement plan on behalf 
of an individual (E) while the individual was a nonresident 
alien. The contributions were not subject to income tax in the 
United States or a foreign country. Suppose the contributions 
are in a discriminatory nonexempt trust so that earnings on the 
trust would be taxable to E if E were a United States resident; 
however, because E is a nonresident alien, E is not subject to 
tax on the earnings. Suppose E then relocates to the United 
States and becomes a U.S. resident, during which time earnings 
on the trust are taxable under the rules requiring income 
inclusion of vested accrued amounts for highly compensated 
employees. E's basis does not include the employer 
contributions, nor any earnings paid or accrued while E was a 
nonresident alien. E's basis will include the earnings 
includible in gross income while E was a U.S. resident.
    There is no inference that this provision applies in any 
case to create tax jurisdiction with respect to wages, fees, 
and salaries otherwise exempt under section 893. Similarly, 
there is no inference that this provision applies where 
contrary to an agreement of the United States that has been 
validly authorized by Congress (or in the case of a treaty, 
ratified by the Senate), and which provides an exemption for 
income.
    Most U.S. tax treaties specifically address the taxation of 
pension distributions. The U.S. Model treaty provides for 
exclusive residence-based taxation of pension distributions to 
the extent such distributions were not previously included in 
taxable income in the other country. For treaty purposes, the 
United States treats any amount that has increased the 
recipient's basis (as defined in section 72) as having been 
previously included in taxable income. The following example 
illustrates how the provision could affect the amount of a 
distribution that may be taxed by the United States pursuant to 
a tax treaty.
    Assume the following facts. A, a nonresident alien 
individual, performs services outside the United States. A's 
employer makes contributions on behalf of A to a pension plan 
established in A's country of residence, Z. For U.S. tax 
purposes, no portion of the contributions or earnings are 
included in A's gross income because such amounts relate to 
services performed without the United States.\201\ Later in 
time, A retires and becomes a resident alien of the United 
States.
---------------------------------------------------------------------------
    \201\ Sec. 872.
---------------------------------------------------------------------------
    Under the provision, the employer contributions to the 
pension plan would not be taken into account in determining A's 
basis unless A was subject to income tax on the contributions 
by a foreign country. If A was not subject to tax on such 
amounts by a foreign country, A would be subject to U.S. tax on 
the entire amount of contributions. Earnings that accrued while 
A was a nonresident alien would be subject to the provision. 
Earnings that accrued while A was a resident of the United 
States would be subject to present-law rules. This result is 
consistent with the treatment of pension distributions under 
the U.S. Model treaty, which provides for residence-based 
taxation only to the extent such amounts have not been taxed 
previously by the treaty partner.
    Even though A is a resident alien under U.S. statutory 
rules, if A is a resident of country Y, with which the United 
States has an income tax treaty (including a pension provision 
identical to the U.S. Model) and A qualifies for benefits as a 
resident of Y under the U.S.-Y treaty, A would be subject to 
U.S. tax on the distributions only to the extent the amounts 
were not previously included in A's taxable income in country 
Y. Thus, if Y had taxed A on the employer contributions or the 
earnings of the plan, distributions attributable to these 
previously taxed amounts would not be subject to U.S. income 
tax pursuant to the U.S.-Y tax treaty. On the other hand, if Z 
rather than Y had taxed A on the employer contributions or 
earnings of the plan, the pension provision in the U.S.-Y 
treaty would not apply.
    The provision authorizes the Secretary of the Treasury to 
issue regulations to carry out the purposes of this provision, 
including regulations treating contributions as not subject to 
income tax under the laws of any foreign country under 
appropriate circumstances. For example, Treasury could provide 
that foreign income tax that was merely nominal would not 
satisfy the ``subject to income tax'' requirement.

                             EFFECTIVE DATE

    The provision is effective for distributions occurring on 
or after the date of enactment. No inference is intended that 
the earnings subject to the provision are included in basis 
under present law.

  G. Modify Qualification Rules for Tax-Exempt Property and Casualty 
  Insurance Companies and Modify Definition of Insurance Company for 
                Property and Casualty Insurance Company


(Secs. 501(c)(15) and 831(b) and (c) of the Code)

                           PRESENT LAW \202\
---------------------------------------------------------------------------

    \202\ Present law refers to the law in effect on the dates of 
Committee action on the bill. It does not reflect the changes made by 
the Pension Funding Equity Act of 2004, Pub. L. No. 108-218 (April 10, 
2004).
---------------------------------------------------------------------------

Qualification rules

    A property and casualty insurance company generally is 
subject to tax on its taxable income (sec. 831(a)). The taxable 
income of a property and casualty insurance company is 
determined as the sum of its underwriting income and investment 
income (as well as gains and other income items), reduced by 
allowable deductions (sec. 832).
    A property and casualty insurance company is eligible to be 
exempt from Federal income tax if its net written premiums or 
direct written premiums (whichever is greater) for the taxable 
year do not exceed $350,000 (sec. 501(c)(15)).
    A property and casualty insurance company may elect to be 
taxed only on taxable investment income if its net written 
premiums or direct written premiums (whichever is greater) for 
the taxable year exceed $350,000, but do not exceed $1.2 
million (sec. 831(b)).
    For purposes of determining the amount of a company's net 
written premiums or direct written premiums under these rules, 
premiums received by all members of a controlled group of 
corporations of which the company is a part are taken into 
account. For this purpose, a more-than-50-percent threshhold 
applies under the vote and value requirements with respect to 
stock ownership for determining a controlled group, and rules 
treating a life insurance company as part of a separate 
controlled group or as an excluded member of a group do not 
apply (secs. 501(c)(15), 831(b)(2)(B) and 1563).

Definition of insurance company

    Present law provides specific rules for taxation of the 
life insurance company taxable income of a life insurance 
company (sec. 801), and for taxation of the taxable income of 
an insurance company other than a life insurance company (sec. 
831) (generally referred to as a property and casualty 
insurance company). For Federal income tax purposes, a life 
insurance company means an insurance company that is engaged in 
the business of issuing life insurance and annuity contracts, 
or noncancellable health and accident insurance contracts, and 
that meets a 50-percent test with respect to its reserves (sec. 
816(a)). This statutory provision applicable to life insurance 
companies explicitly defines the term ``insurance company'' to 
mean any company, more than half of the business of which 
during the taxable year is the issuing of insurance or annuity 
contracts or the reinsuring of risks underwritten by insurance 
companies (sec. 816(a)).
    The life insurance company statutory definition of an 
insurance company does not explicitly apply to property and 
casualty insurance companies, although a long-standing Treasury 
regulation \203\ that is applied to property and casualty 
companies provides a somewhat similar definition of an 
``insurance company'' based on the company's ``primary and 
predominant business activity.'' \204\
---------------------------------------------------------------------------
    \203\ The Treasury regulation provides that ``the term `insurance 
company' means a company whose primary and predominant business 
activity during the taxable year is the issuing of insurance or annuity 
contracts or the reinsuring of risks underwritten by insurance 
companies. Thus, though its name, charter powers, and subjection to 
State insurance laws are significant in determining the business which 
a company is authorized and intends to carry on, it is the character of 
the business actually done in the taxable year which determines whether 
a company is taxable as an insurance company under the Internal Revenue 
Code.'' Treas. Reg. section 1.801-3(a)(1).
    \204\ Court cases involving a determination of whether a company is 
an insurance company for Federal tax purposes have examined all of the 
business and other activities of the company. In considering whether a 
company is an insurance company for such purposes, courts have 
considered, among other factors, the amount and source of income 
received by the company from its different activities. See Bowers v. 
Lawyers Mortgage Co., 285 U.S. 182 (1932); United States v. Home Title 
Insurance Co., 285 U.S. 191 (1932). See also Inter-American Life 
Insurance Co. v. Comm'r, 56 T.C. 497, aff'd per curiam, 469 F.2d 697 
(9th Cir. 1972), in which the court concluded that the company was not 
an insurance company: ``The * * * financial data clearly indicates that 
petitioner's primary and predominant source of income was from its 
investments and not from issuing insurance contracts or reinsuring 
risks underwritten by insurance companies. During each of the years in 
issue, petitioner's investment income far exceeded its premiums and the 
amounts of earned premiums were de minimis during those years. It is 
equally as clear that petitioner's primary and predominant efforts were 
not expended in issuing insurance contracts or in reinsurance. Of the 
relatively few policies directly written by petitioner, nearly all were 
issued to [family members]. Also, Investment Life, in which [family 
members] each owned a substantial stock interest, was the source of 
nearly all of the policies reinsured by petitioner. These facts, 
coupled with the fact that petitioner did not maintain an active sales 
staff soliciting or selling insurance policies * * *, indicate a lack 
of concentrated effort on petitioner's behalf toward its chartered 
purpose of engaging in the insurance business. * * * For the above 
reasons, we hold that during the years in issue, petitioner was not `an 
insurance company * * * engaged in the business of issuing life 
insurance' and hence, that petitioner was not a life insurance company 
within the meaning of section 801.'' 56 T.C. 497, 507-508.
---------------------------------------------------------------------------
    When enacting the statutory definition of an insurance 
company in 1984, Congress stated, ``[b]y requiring [that] more 
than half rather than the `primary and predominant business 
activity' be insurance activity, the bill adopts a stricter and 
more precise standard for a company to be taxed as a life 
insurance company than does the general regulatory definition 
of an insurance company applicable for both life and nonlife 
insurance companies * * * Whether more than half of the 
business activity is related to the issuing of insurance or 
annuity contracts will depend on the facts and circumstances 
and factors to be considered will include the relative 
distribution ofthe number of employees assigned to, the amount 
of space allocated to, and the net income derived from, the various 
business activities.'' \205\
---------------------------------------------------------------------------
    \205\ H.R. Rep. 98-432, part 2, at 1402-1403 (1984); S. Prt. No. 
98-169, vol. I, at 525-526 (1984); see also H.R. Rep. No. 98-861 at 
1043-1044 (1985) (Conference Report).
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    The Committee has become aware of abuses in the area of 
tax-exempt insurance companies. Considerable media attention 
has focused on the inappropriate use of tax-exempt insurance 
companies to shelter investment income.\206\ The Committee 
believes that the use of these organizations as vehicles for 
sheltering income was never contemplated by Congress. The 
proliferation of these organizations as a means to avoid tax on 
income, sometimes on large investment portfolios, is 
inconsistent with the original narrow scope of the provision, 
which has been in the tax law for decades. The Committee 
believes it is necessary to limit the availability of tax-
exempt status under the provision so that it cannot be abused 
as a tax shelter. To that end, the bill applies a gross 
receipts test and requires that premiums received for the 
taxable year be greater than 50 percent of gross receipts.
---------------------------------------------------------------------------
    \206\ See David Cay Johnston, Insurance Loophole Helps Rich, N.Y. 
Times, April 1, 2003; David Cay Johnston, Tiny Insurers Face Scrutiny 
as Tax Shields, N.Y. Times, April 4, 2003, at C1; Janet Novack, Are You 
a Chump?, Forbes, Mar. 5, 2001.
---------------------------------------------------------------------------
    The bill correspondingly expands the availability of the 
present-law election of a property and casualty insurer to be 
taxed only on taxable investment income to companies with 
premiums below $350,000. This provision of present law provides 
a relatively simple tax calculation for small property and 
casualty insurers, and because the election results in the 
taxation of investment income, the Committee does not believe 
that it is abused to avoid tax on investment income. Thus, the 
bill provides that a company whose net written premiums (or if 
greater, direct written premiums) do not exceed $1.2 million 
(without regard to the $350,000 threshhold of present law) is 
eligible for the simplification benefit of this election.
    The Committee believes that the law will be made clearer 
and more exact and tax administration will be improved by 
conforming the definition of an insurance company for purposes 
of the property and casualty insurance tax rules to the 
existing statutory definition of an insurance company under the 
life insurance company tax rules. Further, the Committee 
expects that IRS enforcement activities to prevent abuse of the 
provision relating to tax-exempt insurance companies will be 
simplified and improved by this provision of the bill.

                        EXPLANATION OF PROVISION

    [The bill does not include the provisions relating to 
qualification rules for an insurance company to be eligible for 
tax-exempt status, to elect to be taxed on taxable investment 
income and defining an insurance company for these purposes, as 
approved by the Committee, because substantially similar 
provisions \207\ were enacted into law in the Pension Funding 
Equity Act of 2004 (Pub. L. No. 108-218) subsequent to 
Committee action on the bill. The following discussion 
describes the Committee action.]
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    \207\ Section 206 of PFEA 2004 modifies the requirements for a 
property and casualty insurance company to be eligible for tax-exempt 
status, providing that the company's gross receipts may not exceed 
$600,000 and premiums received for the taxable year are required to be 
greater than 50 percent of its gross receipts. Section 206 of PFEA 2004 
also provides that a property and casualty company may elect to be 
taxed only on taxable investment income if its net written premiums or 
direct written premiums (whichever is greater) do not exceed $1.2 
million. Section 206 of PFEA 2004 modifies the definition of an 
insurance company for purposes of these rules to mean any company, more 
than half of the business of which during the taxable year is the 
issuing of insurance or annuity contracts or the reinsuring of risks 
underwritten by insurance companies. Section 206 of PFEA 2004 provides 
an additional special rule (not included in the this bill) that a 
mutual property and casualty insurance company is eligible to be exempt 
from Federal income tax under the provision if (a) its gross receipts 
for the taxable year do not exceed $150,000, and (b) the premiums 
received for the taxable year are greater than 35 percent of its gross 
receipts, provided certain requirements are met. Section 206 of PFEA 
provision generally is effective for taxable years beginning after 
December 31, 2003, except that a special transition rule (not included 
in this bill) is provided with respect to certain companies. This 
transition rule applies in the case of a company that, (1) for its 
taxable year that includes April 1, 2004, meets the requirements of 
present-law section 501(c)(15)(A) (as in effect for the taxable year 
beginning before January 1, 2004), and (2) on April 1, 2004, is in a 
receivership, liquidation or similar proceeding under the supervision 
of a State court. Under the transition rule, in the case of such a 
company, the provision applies to taxable years beginning after the 
earlier of (1) the date the proceeding ends, or (2) December 31, 2007.
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Qualification rules

    The provision in the bill would have modified the 
requirements for a property and casualty insurance company to 
be eligible for tax-exempt status, and to elect to be taxed 
only on taxable investment income.
    The provision would have provided that a property and 
casualty insurance company is eligible to be exempt from 
Federal income tax if (a) its gross receipts for the taxable 
year do not exceed $600,000, and (b) the premiums received for 
the taxable year are greater than 50 percent of its gross 
receipts. For purposes of determining gross receipts, the gross 
receipts of all members of a controlled group of corporations 
of which the company is a part are taken into account. The 
provision would have expanded the present-law controlled group 
rule so that it also takes into account gross receipts of 
foreign and tax-exempt corporations.
    The provision also would have provided that a property and 
casualty insurance company may elect to be taxed only on 
taxable investment income if its net written premiums or direct 
written premiums (whichever is greater) do not exceed $1.2 
million (without regard to whether such premiums exceed 
$350,000) (sec. 831(b)). As under present law, for purposes of 
determining the amount of a company's net written premiums or 
direct written premiums under this rule, premiums received by 
all members of a controlled group of corporations (as defined 
in section 831(b)) of which the company is a part are taken 
into account.
    It is intended that regulations or other Treasury guidance 
provide for anti-abuse rules so as to prevent improper use of 
the provision, including, for example, by attempts to 
characterize as premiums any income that is other than premium 
income.

Definition of insurance company

    The provision would have provided that a company that does 
not meet the definition of an insurance company is not eligible 
to be exempt from Federal income tax. For this purpose, the 
term ``insurance company'' means any company, more than half of 
the business of which during the taxable year is the issuing of 
insurance or annuity contracts or the reinsuring of risks 
underwritten by insurance companies (sec. 816(a) and new sec. 
831(c)). A company whose investment activities outweigh its 
insurance activities is not considered to be an insurance 
company for this purpose.\208\ It is intended that IRS 
enforcement activities address the misuse of present-law 
section 501(c)(15). The provision would have conformed the 
definition of an insurance company for purposes of the rules 
taxing property and casualty insurance companies to the rules 
taxing life insurance companies, so that the definition is 
uniform. The provision would have adopted a stricter and more 
precise standard than the ``primary and predominant business 
activity'' test contained in Treasury Regulations. It is not 
intended that a company whose sole activity is the run-off of 
risks under the company's insurance contracts be treated as a 
company other than an insurance company, even if the company 
has little or no premium income.
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    \208\ See, e.g., Inter-American Life Insurance Co. v. Comm'r, 56 
T.C. 497, aff'd per curiam, 469 F.2d 697 (9th Cir. 1972).
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                             EFFECTIVE DATE

    The provisions would have been effective for taxable years 
beginning after December 31, 2003.

      H. Tax Treatment of Company-Owned Life Insurance (``COLI'')


(Secs. 812 and 813 of the bill and new secs. 101(j) and 6039I of the 
        Code)

                              PRESENT LAW

Amounts received under a life insurance contract

    Amounts received under a life insurance contract paid by 
reason of the death of the insured are not includible in gross 
income for Federal tax purposes.\209\ No Federal income tax 
generally is imposed on a policyholder with respect to the 
earnings under a life insurance contract (inside buildup).\210\
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    \209\ Sec. 101(a).
    \210\ This favorable tax treatment is available only if a life 
insurance contract meets certain requirements designed to limit the 
investment character of the contract (sec. 7702).
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    Distributions from a life insurance contract (other than a 
modified endowment contract) that are made prior to the death 
of the insured generally are includible in income to the extent 
that the amounts distributed exceed the taxpayer's investment 
in the contract (i.e., basis). Such distributions generally are 
treated first as a tax-free recovery of basis, and then as 
income.\211\
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    \211\ Sec. 72(e). In the case of a modified endowment contract, 
however, in general, distributions are treated as income first, loans 
are treated as distributions (i.e., income rather than basis recovery 
first), and an additional 10-percent tax is imposed on the income 
portion of distributions made before age 59\1/2\ and in certain other 
circumstances (secs. 72(e) and (v)). A modified endowment contract is a 
life insurance contract that does not meet a statutory ``7-pay'' test, 
i.e., generally is funded more rapidly than seven annual level premiums 
(sec. 7702A).
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Premium and interest deduction limitations \212\

            Premiums
    Under present law, no deduction is permitted for premiums 
paid on any life insurance, annuity or endowment contract, if 
the taxpayer is directly or indirectly a beneficiary under the 
contract.\213\
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    \212\ In addition to the statutory limitations described below, 
interest deductions under company-owned life insurance arrangements 
have also been limited by recent cases applying general principles of 
tax law. See Winn-Dixie Stores, Inc. v. Commissioner, 113 T.C. 254 
(1999), aff'd 254 F.3d 1313 (11th Cir. 2001), cert. denied, April 15, 
2002; Internal Revenue Service v. CM Holdings, Inc., 254 B.R. 578 (D. 
Del. 2000), aff'd, 301 F.3d 96 (3d Cir. 2002); American Electric Power, 
Inc. v. U.S., 136 F.Supp. 2d 762 (S. D. Ohio 2001), aff'd, 326 F.3d 737 
(6th Cir. 2003), reh. denied, 338 F.3d 534 (6th Cir. 2003), cert. 
denied, U.S. No. 03-529 (Jan. 12, 2004); but see Dow Chemical Company 
v. U.S., 250 F. Supp.2d 748 (E.D. Mich. 2003), modified, Case No. 00-
10331-BC, E. D. Mich., Aug. 12, 2003.
    \213\ Sec. 264(a)(1).
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            Interest paid or accrued with respect to the contract
    No deduction generally is allowed for interest paid or 
accrued on any debt with respect to a life insurance, annuity 
or endowment contract covering the life of any individual.\214\ 
An exception is provided under this provision for insurance of 
key persons.
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    \214\ Sec. 264(a)(4).
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    Interest that is otherwise deductible (e.g., is not 
disallowed under other applicable rules or general principles 
of tax law) may be deductible under the key person exception, 
to the extent that the aggregate amount of the debt does not 
exceed $50,000 per insured individual. The deductible interest 
may not exceed the amount determined by applying a rate based 
on a Moody's Corporate Bond Yield Average-Monthly Average 
Corporates. A key person is an individual who is either an 
officer or a 20-percent owner of the taxpayer. The number of 
individuals that can be treated as key persons may not exceed 
the greater of (1) five individuals, or (2) the lesser of five 
percent of the total number of officers and employees of the 
taxpayer, or 20 individuals.\215\
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    \215\ Sec. 264(e)(3).
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            Pro rata interest limitation
    A pro rata interest deduction disallowance rule also 
applies. Under this rule, in the case of a taxpayer other than 
a natural person, no deduction is allowed for the portion of 
the taxpayer's interest expense that is allocable to unborrowed 
policy cash surrender values.\216\ Interest expense is 
allocable to unborrowed policy cash values based on the ratio 
of (1) the taxpayer's average unborrowed policy cash values of 
life insurance, annuity and endowment contracts, to (2) the sum 
of the average unborrowed cash values (or average adjusted 
bases, for other assets) of all the taxpayer's assets.
---------------------------------------------------------------------------
    \216\ Sec. 264(f). This applies to any life insurance, annuity or 
endowment contract issued after June 8, 1997.
---------------------------------------------------------------------------
    Under the pro rata interest disallowance rule, an exception 
is provided for any contract owned by an entity engaged in a 
trade or business, if the contract covers an individual who is 
a 20-percent owner of the entity, or an officer, director, or 
employee of the trade or business. The exception also applies 
to a joint-life contract covering a 20-percent owner and his or 
her spouse.
            ``Single premium'' and ``4-out-of-7'' limitations
    Other interest deduction limitation rules also apply with 
respect to life insurance, annuity and endowment contracts. 
Present law provides that no deduction is allowed for any 
amount paid or accrued on debt incurred or continued to 
purchase or carry a single premium life insurance, annuity or 
endowment contract.\217\ In addition, present law provides that 
no deduction is allowed for any amount paid or accrued on debt 
incurred or continued to purchase or carry a life insurance, 
annuity or endowment contract pursuant to a plan of purchase 
that contemplates the systematic direct or indirect borrowing 
of part or all of the increases in the cash value of the 
contract (either from the insurer or otherwise).\218\ Under 
this rule, several exceptions are provided, including an 
exception if no part of four of the annual premiums due during 
the initial seven-year period is paid by means of such debt 
(known as the ``4-out-of-7 rule'').
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    \217\ Sec. 264(a)(2).
    \218\ Sec. 264(a)(3).
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Definitions of highly compensated employee

    Present law defines highly compensated employees and 
individuals for various purposes. For purposes of 
nondiscrimination rules relating to qualified retirement plans, 
an employee, including a self-employed individual, is treated 
as highly compensated with respect to a year if the employee 
(1) was a five-percent owner of the employer at any time during 
the year or the preceding year or (2) either (a) had 
compensation for the preceding year in excess of $90,000 (for 
2004) or (b) at the election of the employer had compensation 
in excess of $90,000 (for 2004) and was in the highest paid 20 
percent of employees for such year.\219\ The $90,000 dollar 
amount is indexed for inflation.
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    \219\ Sec. 414(q). For purposes of determining the top-paid 20 
percent of employees, certain employees, such as employees subject to a 
collective bargaining agreement, are disregarded.
---------------------------------------------------------------------------
    For purposes of nondiscrimination rules relating to self-
insured medical reimbursement plans, a highly compensated 
individual is an employee who is one of the five highest paid 
officers of the employer, a shareholder who owns more than 10 
percent of the value of the stock of the employer, or is among 
the highest paid 25 percent of all employees.\220\
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    \220\ Sec. 105(h)(5). For purposes of determining the top-paid 25 
percent of employees, certain employees, such as employees subject to a 
collective bargaining agreement, are disregarded.
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                           REASONS FOR CHANGE

    The Committee is aware of companies who have, in the past, 
purchased insurance on rank-and-file employees and collect the 
proceeds years after the employee terminated employment with 
the company. To curtail this practice, when proceeds are 
payable more than 12 months after termination of employment, 
the bill excludes from income only proceeds on policies 
purchased on the lives of directors and highly compensated 
individuals, including the highest-paid 35 percent of 
employees.
    The Committee is also aware of reports that in some cases 
the insured employee is not aware that his or her life has been 
insured. The Committee believes that it is important for 
employers to provide notice to insured employees and to obtain 
the consent of employees to be insured, and consequently, the 
bill imposes notice and consent requirements in order for the 
exceptions to the income inclusion rule to apply.
    In order to aid compliance with the provisions and 
facilitate IRS enforcement, the bill also imposes recordkeeping 
requirements with respect to employer-owned life insurance 
contracts issued after the date of enactment.

                        EXPLANATION OF PROVISION

    The provision provides generally that, in the case of an 
employer-owned life insurance contract, the amount excluded 
from the applicable policyholder's income as a death benefit 
cannot exceed the premiums and other amounts paid by such 
applicable policyholder for the contract. The excess death 
benefit is included in income.
    Exceptions to this income inclusion rule are provided. In 
the case of an employer-owned life insurance contract with 
respect to which the notice and consent requirements of the 
provision are met, the income inclusion rule does not apply to 
an amount received by reason of the death of an insured 
individual who, with respect to the applicable policyholder, 
was an employee at any time during the 12-month period before 
the insured's death, or who, at the time the contract was 
issued, was a director or highly compensated employee or highly 
compensated individual. For this purpose, such a person is one 
who is either: (1) a highly compensated employee as defined 
under the rules relating to qualified retirement plans, 
determined without regard to the election regarding the top-
paid 20 percent of employees; or (2) a highly compensated 
individual as defined under the rules relating to self-insured 
medical reimbursement plans, determined by substituting the 
highest-paid 35 percent of employees for the highest-paid 25 
percent of employees.\221\
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    \221\ As under present law, certain employees are disregarded in 
making the determinations regarding the top-paid groups.
---------------------------------------------------------------------------
    In the case of an employer-owned life insurance contract 
with respect to which the notice and consent requirements of 
the provision are met, the income inclusion rule does not apply 
to an amount received by reason of the death of an insured, to 
the extent the amount is (1) paid to a member of the family 
\222\ of the insured, to an individual who is the designated 
beneficiary of the insured under the contract (other than an 
applicable policyholder), to a trust established for the 
benefit of any such member of the family or designated 
beneficiary, or to the estate of the insured; or (2) used to 
purchase an equity (or partnership capital or profits) interest 
in the applicable policyholder from such a family member, 
beneficiary, trust or estate. It is intended that such amounts 
be so paid or used by the due date of the tax return for the 
taxable year of the applicable policyholder in which they are 
received as a death benefit under the insurance contract, so 
that the payment of the amount to such a person or persons, or 
the use of the amount to make such a purchase, is known in the 
taxable year for which the exception from the income inclusion 
rule is claimed.
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    \222\ For this purpose, a member of the family is defined in 
section 267(c)(4) to include only the individual's brothers and sisters 
(whether by the whole or half blood), spouse, ancestors, and lineal 
descendants.
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    An employer-owned life insurance contract is defined for 
purposes of the provision as a life insurance contract which 
(1) is owned by a person engaged in a trade or business and 
under which such person (or a related person) is directly or 
indirectly a beneficiary, and (2) covers the life of an 
individual who is an employee with respect to the trade or 
business of the applicable policyholder on the date the 
contract is issued.
    An applicable policyholder means, with respect to an 
employer-owned life insurance contract, the person (including 
related persons) that owns the contract, if the person is 
engaged in a trade or business, and if the person (or a related 
person) is directly or indirectly a beneficiary under the 
contract.
    For purposes of the provision, a related person includes 
any person that bears a relationship specified in section 
267(b) or 707(b)(1) \223\ or is engaged in trades or businesses 
that are under common control (within the meaning of section 
52(a) or (b)).
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    \223\ The relationships include specified relationships among 
family members, shareholders and corporations, corporations that are 
members of a controlled group, trust grantors and fiduciaries, tax-
exempt organizations and persons that control such organizations, 
commonly controlled S corporations, partnerships and C corporations, 
estates and beneficiaries, commonly controlled partnerships, and 
partners and partnerships. Detailed rules apply to determine the 
specific relationships.
---------------------------------------------------------------------------
    The notice and consent requirements of the provision are 
met if, before the issuance of the contract, (1) the employee 
is notified in writing that the applicable policyholder intends 
to insure the employee's life, and is notified of the maximum 
face amount at issue of the life insurance contract that the 
employer might take out on the life of the employee, (2) the 
employee provides written consent to being insured under the 
contract and that such coverage may continue after the insured 
terminates employment, and (3) the employee is informed in 
writing that an applicable policyholder will be a beneficiary 
of any proceeds payable on the death of the employee.
    For purposes of the provision, an employee includes an 
officer, a director, and a highly compensated employee; an 
insured means, with respect to an employer-owned life insurance 
contract, an individual covered by the contract who is a U.S. 
citizen or resident. In the case of a contract covering the 
joint lives of two individuals, references to an insured 
include both of the individuals.
    The provision requires annual reporting and recordkeeping 
by applicable policyholders that own one or more employer-owned 
life insurance contracts. The information to be reported is (1) 
the number of employees of the applicable policyholder at the 
end of the year, (2) the number of employees insured under 
employer-owned life insurance contracts at the end of the year, 
(3) the total amount of insurance in force at the end of the 
year under such contracts, (4) the name, address, and taxpayer 
identification number of the applicable policyholder and the 
type of business in which it is engaged, and (5) a statement 
that the applicable policyholder has a valid consent (in 
accordance with the consent requirements under the provision) 
for each insured employee and, if all such consents were not 
obtained, the total number of insured employees forwhom such 
consent was not obtained. The applicable policyholder is required to 
keep records necessary to determine whether the requirements of the 
reporting rule and the income inclusion rule of new section 101(j) are 
met.

                             EFFECTIVE DATE

    The amendments made by this section generally apply to 
contracts issued after the date of enactment, except for 
contracts issued after such date pursuant to an exchange 
described in section 1035 of the Code. In addition, certain 
material increases in the death benefit or other material 
changes will generally cause a contract to be treated as a new 
contract, with an exception for existing lives under a master 
contract. Increases in the death benefit that occur as a result 
of the operation of section 7702 of the Code or the terms of 
the existing contract, provided that the insurer's consent to 
the increase is not required, will not cause a contract to be 
treated as a new contract. In addition, certain changes to a 
contract will not be considered material changes so as to cause 
a contract to be treated as a new contract. These changes 
include administrative changes, changes from general to 
separate account, or changes as a result of the exercise of an 
option or right granted under the contract as originally 
issued.
    Examples of situations in which death benefit increases 
would not cause a contract to be treated as a new contract 
include the following:
    (1) Section 7702 provides that life insurance contracts 
need to either meet the cash value accumulation test of section 
7702(b) or the guideline premium requirements of section 
7702(c) and the cash value corridor of section 7702(d). Under 
the corridor test, the amount of the death benefit may not be 
less than the applicable percentage of the cash surrender 
value. Contracts may be written to comply with the corridor 
requirement by providing for automatic increases in the death 
benefit based on the cash surrender value. Death benefit 
increases required by the corridor test or the cash value 
accumulation test do not require the insurer's consent at the 
time of increase and occur in order to keep the contact in 
compliance with section 7702.
    (2) Death benefits may also increase due to normal 
operation of the contract. For example, for some contracts, 
policyholder dividends paid under the contract may be applied 
to purchase paid-up additions, which increase the death 
benefits. The insurer's consent is not required for these death 
benefit increases.
    (3) For variable contacts and universal life contracts, the 
death benefit may increase as a result of market performance or 
the contract design. For example, some contracts provide that 
the death benefit will equal the cash value plus a specified 
amount at risk. With these contracts, the amount of the death 
benefit at any time will vary depending on changes in the cash 
value of the contract. The insurance company's consent is not 
required for these death benefit increases.

            I. Reporting of Taxable Mergers and Acquisitions


(Sec. 813 of the bill and new sec. 6043A of the Code)

                              PRESENT LAW

    Under section 6045 and the regulations thereunder, brokers 
(defined to include stock transfer agents) are required to make 
information returns and to provide corresponding payee 
statements as to sales made on behalf of their customers, 
subject to the penalty provisions of sections 6721-6724. Under 
the regulations issued under section 6045, this requirement 
generally does not apply with respect to taxable transactions 
other than exchanges for cash (e.g., stock inversion 
transactions taxable to shareholders by reason of section 
367(a)).

                           REASONS FOR CHANGE

    The Committee believes that administration of the tax laws 
would be improved by greater information reporting with respect 
to taxable non-cash transactions, and that the Treasury 
Secretary's authority to require such enhanced reporting should 
be made explicit in the Code.

                        EXPLANATION OF PROVISION

    Under the provision, if gain or loss is recognized in whole 
or in part by shareholders of a corporation by reason of a 
second corporation's acquisition of the stock or assets of the 
first corporation, then the acquiring corporation (or the 
acquired corporation, if so prescribed by the Treasury 
Secretary) is required to make a return containing:
    (1) A description of the transaction;
    (2) The name and address of each shareholder of the 
acquired corporation that recognizes gain as a result of the 
transaction (or would recognize gain, if there was a built-in 
gain on the shareholder's shares);
    (3) The amount of money and the value of stock or other 
consideration paid to each shareholder described above; and
    (4) Such other information as the Treasury Secretary may 
prescribe.
    Alternatively, a stock transfer agent who records transfers 
of stock in such transaction may make the return described 
above in lieu of the second corporation.
    In addition, every person required to make a return 
described above is required to furnish to each shareholder (or 
the shareholder's nominee \224\) whose name is required to be 
set forth in such return a written statement showing:
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    \224\ In the case of a nominee, the nominee must furnish the 
information to the shareholder in the manner prescribed by the 
Secretary of the Treasury.
---------------------------------------------------------------------------
    (1) The name, address, and phone number of the information 
contact of the person required to make such return;
    (2) The information required to be shown on that return; 
and
    (3) Such other information as the Treasury Secretary may 
prescribe.
    This written statement is required to be furnished to the 
shareholder on or before January 31 of the year following the 
calendar year during which the transaction occurred.
    The present-law penalties for failure to comply with 
information reporting requirements are extended to failures to 
comply with the requirements set forth under the provision.

                             EFFECTIVE DATE

    The provision is effective for acquisitions after the date 
of enactment.

                    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 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 provisions of section 710 of the bill 
involve new or increased budget authority with respect to the 
Tax Court Judicial Officers' Retirement Fund.

Tax expenditures

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

Motion to report the bill

    The bill, as modified and amended, was originally ordered 
favorably reported by voice vote, a quorum being present, on 
September 17, 2003. After consideration of further 
modifications and amendments, the bill, as modified and 
amended, was ordered favorably reported by voice vote, a quorum 
being present, on February 2, 2004.

Votes on amendments

    The Committee accepted an amendment by Senator Bingaman 
relating to company-owned life insurance (``COLI'') on 
September 17, 2003. The Committee also accepted an amendment by 
Senator Santorum relating to transfers from the Black Lung 
Disability Trust Fund.

                 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 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, (3) 
clarifying fiduciary requirements under ERISA, and (4) 
improving employees' retirement savings opportunities, 
portability, and spousal protections. 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, transfers of excess assets to retiree health accounts, 
and other plan administration issues. The bill 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 bill includes provisions relating to certain executive 
compensation arrangements and the proper tax treatment of such 
arrangements. These provisions may impose additional 
administrative requirements on employers; however, the employer 
may avoid application of the provisions through the design of 
these arrangements.
    The bill includes various other provisions that are not 
expected to impose additional administrative requirements or 
regulatory burdens on individuals or businesses.

Impact on personal privacy and paperwork

    The provisions of 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 may currently apply withholding to these 
options. Certain provisions provide additional tax benefits to 
individuals or businesses, such as the provisions relating to 
additional catch-up contributions, the sale of stock to comply 
with conflict of interest rules, and exclusions of educational 
benefits and group legal services. These provisions may require 
individuals and businesses that seek to take advantage of these 
tax benefits 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. ADDITIONAL VIEWS

                              ----------                              


                   ADDITIONAL VIEWS OF SENATOR CONRAD

    I am pleased that as a result of the efforts of Chairman 
Grassley, Senator Baucus, other members of the Committee on 
Finance, and the Department of the Treasury, the bill includes 
a provision on corporate-owned life insurance (COLI) that 
preserves COLI as a valuable tool for employers to use in 
providing a dependable funding source for their employee 
benefit liabilities while at the same time addressing important 
concerns that had been expressed about the product.
    As a result of the Committee's balanced COLI legislation, 
no employer will be able to exclude from income the death 
benefits from a policy purchased after enactment on the life of 
a rank-and-file employee or on the life of an employee who has 
not given informed, voluntary consent to the employer's 
purchase of the life insurance. No one will be able to 
criticize COLI as ``janitors' insurance'' anymore.
    Under the Committee's bill, future COLI purchases will 
require that the employer notify the employee in writing that 
the employer intends to insure the employee's life and that the 
employer will be the beneficiary of the life insurance. The 
employer must also disclose to the employee how much the 
maximum death benefit under the policy will be at the time of 
issuance (i.e., not taking into account normal future death 
benefit increases resulting from policy performance, tax rules, 
or otherwise). This stronger disclosure rule incorporates a 
recommendation that Senator Bingaman and I made to provide 
better information to employees whom the employer seeks to 
insure.
    More importantly, the Committee's bill will also condition 
tax-free death benefits from future COLI purchases on the 
employee's advance written consent to being insured and to 
having the insurance coverage continue after the employee 
terminates his or her employment with the employer. The 
employee's consent to be insured must, of course, be voluntary. 
During its consideration of legislation on COLI, the Committee 
learned that there are no known instances of employers coercing 
employee consent or retaliating for the failure to provide 
consent. However, if such coercion or retaliation were to occur 
after enactment of the Committee's COLI provision, I believe 
the Congress should consider whether there should be a remedy 
in labor law to deter and punish such actions.
    I would like to emphasize the importance that I and other 
members of the Finance Committee attached to the valuable role 
COLI now plays in providing a tool to offset employee benefit 
costs, including retiree health promises. The Committee 
continues to hear disturbing stories about companies that are 
shedding their retiree health liabilities because of cost 
concerns.\225\ I hope that continued availability of COLI will 
help to slow this trend of retiree health benefit reductions. I 
believe the Committee's COLI provision should encourage 
employers willing to abide by its clear rules to consider the 
purchase of COLI in situations where it would constitute an 
appropriate funding mechanism for employee benefit obligations.

    \225\ ``Companies Limit Health Coverage of Many Retirees,'' New 
York Times, Feb. 3, 2004.

                                                       Kent Conrad.

                  ADDITIONAL VIEWS OF SENATOR BINGAMAN

    Although I support the majority of this report, I must 
respectfully state my objections to the provisions pertaining 
to company owned life insurance (COLI). This language is a 
replacement for a meaningful amendment that was originally 
negotiated and agreed to by the Committee during the initial 
mark up of the bill. Instead of reporting out the bill as 
agreed to that day, the Committee kept the bill in limbo for 
several months before replacing the COLI provisions agreed upon 
by the Committee with alternative language. Unfortunately, this 
new language does nothing to curb any of the existing abuses 
nor prevent future ones from occurring.
    As I have noted previously, the core problem with COLI is 
that the uses of this product have moved well beyond what was 
ever intended by Congress. The tax benefits associated with 
this product--tax free inside buildup and tax-free death 
benefits--were intended to aid families and those with a 
significant financial risk of loss upon the untimely passing of 
the insured. This product is now sold in a variety of 
situations where the owners of the policy have little or no 
risk of financial loss on the passing of the insured. For 
example, companies who take out policies on the lives of 
employees routinely keep those policies long after the insured 
has left the employment of the company. This occurs even when 
the former employee has severed all ties with the company and 
is not entitled to any benefit from the company. This was never 
the intent of Congress nor does it make for rational tax 
policy.
    Although companies claim that they purchase the product to 
offset the cost of employee benefits, such as retiree health 
care, the fact is that companies can use the proceeds of these 
tax favored policies for any use. Most commonly, the policies 
are used to ``fund'' deferred compensation arrangements or 
executive benefits packages--benefits for which Congress has 
expressly not provided a tax benefit to businesses. In fact, 
Congress has created disincentives in the Tax Code to 
discourage the use of these arrangements. For example, 
companies are not allowed a deduction for the payment of 
deferred compensation until the employee includes the payment 
as taxable income.
    Congress has explicitly provided tax benefits for employers 
to provide employee benefits, such as qualified retirement 
plans, health insurance and life insurance owned by the 
employee. Unlike COLI, the companies are only eligible to 
receive these tax benefits if they take an affirmative act to 
provide these benefits to the majority of their employees--not 
just the more highly compensated. In most cases, the funds must 
be placed in a trust for the benefit of the employee or the 
employer must transfer the rights to these benefits to the 
employee. Not with COLI. With COLI, a company is able to use 
the proceeds of these tax preferenced policies for anything it 
chooses. The money is not set aside or dedicated to any 
specific use--it is totally up to the discretion of the company 
as to how to use the funds. The insured or their beneficiaries 
are not entitled to any of these life insurance policies.
    Although a company is not required to use the proceeds for 
any specific purpose, the product is most often marketed as a 
funding mechanism for deferred compensation arrangements or 
executive perquisites. Such a use undermines our country's 
qualified retirement plan system that is premised on the 
concept that employers should receive tax incentives to provide 
retirement benefits, but only if the majority of workers can 
benefit. COLI competes with this reward system and pushes us 
closer to a two-tiered retirement system in this country--one 
type of plans for workers and an additional layer of plans for 
the executives. Both of these types of plans are subsidized by 
all taxpayers, not just the ones that benefit. This is the 
wrong approach and it reverses so much of what we have achieved 
over the past decades. Ultimately, it makes it more likely that 
a large segment of workers will not have adequate savings upon 
which to retire. The Committee should be focusing on reducing 
this inequity, not allowing it to expand.
    The proponents of COLI argue that the language contained in 
this report address the abuses in COLI. This can only be true 
if one believes that the current uses of COLI are appropriate 
tax policy. This is evidenced by the revenue estimate from the 
Joint Committee on Taxation that this new provision has a 
negligible revenue effect. Essentially this means that the 
Joint Committee on Taxation has estimated that there will be no 
change in the purchases or uses of this product based on this 
language. This is in direct contrast to the original agreed 
upon language that would reduce abuses by over $1 billion over 
ten years.
    Inexplicably, the notice and consent that is required in 
this language does little to protect the rights of employees, 
as employers are free to fire or not hire employees who do not 
wish to give their consent. In almost every other area of labor 
law, we provide employees with protections, such as those 
contained in ERISA, from retaliatory firings. I offered an 
amendment to correct this seemingly clear potential violation 
of employee rights, but this amendment was not accepted. I fail 
to understand how an employee is better off being dismissed for 
not consenting to have an insurance policy taken out on his or 
her life than if the company purchased the policy without the 
employee's consent. If it was intended that employees' rights 
not to consent be truly voluntary, some form of protection 
would need to be included.
    I also fail to understand the Committee's rationale in 
setting up a procedure that can not be enforced by the IRS. The 
current language requires a company to have a valid consent in 
order to receive the death benefit on the life of the insured 
tax free yet the time between the purchase of the policy and 
the death of the insured could be years, if not decades. Worse, 
the IRS will not even be notified of the death of the insured 
or the receipt of the death benefits by the company that owns 
the policy. Quite simply, there is no way the IRS will ever be 
able to connect these two pieces of information to determine if 
a company is in compliance. As the IRS has demonstrated that it 
is unable to enforce the myriad laws currently in effect, it is 
inconceivable that they will be able to handle these new 
responsibilities.
    I am confident that the issues I have raised will need to 
be addressed in the future by this Committee. The tax benefits 
associated with COLI are simply too great to be ignored as 
evidenced by current abuses. As this report is being filed, 
stories are already circulating evidencing additional abuses 
with charities and churches buying COLI policies and selling 
them to investors. It is important to note that nothing in this 
report will have an impact on these types of policies. With 
deficits continuing to climb, I assume that this Committee will 
eventually need to make real choices about tax policy. At that 
point, I look forward to working with the insurance industry 
and my colleagues to come up with a rational policy that allows 
life insurance to continue to prosper, but in a way that does 
not foster such abuses.

                                                     Jeff Bingaman.

       VII. 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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