[Senate Report 109-174]
[From the U.S. Government Publishing Office]



                                                       Calendar No. 276
109th Congress                                                   Report
                                 SENATE
 1st Session                                                    109-174

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



 
        NATIONAL EMPLOYEE SAVINGS AND TRUST EQUITY GUARANTEE ACT

                                _______
                                

                November 2, 2005.--Ordered to be printed

                                _______
                                

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

                              R E P O R T

                         [To accompany S. 1953]

    The Committee on Finance, having considered an original 
bill (S. 1953) 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 benefits are funded and 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...........................................6
    TITLE I--DIVERSIFICATION RIGHTS AND OTHER DEFINED CONTRIBUTION 
    PARTICIPANT PROTECTIONS...........................................6
        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)..................     6
        B. Notice of Freedom to Divest Employer Securities or 
            Real Property (secs. 102 and 205 of the bill, new 
            sec. 4980H of the Code, and new sec. 101(j) of ERISA)    14
        C. Periodic Pension Benefit Statements for Defined 
            Contribution Plans (secs. 103 and 205 of the bill, 
            new sec. 4980I of the Code, and sec. 105(a) of ERISA)    16
        D. Periodic Pension Benefit Statements for Defined 
            Benefit Pension Plans (sec. 103 of the bill, new sec. 
            4980I of the Code, and secs. 105(a) and 502(c)(1) of 
            ERISA)...............................................    20
        E. Notice to Participants and Beneficiaries of Blackout 
            Periods (secs. 104 and 205 of the bill, new sec. 
            4980J of the Code, and sec. 101(i) of ERISA).........    23
        F. Additional IRA Contributions for Certain Employees 
            (sec. 105 of the bill and secs. 25B and 219 of the 
            Code)................................................    27
    TITLE II--PROVIDING INVESTMENT ADVICE AND INVESTMENT EDUCATION TO 
    PLAN PARTICIPANTS................................................29
        A. Investment Education Requirements for Defined 
            Contribution Plan Participants (secs. 201 and 205 of 
            the bill, new sec. 4980I of the Code, and secs. 104 
            and 502 of ERISA)....................................    29
        B. Information Relating to Investment in Employer 
            Securities (secs. 202 and 205 of the bill, new sec. 
            4980H of the Code, and secs. 101 and 502 of ERISA)...    32
        C. Safe Harbor for Independent Investment Advice Provided 
            to Plan Participants (sec. 203 of the bill and new 
            sec. 404(e) of ERISA)................................    34
        D. Treatment of Employer-Provided Qualified Retirement 
            Planning Services (sec. 204 of the bill and sec. 132 
            of the Code).........................................    36
    TITLE III--IMPROVEMENTS IN FUNDING RULES FOR SINGLE-EMPLOYER 
    DEFINED BENEFIT PENSION PLANS....................................38
        A. Minimum Funding Rules for Single-Employer Defined 
            Benefit Pension Plans (secs. 301-302, 305, 311-312, 
            314, and 321 of the bill, sec. 412 of the Code, new 
            secs. 430 and 431 of the Code, secs. 302-308 of 
            ERISA)...............................................    38
        B. Limitations on Benefit Improvements and Distributions 
            by Single-Employer Plans that are Underfunded or 
            Maintained by Financially Weak Employers (secs. 303, 
            313, and 402 of the bill, new sec. 436 of the Code, 
            and new sec. 305 of ERISA)...........................    56
        C. Increase in Deduction Limits for Single-Employer Plans 
            (secs. 304, 322, and 323 of the bill and secs. 404 
            and 4972 of the Code)................................    64
        D. Replacement of 30-Year Treasury Rate for Calculating 
            Lump-Sum Distributions (sec. 331 of the bill, sec. 
            417(e) of the Code, and sec. 205(g) of ERISA)........    67
        E. Interest Rate Assumption for Applying Benefit 
            Limitations to Lump-Sum Distributions (sec. 332 of 
            the bill and sec. 415 of the Code)...................    69
        F. Restrictions on Funding of Nonqualified Deferred 
            Compensation Plan When Employer's Defined Benefit 
            Pension Plan is Underfunded (sec. 333 of the bill, 
            secs. 409A and 4980I of the Code, new sec. 306 of 
            ERISA, and sec. 502(g) of ERISA).....................    71
        G. Special Funding Rules for Plans Maintained by 
            Commercial Airlines that are Amended to Cease Future 
            Benefit Accruals (sec. 334 of the bill)..............    74
        H. Modification of Pension Funding Requirements for Plans 
            Subject to Current Transition Rule (sec. 335 of the 
            bill and sec. 769 of the Retirement Protection Act of 
            1994, as amended by the Pension Funding Equity Act of 
            2004)................................................    82
        I. Treatment of Cash Balance and Other Hybrid Defined 
            Benefit Pension Plans (sec. 341 of the bill, secs. 
            411 and 417 of the Code, and secs. 204 and 205 of 
            ERISA)...............................................    84
        J. Defined Benefit Pension Plan Benefits Provided in 
            Combination with a Qualified Cash-or-Deferred 
            Arrangement (sec. 342 of the bill, new sec. 414(x) of 
            the Code, and new sec. 210(e) of ERISA)..............    92
        K. Studies (secs. 451 and 452 of the bill)...............    99
            1. Study on revitalizing the defined benefit plans...    99
            2. Study on floor-offset ESOPs.......................   100
    TITLE IV--DISCLOSURE AND BENEFIT STATEMENT REQUIREMENTS FOR SINGLE-
    EMPLOYER DEFINED BENEFIT PENSION PLANS..........................102
        A. Actuarial Reports and Summary Annual Reports (sec. 401 
            of the bill, sec. 6059 and new sec. 4980K of the 
            Code, and secs. 103, 104, 502, 4010 and 4011 of 
            ERISA)...............................................   102
    TITLE V--IMPROVEMENTS IN FUNDING RULES FOR MULTIEMPLOYER DEFINED 
    BENEFIT PLANS...................................................105
        A. Increase in Deduction Limits (secs. 322 and 501 of the 
            bill and sec. 404 of the Code).......................   105
        B. Multiemployer Plan Funding Notice (sec. 502 of the 
            bill and new sec. 4980L of the Code).................   107
        C. Permit Qualified Transfers of Excess Pension Assets to 
            Retiree Health Accounts by Multiemployer Plan (sec. 
            503 of the bill, sec. 420 of the Code and secs. 101, 
            403 and 408 of ERISA)................................   108
                                                                       
    TITLE VI--IMPROVEMENTS IN PBGC GUARANTEE PROVISIONS.............110
        A. Increases in PBGC Premiums for Single-Employer Plans 
            (sec. 601 of the bill and sec. 4006 of ERISA)........   110
        B. Rules Relating to Bankruptcy of Employer (secs. 403 
            and 602 of the bill and secs. 4022 and 4044 of ERISA)   113
        C. Limitation on PBGC Guarantee of Shutdown and Other 
            Benefits (sec. 603 of the bill and sec. 4022 of 
            ERISA)...............................................   115
        D. PBGC Premiums for Small and New Plans (secs. 604 and 
            605 of the bill and sec. 4006 of ERISA)..............   117
        E. Authorization for PBGC to Pay Interest on Premium 
            Overpayment Refunds (sec. 606 of the bill and sec. 
            4007(b) of ERISA)....................................   118
        F. Rules for Substantial Owner Benefits in Terminated 
            Plans (sec. 607 of the bill and secs. 4021, 4022, 
            4043, and 4044 of ERISA).............................   119
        G. Acceleration of PBGC Computation of Benefits 
            Attributable to Recoveries from Employers (sec. 608 
            of the bill and secs. 4022(c) and 4062(c) of ERISA)..   120
    TITLE VII--SPOUSAL PENSION PROTECTION...........................121
        A. Study of Spousal Consent for Distributions from 
            Defined Contribution Plans (sec. 701 of the bill)....   121
        B. Division of Pension Benefits Upon Divorce (sec. 702 of 
            the bill)............................................   123
        C. Protection of Rights of Former Spouses under the 
            Railroad Retirement System (secs. 703 and 704 of the 
            bill and secs. 2 and 5 of the Railroad Retirement Act 
            of 1974).............................................   125
        D. Modifications of Joint and Survivor Annuity 
            Requirements (sec. 705 of the bill and secs. 401 and 
            417 of the Code and sec. 205 of ERISA)...............   126
    TITLE VIII--IMPROVEMENTS IN PORTABILITY AND DISTRIBUTION RULES..128
        A. Purchase of Permissive Service Credit (sec. 801 of the 
            bill and secs. 403(b)(13), 415(n)(3), and 457(e)(17) 
            of the Code).........................................   128
        B. Rollover of After-Tax Amounts in Annuity Contracts 
            (sec. 802 of the bill and sec. 402(c)(2) of the Code)   130
        C. Application of Minimum Distribution Rules to 
            Governmental Plans (sec. 803 of the bill)............   131
        D. Waiver of 10-Percent Early Withdrawal Tax on Certain 
            Distributions from Pension Plans for Public Safety 
            Employees (sec. 804 of the bill and sec. 72(t) of the 
            Code)................................................   132
        E. Rollovers by Nonspouse Beneficiaries of Certain 
            Retirement Plan Distributions (sec. 805 of the bill 
            and secs. 402, 403(a)(4), 403(b)(8), and 457(e)(16) 
            of the Code).........................................   133
        F. Faster Vesting of Employer Nonelective Contributions 
            (sec. 806 of the bill, sec. 411 of the Code, and sec. 
            203 of ERISA)........................................   135
        G. Allow Direct Rollovers from Retirement Plans to Roth 
            IRAs (sec. 807 of the bill and sec. 408A(e) of the 
            Code)................................................   136
        H. Elimination of Higher Early Withdrawal Tax on Certain 
            SIMPLE Plan Distributions (sec. 808 of the bill and 
            sec. 72(t) of the Code)..............................   138
        I. SIMPLE Plan Portability (sec. 809 of the bill and 
            secs. 402(c) and 408(d) of the Code).................   139
        J. Eligibility for Participation in Eligible Deferred 
            Compensation Plans (sec. 810 of the bill)............   140
        K. Benefit Transfers to the PBGC (sec. 811 of the bill, 
            sec. 401(a)(31) of the Code, and sec. 4050 of ERISA).   141
        L. Missing Participants (sec. 812 of the bill and sec. 
            4050 of ERISA).......................................   143
    TITLE IX--ADMINISTRATIVE PROVISIONS.............................144
        A. Updating of Employee Plans Compliance Resolution 
            System (sec. 901 of the bill)........................   144
        B. Extension to all Governmental Plans of Moratorium on 
            Application of Certain Nondiscrimination Rules (sec. 
            902 of the bill, sec. 1505 of the Taxpayer Relief Act 
            of 1997, and secs. 401(a) and 401(k) of the Code)....   146
        C. Notice and Consent Period Regarding Distributions 
            (sec. 903 of the bill, sec. 417(a) of the Code, and 
            sec. 205(c) of ERISA)................................   147
        D. Pension Plan Reporting Simplification (sec. 904 of the 
            bill)................................................   148
        E. Voluntary Early Retirement Incentive and Employment 
            Retention Plans Maintained by Local Educational 
            Agencies and Other Entities (sec. 904 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)..............   149
        F. No Reduction in Unemployment Compensation as a Result 
            of Pension Rollovers (sec. 906 of the bill and sec. 
            3304(a)(15) of the Code).............................   152
        G. Withholding on Certain Distributions from Governmental 
            Eligible Deferred Compensation Plans (sec. 907 of the 
            bill and sec. 457 of the Code).......................   153
        H. Defined Benefit Plans Maintained by Tribal Governments 
            (sec. 908 of the bill)...............................   154
        I. Treatment of Plan of Certain Nonprofit Organization as 
            a Governmental Plan (sec. 909 of the bill)...........   154
        J. Provisions Relating to Plan Amendments (sec. 910 of 
            the bill)............................................   155
    TITLE X--UNITED STATES TAX COURT MODERNIZATION..................157
        A. Tax Court Pension and Compensation....................   157
            1. Judges of the Tax Court (secs. 1001-1007 and 1013 
                of the bill and secs. 7443, 7447, 7448, and 7472 
                of the Code).....................................   157
            2. Special trial judges of the Tax Court (secs. 1008-
                1013 of the bill and sec. 7448 and new secs. 
                7443A, 7443B, and 7443C of the Code).............   159
        B. Tax Court Procedure...................................   162
            1. Jurisdiction of Tax Court over collection due 
                process cases (sec. 1021 of the bill and sec. 
                6330 of the Code)................................   162
            2. Authority for magistrate judges to hear and decide 
                certain employment status cases (sec. 1022 of the 
                bill and sec. 7443A of the Code).................   163
            3. Confirmation of Tax Court authority to apply 
                doctrine of equitable recoupment (sec. 1023 of 
                the bill and sec. 6214 of the Code)..............   164
            4. Tax Court filing fees (sec. 1024 of the bill and 
                sec. 7451 of the Code)...........................   165
            5. Appointment of Tax Court employees (sec. 1025 of 
                the bill and sec. 7471(a) of the Code)...........   166
            6. Expanded use of practice fees (sec. 1026 of the 
                bill and sec. 7475 of the Code)..................   168
    TITLE XI--OTHER PROVISIONS......................................168
        A. Transfer of Funds Attributable to Black Lung Trust 
            Funds to Combined Benefit Fund (sec. 1101 of the bill 
            and secs. 501(c)(21) and 9705 of the Code)...........   168
        B. Tax Treatment of Company-Owned Life Insurance 
            (``COLI'') (secs. 1102 and 813 of the bill and new 
            secs. 101(j) and 6039I of the Code)..................   170
III.BUDGET EFFECTS OF THE BILL......................................175

IV. VOTES OF THE COMMITTEE..........................................181
 V. REGULATORY IMPACT AND OTHER MATTERS.............................181
VI. CHANGES IN EXISTING LAW MADE BY THE BILL AS REPORTED............183

                       I. LEGISLATIVE BACKGROUND


Overview

    The Senate Committee on Finance marked up an original bill, 
the ``National Employee Savings and Trust Equity Guarantee Act 
of 2005'' on July 26, 2005, and ordered the bill favorably 
reported by a voice vote.

Hearings

    During the 109th Congress, the Committee held hearings on 
various topics relating to the provisions of the bill, as 
follows.
    The Committee held a hearing on June 30, 2005, on 
encouraging savings and investment.
    The Committee held a hearing on June 7, 2005, titled 
``Preventing the Next Pension Collapse: Lessons from the United 
Airlines Case.''
    On March 1, 2005, the Committee held a hearing on the 
financial status of the Pension Benefit Guaranty Corporation 
(``PBGC'') and the President's defined benefit plan funding 
proposal. On February 8, 2005, the Committee held a hearing on 
the revenue proposals in the President's Fiscal Year 2006 
Budget Proposal.
    In addition, on June 23, 2005, Senator Grassley, Chairman, 
and Senator Baucus, ranking member, sent letters to 36 
companies requesting detailed information regarding their 
pension plans as part of an ongoing effort to understand the 
scope of pension underfunding and to assist in the crafting of 
comprehensive pension reform legislation that will help prevent 
dramatic underfunding in the future.

Prior activity

            In general
    Many provisions of the bill are substantially similar or 
build on proposals previously considered by the Committee.
            Activity during the 108th Congress
    During the 108th Congress, the Committee reported S. 2424, 
the ``National Employee Savings and Trust Equity Guarantee 
Act'' on May 14, 2004.\1\ The Committee held hearings on 
various topics relating to the provisions of the S. 2424 (108th 
Cong).
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    \1\ S. Rep. No. 108-266. The ``National Employee Savings and Trust 
Equity Guarantee Act,'' an original bill, was initially marked up by 
the Committee, and ordered favorably reported by voice vote, on 
September 17, 2003. On October 1, 2003, the Committee by unanimous 
consent recalled the bill and amended it to make the provision relating 
to company-owned life insurance (``COLI'') effective on the date of 
enactment 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.
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    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 conducted at the request of Senators Baucus and 
Grassley. 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 company-owned life 
insurance on October 23, 2003.
            Activity during the 107th Congress
    During the 107th Congress, the Committee reported S. 1971, 
the ``National Employee Savings and Trust Equity Guarantee 
Act,'' and 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 held a hearing on April 18, 2002, regarding 
corporate governance and executive compensation.

                      II. EXPLANATION OF THE BILL


    TITLE I--DIVERSIFICATION RIGHTS AND OTHER DEFINED CONTRIBUTION 
                        PARTICIPANT PROTECTIONS


   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''),\2\ 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.
---------------------------------------------------------------------------
    \2\ 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.
---------------------------------------------------------------------------
    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 memberof 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.\3\
---------------------------------------------------------------------------
    \3\ Such an ESOP design is sometimes referred to as a ``KSOP.''
---------------------------------------------------------------------------
    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.\4\ 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.
---------------------------------------------------------------------------
    \4\ 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.
---------------------------------------------------------------------------
    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).\5\
---------------------------------------------------------------------------
    \5\ 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.\6\ A retirement plan may hold only a ``qualifying'' 
employer security and only ``qualifying'' employer real 
property.
---------------------------------------------------------------------------
    \6\ ERISA sec. 407.
---------------------------------------------------------------------------
    Under ERISA, any stock issued by the employer or an 
affiliate of the employer is a qualifying employer security.\7\ 
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).
---------------------------------------------------------------------------
    \7\ 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).
---------------------------------------------------------------------------
    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.\8\ 
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.\9\
---------------------------------------------------------------------------
    \8\ 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).
    \9\ 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 and 
employer real property are referred to as ``eligible individual account 
plans.''
---------------------------------------------------------------------------
    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, including findings and 
recommendations resulting from its review of Enron's pension 
plans and compensation arrangements.\10\ 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.\11\ The Joint 
Committee staff recommended legislative changes to allow 
participants greater opportunities to invest their accounts in 
diversified investments, rather than in employer 
securities.\12\
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    \10\ 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.
    \11\ Id. at Vol. I, 12-13, 39-40, 515-540.
    \12\ 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,'' \13\ 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 \14\ that 
are readily tradable on an established securities market).
---------------------------------------------------------------------------
    \13\ Under ERISA, the diversification requirements apply to an 
``applicable individual account plan.''
    \14\ 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\15\ 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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    \15\ 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.
---------------------------------------------------------------------------
    The diversification requirements do not apply to an ESOP 
that: (1) does not hold contributions (or earnings thereon) 
that are subject to the special nondiscrimination tests that 
apply to elective deferrals, employee after-tax contributions, 
and matching contributions; and (2) is a separate plan from any 
other qualified retirement plan of the employer. Accordingly, 
an ESOP that holds elective deferrals, employee contributions, 
employer matching contributions, or nonelective employer 
contributions used to satisfy the special nondiscrimination 
tests (including the safe harbor methods of satisfying the 
tests) is subject to the diversification requirements under the 
provision. 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.\16\
---------------------------------------------------------------------------
    \16\ 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.\17\
---------------------------------------------------------------------------
    \17\ 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,\18\ 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.
---------------------------------------------------------------------------
    \18\ 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, 2005.

TABLE 1.--APPLICABLE PERCENTAGE FOR EMPLOYER SECURITIES OR EMPLOYER REAL 
                     PROPERTY HELD ON EFFECTIVE DATE

        Plan year for which diversification appliesApplicable 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 must be 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, 2005. 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, 2006, 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, 2007.
    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, 2005, and, 
under the special rule, the diversification requirements first 
apply to the plan for the first plan year beginning after 
December 31, 2008, the applicable percentage for that year is 
100 percent.

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


(Secs. 102 and 205 of the bill, new sec. 4980H of the Code, and new 
        sec. 101(j) 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 provision relating to 
diversification rights with respect to amounts invested in 
employer securities or employer real property. 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 right and 
describing the importance of diversifying the investment of 
retirement account assets. Underthe diversification provision, 
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 the Treasury has regulatory 
authority over the notice required under the Code and ERISA and 
is directed to prescribe a model notice to be used for this 
purpose within 180 days of enactment of the provision. It is 
expected that the Secretary of the Treasury will consult with 
the Secretary of Labor on the description of the importance of 
diversifying the investment of retirement account assets. In 
addition, it is intended that the Secretary of the Treasury 
will prescribe rules to enable the notice to be provided at 
reduced administrative expense, such as allowing the notice to 
be provided with the summary plan description, with a reminder 
of these rights within a reasonable period before they become 
exercisable.

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.\19\ 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.
---------------------------------------------------------------------------
    \19\ 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 to plan years beginning 
after December 31, 2005. 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.

 C. Periodic Pension Benefit Statements for Defined Contribution Plans


(Secs. 103 and 205 of the bill, new sec. 4980I of the Code, and sec. 
        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.\20\ 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.
---------------------------------------------------------------------------
    \20\ 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.

                           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.

                        EXPLANATION OF PROVISION

Requirements for benefit statements

    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.\21\
---------------------------------------------------------------------------
    \21\ 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 requirements do not apply to a one-
participant retirement plan 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.
---------------------------------------------------------------------------
    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 of 
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.
    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 couldpermit 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 has regulatory authority over the 
benefits statements required under ERISA and the Code and the 
authority to issue interim final rules as the Secretary 
determines appropriate to carry out the provision. 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 is optional. It is 
intended that the model statement include items such as the 
amount of nonforfeitable accrued benefits as of the statement 
date that are payable at normal retirement age under the plan, 
the amount of accrued benefits that are forfeitable but that 
may become nonforfeitable under the terms of the plan, 
information on how to contact the 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.

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 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.\22\ 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, 
the total excise tax imposed during a taxable year will not 
exceed $500,000.
---------------------------------------------------------------------------
    \22\ 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 
requirement. In addition, no tax will be imposed if the 
employer exercises reasonable diligence to comply and provides 
the required benefit statement 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.

Exception for governmental and church plans

    The provision contains an exception from the benefit 
statement 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, 2006. 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, 2007, 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, 2008.

  D. Periodic Pension Benefit Statements for Defined Benefit Pension 
                                 Plans


(Sec. 103 of the bill, new sec. 4980I of the Code, and secs. 105(a) and 
        502(c)(1) of ERISA)

                              PRESENT LAW

In general

    Under ERISA, a plan administrator is required to furnish 
participants with certain notices and information about the 
plan.\23\ 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.
---------------------------------------------------------------------------
    \23\ 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.

                           REASONS FOR CHANGE

    The Committee recognizes that benefits provided under a 
defined benefit pension plan are an important element in 
participants' retirement income planning. The Committee 
believes that providing participants with regular information 
concerning their benefits is necessary to increase participant 
awareness and appreciation of the importance of retirement 
savings.

                        EXPLANATION OF PROVISION

Requirements for benefit statements

    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). 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 has regulatory authority over the 
benefits statements required under ERISA and the Code and the 
authority to issue interim final rules as the Secretary 
determines appropriate to carry out the provision. 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 is optional. It is 
intended that the model statement include itemssuch 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.

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 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.\24\ 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, 
the total excise tax imposed during a taxable year will not 
exceed $500,000.
---------------------------------------------------------------------------
    \24\ 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 benefit statement 
requirement. In addition, no tax will be imposed if the 
employer exercises reasonable diligence to comply and provides 
the required benefit statement 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.

Exception for governmental and church plans

    The provision contains an exception from the benefit 
statement 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, 2006. 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, 2007, 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, 2008.

    E. Notice to Participants and Beneficiaries of Blackout Periods


(Secs. 104 and 205 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 \25\ amended ERISA to 
require that the plan administrator of an individual account 
plan \26\ provide advance notice of a blackout period (a 
``blackout notice'') to plan participants and beneficiaries to 
whom the blackout period applies.\27\ 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).
---------------------------------------------------------------------------
    \25\ Pub. L. No. 107-204 (2002).
    \26\ An ``individual account plan'' is the term generally used 
under ERISA for a defined contribution plan.
    \27\ 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.\28\
---------------------------------------------------------------------------
    \28\ 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 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 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.\29\ The Joint Committee staff issued an 
official report of its investigation, 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.\30\ 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.
---------------------------------------------------------------------------
    \29\ 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.
    \30\ Id. at Vol. I, 12-13, 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.\31\ 
The blackout notice requirement under the Code does not apply 
to a one-participant retirement plan, a governmental plan, or a 
church plan. The Secretary of Labor has regulatory authority 
over the notice required under ERISA and the Code.
---------------------------------------------------------------------------
    \31\ 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 required under the Code generally must be provided by the issuer 
of the annuity contract.
---------------------------------------------------------------------------

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.\32\
---------------------------------------------------------------------------
    \32\ This is the same definition that applies for purposes of the 
provision relating to required diversification rights with respect to 
amounts invested in employer securities or real property.
---------------------------------------------------------------------------

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.\33\ 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.
---------------------------------------------------------------------------
    \33\ 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.

         F. Additional IRA Contributions for Certain Employees


(Sec. 105 of the bill and secs. 25B and 219 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 
$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 2005 and $1,000 in 2006 and thereafter.
    Present law provides a temporary nonrefundable tax credit 
for eligible taxpayers for qualified retirement savings 
contributions (``saver's'' credit). The maximum annual 
contribution eligible for the credit is $2,000. The credit rate 
depends on the adjusted gross income (``AGI'') of the taxpayer. 
Taxpayers filing joint returns with AGI of $50,000 or less, 
head of household returns of $37,500 or less, and single 
returns of $25,000 or less are eligible for the credit. The AGI 
limits applicable to single taxpayers apply to married 
taxpayers filing separate returns. The credit is in addition to 
any deduction or exclusion that would otherwise apply with 
respect to the contribution. The credit offsets minimum tax 
liability as well as regular tax liability. The credit is 
available to individuals who are 18 or over, other than 
individuals who are full-time students or claimed as a 
dependent on another taxpayer's return. The credit is available 
with respect to contributions to various types of retirement 
savings arrangements, including contributions to a traditional 
or Roth IRA.

                           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 2005, and $3,000 per year in 2006-2009. 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.
    Under the provision, the saver's credit applies, with 
modifications, to an additional IRA contribution made by an 
eligible individual in a taxable year beginning before January 
1, 2008. The modified credit is equal to 50 percent of the 
additional IRA contribution and is available without regard to 
the individual's adjusted gross income.

                             EFFECTIVE DATE

    The ability to make additional IRA contributions is 
effective for taxable years beginning after December 31, 2004, 
and before January 1, 2010. The modified saver's credit applies 
with respect to additional IRA contributions made for taxable 
years beginning after December 31, 2004, and before January 1, 
2008.

TITLE II--PROVIDING INVESTMENT ADVICE AND INVESTMENT EDUCATION TO PLAN 
                              PARTICIPANTS


  A. Investment Education Requirements for Defined Contribution Plan 
                              Participants


(Secs. 201 and 205 of the bill, new sec. 4980I of the Code, and secs. 
        104 and 502 of ERISA)

                              PRESENT LAW

In general

    Under ERISA, a plan administrator is required to furnish 
participants with certain notices and information about the 
plan.\34\ 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.
---------------------------------------------------------------------------
    \34\ 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.\35\ The Joint Committee staff issued an 
official report of its investigation, 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.\36\ The Joint 
Committee staff recommended legislative changes to require 
plans to provide participants with notices regarding investment 
principles and investment education.\37\
---------------------------------------------------------------------------
    \35\ 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.
    \36\ Id. at Vol. I, 12, 522-523, 526-535, 536.
    \37\ Id. at Vol. I, 19, 39, 538.
---------------------------------------------------------------------------

                        EXPLANATION OF PROVISION

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.\38\ The Secretary of Labor has regulatory 
authority over the model form required to be provided under 
ERISA and the Code.
---------------------------------------------------------------------------
    \38\ 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 Labor is directed, in 
consultation with the Secretary of the Treasury, 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 and 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 Labor 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 also required to develop an Internet site to be used 
by an individual in making these calculations, the address of 
which will be included in the model form.
    The 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 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.\39\ The excise tax is $100 per day for each 
participant or beneficiary with respect to whom the failure 
occurs, until the model form is provided or the failure is 
otherwise corrected. If the employer exercises reasonable 
diligence to meet the model form requirement, the total excise 
tax imposed during a taxable year will not exceed $500,000.
---------------------------------------------------------------------------
    \39\ 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 model form requirement. 
In addition, no tax will be imposed if the employer exercises 
reasonable diligence to comply and provides the required 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 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 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, 2006. 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, 2007, 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, 2008.

      B. Information Relating to Investment in Employer Securities


(Secs. 202 and 205 of the bill, new sec. 4980H of the Code, and secs. 
        101 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. The Secretary of Labor has regulatory authority 
over the ERISA and Code requirement to provide this 
information.

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.\40\ 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.
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    \40\ 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, 2005. 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, 2006, 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, 2007.

   C. Safe Harbor for Independent Investment Advice Provided to Plan 
                              Participants


(Sec. 203 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 \41\ 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.
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    \41\ An ``individual account plan'' is the term generally used 
under ERISA for a defined contribution plan.
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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 
\42\) 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,\43\ (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.
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    \42\ 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.
    \43\ 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. Treatment of Employer-Provided Qualified Retirement Planning 
                                Services


(Sec. 204 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.\44\ 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.
---------------------------------------------------------------------------
    \44\ Secs. 132 and 3121(a)(20).
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    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 \45\) 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,\46\ (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.
---------------------------------------------------------------------------
    \45\ See 15 U.S.C. 80b-3a.
    \46\ 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, 2005, and before January 1, 2011.

 TITLE III--IMPROVEMENTS IN FUNDING RULES FOR SINGLE-EMPLOYER DEFINED 
                         BENEFIT PENSION PLANS


 A. Minimum Funding Rules for Single-Employer Defined Benefit Pension 
                                 Plans


(Secs. 301-302, 305, 311-312, 314, and 321 of the bill, sec. 412 of the 
        Code, new secs. 430 and 431 of the Code, secs. 302-308 of 
        ERISA)

                              PRESENT LAW

In general

    Single-employer defined benefit pension plans are subject 
to minimum funding requirements under the Employee Retirement 
Income Security Act of 1974 (``ERISA'') and the Internal 
Revenue Code (the ``Code'').\47\ The amount of contributions 
required for a plan year under the minimum funding rules is 
generally the amount needed to fund benefits earned during that 
year plus that year's portion of other liabilities that are 
amortized over a period of years, such as benefits resulting 
from a grant of past service credit. The amount of required 
annual contributions is determined under one of a number of 
acceptable actuarial cost methods. Additional contributions are 
required under the deficit reduction contribution rules in the 
case of certain underfunded plans. No contribution is required 
under the minimum funding rules in excess of the full funding 
limit (described below).
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    \47\ Code sec. 412. The minimum funding rules also apply to 
multiemployer plans, but the rules for multiemployer plans differ in 
various respects from the rules applicable to single-employer plans. 
The minimum funding rules do not apply to governmental plans or to 
church plans, except church plans with respect to which an election has 
been made to have various ERISA and Code requirements, including the 
funding requirements, apply to the plan. In addition, special rules 
apply to certain plans funded exclusively by the purchase of individual 
insurance contracts (referred to as ``insurance contract'' plans).
---------------------------------------------------------------------------

General minimum funding rules

            Funding standard account
    As an administrative aid in the application of the funding 
requirements, a defined benefit pension plan is required to 
maintain a special account called a ``funding standard 
account'' to which specified charges and credits are made for 
each plan year, including a charge for normal cost and credits 
for contributions to the plan. Other credits or charges may 
apply as a result of decreases or increases in past service 
liability as a result of plan amendments, experience gains or 
losses, gains or losses resulting from a change in actuarial 
assumptions, or a waiver of minimum required contributions.
    In determining plan funding under an actuarial cost method, 
a plan's actuary generally makes certain assumptions regarding 
the future experience of a plan. These assumptions typically 
involve rates of interest, mortality, disability, salary 
increases, and other factors affecting the value of assets and 
liabilities. If the plan's actual unfunded liabilities are less 
thanthose anticipated by the actuary on the basis of these 
assumptions, then the excess is an experience gain. If the actual 
unfunded liabilities are greater than those anticipated, then the 
difference is an experience loss. Experience gains and losses for a 
year are generally amortized as credits or charges to the funding 
standard account over five years.
    If the actuarial assumptions used for funding a plan are 
revised and, under the new assumptions, the accrued liability 
of a plan is less than the accrued liability computed under the 
previous assumptions, the decrease is a gain from changes in 
actuarial assumptions. If the new assumptions result in an 
increase in the accrued liability, the plan has a loss from 
changes in actuarial assumptions. The accrued liability of a 
plan is the actuarial present value of projected pension 
benefits under the plan that will not be funded by future 
contributions to meet normal cost or future employee 
contributions. The gain or loss for a year from changes in 
actuarial assumptions is amortized as credits or charges to the 
funding standard account over ten years.
    If minimum required contributions are waived (as discussed 
below), the waived amount (referred to as a ``waived funding 
deficiency'') is credited to the funding standard account. The 
waived funding deficiency is then amortized over a period of 
five years, beginning with the year following the year in which 
the waiver is granted. Each year, the funding standard account 
is charged with the amortization amount for that year unless 
the plan becomes fully funded.
    If, as of the close of a plan year, the funding standard 
account reflects credits at least equal to charges, the plan is 
generally treated as meeting the minimum funding standard for 
the year. If, as of the close of the plan year, charges to the 
funding standard account exceed credits to the account, then 
the excess is referred to as an ``accumulated funding 
deficiency.'' Thus, as a general rule, the minimum contribution 
for a plan year is determined as the amount by which the 
charges to the funding standard account would exceed credits to 
the account if no contribution were made to the plan. For 
example, if the balance of charges to the funding standard 
account of a plan for a year would be $200,000 without any 
contributions, then a minimum contribution equal to that amount 
would be required to meet the minimum funding standard for the 
year to prevent an accumulated funding deficiency.
            Credit balances
    If credits to the funding standard account exceed charges, 
a ``credit balance'' results. A credit balance results, for 
example, if contributions in excess of minimum required 
contributions are made. Similarly, a credit balance may result 
from large net experience gains. The amount of the credit 
balance, increased with interest at the rate used under the 
plan to determine costs, can be used to reduce future required 
contributions.
            Funding methods and general concepts
    A defined benefit pension plan is required to use an 
acceptable actuarial cost method to determine the elements 
included in its funding standard account for a year. Generally, 
an actuarial cost method breaks up the cost of benefits under 
the plan into annual charges consisting of two elements for 
each plan year. These elements are referred to as: (1) normal 
cost; and (2) supplemental cost.
    The plan's normal cost for a plan year generally represents 
the cost of future benefits allocated to the year by the 
funding method used by the plan for current employees and, 
under some funding methods, for separated employees. 
Specifically, it is the amount actuarially determined that 
would be required as a contribution by the employer for the 
plan year in order to maintain the plan if the plan had been in 
effect from the beginning of service of the included employees 
and if the costs for prior years had been paid, and all 
assumptions as to interest, mortality, time of payment, etc., 
had been fulfilled. The normal cost will be funded by future 
contributions to the plan: (1) in level dollar amounts; (2) as 
a uniform percentage of payroll; (3) as a uniform amount per 
unit of service (e.g., $1 per hour); or (4) on the basis of the 
actuarial present values of benefits considered accruing in 
particular plan years.
    The supplemental cost for a plan year is the cost of future 
benefits that would not be met by future normal costs, future 
employee contributions, or plan assets. The most common 
supplemental cost is that attributable to past service 
liability, which represents the cost of future benefits under 
the plan: (1) on the date the plan is first effective; or (2) 
on the date a plan amendment increasing plan benefits is first 
effective. Other supplemental costs may be attributable to net 
experience losses, changes in actuarial assumptions, and 
amounts necessary to make up funding deficiencies for which a 
waiver was obtained. Supplemental costs must be amortized 
(i.e., recognized for funding purposes) over a specified number 
of years, depending on the source. For example, the cost 
attributable to a past service liability is generally amortized 
over 30 years.
    Normal costs and supplemental costs under a plan are 
computed on the basis of an actuarial valuation of the assets 
and liabilities of a plan. An actuarial valuation is generally 
required annually and is made as of a date within the plan year 
or within one month before the beginning of the plan year. 
However, a valuation date within the preceding plan year may be 
used if, as of that date, the value of the plan's assets is at 
least 100 percent of the plan's current liability (i.e., the 
present value of benefit liabilities under the plan, as 
described below).
    For funding purposes, the actuarial value of plan assets 
may be used, rather than fair market value. The actuarial value 
of plan assets is the value determined under a reasonable 
actuarial valuation method that takes into account fair market 
value and is permitted under Treasury regulations. Any 
actuarial valuation method used must result in a value of plan 
assets that is not less than 80 percent of the fair market 
value of the assets and not more than 120 percent of the fair 
market value. In addition, if the valuation method uses average 
value of the plan assets, values may be used for a stated 
period not to exceed the five most recent plan years, including 
the current year.\48\
---------------------------------------------------------------------------
    \48\ Treas. Reg. sec. 1.412(c)(2)-1(b)(7)(ii).
---------------------------------------------------------------------------
    In applying the funding rules, all costs, liabilities, 
interest rates, and other factors are required to be determined 
on the basis of actuarial assumptions and methods, each of 
which is reasonable (taking into account the experience of the 
plan and reasonable expectations), or which, in the aggregate, 
result in a total plan contribution equivalent to a 
contribution that would be obtained if each assumption and 
method were reasonable. In addition, the assumptions are 
required to offer the actuary's best estimate of anticipated 
experience under the plan.\49\
---------------------------------------------------------------------------
    \49\ Under present law, certain changes in actuarial assumptions 
that decrease the liabilities of an underfunded single-employer plan 
must be approved by the Secretary of the Treasury.
---------------------------------------------------------------------------

Additional contributions for underfunded plans

            In general
    Under special funding rules (referred to as the ``deficit 
reduction contribution'' rules),\50\ an additional charge to a 
plan's funding standard account is generally required for a 
plan year if the plan's funded current liability percentage for 
the plan year is less than 90 percent.\51\ A plan's ``funded 
current liability percentage'' is generally the actuarial value 
of plan assets as a percentage of the plan's current 
liability.\52\ In general, a plan's current liability means all 
liabilities to employees and their beneficiaries under the 
plan, determined on a present-value basis.
---------------------------------------------------------------------------
    \50\ 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.
    \51\ 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.
    \52\ In determining a plan's funded current liability percentage 
for a plan year, the value of the plan's assets is generally reduced by 
the amount of any credit balance under the plan's funding standard 
account. However, this reduction does not apply in determining the 
plan's funded current liability percentage for purposes of whether an 
additional charge is required under the deficit reduction contribution 
rules.
---------------------------------------------------------------------------
    The amount of the additional charge 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 event 
benefits. The amount of the additional charge cannot exceed the 
amount needed to increase the plan's funded current liability 
percentage to 100 percent (taking into account any expected 
increase in current liability due to benefits accruing during 
the plan year).
    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.\53\ 
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 decreases by .40 of one percentage point for each 
percentage point by which the plan's funded current liability 
percentage exceeds 60 percent. For example, if a plan's funded 
current liability percentage is 85 percent (i.e., it exceeds 60 
percent by 25 percentage points), the applicable percentage is 
20 percent (30 percent minus 10 percentage points (25 
multiplied by .4)).\54\
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    \53\ 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.
    \54\ In making these computations, the value of the plan's assets 
is reduced by the amount of any credit balance under the plan's funding 
standard account.
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    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. The value of any 
unpredictable contingent event benefit is not considered in 
determining additional contributions until the event has 
occurred. The event on which an unpredictable contingent event 
benefit is contingent is generally not considered to have 
occurred until all events on which the benefit is contingent 
have occurred.
            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. For plans years beginning before 
January 1, 2004, the interest rate used to determine a plan's 
current liability must be within a permissible range of the 
weighted average \55\ 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 (120 percent for plan years 
beginning in 2002 or 2003).\56\ The interest rate used under 
the plan generally 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.\57\
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    \55\ 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.
    \56\ 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.
    \57\ Code sec. 412(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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    Under the Pension Funding Equity Act of 2004 (``PFEA 
2004''),\58\ a special interest rate applies in determining 
current liability for plan years beginning in 2004 or 2005.\59\ 
For these years, the interest rate used must be within a 
permissible range of the weighted average of the rates of 
interest on amounts invested conservatively in long-term 
investment-grade corporate bonds 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. The interest rate is to be determined by the Secretary 
of the Treasury on the basis of two or more indices that are 
selected periodically by the Secretary and are in the top three 
quality levels available.
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    \58\ Pub. L. No. 108-218 (2004).
    \59\ In addition, under 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.
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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.\60\ The Secretary of the Treasury requires the use 
of the 1983 Group Annuity Mortality Table.\61\
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    \60\ Code sec. 412(l)(7)(C)(ii).
    \61\ 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.
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Other rules

            Full funding limitation
    No contributions are required under the minimum funding 
rules in excess of the full funding limitation. 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.\62\ 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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    \62\ 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, contributions for the current plan year must be made in 
quarterly installments with any remaining amount due 8\1/2\ 
months after the end of the plan year.\63\ 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.\64\
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    \63\ Code sec. 412(m).
    \64\ If quarterly contributions are required with respect to a 
plan, the amount of a quarterly installment must also be sufficient to 
cover any shortfall in the plan's liquid assets (a ``liquidity 
shortfall'').
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            Funding waivers
    Within limits, the Secretary of the Treasury is permitted 
to waive all or a portion of the contributions required under 
the minimum funding standard for a plan year (a ``waived 
funding deficiency'').\65\ 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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    \65\ Code sec. 412(d). Under similar rules, the amortization period 
applicable to an unfunded past service liability or loss may also be 
extended.
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    The IRS is authorized to require security to be granted as 
a condition of granting a waiver of the minimum funding 
standard if the sum of the plan's accumulated funding 
deficiency and the balance of any outstanding waived funding 
deficiencies exceeds $1 million.
            Failure to make required contributions
    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.\66\ The excise tax is 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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    \66\ Code sec. 4971. An excise tax applies also if a quarterly 
installment is less than the amount required to cover the plan's 
liquidity shortfall.
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    If the total of the contributions the employer fails to 
make (plus interest) exceeds $1 million and the plan's funded 
current liability percentage is less than 100 percent, a lien 
arises in favor of the plan with respect to all property of the 
employer and the members of the employer's controlled group. 
The amount of the lien is the total amount of the missed 
contributions (plus interest).

                           REASONS FOR CHANGE

    The Committee believes that fundamental reform of the 
single-employer defined benefit pension plan funding rules is 
necessary. The present-law single-employer defined benefit plan 
funding rules are overly complex and do not operate to ensure 
that pension plans become and remain adequately funded. The 
Committee believes that the present-law funding rules provide 
an inaccurate measure of a plan's true financial status. The 
present-law rules have resulted in plan underfunding which has 
led to a loss of pension benefits for plan participants and 
record deficits for the PBGC. In recent years, plans which had 
complied with present-law requirements have nonetheless 
terminated on severely underfunded bases.
    The Committee believes that liabilities should be measured 
more precisely than required under present law. The Committee 
believes that it is necessary to provide a more accurate 
interest rate for pension purposes and that a more accurate 
calculation would result from matching interest rates to the 
timing of expected payments rather than using a single long-
term interest rate. Accordingly, the Committee believes that a 
yield curve that reflects the rates of interest on corporate 
bonds of varying maturities should be used for pension 
purposes. Such rates take into account the timing of when 
benefit payments will be due under the plan.
    Present-law rules for the valuation of plan assets allow 
value to be based on average value over a period of up to five 
years. The Committee believes that the use of such value can 
disguise the true value of plan assets and the funded status of 
the plan. The Committee believes that fair market value (or 
average value for a recent period) should be used to determine 
a plan's funded status.
    The Committee recognizes that accurate measurement is 
necessary, but also recognizes that accurate measurement can 
result in large fluctuations in required pension plan 
contributions from one year to the next. Thus, the Committee 
believes that it is appropriate to impose a limit on the amount 
of fluctuation of required contributions from one year to the 
next.
    The Committee is also concerned about seriously underfunded 
plans maintained by employers experiencing ongoing financial 
weakness or 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 such 
employers should be required to use certain additional 
assumptions that will require funding to a target that more 
closely reflects the cost of terminating the plan.

                        EXPLANATION OF PROVISION

Interest rate required for plan years beginning in 2006

    For plan years beginning after December 31, 2005, and 
before January 1, 2007, the provision generally applies the 
present-law funding rules.\67\ For such years, the provision 
extends the use of the rate of interest on amounts invested 
conservatively in long-term investment-grade corporate bonds in 
determining current liability for funding purposes. As under 
present law, the interest rate used must be within the 
permissible range of the weighted average of the rates of 
interest on amounts invested conservatively in long-term 
investment-grade corporate bonds during the four-year period 
ending on the last day before the plan year begins.
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    \67\ The interest rate used under the provision for PBGC premiums, 
and other provisions relating to such premiums, is discussed under 
Title VI., below.
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General funding rules for plan years beginning after 2006

    For plan years beginning after December 31, 2006, in the 
case of single-employer defined benefit pension plans, the 
provision repeals the present-law funding rules (including the 
requirement that a funding standard account be maintained) and 
provides a new set of rules for determining minimum required 
contributions.\68\ Under the provision, the minimum required 
contribution to a single-employer defined benefit pension plan 
for a plan year generally depends on a comparison of the value 
of the plan's assets with the plan's target liability.
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    \68\ The provision does not change the funding rules applicable to 
insurance contract plans. Governmental plans and church plans continue 
to be exempt from the funding rules to the extent provided under 
present law. The provision generally does not change the funding rules 
for multiemployer plans, except to repeal the alternative minimum 
funding standard account rules and extend controlled-group liability 
for required contributions to multiemployer plans.
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    The minimum required contribution for a plan year is the 
sum of (1) the target normal cost of the plan for the plan 
year; (2) the aggregate amortization payment for the plan year; 
and (3) the waiver amortization payment for the plan year. The 
sum of the amortization payments for the plan year cannot 
exceed the unfunded target liability for the plan year. For 
plan years beginning after 2007, a limit applies on the amount 
that required contributions can increase or decrease from the 
contribution required for the prior year.
    A plan's target normal cost for a plan year is the present 
value of benefits that accrue or are earned during the plan 
year. A plan's unfunded target liability is the excess of the 
target liability for the plan year, over the value of the 
assets of the plan as of the valuation date. Under the 
provision, a plan's target liability is the present value of 
all benefits accrued or earned under the plan as of the 
beginning of the plan year. As discussed below, if a plan 
sponsor is a financially-weak employer, the target normal cost 
is the at-risk normal cost and the target liability is the at-
risk target liability.
    The provision specifies the interest rates and mortality 
table that must be used in determining a plan's target normal 
cost and target liability, as well as certain other actuarial 
assumptions that must be used.
    As described in more detail below, under the provision, 
credit balances generated under present law are carried over to 
a new ``prefunding balance.'' In addition, as described more 
fully below, contributions in excess of the minimum 
contributions required under the provision generally increase 
the prefunding balance. Prefunding balances may be credited 
against the minimum required contribution. In determining the 
required contribution for a plan year, the value of plan assets 
is reduced by any prefunding balance.

Target normal cost

    Under the provision, the minimum required contribution for 
a plan year generally includes the plan's target normal cost 
for the plan year. A plan's target normal cost is the present 
value of all benefits which accrue or are earned under the plan 
during the plan year (the ``current'' year).\69\ For this 
purpose, an increase in any benefit attributable to services 
performed in a preceding year by reason of a compensation 
increase during the current year is treated as accruing in the 
current year.
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    \69\ It is intended that Treasury will provide guidance addressing 
normal cost issues, It is expected that such guidance will address 
issues such as the treatment of administrative expenses and determining 
accruals for the year in the case of a plan using a valuation date 
other than the first day of the plan year.
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    As discussed below, if a plan sponsor is a financially-weak 
employer, the plan's target normal cost is the at-risk target 
normal cost (subject to a phase-in rule discussed below).

Aggregate amortization payment

            In general
    The minimum required contribution includes the aggregate 
amortization payment (if any) for the plan.
            Target liability
    A plan's target liability is the present value of all 
benefits accrued or earned under the plan as of the beginning 
of the plan year.
    As discussed below, if a plan sponsor is financially weak, 
the target liability is the at-risk target liability (subject 
to a phase-in rule discussed below).
            Unfunded target liability
    A plan's unfunded target liability with respect to a plan 
year is the excess of the target liability for the plan year 
over the value of the assets of the plan as of the valuation 
date (reduced by any prefunding balance for purposes of 
determining the minimum required contribution).
    A transition rule generally applies in determining a plan's 
unfunded target liability for plan years beginning in 2007 and 
2008. In the case of plan years beginning in 2007, the unfunded 
target liability is the excess of 93 percent of the target 
liability for the plan year over the assets of the plan as of 
the valuation date (reduced by any prefunding balance). For 
plan years beginning in 2008, the percentage is 96 percent.
    A five-year transition rule applies in the case of plans 
with 100 or fewer participants. Under such rule, for plan years 
beginning in 2007, the unfunded target liability is the excess 
of 92 percent of the target liability for the plan year over 
the assets of the plan as of the valuation date (reduced by any 
prefunding balance). The percentage is 94 percent for 2008, 96 
percent for 2009, and 98 percent for 2010.
            Aggregate amortization payment
    The aggregate amortization payment for a plan year is the 
aggregate amount of the target liability amortization 
installments determined for the plan year with respect to 
amortizable target liability for the plan year and each of the 
six preceding plan years.
    Amortizable target liability is the amount by which (1) the 
unfunded target liability for the plan year is more or less 
than (2) the present value of all target liability amortization 
installments and waiver amortization installments which were 
determined for the current year or any succeeding plan year 
with respect to any amortizable target liability or waived 
funding deficiency for any plan year preceding the current plan 
year.
    If the plan has an amortizable target liability, the 
liability must be amortized over the seven year period 
beginning with the current plan year. Each amortization 
installment is a fixed amount equal to the amount necessary to 
amortize the liability in seven level amortization payments. If 
the present value of already scheduled amortization payments is 
greater than the plan's unfunded target liability, the excess 
is amortized over seven years. Each annual amortization amount 
can offset any annual amortization amounts required with 
respect to shortfalls (i.e., negative amortization installments 
may offset positive amortization installments).
    In determining the present value of any amortization 
installment or the amount of any amortization installment, the 
plan must assume that each amortization installment will be 
paid on the valuation date for the plan year for which the 
installment is determined. The plan must also use the interest 
rates determined under the yield curve method (discussed below) 
for the current plan year.\70\
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    \70\ The phase-in yield curve method does not apply for this 
purpose.
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Waiver amortization payment

    The provision retains the present-law rules under which the 
Secretary of the Treasury may waive all or a portion of the 
contributions required under the minimum funding standard for a 
plan year (referred to as a ``waived funding deficiency'').\71\ 
If a plan has a waived funding deficiency for a plan year or 
any of the five preceding plan years, the minimum required 
contribution for the plan year includes the waiver amortization 
payment for the plan year.
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    \71\ In the case of single-employer plans, the provision repeals 
the present-law rules under which the amoritization period applicable 
to an unfunded past service liability or loss may be extended.
---------------------------------------------------------------------------
    The waiver amortization payment for a plan year is the 
aggregate amount of the waiver amortization installments 
determined for the plan year with respect to any amortizable 
waived funding deficiency for the five preceding plan years. 
The waiver amortization installments with respect to an 
amortizable waived funding deficiency for a plan year are 
annual installments determined as the amount needed to amortize 
the waiver amortization base in level annual installments over 
the five-year period beginning with the following plan year. 
The waiver amortization installments for a plan year are 
determined by assuming each amortization installment will be 
paid on the valuation date for which the installment is 
determined and using the interest rates determined under the 
yield curve method for the plan year in which the waived 
funding deficiency to which the installment relates arose.

Limitation on annual increases and decreases

    For plan years beginning after 2007, the provision includes 
a limitation on the amount that required contributions can 
increase or decrease from one plan year to the next. The limit 
is the greater of (1) 30 percent of the plan's target normal 
cost for the preceding plan year or (2) two percent of the 
plan's target liability for the preceding plan year. The 
minimum required contribution for the current plan year cannot 
be greater than the minimum required contribution for the 
preceding plan year plus the limit and cannot be less than the 
minimum required contribution for the preceding plan year minus 
the limit.
    For purposes of this rule, the minimum required 
contribution for the preceding year is determined (1) before 
interest is determined in the case of contributions made after 
the valuation date (as discussed below) and (2) after the 
application of the limit on the annual increase or decrease in 
minimum required contributions for that year. In addition, for 
purposes of this rule, the minimum required contribution for 
the preceding year is reduced by any amortization installment 
(i.e., any target liability amortization installment or waiver 
amortization installment) attributable to any amortizable 
target liability or any waived funding deficiency that was 
fully amortized as of the close of the preceding plan year.
    The limit does not apply to costs attributable to benefit 
improvements for the current year (i.e., the minimum required 
contribution taking into account the limit would be determined 
and then costs attributable to benefit improvements would be 
taken into account). A similar rule applies in the case of 
benefit decreases.

Special rule for plans that reach funding target

    If the value of the plan's assets (reduced by any 
prefunding balance) equals or exceeds the target liability for 
the plan year (1) the minimum required contribution otherwise 
determined is equal to target normal cost, reduced (but not 
below zero) by the amount of such excess, and (2) amortization 
installments determined with respect to unfunded target 
liability and waived funding deficiencies allocable to the 
current plan year or any succeeding plan year are not required 
to be made, or taken into account for any other purpose, in any 
succeeding plan year.\72\
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    \72\ If the rule applies for a plan year, the plan's normal cost is 
treated as the minimum required contribution for the year for purposes 
of applying the limitation on annual increases or decreases for the 
following year.
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Actuarial assumptions used in determining a plan's target normal cost 
        and target liability

            Interest rates
    The provision requires that the determination of present 
value or other computation requiring any interest rate 
assumption be made using the yield curve method. For plan years 
beginning in 2007 and 2008, a phase-in yield curve method 
applies.
    The yield curve method is a method under which present 
value or other amounts requiring interest rate assumptions are 
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). Each month, 
the Secretary of the Treasury is required to publish any yield 
curve which shall apply to plan years beginning in such month 
and such yield curve must be based on average interest rates 
for business days occurring during the three preceding months.
    Under the phase-in yield curve method applicable for plan 
years beginning in 2007 and 2008, present value or any other 
amount requiring the use of interest rate assumptions is equal 
to the sum of two amounts: (1) the applicable percentage of 
such amount determined under the yield curve method; and (2) 
such amount determined using the interest rate rules in effect 
for plan years beginning in 2005 under present law and 2006 
under the provision (i.e., an interest rate in the permissible 
range of the weighted four-year average of conservative long-
term corporate bond rates), multiplied by a percentage equal to 
100 percent minus the applicable percentage for the plan year. 
For this purpose, the applicable percentage is 33 percent for 
plan years beginning in 2007 and 67 percent for plan years 
beginning in 2008.
    Under the provision, certain amounts (e.g., contributions 
made after the valuation date) are determined using the plan's 
``applicable effective interest rate'' for a plan year. The 
applicable effective interest rate with respect to a plan for a 
plan year is the single rate of interest which, if used to 
determine the present value of benefits accrued or earned under 
the plan as of the beginning of the plan year, would result in 
an amount equal to the plan's target liability for the plan 
year.
            Mortality table
    As under present law, the provision requires that the 
Secretary of the Treasury prescribe by regulation mortality 
tables to be used in calculating funding requirements. Such 
tables must be based on the actual experience of pension plans 
and projected trends in such experience. It is expected that 
the Secretary will take into account projections of future 
improvements in mortality. In prescribing the mortality tables, 
the Secretary is required to take into account results of 
available independent studies of mortality of individuals 
covered by pension plans.
    As under present law, the provision requires the Secretary 
of the Treasury to issue separate mortality tables that may be 
used for individuals who are entitled to benefits under the 
plan on account of disability.
    As under present law, the provision requires that the 
Secretary periodically (at least every five years) review the 
mortality tables and, to the extent determined necessary, 
update the tables to reflect the actual experience in pension 
plans and projected trends in such experience. It is intended 
that the mortality currently used under present law will 
continue to apply until the Secretary issues an updated table, 
which is expected shortly.
            Value of plan assets
    The provision provides that the value of plan assets is to 
be determined on the basis of fair market value. The provision 
allows the value of plan assets to be determined by averaging 
fair market values over not more than the period beginning on 
the last day of the fourth month preceding the valuation date 
and ending on the valuation date in accordance with regulations 
prescribed by the Secretary.\73\
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    \73\ The 80 to 120 percent corridor under present law does not 
apply.
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            Other assumptions
    Under the provision, in determining present value or other 
computations, the probability that future benefits will be paid 
in optional forms of benefit provided under the plan must be 
taken into account (including lump-sum distributions). In 
addition, there must be taken into account any difference in 
the present value of such optional form of benefit and the 
present value of the future payments used in computing target 
normal costs and target liability.
    The provision generally does not require other specified 
assumptions to be used in determining the plan's target normal 
cost and funding target except in the case of plans maintained 
by financially-weak plan sponsors (discussed below). However, 
similar to present law, the determination of present value or 
other computation must be made on the basis of actuarial 
assumptions and methods, each of which is reasonable (taking 
into account the experience of the plan and reasonable 
expectations), and which, in combination, offer the actuary's 
best estimate of anticipated experience under the plan.\74\
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    \74\ The provision retains the present-law rule under which certain 
changes in actuarial assumptions that decrease the liabilities of an 
underfunded single-employer plan must be approved by the Secretary of 
the Treasury.
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Special rules for plans maintained by financially-weak employers

    The provision applies special rules in determining the 
target liability and target normal cost in the case of plans 
maintained by financially-weak employers. If, as of the 
valuation date, a plan sponsor is a financially-weak employer, 
the plan's target liability is the at-risk target liability and 
the plan's target normal cost is the at-risk target normal 
cost.
    In general, a plan sponsor is a financially-weak employer 
if, as of the valuation date for each of the three consecutive 
plan years ending with the current plan year, the plan sponsor 
is rated as below investment grade.\75\ A sponsor is rated as 
below investment grade if (1) it has an outstanding senior 
unsecured debt instrument which is rated lower than investment 
grade by each of the nationally recognized statistical rating 
organizations for corporate bonds that has issued a credit 
rating for such instrument, or (2) if no outstanding senior 
unsecured debt instrument has been rated by such an 
organization, but one or more organizations has made an issuer 
credit rating for the employer, all such organizations that 
have so rated the employer have rated the employer lower than 
investment grade.\76\
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    \75\ Plan years beginning on or before the date of enactment are 
not taken into account in determining whether an employer is 
financially weak.
    \76\ In the case of a multiple employer plan, which covers 
employees of more than one employer, each employer's financial status 
is determined separately, based on the employer's controlled group.
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    In determining if a plan sponsor is a financially-weak 
employer, a special rule applies in the case of a plan sponsor 
that, as of the current year valuation date, continues to be 
rated as below investment grade, but receives a higher credit 
rating by any rating organization than that received by such 
organization as of the valuation date for the preceding plan 
year (an ``improvement year'').\77\ Under such rule, the 
improvement year is not taken into account in determining if 
the plan sponsor is financially weak and plan years immediately 
before and after the improvement year are treated as 
consecutive plan years. The rule applies even if the credit 
rating by another rating organization is lowered for such 
period. For example, suppose that as of the valuation date for 
2007, the employer is rated by all of the nationally recognized 
statistical rating organizations as below investment grade, 
including a rating by Moody's of Ca. Suppose that the ratings 
for the employer remain the same as of the valuation date for 
2008. If, as of the valuation date for 2009, the rating by 
Moody's is improved to B, plan year 2009 is an improvement 
period and such year is disregarded in determining if the 
employer is financially weak. This result applies even if the 
rating from another rating agency is lowered as of the 
valuation date for 2009. If, as of the valuation date for 2010, 
there is no additional improvement (i.e., ratings by all of the 
rating organizations are either lowered or remain the same as 
those for 2009), the employer is treated as below investment 
grade for three consecutive plan years (2007, 2008 and 2010) 
and is financially-weak beginning in 2010.
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    \77\ If a plan sponsor receives a rating of investment grade or 
higher from any of the nationally recognized statistical rating 
organizations for any plan year, the plan sponsor is not treated as 
below investment grade for such year. Thus, the earliest that the plan 
sponsor could be determined to be a financially-weak employer is the 
third year following such year.
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    A phase-in rule applies in the case of plan sponsors that 
are financially weak for less than five consecutive years. If a 
plan sponsor was not financially weak on the valuation date of 
the four immediately preceding plan years, the at-risk target 
liability or at-risk target normal cost is equal to the sum of 
(1) the applicable percentage of the at-risk target liability 
or the at-risk target normal cost (whichever is applicable, 
determined without regard to the phase-in), and (2) a 
percentage equal to 100 percent minus the applicable percentage 
of the target liability or target normal cost (whichever is 
applicable, determined without regard to the rules for 
financially-weak employers). The applicable percentage of at-
risk target liability or at-risk normal cost that is used is 
based on the number of years that the plan sponsor is 
financially weak. The applicable percentage is 20 percent for 
the first year that the plan sponsor is financially weak and 
increases by 20 percent per year until the fifth year when 100 
percent of the at-risk target liability or at-risk normal cost 
is used.
    An improvement year is disregarded in applying the 20-
percent per year phase-in. In the case of an improvement year, 
the applicable percentage is the applicable percentage in 
effect for the preceding plan year. The rule applies even if 
the credit rating by another rating organization is lowered for 
such period. If, as of the valuation date for any succeeding 
plan year, the credit rating has not been raised, the 
applicable percentage is increased by 20 percent for such 
succeeding plan year.
    If an employer is a member of a controlled group, the 
employer is not treated as financially weak if a significant 
member (as determined under regulations prescribed by the 
Secretary) of such group has an outstanding senior unsecured 
debt instrument that is rated as being investment grade by one 
of the nationally recognized statistical rating organizations. 
In the case of plans with fewer than 500 participants, the 
employer is not treated as financially weak. In the case of a 
plan which on any day during the preceding plan year had at 
least 500 participants, if an employer has no outstanding 
senior unsecured debt instrument which is rated by a nationally 
recognized statistical rating organization and no such 
organization has made an issuer credit rating for the employer, 
the employer is treated as financially weak only to the extent 
provided in regulations prescribed by the Secretary. It is 
expected that the Treasury regulations will determine whether 
the plan sponsor is financially weak based on financial 
measures, e.g., whether the long-term debt to equity ratio of 
the controlled group is 1.5 or more (with debt to include the 
unfunded pension liability and equity to be based on fair 
market value for a privately-held company or market 
capitalization for a company whose stock is publicly-traded).
    A plan is not subject to the special rules for plans 
maintained by financially-weak employers for any plan year in 
which the plan has no unfunded target liability, i.e., the 
value of plan assets is at least equal to the plan's target 
liability (determined without regard to the at-risk 
assumptions). For this purpose, the value of plan assets is not 
reduced by any prefunding balance.
    The rules for plans of financially-weak employers do not 
apply to a multiple employer plan if at least 85 percent of the 
employers participating in the plan are (1) certain rural 
cooperatives \78\ or (2) certain cooperative organizations 
which are owned more than 50 percent by producers of 
agricultural products or by certain cooperatives of 
agricultural producers.
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    \78\ This is as defined in Code section 401(k)(7)(B) without regard 
to (iv) thereof and includes (1) organizations engaged primarily in 
providing electric service on a mutual or cooperative basis, or engaged 
primarily in providing electric service to the public and which is 
exempt from tax or which is a State or local government, other than a 
municipality; (2) certain civic leagues and business leagues exempt 
from tax 80 percent of the members of which are described in (1); (3) 
certain cooperative telephone companies; and (4) any organization that 
is a national association of organizations described above.
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    A plan's at-risk target liability and at-risk normal cost 
are determined in the same manner as target liability and 
target normal cost, except that certain additional actuarial 
assumptions are required to be used. Under those assumptions, 
it must be assumed that all employees who are not otherwise 
assumed to retire as of the valuation date will retire at the 
earliest retirement age under the plan,\79\ but not before the 
end of the plan year for which the at-risk target liability and 
at-risk target normal cost are being determined. It is also 
required to be assumed that all employees will elect the 
retirement benefit available under the plan at the assumed age 
that would result in the highest present value of 
liabilities.\80\ In no event, however, can at-risk target 
liability or at-risk normal cost be less than target liability 
or target normal cost determined without regard to the at-risk 
rules.
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    \79\ It is intended that the determination of earliest retirement 
age will be addressed in Treasury guidance.
    \80\ It is intended that Treasury guidance will specify that the 
form that is actuarially expected to result in the highest target 
liability must be assumed. The determination is not required to be made 
on an individual basis as long as no material difference in the plan's 
liabilities results.
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Use of prefunding balance to satisfy minimum required contributions

    The provision allows a plan sponsor to use any amount of a 
plan's prefunding balance to satisfy all or a portion of the 
minimum required contribution for the plan year. The prefunding 
balance consists of a beginning balance, increased and 
decreased (as described below) and adjusted to reflect the rate 
of net gain or loss on plan assets.
    In the case of a single-employer plan that was in effect 
for a plan year beginning in 2006 and, as of the end of the 
2006 plan year, had a positive balance in the funding standard 
account maintained under the funding rules as in effect for 
2006, the beginning balance for the prefunding balance is such 
positive balance. In other cases, the beginning balance of the 
prefunding balance is zero.
    As of the first day of each plan year beginning after 2007, 
the prefunding balance of a plan is increased by the amount of 
the excess (if any) of (1) the aggregate total employer 
contributions for the preceding plan year, over (2) the minimum 
required contribution for the preceding plan year. The excess 
contribution must be properly adjusted for interest accruing 
forthe periods between the first day of the current plan year 
and the dates on which the excess contributions were made, determined 
by using the applicable effective interest rate for the preceding plan 
year and by treating contributions as being first used to satisfy the 
minimum required contribution. Additional contributions required to be 
made under the limitation on benefits provision do not increase the 
prefunding balance.
    As of the first day of each plan year beginning after 2007, 
the prefunding balance of a plan is decreased (but not below 
zero) by the amount credited against the minimum required 
contribution for the preceding plan year.
    In determining the prefunding balance as of the first day 
of the plan year, the plan sponsor must adjust the balance in 
accordance with regulations prescribed by the Secretary of the 
Treasury, to reflect the rate of net gain or loss on plan 
assets. The rate of net gain or loss is determined on the basis 
of the fair market value of the plan assets and the gain or 
loss experienced with respect to plan assets for the preceding 
plan year, properly taking into account, in accordance with 
regulations, all contributions, distributions, and other plan 
payments made during the period.
    The value of assets must be reduced by the prefunding 
balance in determining the plan's minimum required 
contribution.

Other rules and definitions

            Valuation date
    Under the provision, all determinations made with respect 
to minimum required contributions for a plan year (such as the 
value of plan assets and liabilities) must be made as of the 
plan's valuation date for the plan year. In general, the 
valuation date for a plan year must be the first day of the 
plan year. However, any day in the plan year may be designated 
as the plan's valuation date for the plan year and succeeding 
plan years if, on each day during the preceding plan year, the 
plan had 100 or fewer participants.\81\ For this purpose, all 
defined benefit pension plans (other than multiemployer plans) 
maintained by the same employer (or a predecessor employer), or 
by any member of such employer's controlled group, are treated 
as a single plan, but, in the case of multiple employer plans, 
only participants with respect to such employer or controlled 
group member are taken into account.
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    \81\ In the case of a plan's first plan year, the ability to use a 
valuation date other than the first day of the plan year is determined 
by taking into account the number of participants the plan is 
reasonably expected to have on each day during the first plan year. As 
under present law, a change in valuation date is a change in funding 
method requiring IRS approval. Thus, IRS approval is required to change 
the valuation date used by a smaller plan. However, the valuation date 
is automatically changed to the first day of the plan year if a plan is 
no longer eligible for the special rule.
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            Treatment of contributions after valuation date
    If an employer makes any contribution to the plan after the 
valuation date for the plan year in which the contribution is 
made and the contribution is for a preceding plan year, the 
contribution is taken into account as an asset of the plan as 
of the valuation date. In the case of any plan year beginning 
after 2007, only the present value of such contribution is to 
be taken into account. The present value is determined using 
the applicable effective interest rate for the preceding plan 
year to which the contribution is properly allocable. If 
contributions for the plan year are made during the plan year, 
but before the valuation date for the plan year, such 
contributions and interest on such contributions between the 
date of the contributions and the valuation date (determined by 
using the applicable effective interest rate for the plan year) 
are not included in the plan assets.
            Timing rules for contributions
    As under present law, the due date for the payment of a 
minimum required contribution for a plan year is 8\1/2\ months 
after the end of the plan year. Any payment made on a date 
other than the valuation date for the plan year must be 
adjusted by interest at the plan's applicable effective rate of 
interest for the plan year for the period between the valuation 
date and the payment date. Such interest is included in the 
minimum required contribution.
    The provision retains the present-law rules requiring 
quarterly contributions with some modifications. Except in the 
case of plans covering 100 or fewer participants during the 
preceding year and plans that had an unfunded target liability 
\82\ of $1 million or less for the preceding year, quarterly 
contributions must be made during a plan year if the plan had a 
funded target liability percentage of less than 100 percent for 
the preceding plan year.\83\ If an employer fails to pay the 
full amount of a required installment for the plan year, the 
amount of interest charged on the underpayments is determined 
using a rate of interest equal to the applicable effective rate 
of interest for the plan, plus five percentage points.
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    \82\ Plan assets are not reduced by the plan's prefunding balance 
for this purpose.
    \83\ The provision also retains the present-law rules under which 
the amount of any quarterly installment must be sufficient to cover any 
liquidity shortfall.
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            Excise tax on failure to make minimum required 
                    contributions
    The provision retains the present-law rules under which 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.\84\ The excise tax is 10 percent of the 
aggregate unpaid minimum required contributions for all plan 
years remaining unpaid as of the end of any plan year. In 
addition, a tax of 100 percent may be imposed if any unpaid 
minimum required contributions remain unpaid after a certain 
period.
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    \84\ The provision retains the present-law rules under which a lien 
in favor of the plan with respect to property of the employer (and 
members of the employer's controlled group) arises in certain 
circumstances in which the employer fails to make required 
contributions.
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            Regulations
    Under the provision, the Secretary of the Treasury is to 
prescribe such regulations as are necessary to carry out the 
provision, including regulations (1) for the proper treatment 
of increases in liabilities of any plan pursuant to plan 
amendments that are adopted, or which take effect, on a date 
during the plan year other than the valuation date; (2) for the 
application of any small plan exception under the provision in 
the case of mergers and acquisitions; and (3) for the 
application of the funding rules for multiple employer plans. 
In general, it is intended that for purposes of the minimum 
funding requirements, multiple employer plans will be treated 
as separate plans.
            Conforming changes
    The provision makes various technical and conforming 
changes to reflect the new funding requirements.

                             EFFECTIVE DATE

    The extension of the present-law interest rate is effective 
for plan years beginning after December 31, 2005, and before 
January 1, 2007. The modifications to the single-employer plan 
funding rules are generally effective for plan years beginning 
after December 31, 2006.

  B. Limitations on Benefit Improvements and Distributions by Single-
 Employer Plans That Are Underfunded or Maintained by Financially Weak 
                               Employers


(Secs. 303, 313, and 402 of the bill, new sec. 436 of the Code, and new 
        sec. 305 of ERISA)

                              PRESENT LAW

In general

    Under present law, various restrictions may apply to 
benefit increases and distributions from a defined benefit 
pension plan, depending on the funding status of the plan.

Limitation on certain benefit increases while funding waivers in effect

    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.\85\ A waiver may be granted if the 
employer responsible for the contribution could not make the 
required contribution without temporary substantial business 
hardship for the employer (and members of the employer's 
controlled group) and if requiring the contribution would be 
adverse to the interests of plan participants in the aggregate.
---------------------------------------------------------------------------
    \85\ Code sec. 412(d).
---------------------------------------------------------------------------
    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.\86\
---------------------------------------------------------------------------
    \86\ Code sec. 412(f).
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Security for certain plan amendments

    In the case of a single-employer defined benefit pension 
plan, if a plan amendment increasing current liability is 
adopted and the plan's funded current liability percentage is 
less than 60 percent (taking into account the effect of the 
amendment, but disregarding any unamortized unfunded old 
liability), the employer and members of the employer's 
controlled group must provide security in favor of the 
plan.\87\ The amount of security required is the excess of: (1) 
the lesser of (a) the amount by which the plan's assets are 
less than 60 percent of current liability, taking into account 
the benefit increase, or (b) the amount of the benefit increase 
and prior benefit increases after December 22, 1987, over (2) 
$10 million. The amendment is not effective until the security 
is provided.
---------------------------------------------------------------------------
    \87\ Code sec. 401(a)(29).
---------------------------------------------------------------------------
    The security must be in the form of a bond, cash, certain 
U.S. government obligations, or such other form as is 
satisfactory to the Secretary of the Treasury and the parties 
involved. The security is released after the funded liability 
of the plan reaches 60 percent.

Prohibition on benefit increases during bankruptcy

    Subject to certain exceptions, if an employer maintaining a 
single-employer defined benefit pension plan is involved in 
bankruptcy proceedings, 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.\88\
---------------------------------------------------------------------------
    \88\ Code sec. 401(a)(33).
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Restrictions on benefit payments due to liquidity shortfalls

    In the case of a single-employer 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. If quarterly contributions are required with respect to a 
plan, the amount of a quarterly installment must also be 
sufficient to cover any shortfall in the plan's liquid assets 
(a ``liquidity shortfall''). In general, a plan has a liquidity 
shortfall for a quarter if the plan's liquid assets (such as 
cash and marketable securities) are less than a certain amount 
(generally determined by reference to disbursements from the 
plan in the preceding 12 months).
    If a quarterly installment is less than the amount required 
to cover the plan's liquidity shortfall, limits apply to the 
benefits that can be paid from a plan during the period of 
underpayment. During that period, the plan may not make: (1) 
any payment in excess of the monthly amount paid under a single 
life annuity (plus any social security supplement provided 
under the plan) in the case of a participant or beneficiary 
whose annuity starting date occurs during the period; (2) any 
payment for the purchase of an irrevocable commitment from an 
insurer to pay benefits (e.g., an annuity contract); or (3) any 
other payment specified by the Secretary of the Treasury by 
regulations.\89\
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    \89\ Code sec. 401(a)(32).
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Prohibition on reductions in accrued benefits

    An amendment of a qualified retirement plan may not 
decrease the accrued benefit of a plan participant.\90\ This 
restriction is sometimes referred to as the ``anticutback'' 
rule and applies to benefits that have already accrued. In 
general, an amendment may reduce the amount of future benefit 
accruals, provided that, in the case of a significant reduction 
in the rate of future benefit accrual, certain notice 
requirements are met.
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    \90\ Code sec. 411(d)(6).
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    For purposes of the anticutback rule, an amendment is also 
treated as reducing an accrued benefit if, with respect to 
benefits accrued before the amendment is adopted, the amendment 
has the effect of either (1) eliminating or reducing an early 
retirement benefit or a retirement-type subsidy, or (2) except 
as provided by Treasury regulations, eliminating an optional 
form of benefit.

                           REASONS FOR CHANGE

    Under present law, sponsors of underfunded plans can 
continue to provide for additional accruals and, in some cases, 
may make benefit increases, pushing the cost of paying for such 
benefits off into the future. Companies should be more 
responsible with respect to pension benefits and should not 
continue to promise increased benefits when current promises 
are unfulfilled. Lump sums and other accelerated distributions 
from a severely underfunded plan allow certain participants to 
receive the full value of their benefits while depleting plan 
assets for those who remain in the plan. The Committee believes 
that appropriate restrictions should apply to underfunded plans 
to reduce the risk that underfunding will increase.

                        EXPLANATION OF PROVISION

In general

    Under the provision, in the case of an underfunded single-
employer defined benefit pension plan or a plan of an employer 
in bankruptcy, limitations may apply with respect to: (1) 
benefit increases; (2) certain forms of distribution; and (3) 
benefit accruals.

Limitations on benefit increases for plans less than 80 percent funded 
        and plans of employers in bankruptcy

            Restrictions on plans less than 80 percent funded
    If a plan's adjusted funded target liability percentage as 
of the valuation date for the preceding plan year is less than 
80 percent, then no applicable benefit increase may take effect 
in the current plan year until an additional funding 
requirement is satisfied. The additional funding requirement is 
satisfied if the plan sponsor, in addition to normal cost and 
the aggregate amortization payment and the waiver amortization 
payment for the year (if any), makes contributions sufficient 
so that the plan's adjusted funded target liability percentage 
(determined by assuming that the applicable benefit increase 
had taken effect as of the beginning of the year) is at least 
80 percent. If a contribution required under the provision is 
made after the first day of the plan year, the contribution is 
adjusted for interest as under the minimum funding rules.
    An applicable benefit increase generally is any increase in 
liabilities of the plan by plan amendment (or otherwise as 
specified by the Secretary) which would occur by reason of: (1) 
any increase in benefits; (2) any change in the accrual of 
benefits; or (3) any change in the rate at which benefits 
become nonforfeitable under the plan. It is intended that the 
Secretary will treat phased benefit increases as an applicable 
benefit increase pursuant to a plan amendment. For example, if 
a plan provides for a benefit of 1 percent for each year of 
service and the percentage increases to 1.5 percent after a 
certain date, and then increases to 2 percent at a later date, 
the increase in liabilities due to the increase to 1.5 percent 
is to be treated as an applicable benefit increase and the 
increase from 1.5 percent to 2 percent is treated as a separate 
applicable benefit increase. It is intended that increases in 
benefits due to increases in final average pay are not an 
applicable benefit increase. Rather, such increases are part of 
normal cost for that year. An applicable benefit increase does 
not include any increase in liabilities under a plan: (1) by 
reason of a plan amendment if such amendment is required as a 
condition of qualification of the plan; or (2) which is 
specified in Treasury regulations.
    Two additional exceptions apply in the case of a plan 
maintained pursuant to a collective bargaining agreement.\91\ 
In the case of such a plan, an applicable benefit increase does 
not include an increase in liabilities of the plan by reason of 
any increase in benefits under a formula which is not based on 
a participant's compensation, if the rate of increase is not in 
excess of the contemporaneous rate of increase in average wages 
of participants covered by the amendment. In addition, in the 
case of increases in liabilities by reason of a plan provision 
pursuant to a collective bargaining agreement ratified when the 
plan had an adjusted funded target liability percentage of at 
least 80 percent and which takes effect in any plan year 
beginning after the year in which the agreement was ratified, 
the restriction does not apply for years beginning before the 
earlier of: (1) the date on which such collective bargaining 
agreement terminates (determined without regard to any 
extensions); and (2) the date which is three years after the 
date the limitation would otherwise apply.
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    \91\ The special rules for plans maintained pursuant to a 
collective bargaining agreement apply with respect to individuals 
covered by such agreement.
---------------------------------------------------------------------------
    The limitation does not apply to a plan for the first five 
years the plan (or a predecessor plan) is in effect.
            Restrictions on plans of employers in bankruptcy
    In the case of any period during which the plan sponsor is 
in bankruptcy, the provision is applied by substituting ``100 
percent'' for ``80 percent.'' In addition, the exceptions for 
collectively bargained plans and the exception for the first 
five years the plan is in effect do not apply.

Limitation on certain forms of distribution for plans less than 60 
        percent funded and plans of employers in bankruptcy

            In general
    Under the provision, restrictions on distributions apply if 
(1) a plan is less than 60 percent funded or (2) the employer 
is in bankruptcy and the plan is less than 100 percent 
funded.\92\
---------------------------------------------------------------------------
    \92\  The present-law restrictions on distributions during a period 
of liquidity shortfall continue to apply under the provision.
---------------------------------------------------------------------------
            Restrictions on plans less than 60 percent funded
    If a plan's adjusted funded target liability percentage is 
less than 60 percent for the prior plan year, then no 
prohibited payments may be made in the current plan year until 
the plan actuary certifies that the plan has an adjusted funded 
target liability percentage of at least 60 percent or the 
employer makes sufficient contributions in addition to any 
other required contributions (or provides security as provided 
below) so that the plan's adjusted funded target liability 
percentage for the current year is at least 60 percent.
    If the plan's funded target liability percentage is not at 
least 60 percent by the end of the plan year (or there is no 
actuarial certification), the freeze on prohibited payments 
continues until the plan's funded target liability percentage 
has been at least 60 percent for two consecutive plan years. If 
contributions (or security) are required in order for the 
adjusted funded target liability percentage to be 60 percent by 
the end of the current plan year, and the employer fails to 
make the contributions (or provide security), such failure is 
treated as the failure to make a minimum required contribution 
for purposes of the quarterly contribution rules, the excise 
tax on failure to make required contributions, and the lien 
with respect to failures to make certain required 
contributions.
    If, before the close of the current plan year, the plan 
sponsor makes the contribution required under the provision or 
the plan's enrolled actuary certifies that, as of the valuation 
date for the plan year, the adjusted funded target liability 
percentage is at least 60 percent, then there is no freeze on 
prohibited payments and, under rules prescribed by the 
Secretary, the plan is to restore any payments not made during 
the plan year before such certification or contributions were 
made.
    The timing of the provision is illustrated by the following 
example. Suppose that the valuation date for a plan (and the 
beginning of the plan year) is January 1 and that the plan's 
adjusted funded target liability percentage is less than 60 
percent as of January 1, 2008. If the plan's adjusted funded 
target liability percentage is less than 60 percent as of 
January 1, 2009, then no prohibited payments can be made until 
the plan actuary certifies that such percentage is at least 60 
percent or the employer makes sufficient contributions to the 
plan (or provides security) so that such percentage is at least 
60 by the end of the plan year. If no such contributions or 
certification is made, then a prohibited period continues in 
effect until the plans' adjusted funded target liability 
percentage is at least 60 percent for two consecutive plan 
years beginning after January 1, 2009.
    As described above, the requirement to make contributions 
under the provision may be satisfied by providing security in 
lieu of contributions.\93\ The security must meet the present-
law requirements applicable to security required for certain 
plan amendments and must be provided no later than the due date 
of the contribution to which it relates (or such earlier date 
as the Secretary prescribes). The security is released at the 
end of the prohibited period for the failure to which the 
security relates. The security may be perfected and enforced at 
any time after the earlier of: (1) the date the employer fails 
to meet any minimum funding requirement (other than the 
requirement for which the security was provided), (2) the 
plan's adjusted funded target liability percentage is less than 
60 percent for seven years, or (3) the date on which the plan 
terminates.
---------------------------------------------------------------------------
    \93\ The security may not be used to offset minimum required 
contributions and is not taken into account in determining the value of 
plan assets for purposes of the funding rules.
---------------------------------------------------------------------------
    The prohibited payments for a plan that is less than 60-
percent funded are generally the same as those that are 
prohibited under present law during a period of a liquidity 
shortfall. Thus, during a prohibited period, a plan generally 
may not make: (1) any payment in excess of the monthly amount 
paid under a single life annuity (plus any social security 
supplement provided under the plan) in the case of a 
participant or beneficiary whose annuity starting date occurs 
during the period; (2) any payment for the purchase of an 
irrevocable commitment from an insurer to pay benefits (e.g., 
an annuity contract); or (3) any other payment specified by the 
Secretary of the Treasury by regulations. However, an otherwise 
prohibited payment may be made if the payment does not exceed 
the lesser of: (1) 50 percent of the amount of the payment that 
would be made in the absence of the prohibition; and (2) the 
present value (as determined under guidance prescribed by the 
PBGC using the interest and mortality assumptions under section 
417(e)) of the maximum PBGC guaranteed benefit. The PBGC is 
directed to publish such present value.
            Restrictions on plans in bankruptcy
    Under the provision, no prohibited payments (regardless of 
amount) may be made during any period the plan sponsor is in 
bankruptcy. This prohibition does not apply to any portion of a 
plan year which occurs on or after the date the plan's actuary 
certifies that, as of the valuation date for the plan year, the 
plan's funded target liability percentage is at least 100 
percent.

Additional limitation on benefit accruals for plans less than 60-
        percent funded

    If a plan is less than 60 percent funded, then accruals are 
frozen and certain benefits are eliminated. These limitations 
do not apply for the first five plan years a plan (or a 
predecessor plan) is in effect.
    If a plan's adjusted funded target liability percentage is 
less than 60 percent for the prior plan year, then benefit 
accruals are suspended in the current plan year until the plan 
actuary certifies that the plan has an adjusted funded target 
liability percentage of at least 60 percent or the employer 
makes sufficient contributions (or provides security as 
provided below) so that the plan's adjusted funded target 
liability percentage for the current year is at least 60 
percent.
    If the plan's funded target liability percentage is not at 
least 60 percent by the end of the plan year (or there is no 
actuarial certification), the freeze continues until the plan's 
funded target liability percentage has been at least 60 percent 
for two consecutive plan years. If contributions (or security) 
are required in order for the adjusted funded target liability 
percentage to be 60 percent by the end of the current plan 
year, and the employer fails to make the contributions (or 
provide security), such failure is treated as the failure to 
make a minimum required contribution for purposes of the 
quarterly contribution rules, the excise tax on failure to make 
required contributions, and the lien with respect to failures 
to make certain required contributions.
    A special rule applies in the case of a plan maintained 
pursuant to a collective bargaining agreement ratified before 
the freeze period would otherwise apply and in a plan year with 
respect to which the plan had an adjusted funded target 
liability percentage of at least 60 percent. In the case of 
benefits pursuant to and individuals covered by such an 
agreement, the freeze does not apply for years beginning before 
the earlier of: (1) the date on which such collective 
bargaining agreement terminates (determined without regard to 
any extensions); and (2) the date which is three years after 
the date the freeze would otherwise apply.
    During a freeze period, the accrued benefit, any death or 
disability benefit, and any social security supplement (as 
described in sec. 411(a)(9)) of each participant are frozen at 
the amount of such benefit or supplement immediately before the 
freeze period and all other benefits provided under the plan 
are eliminated to the extent that such freezing or elimination 
would be permitted under the anti-cutback rules (or other 
applicable Code or ERISA requirements) if they had been 
implemented by a plan amendment.
    The same rules relating to providing security in lieu of 
contributions that apply with respect to restrictions on 
distributions apply with respect to a freeze period.

Determining funding levels and other rules

    For purposes of the restrictions on benefits, accruals, and 
payments, the funded target liability percentage for any plan 
year is a percentage equal to a fraction, the numerator of 
which is the value of plan assets (determined as under the 
funding rules) and the denominator of which is the target 
liability for the plan year. In determining adjusted funded 
target liability percentage, certain distributions for the 
immediately preceding two plan years are added back in to the 
numerator and denominator of the fraction. The distributions 
added back in are the sum of purchases of annuities, payments 
of single sums, and such other disbursements as the Secretary 
provides in regulations. In determining the funded target 
liability percentage, plan assets are not reduced by any 
prefunding balance. Contributions required under the provisions 
relating to benefit limitations, prohibited payments and freeze 
periods do not give rise to a prefunding balance (and such 
contribution requirements cannot be satisfied with a prefunding 
balance).

Notice to participants

    The provision amends the Code and ERISA to require that the 
plan administrator provide written notice to participants and 
beneficiaries of a limitation applicable to a plan within a 
reasonable period of time before the limitation takes effect. 
Similarly, the plan administrator is to provide written notice 
to participants and beneficiaries of the date a limitation will 
cease to apply to a plan within a reasonable period of time 
before such cessation. The Secretary of the Treasury may 
provide that a notice be provided at a later time if it is not 
practicable to provide the notice in advance.
    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. 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. The 
$500,000 limit is applied separately with respect to each type 
of notice required.
    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 uses 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.
    In addition to the excise tax, if the required notice is 
not provided, the Secretary of Labor may impose a civil penalty 
of up to $100 a day from the time of the failure. Each 
violation with respect to any single participant or beneficiary 
is treated as a separate violation.

Coordination with other requirements

    Under the provision, a plan does not fail to meet the 
qualification requirements solely by reason of complying with 
the requirements of the provision.

Restoration of benefits

    If limitations on distributions or accruals apply with 
respect to plan for a plan year, unless the plan provides 
otherwise, prohibited distributions or accruals resume as of 
the day following the prohibited or freeze period. This rule is 
not to be construed as affecting the plan's treatment of 
benefits prohibited, frozen, or eliminated during the 
prohibited or freeze period.

                             EFFECTIVE DATE

    The provision generally applies with respect to plan years 
beginning after December 31, 2006.
    In the case of a plan maintained pursuant to one or more 
collective bargaining agreements between employee 
representatives and one or more employers ratified before the 
date of enactment of the provision, the provision does not 
apply to plan years beginning before the earlier of: (1) the 
later of (a) the date on which the last collective bargaining 
agreement relating to the plan terminates (determined without 
regard to any extension thereof agreed to after the date of 
enactment), or (b) the first day of the first plan year to 
which the provision would otherwise apply; or (2) January 1, 
2009. For this purpose, any plan amendment made pursuant to a 
collective bargaining agreement relating to the plan that 
amends the plan solely to conform to any requirement under the 
provision is not to be treated as a termination of the 
collective bargaining agreement.
    Only plan years after the effective date are taken into 
account in determining whether a limitation applies to a plan. 
Thus, in the case of a plan that is not maintained pursuant to 
a collective bargaining agreement, the first year that a 
limitation could apply to a plan based on its funding status is 
a plan year beginning in 2008.

       C. Increase in Deduction Limits for Single-Employer Plans


(Secs. 304, 322, and 323 of the bill and secs. 404 and 4972 of the 
        Code)

                              PRESENT LAW

    Employer contributions to qualified retirement plans are 
deductible subject to certain limits.\94\ In general, the 
deduction limit depends on the kind of plan.
---------------------------------------------------------------------------
    \94\ Code 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 10 years, but limited to the full funding 
limitation for the year.\95\ The maximum amount otherwise 
deductible generally is not less than the plan's unfunded 
current liability.\96\ In the case of a single-employer plan 
covered by the PBGC insurance program 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 plan 
termination under the PBGC insurance program.
---------------------------------------------------------------------------
    \95\ The full funding limitation is the excess, if any, of (1) the 
accrued liability of 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. However, the full funding limit is not less than 
the excess, if any, of 90 percent of the plan's current liability 
(including normal cost) over the actuarial value of plan assets.
    \96\ In the case of a plan with 100 or fewer participants, unfunded 
current liability for this purpose does not include the liability 
attributable to benefit increases for highly compensated employees 
resulting from a plan amendment that is made or becomes effective, 
whichever is later, within the last two years.
---------------------------------------------------------------------------
    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 pension 
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. 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, but not less than the amount of the plan's 
unfunded current liability.
    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. 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 thecompensation of the employees covered by the defined 
contribution plan, or (2) the amount of matching contributions.

                           REASONS FOR CHANGE

    The Committee is concerned that the present-law deduction 
limits play a role in the underfunding of defined benefit 
pension plans by restricting employers' ability to make 
contributions in addition to minimum required contributions. 
The Committee believes that employers should have greater 
flexibility to make additional contributions, particularly in 
good economic times when extra resources are available to fund 
the plan. Such additional contributions enable employers to 
improve the funded status of their plans and reduce the chance 
that the employer will be required to make larger contributions 
during an economic downturn. Such additional contributions also 
further benefit security for plan participants (and reduce risk 
to the PBGC) by increasing the assets available to pay promised 
plan benefits.
    The Committee understands that the overall limit on 
deductible contributions has the effect of reducing, or even 
eliminating, employers' ability to make deductible 
contributions to their defined contribution plans in years in 
which substantial contributions must be made to their defined 
benefit pension plans. As a result, employees may receive 
little or no contributions to their defined contribution plan 
accounts in such years. The Committee believes that the overall 
deduction limit should allow for defined contribution plan 
contributions up to certain levels without regard to 
contributions made to defined benefit pension plans. The 
Committee is also concerned that the overall deduction limit 
may discourage employers from making defined benefit pension 
plan contributions in addition to minimum required 
contributions, which increases the risk that plan assets will 
not be sufficient to provide benefits in the case of plan 
termination. The Committee believes that the overall deduction 
limit should be applied without regard to contributions to 
defined benefit pension plans covered by the PBGC insurance 
program.

                        EXPLANATION OF PROVISION

Deduction limits for contributions to defined benefit pension plans

    Under the provision, for 2006, the maximum amount 
deductible for contributions to a single-employer defined 
benefit pension plan is not less than the excess (if any) of 
(1) 180 percent of the plan's current liability, over (2) the 
value of plan assets.\97\
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    \97\ Under the provision relating to funding requirements for 
single-employer plans, the interest rate used to determine current 
liability for plan years beginning in 2006 must be within the 
permissible range of the weighted average of the rates of interest on 
amounts invested conservatively in long-term investment-grade corporate 
bonds during the four-year period ending on the last day before the 
plan year begins. Current liability as determined for funding purposes 
in 2006 applies also in determining the deduction limits for 2006.
---------------------------------------------------------------------------
    For years after 2006, the maximum deductible amount for a 
single-employer defined benefit pension plan is not less than 
the greater of: (1) the excess (if any) of the sum of the 
plan's target liability, the plan's target normal cost, and a 
cushion amount for a plan year, over the value of plan assets 
(as determined under the minimum funding rules); and (2) the 
minimum required contribution for the plan year. However, in 
the case of a plan to which at-risk target liability and at-
risk target normal cost do not apply, the amount in (1) is not 
less than the excess (if any) of the sum of the plan's at-risk 
target liability and at-risk target normal cost (determined as 
if they did apply), over the value of plan assets.
    The cushion amount for a plan year is the sum of (1) 80 
percent of the plan's target liability for the plan year; and 
(2) the amount by which the plan's target liability would 
increase if determined by taking into account increases in 
participants' compensation for future years or, if the plan 
does not base benefits attributable to past service on 
compensation, increases in benefits that are expected to occur 
in succeeding plans year (determined on the basis of average 
annual benefit increases over the previous six years).\98\ For 
this purpose, the dollar limits on benefits and on compensation 
apply, but, in the case of a plan that is covered by the PBGC 
insurance program, increases in the limits that are expected to 
occur in succeeding plan years may be taken into account.
---------------------------------------------------------------------------
    \98\ In determining the cushion amount for a plan with 100 or fewer 
participants, target liability does not include the liability 
attributable to benefit increases for highly compensated employees 
resulting from a plan amendment that is made or becomes effective, 
whichever is later, within the last two years.
---------------------------------------------------------------------------
    The provision retains the present-law rule under which, in 
the case of a single-employer plan covered by the PBGC 
insurance program 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 plan termination under the PBGC 
insurance program.

Overall deduction limit for combinations of plans

    For 2006, in the case of single-employer plans, the overall 
limit on deductions for contributions to one or more defined 
benefit pension plans and one or more defined contribution 
plans applies to contributions to 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. 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.
    Under the provision, for years after 2006, single-employer 
defined benefit plans that are covered by the PBGC insurance 
program are not taken into account in applying the overall 
limit on deductions for contributions to combinations of 
defined benefit and defined contribution plans. Thus, the 
deduction for contributions to a defined benefit pension plan 
or a defined contribution plan is not affected by the overall 
deduction limit merely because employees are covered by both 
plans if the defined benefit plan is covered by the PBGC 
insurance program (i.e., the separate deduction limits for 
contributions to defined contribution plans and defined benefit 
pension plans apply).
    In addition, for years after 2006, in applying the overall 
deduction limit to contributions to one or more single-employer 
defined benefit pension plans that are not covered by the PBGC 
insurance program and one or more defined contribution plans, 
the overall limit applies to contributions to 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. 
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 years beginning after 
December 31, 2005.

   D. Replacement of 30-Year Treasury Rate for Calculating Lump-Sum 
                             Distributions


(Sec. 331 of the bill, sec. 417(e) of the Code, and sec. 205(g) of 
        ERISA)

                              PRESENT LAW

    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 present value of certain optional forms of benefit, 
such as a lump sum.\99\ 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.
---------------------------------------------------------------------------
    \99\ Code sec. 417(e)(3).
---------------------------------------------------------------------------
    The applicable interest rate is the annual interest rate 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.
    Under the anticutback rule, an amendment of a qualified 
retirement plan generally may not eliminate an optional form of 
benefit.\100\ For this purpose, a change in the interest rate 
used to determine an optional form of benefit is generally 
treated as the elimination of one optional form of benefit and 
the addition of a new optional form of benefit.
---------------------------------------------------------------------------
    \100\ Code sec. 411(d)(6).
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    Under present law, the interest rate on 30-year Treasury 
securities is used to determine present value in the case of 
certain forms of benefit, such as lump sums. The Committee 
considers interest rates on high-quality corporate bonds to be 
more appropriate for this purpose. In addition, the Committee 
believes that a more accurate present value will result from 
matching interest rates to the timing of the payments being 
valued, rather 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 
this purpose.
    The Committee recognizes that an immediate change in the 
interest rate used to calculate lump-sum benefits will in some 
cases reduce the amount of these benefits, which may cause 
participants to terminate employment in order to avoid any 
possible reduction. The Committee believes that a deferred 
effective date followed by a phase-in period of the yield-curve 
rates will mitigate any potential effect on participants and 
will provide participants with time to evaluate the impact of 
the change in interest rates on their benefits.

                        EXPLANATION OF PROVISION

    The provision replaces the applicable interest rate used in 
determining the minimum present value of certain optional forms 
of benefit, such as lump sums, with the phase-in yield curve 
method (for plan years beginning in 2007-2010) and the yield 
curve method (for plan years beginning after 2010), based on 
the methods used to determine target liability (i.e., the value 
of plan liabilities) under the provision relating to the 
funding requirements for single-employer defined benefit 
pension plans.
    Under the yield curve method, present value 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 with varying maturities (as used 
in determining target liability); 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 present-law rules relating to the use 
of a stability period and averaging continue to apply.
    Under the phase-in yield curve method, present value is the 
sum of two amounts: (1) the applicable percentage of present 
value determined under the yield curve method; and (2) present 
value determined using the annual rate of interest on 30-year 
Treasury securities, multiplied by a percentage equal to 100 
percent minus the applicable percentage for the plan year.\101\ 
For this purpose, the applicable percentage for a plan year is 
determined in accordance with the following table.
---------------------------------------------------------------------------
    \101\ In applying the phase-in yield curve method for purposes of 
the provision relating to the funding requirements for single-employer 
defined benefit pension plans, an interest rate based on a weighted 
four-year average of conservative long term corporate bond rates 
applies, rather than the annual rate of interest on 30-year Treasury 
securities.
---------------------------------------------------------------------------

  TABLE 2.--APPLICABLE PERCENTAGE FOR PLAN YEARS BEGINNING IN 2007-2010

        Plan years beginning in                    Applicable percentage
2007..............................................................    20
2008..............................................................    40
2009..............................................................    60
2010..............................................................    80

    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.
    Under the provision relating to plan amendments, a plan 
amendment made pursuant to the provision 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, 2007). 
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, rather than the interest rate on 30-year Treasury 
securities, in determining benefits subject to the minimum 
present value rules.
    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 
in determining the amount of a benefit (other than the accrued 
benefit) that is not subject to the minimum present 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 
relating to plan amendments applies to a plan amendment made 
pursuant to the special rule.

                             EFFECTIVE DATE

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

 E. Interest Rate Assumption for Applying Benefit Limitations to Lump-
                           Sum Distributions


(Sec. 332 of the bill and sec. 415 of the Code)

                              PRESENT LAW

    Annual benefits payable under a defined benefit pension 
plan generally may not exceed the lesser of (1) 100 percent of 
average compensation, or (2) $170,000 (for 2005).\102\ The 
dollar limit generally applies to a benefit payable in the form 
of a straight life annuity. If the benefit is not in the form 
of a straight life annuity (e.g., a lump sum), the benefit 
generally is adjusted to an equivalent straight life annuity. 
For purposes of adjusting a benefit in a form that is subject 
to the minimum present value rules, such as a lump-sum benefit, 
the interest rate used generally must be not less than the 
greater of: (1) the rate applicable in determining minimum lump 
sums, i.e., the interest rate on 30-year Treasury securities; 
or (2) the interest rate specified in the plan. For 2004 and 
2005, 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.
---------------------------------------------------------------------------
    \102\ Code sec. 415(b).
---------------------------------------------------------------------------
    Under the anticutback rule, an amendment of a qualified 
retirement plan generally may not eliminate an optional form of 
benefit.\103\ For this purpose, a change in the interest rate 
used to determine an optional form of benefit is generally 
treated as the elimination of one optional form of benefit and 
the addition of a new optional form of benefit.
---------------------------------------------------------------------------
    \103\ Code sec. 411(d)(6).
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    The Committee understands that, under some plans, in 
determining lump-sum benefits, a fixed interest rate is used 
rather than the variable rate that is required under the 
minimum present value rules (provided that the resulting lump 
sum cannot be less than the minimum present value). The use of 
a fixed rate rather than a variable rate makes the value of 
benefits more predictable for employees and also makes 
employers' required contributions more predictable. The 
Committee further understands that the present-law requirement 
to use a variable rate in applying the benefit limits to lump 
sums interferes with this predictability. The Committee 
therefore believes that it should be permissible to use a fixed 
rate in applying the benefit limits to lump sums.

                        EXPLANATION OF PROVISION

    Under the provision, for purposes of adjusting a benefit in 
a form that is subject to the minimum present value rules, such 
as a lump-sum benefit, the interest rate used generally must be 
not less than the greater of: (1) 5.5 percent; or (2) the 
interest rate specified in the plan.\104\ Thus, the rule that 
applies for 2004 and 2005 is made permanent.
---------------------------------------------------------------------------
    \104\ In the case of a plan under which lump-sum benefits are 
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 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 applicable under the minimum value rules.
---------------------------------------------------------------------------
    Under the provision relating to plan amendments, a plan 
amendment made pursuant to the provision 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, 2007). 
Thus, subject to those requirements, a plan amendment that 
changes made pursuant to the provision to change the interest 
rate used to apply the benefit limits to benefits that are 
subject to the minimum present value rules will not violate the 
anticutback rule.

                             EFFECTIVE DATE

    The provision is effective for years beginning after 2005.

 F. Restrictions on Funding of Nonqualified Deferred Compensation Plan 
      When Employer's Defined Benefit Pension Plan Is Underfunded


(Sec. 333 of the bill, secs. 409A and 4980I of the Code, new sec. 306 
        of ERISA, and sec. 502(g) of ERISA)

                              PRESENT LAW

In general

    Present law does not include any prohibition on the funding 
of nonqualified deferred compensation in connection with the 
funded status of a defined benefit pension plan of the same 
plan sponsor.

Income tax treatment of nonqualified deferred compensation

    Amounts deferred under a nonqualified deferred compensation 
plan for all taxable years are currently includible in gross 
income to the extent not subject to a substantial risk of 
forfeiture and not previously included in gross income, unless 
certain requirements are satisfied.\105\ For example, 
distributions from a nonqualified deferred compensation plan 
may be allowed only upon certain times and events. Rules also 
apply for the timing of elections. If the requirements are not 
satisfied, in addition to current income inclusion, interest at 
the underpayment rate plus one percentage point 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. The 
amount required to be included in income is also subject to a 
20-percent additional tax.
---------------------------------------------------------------------------
    \105\ Code section 409A.
---------------------------------------------------------------------------
    In the case of assets set aside in a trust (or other 
arrangement) for purposes of paying nonqualified deferred 
compensation, such assets are treated as property transferred 
in connection with the performance of services under Code 
section 83 at the time set aside if such assets (or trust or 
other arrangement) are located outside of the United States or 
at the time transferred if such assets (or trust or other 
arrangement) are subsequently transferred outside of the United 
States. A transfer of property in connection with the 
performance of services under Code section 83 also occurs with 
respect to compensation deferred under a nonqualified deferred 
compensation plan if the plan provides that upon a change in 
the employer's financial health, assets will be restricted to 
the payment of nonqualified deferred compensation.

                           REASONS FOR CHANGE

    The Committee believes that it is inappropriate for 
companies with underfunded defined benefit pension plans to 
fund nonqualified deferred compensation plans covering 
executives while the pension plan is not adequately funded. 
Executives of companies with underfunded defined benefit 
pension plans should not benefit from having their nonqualified 
deferred compensation arrangements funded, and thus, more 
secure, while the pension plan faces underfunding.
    While rank-and-file employees have little control over a 
company's decision to fund its pension plans, executives often 
have control in determining whether nonqualified deferred 
compensation plans will be funded. In addition, executives who 
are covered by a nonqualified deferred compensation plan may 
also be instrumental in deciding how much to contribute to the 
defined benefit pension plan, thus determining the funded 
status of the pension plan. The Committee believes that it is 
also appropriate to restrict funding of nonqualified deferred 
compensation during the period immediately preceding 
termination of the company's pension plan and when the plan 
sponsor is in bankruptcy.
    The Committee believes that if a nonqualified deferred 
compensation plan covering executives is funded during certain 
periods of pension plan underfunding, when the plan sponsor is 
in bankruptcy, or immediately preceding termination of a 
pension plan, executives should be required to recognize 
current income inclusion upon the funding of their nonqualified 
deferred compensation plans and penalties should apply.

                        EXPLANATION OF PROVISION

ERISA prohibition on funding nonqualified deferred compensation

    The provision provides that during any restricted period, a 
plan sponsor of a single-employer defined benefit pension plan 
(and any member of its controlled group) may not directly or 
indirectly transfer assets, and may not directly or indirectly 
otherwise reserve assets, in a trust (or other arrangement 
determined by the Secretary of Treasury) for purposes of paying 
deferred compensation of an applicable covered employee under a 
nonqualified deferred compensation plan of such plan sponsor or 
member.
    With respect to any single-employer defined benefit pension 
plan, the restricted period is (1) if the plan's adjusted 
target liability percentage as of the valuation date for the 
preceding plan year and current plan year is less than 80 
percent, the period beginning on the first day of the current 
plan year and ending on the first day for which the plan's 
adjusted funded target liability percentage is at least 80 
percent; (2) any period that the plan sponsor is in bankruptcy; 
and (3) in the case of a plan that terminates, the 12-month 
period beginning on the date which is six months before the 
termination date of the plan if, as of the termination date, 
plan assets are not sufficient for benefit liabilities.
    In general, covered employees include the chief executive 
officer (or individual acting in such capacity) and the four 
highest compensated officers for the taxable year (other than 
the chief executive officer). An applicable covered employee 
includes any (1) covered employee of a plan sponsor; (2) 
covered employee of a member of a controlled group which 
includes the plan sponsor; and (3) former employee who was a 
covered employee at the time of termination of employment with 
the plan sponsor or a member of a controlled group which 
includes the plan sponsor.
    The provision requires that the plan administrator of a 
single-employer defined benefit pension plan notify the plan 
sponsor within a reasonable time after the occurrence of an 
eventwhich results in a restricted period with respect to the 
plan. The notice must include the duration of the restricted period and 
the restrictions that apply during such period. Within 30 days of 
receipt of the notice, the plan sponsor must notify the plan 
administrator (of the single-employer defined benefit pension plan) of 
nonqualified deferred compensation plans maintained by the plan sponsor 
(or members of the controlled group) and the amount of any assets 
transferred or otherwise reserved by the plan sponsor (or member) in 
violation of the prohibition on transfers during any portion of the 
restricted period occurring on or before the date the plan sponsor 
provided such notice. If, subsequent to this notice, and during any 
portion of the remaining restricted period, the plan sponsor (or member 
of controlled group) (1) transfers or reserves assets in violation of 
the prohibition, or (2) establishes a new nonqualified deferred 
compensation plan, the plan sponsor must notify the plan administrator 
(of the single-employer defined benefit pension plan) within three days 
of such action. An excise tax of $1,000 per day applies in the case of 
a failure to provide a notice as required by the provision.
    The provision provides that any fiduciary of the plan may 
have access to the financial records of a plan sponsor (or 
member of the controlled group) to determine if assets were 
transferred or otherwise reserved in violation of the 
provision.
    The provision also creates a civil right of action by a 
fiduciary of a single-employer defined benefit pension plan 
against (1) a plan sponsor, member of a controlled group which 
includes the plan sponsor, an applicable covered employee, or a 
person holding assets which are part of a nonqualified deferred 
compensation plan, to recover on behalf of the plan (A) assets 
which were set aside or transferred in violation of the 
provision (and earnings thereon), or (B) amounts equivalent to 
such assets and earnings; or (2) a plan sponsor, or member of a 
controlled group which includes the plan sponsor, to compel the 
production of records the fiduciary is entitled to under the 
provision. The provision also provides for the recovery of 
attorney's fees and costs of the action.

Tax consequences of funding nonqualified deferred compensation

    Under the provision, if during any restricted period, a 
plan sponsor of a single-employer defined benefit pension plan 
(or any member of the controlled group) directly or indirectly 
transfers assets, or directly or indirectly otherwise reserves 
assets, in a trust (or other arrangement as determined by the 
Secretary of the Treasury) for purposes of paying deferred 
compensation of an applicable covered employee under a 
nonqualified deferred compensation plan, such assets are 
treated as property transferred in connection with the 
performance of services (whether or not such assets are 
available to satisfy the claims of general creditors) under 
Code section 83. Thus, the provision requires current income 
inclusion to the extent of assets transferred or otherwise 
reserved.
    Any subsequent increases in the value of, or any earnings 
with respect to, transferred or restricted assets are treated 
as additional transfers of property. Interest at the 
underpayment rate plus one percentage point 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 not subject to a 
substantial risk of forfeiture. The amount required to be 
included in income is also subject to an additional 20-percent 
tax.

Definition of nonqualified deferred compensation plan

    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.\106\ A qualified governmental excess benefit 
arrangement (sec. 415(m)) is a qualified employer plan. An 
eligible deferred compensation plan (sec. 457(b)) is also a 
qualified employer plan under the provision. The term plan 
includes any agreement or arrangement, including an agreement 
or arrangement that includes one person.
---------------------------------------------------------------------------
    \106\ A qualified employer plan also includes a section 501(c)(18) 
trust.
---------------------------------------------------------------------------

                             EFFECTIVE DATE

    The provision is effective for transfers and other 
reservations of assets after December 31, 2006.

 G. Special Funding Rules for Plans Maintained by Commercial Airlines 
           That Are Amended To Cease Future Benefit Accruals


(Sec. 334 of the bill)

                              PRESENT LAW

In general

    Single-employer defined benefit pension plans are subject 
to minimum funding requirements under the Employee Retirement 
Income Security Act of 1974 (``ERISA'') and the Internal 
Revenue Code (the ``Code'').\107\ The amount of contributions 
required for a plan year under the minimum funding rules is 
generally the amount needed to fund benefits earned during that 
year plus that year's portion of other liabilities that are 
amortized over a period of years, such as benefits resulting 
from a grant of past service credit. The amount of required 
annual contributions is determined under one of a number of 
acceptable actuarial cost methods. Additional contributions are 
required under the deficit reduction contribution rules in the 
case of certain underfunded plans. No contribution is required 
under the minimum funding rules in excess of the full funding 
limit (described below).
---------------------------------------------------------------------------
    \107\ Code sec. 412. The minimum funding rules also apply to 
multiemployer plans, but the rules for multiemployer plans differ in 
various respects from the rules applicable to single-employer plans.
---------------------------------------------------------------------------

General minimum funding rules

            Funding standard account
    As an administrative aid in the application of the funding 
requirements, a defined benefit pension plan is required to 
maintain a special account called a ``funding standard 
account'' to which specified charges and credits are made for 
each plan year, including a charge for normal cost and credits 
for contributions to the plan. Other credits or charges or 
credits may apply as a result of decreases or increases in past 
service liability as a result of plan amendments, experience 
gains or losses, gains or losses resulting from a change in 
actuarial assumptions, or a waiver of minimum required 
contributions.
    If, as of the close of a plan year, the funding standard 
account reflects credits at least equal to charges, the plan is 
generally treated as meeting the minimum funding standard for 
the year. If, as of the close of the plan year, charges to the 
funding standard account exceed credits to the account, then 
the excess is referred to as an ``accumulated funding 
deficiency.'' Thus, as a general rule, the minimum contribution 
for a plan year is determined as the amount by which the 
charges to the funding standard account would exceed credits to 
the account if no contribution were made to the plan. For 
example, if the balance of charges to the funding standard 
account of a plan for a year would be $200,000 without any 
contributions, then a minimum contribution equal to that amount 
would be required to meet the minimum funding standard for the 
year to prevent an accumulated funding deficiency.
            Credit balances
    If credits to the funding standard account exceed charges, 
a ``credit balance'' results. A credit balance results, for 
example, if contributions in excess of minimum required 
contributions are made. Similarly, a credit balance may result 
from large net experience gains. The amount of the credit 
balance, increased with interest at the rate used under the 
plan to determine costs, can be used to reduce future required 
contributions.
            Funding methods and general concepts
    A defined benefit pension plan is required to use an 
acceptable actuarial cost method to determine the elements 
included in its funding standard account for a year. Generally, 
an actuarial cost method breaks up the cost of benefits under 
the plan into annual charges consisting of two elements for 
each plan year. These elements are referred to as: (1) normal 
cost; and (2) supplemental cost.
    The plan's normal cost for a plan year generally represents 
the cost of future benefits allocated to the year by the 
funding method used by the plan for current employees and, 
under some funding methods, for separated employees. 
Specifically, it is the amount actuarially determined that 
would be required as a contribution by the employer for the 
plan year in order to maintain the plan if the plan had been in 
effect from the beginning of service of the included employees 
and if the costs for prior years had been paid, and all 
assumptions as to interest, mortality, time of payment, etc., 
had been fulfilled. The normal cost will be funded by future 
contributions to the plan: (1) in level dollar amounts; (2) as 
a uniform percentage of payroll; (3) as a uniform amount per 
unit of service (e.g., $1 per hour); or (4) on the basis of the 
actuarial present values of benefits considered accruing in 
particular plan years.
    The supplemental cost for a plan year is the cost of future 
benefits that would not be met by future normal costs, future 
employee contributions, or plan assets. The most common 
supplemental cost is that attributable to past service 
liability, which represents the cost of future benefits under 
the plan: (1) on the date the plan is first effective; or (2) 
on the date a plan amendment increasing plan benefits is first 
effective. Other supplemental costs may be attributable to net 
experience losses, changes in actuarial assumptions, and 
amounts necessary to make up funding deficiencies for which a 
waiver was obtained. Supplemental costs must be amortized 
(i.e., recognized for funding purposes) over a specified number 
of years, depending on the source. For example, the cost 
attributable to a past service liability is generally amortized 
over 30 years.
    Normal costs and supplemental costs under a plan are 
computed on the basis of an actuarial valuation of the assets 
and liabilities of a plan. An actuarial valuation is generally 
required annually and is made as of a date within the plan year 
or within one month before the beginning of the plan year. 
However, a valuation date within the preceding plan year may be 
used if, as of that date, the value of the plan's assets is at 
least 100 percent of the plan's current liability (i.e., the 
present value of benefit liabilities under the plan, as 
described below).
    For funding purposes, the actuarial value of plan assets 
may be used, rather than fair market value. The actuarial value 
of plan assets is the value determined under a reasonable 
actuarial valuation method that takes into account fair market 
value and is permitted under Treasury regulations. Any 
actuarial valuation method used must result in a value of plan 
assets that is not less than 80 percent of the fair market 
value of the assets and not more than 120 percent of the fair 
market value. In addition, if the valuation method uses average 
value of the plan assets, values may be used for a stated 
period not to exceed the five most recent plan years, including 
the current year.
    In applying the funding rules, all costs, liabilities, 
interest rates, and other factors are required to be determined 
on the basis of actuarial assumptions and methods, each of 
which is reasonable (taking into account the experience of the 
plan and reasonable expectations), or which, in the aggregate, 
result in a total plan contribution equivalent to a 
contribution that would be obtained if each assumption and 
method were reasonable. In addition, the assumptions are 
required to offer the actuary's best estimate of anticipated 
experience under the plan.\108\
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    \108\ Under present law, certain changes in actuarial assumptions 
that decrease the liabilities of an underfunded single-employer plan 
must be approved by the Secretary of the Treasury.
---------------------------------------------------------------------------

Additional contributions for underfunded plans

    Under special funding rules (referred to as the ``deficit 
reduction contribution'' rules),\109\ an additional charge to a 
plan's funding standard account is generally required for a 
plan year if the plan's funded current liability percentage for 
the plan year is less than 90 percent.\110\ A plan's ``funded 
current liability percentage'' is generally the actuarial value 
of plan assets 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, determined on 
a present-value basis.\111\
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    \109\ 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.
    \110\ 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.
    \111\ Specific interest rate and mortality assumptions must be used 
in determining a plan's current liability for purposes of the special 
funding rule.
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    The amount of the additional charge 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 event 
benefits. The amount of the additional charge cannot exceed the 
amount needed to increase the plan's funded current liability 
percentage to 100 percent (taking into account any expected 
increase in current liability due to benefits accruing during 
the plan year).
    The deficit reduction contribution is generally 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. 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 decreases by .40 of one percentage point for each 
percentage point by which the plan's funded current liability 
percentage exceeds 60 percent. For example, if a plan's funded 
current liability percentage is 85 percent (i.e., it exceeds 60 
percent by 25 percentage points), the applicable percentage is 
20 percent (30 percent minus 10 percentage points (25 
multiplied by .4)).
    The Pension Funding Equity Act of 2004 allows certain 
employers, including a commercial passenger airline, to elect a 
reduced contribution under the deficit reduction contribution 
rules with respect to certain plans for plan years beginning 
after December 27, 2003, and before December 28, 2005. If an 
employer so elects, the additional contribution is the greater 
of: (1) 20 percent of the amount of the additional contribution 
that would otherwise be required; or (2) the additional 
contribution that would be required if the deficit reduction 
contribution for the plan year were determined as the expected 
increase in current liability due to benefits accruing during 
the plan year. An election of a reduced contribution may be 
made only with respect to a plan that was not subject to the 
deficit reduction contribution rules for the plan year 
beginning in 2000. In addition, certain notice and benefit 
restriction requirements must be met.

Other funding-related rules

            Full funding limitation
    No contributions are required under the minimum funding 
rules in excess of the full funding limitation. 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. 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.
            Funding waivers
    Within limits, the Secretary of the Treasury is permitted 
to waive all or a portion of the contributions required under 
the minimum funding standard for a plan year (a ``waived 
funding deficiency'').\112\ 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.
---------------------------------------------------------------------------
    \112\ Code sec. 412(d). Under similar rules, the amortization 
period applicable to unfunded past service liability may also be 
extended.
---------------------------------------------------------------------------
    The IRS is authorized to require security to be granted as 
a condition of granting a waiver of the minimum funding 
standard if the sum of the plan's accumulated funding 
deficiency and the balance of any outstanding waived funding 
deficiencies exceeds $1 million.

Notice of certain plan amendments

    A notice requirement must be met if an amendment to a 
defined benefit pension plan provides for a significant 
reduction in the rate of future benefit accrual. In that case, 
the plan administrator must furnish a written notice concerning 
the amendment. Notice may also be required if a plan amendment 
eliminates or reduces an early retirement benefit or 
retirement-type subsidy. The plan administrator is required to 
provide the notice to any participant or alternate payee whose 
rate of future benefit accrual may reasonably be expected to be 
significantly reduced by the plan amendment (and to any 
employee organization representing affected participants). The 
notice must be written in a manner calculated to be understood 
by the average plan participant and must provide sufficient 
information to allow recipients to understand the effect of the 
amendment. In the case of a single-employer plan, the plan 
administrator is generally required to provide the notice at 
least 45 days before the effective date of the plan amendment. 
In the case of a multiemployer plan, the notice is generally 
required to be provided 15 days before the effective date of 
the plan amendment.

                           REASONS FOR CHANGE

    The Committee recognizes that the minimum funding rules 
play an important role in assuring that defined benefit pension 
plans are adequately funded. However, the Committee believes 
that special issues arise with respect to plans maintained by 
commercial airlines. The airline industry has faced significant 
economic challenges in recent years, forcing some airlines into 
bankruptcy proceedings. Recent economic conditions have also 
caused some plans maintained by airlines to be significantly 
underfunded. In some cases, underfunded plans have been 
terminated in bankruptcy proceedings, resulting in a loss of 
benefits by participants and an increase in PBGC liabilities.
    Many airlines have taken measures to reduce costs, 
including in some cases freezing benefits (and thus 
liabilities) under their defined benefit pension plans. While 
the freezing of benefits is unfortunate, it is consistent with 
the Committee's view that employers should fund benefits that 
have already been promised to employees before promising 
additional benefits. The Committee is concerned that, even if 
benefits under plans maintained by such airlines are frozen, 
the amount of contributions required under the minimum funding 
rules may have the effect of diverting funds needed to assure 
the continued viability of the airlines' business, which could 
result in further terminations of underfunded plans. The 
Committee therefore believes that such airlines should be 
provided with additional time for funding their plans, subject 
to appropriate conditions.

                        EXPLANATION OF PROVISION

In general

    Under the provision, if an election is made with respect to 
an eligible plan for a plan year (an ``applicable'' plan year), 
the minimum required contribution for the plan year is 
determined under a special method.\113\ If minimum required 
contributions as determined under the provision are made: (1) 
for an applicable plan year beginning before January 1, 2007 
(for which the present-law funding rules apply), the plan does 
not have an accumulated funding deficiency; and (2) for an 
applicable plan year beginning on or after January 1, 2007 (for 
which the changes to the funding rules made under the bill 
apply), the minimum required contribution is the contribution 
determined under the provision. For purposes of the provision, 
an eligible plan is a single-employer defined benefit pension 
plan sponsored by an employer that is a commercial passenger 
airline and with respect to which certain benefit accrual and 
benefit increase restrictions are met.
---------------------------------------------------------------------------
    \113\ Any amortization bases, credit balance, or prefunding balance 
under the plan's funding standard account as of the end of the last 
year preceding the first applicable year is reduced to zero.
---------------------------------------------------------------------------
    An election under the provision must be made at such time 
and in such manner as prescribed by the Secretary of the 
Treasury. The employer may select the first plan year to which 
the election applies from among plan years ending after the 
date of the election. The election applies to that plan year 
and subsequent plan years, unless the election is revoked with 
the approval of the Secretary. The employer may also change the 
plan year with respect to the plan by specifying a new plan 
year in the election. Such a change in plan year does not 
require approval of the Secretary.

Determination of required contribution

    Under the provision, the minimum required contribution for 
any applicable plan year during the amortization period is the 
amount required to amortize the plan's unfunded liability, 
determined as of the first day of the plan year, in equal 
annual installments over the remaining amortization period. For 
this purpose, the amortization period is the 14-plan-year 
period beginning with the first applicable plan year. Thus, the 
annual amortization amount is redetermined each year, based on 
the plan's unfunded liability at that time and the remainder of 
the amortization period. For any plan years beginning after the 
end of the amortization period, the plan is subject to the 
generally applicable minimum funding rules (as modified under 
the provision of the bill relating to funding requirements for 
single-employer plans, including the limitations on benefit 
increases and distributions by underfunded plans). The plan's 
prefunding balance as of the first day of the first year 
beginning after the end of the amortization period is 
zero.\114\
---------------------------------------------------------------------------
    \114\ If an election to use the special method is revoked before 
the end of the amortization period, the plan is subject to the 
generally applicable minimum funding rules beginning with the first 
plan year for which the election is revoked, and the plan's prefunding 
balance as of the beginning of that year is zero.
---------------------------------------------------------------------------
    For purposes of the provision, a plan's unfunded liability 
is the unfunded accrued liability under the plan, determined 
under the unit credit funding method. As under present law, 
minimum required contributions (including the annual 
amortization amount) under the provision must be determined 
using actuarial assumptions and methods, each of which is 
reasonable (taking into account the experience of the plan and 
reasonable expectations), or which, in the aggregate, result in 
a total plan contribution equivalent to a contribution that 
would be obtained if each assumption and method were 
reasonable. The assumptions are required also to offer the 
actuary's best estimate of anticipated experience under the 
plan. In addition, as under present law, the rate of interest 
used must be an appropriate rate consistent with the rate or 
rates used under the plan to determine costs, and the value of 
plan assets used must be the fair market value.

Benefit accrual and benefit increase restrictions

    Under the provision, effective as of the first day of the 
first applicable plan year and at all times thereafter, an 
eligible plan must provide that, with respect to each 
participant: (1) the accrued benefit, any death or disability 
benefit, and any social security supplement are frozen at the 
amount of the benefit or supplement immediately before such 
first day; and (2) all other benefits under the plan are 
eliminated. However, the freezing or elimination of benefits or 
supplements is required only to the extent that it would be 
permitted under the anticutback rule if implemented by a plan 
amendment adopted immediately before such first day.
    In addition, no applicable benefit increase under an 
eligible plan may take effect at any time during the period 
beginning on July 26, 2005, and ending on the day before the 
first day of the first applicable plan year. For this purpose, 
an applicable benefit increase generally is any increase in 
liabilities of the plan by plan amendment (or otherwise as 
specified by the Secretary) which would occur by reason of: (1) 
any increase in benefits; (2) any change in the accrual of 
benefits; or (3) any change in the rate at which benefits 
become nonforfeitable under the plan. An applicable benefit 
increase does not include any increase in liabilities under a 
plan: (1) by reason of a plan amendment if such amendment is 
required as a condition of qualification of the plan; or (2) 
which is specified in Treasury regulations.\115\
---------------------------------------------------------------------------
    \115\ Applicable benefit increase is generally defined as under the 
provision relating to benefit limitations under single-employer defined 
benefit pension plans. However, exceptions for certain benefit 
increases provided under a plan maintained pursuant to a collective 
bargaining agreement do not apply.
---------------------------------------------------------------------------

Treatment of successors plans, PBGC benefit guarantee, and other rules

    Under the provision, authority is granted to the Secretary 
of the Treasury to disqualify one or more single-employer 
defined benefit pension plans (``successor'' plans) established 
by an employer maintaining an eligible plan to which the 
special method applies if the successor plan or plans provide 
benefit accruals to any substantial number of successor 
employees. For this purpose, a successor employee is any 
employee covered by the eligible plan or any employee 
performing substantially the same type of work with respect to 
the employer's business operations as an employee covered by 
the eligible plan. The Secretary of the Treasury may, in his or 
her discretion, disqualify a successor plan unless all benefit 
obligations under the eligible plan have been satisfied.
    Under the provision, if an election to apply the special 
method is made with respect to a plan and the plan is 
terminated, certain aspects of the PBGC guarantee provisions 
are applied as if the plan terminated on the first day of the 
first applicable plan year. Specifically, the amount of 
guaranteed benefits payable by the PBGC is determined based on 
plan provisions, salary, service, and the guarantee in effect 
on the first day of the first applicable plan year. In 
addition, the priority among participants for purposes of 
allocating plan assets and employer recoveries to non-
guaranteed benefits in the event of plan termination is 
determined as of the first day of the first applicable plan 
year.
    Under the provision, the provision of the bill under which 
defined benefit plans that are covered by the PBGC insurance 
program are not taken into account in applying the overall 
limit on deductions for contributions to combinations of 
defined benefit and defined contribution plans, does not apply 
to an eligible plan to which the special method applies.
    In the case of notice required with respect to an amendment 
that is made to an eligible plan maintained pursuant to one or 
more collective bargaining agreements in order to comply with 
the benefit accrual and benefit increase restrictions under the 
provision, the provision allows the notice to be provided 15 
days before the effective date of the plan amendment.

                             EFFECTIVE DATE

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

 H. Modification of Pension Funding Requirements for Plans Subject to 
                        Current Transition Rule


(Sec. 335 of the bill and sec. 769 of the Retirement Protection Act of 
        1994, as amended by the Pension Funding Equity Act of 2004)

                              PRESENT LAW

    Defined benefit pension plans are required to meet certain 
minimum funding rules. In some cases, additional contributions 
are required if a single-employer defined benefit pension plan 
is underfunded. Additional contributions generally are not 
required in the case of a plan with a funded current liability 
percentage of at least 90 percent. A plan's funded current 
liability percentage is the value of plan assets as a 
percentage of current liability. In general, a plan's current 
liability means all liabilities to employees and their 
beneficiaries under the plan. 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 pension plans in the event the plan is 
terminated with insufficient assets to pay for plan benefits. 
The PBGC is funded in part by a flat-rate premium per plan 
participant, and a variable rate premium based on 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.
    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 generally 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 
2004 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 2004, the relief from the 
minimum funding requirements generally applies only if certain 
specified contributions are made.
    For plan years beginning in 2004 and 2005, the funded 
current liability percentage of the plan is 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 are 
not required with respect to the plan. In addition, for these 
years, the mortality table used under the plan is used in 
determining the amount of unfunded vested benefits under the 
plan for purposes of calculating PBGC variable rate premiums.
    For plan years beginning after 2005 and before 2010, the 
funded current liability percentage generally 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 generally applies for a 
plan year beginning in 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 extend to 2006 the special rule that 
applies to such plans for 2004 and 2005 and, for years after 
2006, to modify the special rule to reflect the changes made in 
the minimum funding rules.

                        EXPLANATION OF PROVISION

    The provision revises the special rule for a plan that is 
sponsored by a company engaged primarily in interurban or 
interstate passenger bus service and that meets the other 
requirements for the special rule under present law. Under the 
provision, for the plan year beginning in 2006, the funded 
current liability percentage of such a plan is 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 
the 2006 plan year, additional contributions and quarterly 
contributions are not required with respect to the plan. In 
addition, the mortality table used under the plan is used in 
determining the amount of unfunded vested benefits under the 
plan for purposes of calculating PBGC variable rate premiums.
    Under the provision, for plan years beginning after 2006, 
the mortality table used by the plan is used in: (1) 
determining any present value or making any computation under 
the minimum funding rules; and (2) determining unfunded target 
liability for PBGC variable premium rate purposes.\116\ In 
addition, in determining the minimum required contribution for 
plan years after 2006, the value of plan assets is not reduced 
by the plan's prefunding balance if, pursuant to a written 
agreement with the PBGC entered into before January 1, 2006, 
the prefunding balance is not available to reduce the minimum 
required contribution for the plan year.
---------------------------------------------------------------------------
    \116\ The term ``unfunded target liability'' is defined under the 
provision relating to minimum funding rules for single-employer plans 
and generally means: (1) the excess (if any) of the plan's target 
liability for the plan year (i.e., the present value of liabilities 
under the plan), over (2) the value of the plan's assets (reduced by 
any prefunding balance).
---------------------------------------------------------------------------

                             EFFECTIVE DATE

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

 I. Treatment of Cash Balance and Other Hybrid Defined Benefit Pension 
                                 Plans


(Sec. 341 of the bill, secs. 411 and 417 of the Code, and secs. 204 and 
        205 of ERISA)

                              PRESENT LAW

Cash balance and other hybrid plans

    A cash balance plan is a defined benefit pension plan with 
benefits resembling the benefits associated with defined 
contribution plans. Cash balance plans are sometimes referred 
to as ``hybrid'' plans because they combine features of a 
defined benefit pension plan and a defined contribution plan. 
Other types of hybrid plans exist as well, such as so-called 
``pension equity'' plans.
    Under a cash balance plan, benefits are determined by 
reference to a hypothetical account balance. An employee's 
hypothetical account balance is determined by reference to 
hypothetical annual allocations to the account (``pay 
credits'') (e.g., a certain percentage of the employee's 
compensation for the year) and hypothetical earnings on the 
account (``interest credits'').
    Cash balance plans are generally designed so that, when a 
participant receives a pay credit for a year of service, the 
participant also receives the right to future interest on the 
pay credit, regardless of whether the participant continues 
employment (referred to as ``front-loaded'' interest credits). 
That is, the participant's hypothetical account continues to be 
credited with interest after the participant stops working for 
the employer. As a result, if an employee terminates employment 
and defers distribution to a later date, interest credits will 
continue to be credited to that employee's hypothetical 
account.
    Cash balance plans and other hybrid plans are subject to 
the qualification requirements applicable to defined benefit 
pension plans generally. However, because such plans have 
features of both defined benefit pension plans and defined 
contributions plans, questions arise as to the proper 
application of the qualification requirements to such 
plans.\117\ Issues that commonly arise include: (1) the 
application of the age discrimination rules; (2) the proper 
method for determining lump-sum distributions; and (3) the 
treatment of a conversion to a cash balance plan or other 
hybrid plan formula.
---------------------------------------------------------------------------
    \117\ There is little guidance under present law with respect to 
many of the issues raised by cash balance conversions. In 1999, the IRS 
imposed a moratorium on determination letters for cash balance 
conversions pending clarification of applicable legal requirements. 
Under the moratorium, all determination letter requests regarding 
converted cash balance plans are sent to the National Office for 
review; however, the National Office is not currently acting on these 
plans.
---------------------------------------------------------------------------

Age discrimination

    Present law prohibits any reduction in the rate of a 
participant's benefit accrual (or the cessation of accruals) 
under a defined benefit pension plan because of the attainment 
of any age. The age discrimination rules do not prohibit all 
benefit formulas under which a reduction in accruals is 
correlated with participants' age in some manner. For example, 
a plan may limit the total amount of benefits, or may limit the 
years of service or participation considered in determining 
benefits.
    An age discrimination issue has arisen as a result of 
front-loaded interest credits under cash balance plans because 
there is a longer time for interest credits to accrue on 
hypothetical contributions to the account of a younger 
participant. Several court cases have considered whether front-
loaded interest credits under cash balance plans violate the 
age discrimination rules and have reached inconsistent 
conclusions.\118\ A similar issue may arise with respect to 
other types of hybrid plans.
---------------------------------------------------------------------------
    \118\ Tootle v. ARINC Inc., 2004 U.S. Dist. LEXIS 10629 (June 10, 
2004); Cooper v. IBM Personal Pension Plan, 274 F. Supp. 2d 1010 (S.D. 
Ill. 2003); Eaton v. Onan, 117 F. Supp. 2d 812 (S.D. Ind. 2000). In 
addition, proposed Treasury regulations issued in December 2002 
provided rules under which cash balance plans could provide front-
loaded interest credits without violating the age discrimination rules. 
However, the Treasury Department announced the withdrawal of the 
regulations in June 2004.
---------------------------------------------------------------------------

Determination of minimum lump-sum benefits

    Defined benefit pension plans, including cash balance plans 
and other hybrid plans, are required to provide benefits in the 
form of a life annuity commencing at a participant's normal 
retirement age. If the plan permits benefits to be paid in 
certain other forms, such as a lump sum, minimum present value 
rules apply, under which the alternative form of benefit cannot 
be less than the present value of the life annuity payable at 
normal retirement age, determined using certain statutorily 
prescribed interest and mortality assumptions.
    Most cash balance plans are designed to permit a lump-sum 
distribution of a participant's hypothetical account balance 
upon termination of employment. As is the case with defined 
benefit pension plans generally, such a lump-sum amount is 
required to be not less than the present value of the benefit 
payable at normal retirement age, determined using the 
statutory interest and mortality assumptions.\119\ A 
participant's normal retirement benefit under a cash balance 
plan is generally determined by projecting the participant's 
hypothetical account balance to normal retirement age by 
crediting to the account future interest credits, the right to 
which has already accrued, and converting the projected account 
balance to an actuarially equivalent life annuity payable at 
normal retirement age, using the interest and mortality 
assumptions specified in the plan.
---------------------------------------------------------------------------
    \119\ Berger v. Xerox Corp. Retirement Income Guarantee Plan, 338 
F.3d 755 (7th Cir. 2003); Esden v. Bank of Boston, 229 F.3d 154 (2d 
Cir. 2000), cert. dismissed, 531 U.S. 1061 (2001); Lyons v. Georgia 
Pacific Salaried Employees Retirement Plan, 221 F.3d 1235 (11th Cir. 
2000), cert. denied, 532 U.S. 967 (2001); West v. AK Steel Corp. 
Retirement Accumulation Plan, 318 F. Supp.2d 579 (S.D. Ohio 2004); 
Notice 96-8, 1996-1996-1 C.B. 359. Additionally, under Esden, if 
participants accrue interest credits under a cash balance plan at an 
interest rate that is higher than the interest assumptions prescribed 
by the Code for determining the present value of the annuity, the 
interest credits must be reflected in the projection of the 
participant's hypothetical account balance to normal retirement age in 
order to avoid violating the Code's prohibition against forfeitures.
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    A difference in the rate of interest credits provided under 
the plan, which is used to project the account balance forward 
to normal retirement age, and the statutory rate used to 
determine the lump-sum value (i.e., present value) of the 
accrued benefit will cause a discrepancy between the value of 
the minimum lump-sum and the employee's hypothetical account 
balance. In particular, if the plan's interest crediting rate 
is higher than the statutory interest rate, then the resulting 
lump-sum amount will generally be greater than the hypothetical 
account balance.\120\
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    \120\ This result is sometimes referred to as ``whipsaw.''
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Protection of accrued benefits when a plan is amended

    In general, an amendment of a qualified retirement plan may 
not reduce benefits that have already accrued (the 
``anticutback rule''). For this purpose, an amendment is 
treated as reducing accrued benefits if it has the effect of 
eliminating or reducing an early retirement benefit or a 
retirement-type subsidy or of eliminating an optional form of 
benefit. Several approaches may be used to comply with the 
anticutback rule, including wearaway and no-wearaway 
approaches.
    Under a wearaway approach, a participant's accrued benefit 
after a plan amendment is determined as the greater of: (1) the 
participant's accrued benefit before the amendment 
(``preamendment'' accrued benefit); and (2) the benefit 
determined by applying the new benefit formula to all the 
participant's years of service, both before and after the 
amendment. Under a wearaway approach, if a participant's 
preamendment accrued benefit is greater than the benefit 
provided under the new formula, the participant may have a 
period (a wearaway period) during which the participant does 
not accrue any additional benefits.
    Under a no-wearaway approach, a participant's benefit after 
a plan amendment is determined as the sum of: (1) the 
participant's preamendment accrued benefit; and (2) the accrued 
benefit that results from applying the new formula with respect 
to years of service after the plan amendment. Under this 
approach, participants earn additional benefits under the new 
plan formula immediately.
    In addition to wearaway and no-wearaway approaches, a plan 
amendment may include a grandfather provision under which the 
benefit formula that applied before the amendment continues to 
apply to the participants in the plan before the amendment if 
it provides a greater benefit than the new formula or under 
which such participants may choose between the old and new 
formulas. Alternatively, a plan amendment may provide a 
grandfather provision for older and longer-service 
participants.
    A notice requirement must be met if an amendment to a 
defined benefit pension plan provides for a significant 
reduction in the rate of future benefit accrual.\121\ In that 
case, the plan administrator must furnish a written notice 
concerning the amendment. Notice may also be required if a plan 
amendment eliminates or reduces an early retirement benefit or 
retirement-type subsidy. The plan administrator is required to 
provide the notice to any participant or alternate payee whose 
rate of future benefit accrual may reasonably be expected to be 
significantly reduced by the plan amendment (and to any 
employee organization representing affected participants). The 
notice must be written in a manner calculated to be understood 
by the average plan participant and must provide sufficient 
information to allow recipients to understand the effect of the 
amendment. The plan administrator is generally required to 
provide the notice at least 45 days before the effective date 
of the plan amendment.
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    \121\ This notice is required under the Economic Growth and Tax 
Relief Reconciliation Act of 2001 (``EGTRRA'') and applies to plan 
amendments effective on or after June 7, 2001.
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                           REASONS FOR CHANGE

    The Committee believes that cash balance and other hybrid 
plans may play a valuable role in the future of the defined 
benefit pension plan system and providing retirement income 
security for employees. The Committee recognizes that the 
design of these plans raises questions as to how the defined 
benefit pension plan rules should be applied to them.
    In addition, cash balance plan issues arose as part of the 
Joint Committee staff's investigation (undertaken at the 
request of the Committee) relating to Enron Corporation and 
related entities, including a review of the qualified 
retirement plans covering Enron employees. In the report of its 
investigation, the Joint Committee staff found that the lack of 
clear guidance with respect to cash balance plan conversions 
and cash balance plans in general creates uncertainty for 
employers and employees and recommended that clear rules be 
adopted with respect to the operation of cash balance plans and 
the conversion of traditional defined benefit pension plans 
into cash balance plans.\122\
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    \122\ 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, at Vol. 
I, 19, 38, 487.
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    The Committee is also concerned about assuring adequate 
protections for participants in hybrid plans, including in the 
case of conversions to hybrid plans. For example, concern about 
cash balance plan conversions led to the enactment under EGTRRA 
of the notice requirement applicable in the case of a plan 
amendment that provides for a significant reduction in the rate 
of future benefit accrual.
    The Committee believes that the uncertainty that exists 
with respect to certain aspects of hybrid plans should be 
resolved by providing rules that both accommodate the nature 
and design of these plans and include appropriate protections 
for participants.

                        EXPLANATION OF PROVISION

In general

    The provision provides rules for qualified cash balance 
plans (as defined in the provision) that address: (1) 
application of the prohibition on age discrimination; and (2) 
determination of minimum lump-sum benefits. The provision also 
provides rules with respect to the conversion of a defined 
benefit pension plan to a cash balance plan design.
    Under the provision, a qualified cash balance plan is a 
cash balance plan that meets certain vesting and interest 
credit requirements. With respect to vesting, benefits under 
the plan must be fully vested after three years of service. 
With respect to interest credits, the plan must generally 
provide that any interest credit (or equivalent amount) for any 
plan year is at a rate that is: (1) not less than the Federal 
mid-term interest rate (i.e., the rate on the average market 
yield on outstanding marketable Treasury securities with 
remaining periods to maturity of over three years, but not over 
nine years); and (2) not greater than the greater of the 
Federal mid-term interest rate and a rate equivalent to the 
rate of interest on amounts invested conservatively in long-
term investment grade corporate bonds.\123\ In addition, if the 
interest credit rate under the plan is a variable rate, the 
plan must provide that, on plan termination, the rate of 
interest used to determine accrued benefits under the plan is 
equal to the average of the interest rates used under the plan 
during the five-year period ending on the termination date.
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    \123\ The rate of interest on amounts invested conservatively in 
long-term investment grade corporate bonds is to be determined by the 
Secretary of the Treasury on the basis of two or more indices that are 
selected periodically by the Secretary. The Secretary is directed to 
make publicly available the indices and methodology used to determine 
the rate. It is intended that the Secretary of the Treasury will also 
issue regulations that provide alternatives to the use of the 
applicable Federal mid-term interest rate in appropriate circumstances. 
For example, in the case of pension equity plans, the interest credit 
requirement may be indirectly reflected in the benefit formula using a 
fixed rate of return, such as three percent, and reasonable service 
groupings.
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    Under the provision, a cash balance plan is a defined 
benefit plan under which the accrued benefit is determined by 
reference to a hypothetical ``accumulation'' account, to which 
pay credits and interest credits are credited. In addition, the 
Secretary of the Treasury is directed to issue regulations that 
include in the definition of cash balance plan any defined 
benefit plan (or any portion of a defined benefit plan) that 
has an effect similar to a cash balance plan. The regulations 
may provide that if a plan sponsor represents in communications 
to participants and beneficiaries that a plan amendment results 
in a plan being a defined benefit plan having an effect similar 
to a cash balance plan, the plan is treated as a cash balance 
plan. The regulations may also provide for the treatment of a 
cash balance plan as a qualified cash balance plan if the plan 
has an effect similar to the effect of a qualified cash balance 
plan. For example, the regulations may provide rules under 
which a pension equity plan is treated as a qualified cash 
balance plan.

Age discrimination

    Under the provision, a qualified cash balance plan does not 
violate the prohibition on age discrimination merely because it 
may reasonably be expected that the period over which interest 
credits will be made to a participant's accumulation account 
(or its equivalent) is longer for a younger participant, 
provided that the rate of any pay credit or interest credit to 
an account under the plan does not decrease by reason of the 
participant's attainment of any age.

Determination of minimum lump-sum benefits

    Under the provision, except as provided in regulations, for 
purposes of determining the minimum present value of a 
participant's accrued benefit under a qualified cash balance 
plan, the present value of the accrued benefit is equal to the 
balance in the participant's accumulation account (or its 
equivalent) as of the time the present value determination is 
made.

Conversions

            In general
    Under the provision, for purposes of the anticutback rule, 
an ``applicable'' plan amendment is treated as reducing a 
participant's accrued benefit unless certain requirements are 
met. An applicable plan amendment is generally a plan amendment 
to a defined benefit plan that has the effect of converting the 
plan to a cash balance plan.\124\
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    \124\ If the benefits under two or more defined benefit plans 
established by an employer are coordinated in such a manner as to have 
the effect of the adoption of an applicable plan amendment, the sponsor 
of the defined benefit plan or plans providing for the coordination is 
treated as having adopted an applicable plan amendment as of the date 
the coordination begins. In addition, the Secretary of the Treasury is 
directed to issue regulations to prevent the avoidance of the 
requirements with respect to an applicable plan amendment through the 
use of two or more plan amendments rather than a single amendment.
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    The provision requires that, under the terms of the plan as 
in effect after the amendment, the accrued benefit of a 
participant who is a participant as of the effective date of 
the amendment cannot at any time be less than the accrued 
benefit determined under one of three methods (as described 
below), which is specified in the plan and applies uniformly to 
all participants. An applicable plan amendment is not treated 
as using one of the three methods if the plan amendment has the 
effect of converting the plan into a cash balance plan other 
than a qualified cash balance plan.
            Methods of determining accrued benefits
    Methods.--The three methods under which accrued benefits 
must be determined after an applicable plan amendment are as 
follows: (1) no wearaway; (2) greater of new or old plan terms 
or participant election; and (3) equivalent methods as provided 
by the Secretary.
    No wearaway.--Under this method, the accrued benefit is the 
sum of: (1) a participant's accrued benefit for years of 
service before the effective date of the amendment, determined 
under the terms of the plan as in effect before the amendment; 
and (2) except for certain required benefits (described below), 
the participant's accrued benefit for years of service after 
the effective date of the plan amendment, determined under the 
terms of the plan as in effect after the terms of the 
amendment.
    In applying (2) above, the plan must provide certain 
required benefits under one of two options. Under the first 
option, for each of the first five years for which the 
amendment is effective, the accrued benefit of all participants 
is the greater of the accrued benefits determined under the 
terms of the plan as in effect before and after the amendment. 
Under the second option, for all periods after the effective 
date of the amendment, the accrued benefit of all participants 
who, as of the effective date of the amendment, have attained 
the age of 40 and have a combined age and years of service of 
at least 55, is determined under either of the following 
methods as selected by the plan and specified in the amendment: 
(1) the accrued benefit is the greater of the accrued benefits 
determined under the terms of the plan as in effect before and 
after the amendment; or (2) at the election of the participant 
at the time of conversion, the accrued benefit is determined 
under the terms of the plan as in effect either before or after 
the amendment.
    Requirements similar to the requirements described above 
must also be met with respect to any early retirement benefit 
or retirement-type subsidy.
    Greater of new or old plan terms or participant election.--
Under this method, the accrued benefit is determined under 
either of the following methods as selected by the plan and 
specified in the amendment: (1) the accrued benefit is the 
greater of the accrued benefits determined under the terms of 
the plan as in effect before and after the amendment; or (2) at 
the election of the participant at the time of conversion, the 
accrued benefit is determined under the terms of the plan as in 
effect either before or after the amendment.
    Requirements similar to the requirements described above 
must also be met with respect to any early retirement benefit 
or retirement-type subsidy.
    Regulations.--Under the third method, the accrued benefit 
is determined under regulations issued by the Secretary of 
Treasury that require a plan to provide a credit of additional 
amounts or increases in initial account balances in amounts 
substantially equivalent to the benefits that would be required 
to be provided in order to satisfy one of the two preceding 
methods.
            Additional rules
    If, for purposes of any of the methods, an applicable plan 
amendment provides that an amount will initially be credited to 
a participant's accumulation account (or its equivalent) on the 
effective date of the amendment with respect to a participant's 
accrued benefit for periods before the effective date, the 
method is treated as being satisfied with respect to such 
accrued benefit only if the amount initially credited is not 
less than the present value of the accrued benefit, determined 
using the mortality table applicable under the minimum present 
value rules and the lower of: (1) the interest rate applicable 
under the minimum present value rules or (2) the interest rate 
used to credit interest under the plan. For purposes of the 
first method described above, if any early retirement benefit 
or retirement-type subsidy is not included in the initial 
account balance, the plan shall credit the accumulation account 
with the amount of such benefit or subsidy for the plan year in 
which the participant retires if, as of such time, the 
participant has met any age, years of service, and other 
requirements under the plan for entitlement to the subsidy.
    If a plan provides a participant with an election under the 
first or second method, the plan is not treated as satisfying 
the method unless the plan provides the participant with notice 
of the right to make the election, including information 
(meeting requirements prescribed by the Secretary of the 
Treasury) (1) which the participant may use to project benefits 
under the formulas from which the participant may choose and 
model the impact of the choice, and (2) with respect to 
circumstances under which the participant might not receive the 
projected accrued benefits by reason of a plan termination or 
otherwise. In addition, the plan must provide that if, during 
any of the first five plan years during which the participant's 
election is in effect, a plan amendment is adopted that results 
in a significant reduction in the future rate of benefit 
accrual, the accrued benefit of the participant must be 
determined as if the participant had made the election that 
resulted in the greatest accrued benefit. Moreover, a plan is 
not treated as satisfying either method if any other benefit is 
contingent (directly or indirectly) on the election.
    The Secretary of the Treasury is directed to prescribe 
regulations under which, if a plan amendment is treated as 
meeting the requirements of the provision with respect to any 
participant because the participant is eligible to continue to 
accrue benefits in the same manner as under the terms of the 
plan as in effect before the amendment: (1) the plan is not 
treated as failing to meet the accrual requirements if the 
requirements of the provision are met; and (2) subject to terms 
and conditions provided in the regulations, the plan is not 
treated as failing to satisfy the prohibition on discrimination 
in favor of highly compensated employees merely because the 
plan provides any accrual or benefit required to be provided 
under the method used to meet the requirements of the provision 
or because only participants as of the effective date of the 
amendment are eligible to continue to accrue benefits in the 
same manner as under the terms of the plan as in effect before 
the amendment, provided that the plan satisfied the prohibition 
on discrimination in favor of highly compensated employees 
under the terms of the plan as in effect before the amendment.

No inference regarding present law

    Nothing in the provision is to be construed to infer the 
proper treatment of cash balance plans, or conversions to cash 
balance plans, under the rules prohibiting age discrimination 
or for determining the minimum present value of benefits as in 
effect before the provision is effective. Further, it is 
intended that no inference be drawn that a cash balance plan or 
conversion that occurred in the past is or was in violation of 
the law merely because it fails or failed to meet the 
requirements set forth in the bill for future cash balance 
plans and conversions.

                             EFFECTIVE DATE

    The provisions relating to age discrimination and the 
determination of lump-sum benefits are generally effective for 
periods after July 26, 2005. In the case of a plan in existence 
on July 26, 2005, for purposes of the provisions relating to 
age discrimination and the determination of lump-sum benefits, 
the vesting and interest credit requirements that must be met 
in order to be a qualified cash balance plan apply for plan 
years beginning after December 31, 2006, unless the plan 
sponsor elects to apply these requirements for any period after 
July 26, 2005, and before the first plan year beginning after 
December 31, 2006. In the case of a plan maintained pursuant to 
one or more collective bargaining agreements ratified on or 
before the date of enactment, the vesting and interest credit 
requirements do not apply for plan years beginning before the 
earlier of: (1) the later of January 1, 2007, 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) January 1, 2009.
    The provision relating to conversions is effective with 
respect to plan amendments adopted and taking effect after July 
26, 2005, except that a plan sponsor may elect to apply the 
provision with respect to a plan amendment adopted before July 
26, 2005, and taking effect after that date.

J. Defined Benefit Pension Plan Benefits Provided in Combination With a 
                 Qualified Cash-or-Deferred Arrangement


(Sec. 342 of the bill, new sec. 414(x) of the Code, and new sec. 210(e) 
        of ERISA)

                              PRESENT LAW

In general

    Under present law, most defined contribution plans may 
include a qualified cash or deferred arrangement (commonly 
referred to as a ``section 401(k)'' or ``401(k)'' plan),\125\ 
under which employees may elect to receive cash or to have 
contributions made to the plan by the employer on behalf of the 
employee in lieu of receiving cash (referred to as ``elective 
deferrals'' or ``elective contributions'').\126\ A section 
401(k) plan may provide that elective deferrals are made for an 
employee at a specified rate unless the employee elects 
otherwise (i.e., elects not to make contributions or to make 
contributions at a different rate), provided that the employee 
has an effective opportunity to elect to receive cash in lieu 
of the default contributions. Such a design is sometimes 
referred to as ``automatic enrollment.''
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    \125\ Legally, a section 401(k) plan is not a separate type of 
plan, but is a profit-sharing, stock bonus, or pre-ERISA money purchase 
plan that contains a qualified cash or deferred arrangement. The terms 
``section 401(k) plan'' and ``401(k) plan'' are used here for 
convenience.
    \126\ The maximum annual amount of elective deferrals that can be 
made by an individual is subject to a limit ($14,000 for 2005). An 
individual who has attained age 50 before the end of the taxable year 
may also make catch-up contributions to a section 401(k) plan, subject 
to a limit ($4,000 for 2005).
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    Besides elective deferrals, a section 401(k) plan may 
provide for: (1) matching contributions, which are employer 
contributions that are made only if an employee makes elective 
deferrals; and (2) nonelective contributions, which are 
employer contributions that are made without regard to whether 
an employee makes elective deferrals. Under a section 401(k) 
plan, no benefit other than matching contributions can be 
contingent on whether an employee makes elective deferrals. 
Thus, an employee's eligibility for benefits under a defined 
benefit pension plan cannot be contingent on whether the 
employee makes elective deferrals.
    A cash balance plan is a defined benefit pension plan with 
benefits resembling the benefits associated with defined 
contribution plans. Cash balance plans are sometimes referred 
to as ``hybrid'' plans because they combine features of a 
defined benefit pension plan and a defined contribution plan. 
Under a cash balance plan, benefits are determined by reference 
to a hypothetical account balance. An employee's hypothetical 
account balance is determined by reference to hypothetical 
annual allocations to the account (``pay credits'') (e.g., a 
certain percentage of the employee's compensation for the year) 
and hypothetical earnings on the account (``interest 
credits''). Other types of hybrid plans exist as well, such as 
so-called ``pension equity'' plans.
    The assets of a qualified retirement plan (either a defined 
contribution plan or a defined benefit pension plan) must be 
held in trust for the exclusive benefit of participants and 
beneficiaries. Defined benefit pension plans are subject to 
funding rules, which require employers to make contributions at 
specified minimum levels.\127\ In addition, limits apply on the 
extent to which defined benefit pension plan assets may be 
invested in employer securities or real property. The minimum 
funding rules and limits on investments in employer securities 
or real property generally do not apply to defined contribution 
plans.
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    \127\ The Pension Benefit Guaranty Corporation generally guarantees 
a minimum level of benefits under a defined benefit plan.
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Nondiscrimination requirements

    Under a general nondiscrimination requirement, the 
contributions or benefits provided under a qualified retirement 
plan must not discriminate in favor of highly compensated 
employees.\128\ Treasury regulations provide detailed and 
exclusive rules for determining whether a plan satisfies the 
general nondiscrimination rules. Under the regulations, the 
amount of contributions or benefits provided under the plan and 
the benefits, rights and features offered under the plan must 
be tested.
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    \128\ Under special rules, referred to as the permitted disparity 
rules, higher contributions or benefits can be provided to higher-paid 
employees in certain circumstances without violating the general 
nondiscrimination rules.
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    A special nondiscrimination test applies to elective 
deferrals under a section 401(k) plan, called the actual 
deferral percentage test or the ``ADP'' test. The ADP test 
compares the actual deferral percentages (``ADPs'') of the 
highly compensated employee group and the nonhighly compensated 
employee group. The ADP for each group generally is the average 
of the deferral percentages separately calculated for the 
employees in the group who are eligible to make elective 
deferrals for all or a portion of the relevant plan year. Each 
eligible employee's deferral percentage generally is the 
employee's elective deferrals for the year divided by the 
employee's compensation for the year.
    The plan generally satisfies the ADP test if the ADP of the 
highly compensated employee group for the current plan year is 
either (1) not more than 125 percent of the ADP of the 
nonhighly compensated employee group for the prior plan year, 
or (2) not more than 200 percent of the ADP of the nonhighly 
compensated employee group for the prior plan year and not more 
than two percentage points greater than the ADP of the 
nonhighly compensated employee group for the prior plan year.
    Under a safe harbor, a section 401(k) plan is deemed to 
satisfy the special nondiscrimination test if the plan 
satisfies one of two contribution requirements and satisfies a 
notice requirement (a ``safe harbor section 401(k) plan''). A 
plan satisfies the contribution requirement under the safe 
harbor rule if the employer either (1) satisfies a matching 
contribution requirement or (2) makes a nonelective 
contribution to a defined contribution plan of at least three 
percent of an employee's compensation on behalf of each 
nonhighly compensated employee who is eligible to participate 
in the arrangement. A plan generally satisfies the matching 
contribution requirement if, under the arrangement: (1) the 
employer makes a matching contribution on behalf of each 
nonhighly compensated employee that is equal to (a) 100 percent 
of the employee's elective deferrals up to three percent of 
compensation and (b) 50 percent of the employee's elective 
deferrals from three to five percent of compensation; and (2) 
the rate of matching contribution with respect to any rate of 
elective deferrals of a highly compensated employee is not 
greater than the rate of matching contribution with respect to 
the same rate of elective deferral of a nonhighly compensated 
employee.\129\
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    \129\ Alternatively, matching contributions may be provided at a 
different rate, provided that: (1) the rate of matching contribution 
doesn't increase as the rate of elective deferral increases; and (2) 
the aggregate amount of matching contributions with respect to each 
rate of elective deferral is not less than the amount that would be 
provided under the general rule.
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    Employer matching contributions are also subject to a 
special nondiscrimination test, the ``ACP test,'' which 
compares the average actual contribution percentages (``ACPs'') 
of matching contributions for the highly compensated employee 
group and the nonhighly compensated employee group. The plan 
generally satisfies the ACP test if the ACP of the highly 
compensated employee group for the current plan year is either 
(1) not more than 125 percent of the ACP of the nonhighly 
compensated employee group for the prior plan year, or (2) not 
more than 200 percent of the ACP of the nonhighly compensated 
employee group for the prior plan year and not more than two 
percentage points greater than the ACP of the nonhighly 
compensated employee group for the prior plan year.
    A safe harbor section 401(k) plan that provides for 
matching contributions must satisfy the ACP test. 
Alternatively, it is deemed to satisfy the ACP test if it 
satisfies a matching contribution safe harbor, under which (1) 
matching contributions are not provided with respect to 
elective deferrals in excess of six percent of compensation, 
(2) the rate of matching contribution does not increase as the 
rate of an employee's elective deferrals increases, and (3) the 
rate of matching contribution with respect to any rate of 
elective deferral of a highly compensated employee is no 
greater than the rate of matching contribution with respect to 
the same rate of deferral of a nonhighly compensated employee.

Vesting rules

    A qualified retirement plan generally must satisfy 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.
    Special vesting rules apply to elective deferrals and 
matching contributions. Elective deferrals must be immediately 
vested. Matching contributions generally must vest at least 
asrapidly 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 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 
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. However, matching contributions under a safe 
harbor section 401(k) plan must be immediately vested.

Top-heavy rules

    Under present law, a top-heavy plan is a qualified 
retirement plan under which cumulative benefits are provided 
primarily to key employees. An employee is considered a key 
employee if, during the prior year, the employee was (1) an 
officer with compensation in excess of a certain amount 
($135,000 for 2005), (2) a five-percent owner, or (3) a one-
percent owner with compensation in excess of $150,000. A plan 
that is top-heavy must provide (1) minimum employer 
contributions or benefits to participants who are not key 
employees and (2) more rapid vesting for participants who are 
not key employees (as discussed below).
    In the case of a defined contribution plan, the minimum 
contribution is the lesser of (1) three percent of 
compensation, or (2) the highest percentage of compensation at 
which contributions were made for any key employee. In the case 
of a defined benefit pension, the minimum benefit is the lesser 
of (1) two percent of average compensation multiplied by the 
participant's years of service, or (2) 20 percent of average 
compensation. For this purpose, a participant's average 
compensation is generally average compensation for the 
consecutive-year period (not exceeding five years) during which 
the participant's aggregate compensation is the greatest.
    Top-heavy plans must satisfy one of two alternative minimum 
vesting schedules. A plan satisfies the first schedule if a 
participant acquires a nonforfeitable right to 100 percent of 
contributions or benefits 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 contributions or 
benefits for each year of service beginning with the 
participant's second year of service and ending with 100 
percent after six years of service.\130\
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    \130\ The top-heavy vesting schedules are the same as the vesting 
schedules that apply to matching contributions.
---------------------------------------------------------------------------
    A safe harbor section 401(k) plan is not subject to the 
top-heavy rules, provided that, if the provides for matching 
contributions, it must also satisfy the matching contribution 
safe harbor.

Other qualified retirement plan requirements

    Qualified retirement plans are subject to various other 
requirements, some of which depend on whether the plan is a 
defined contribution plan or a defined benefit pension. Such 
requirements include limits on contributions and benefits and 
spousal protections.
    In the case of a defined contribution plan, annual 
additions with respect to each plan participant cannot exceed 
the lesser of: (1) 100 percent of the participant's 
compensation; or (2) a dollar amount, indexed for inflation 
($42,000 for 2005). Annual additions are the sum of employer 
contributions, employee contributions, and forfeitures with 
respect to an individual under all defined contribution plans 
of the same employer. In the case of a defined benefit pension, 
annual benefits payable under the plan generally may not exceed 
the lesser of: (1) 100 percent of average compensation; or (2) 
$170,000 (for 2005).
    Defined benefit pension plans are required to provide 
benefits in the form of annuity unless the participant (and his 
or her spouse, in the case of a married participant) consents 
to another form of benefit. In addition, in the case of a 
married participant, benefits generally must be paid in the 
form of a qualified joint and survivor annuity (``QJSA'') 
unless the participant and his or her spouse consent to a 
distribution in another form. 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. These spousal 
protection requirements generally do not apply to a defined 
contribution plan that does not offer annuity distributions.

Annual reporting by qualified retirement plans

    The plan administrator of a qualified retirement plan 
generally must file an annual return with the Secretary of the 
Treasury and an annual report with the Secretary of Labor. In 
addition, in the case of a defined benefit pension, certain 
information is generally required to be filed with the Pension 
Benefit Guaranty Corporation (``PBGC''). Form 5500, 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 with the 
Department of Labor.
    The Form 5500 is due by the last day of the seventh month 
following the close of the plan year. The due date may be 
extended up to two and one-half months. Copies of filed Form 
5500s are available for public examination at the U.S. 
Department of Labor.
    A plan administrator must automatically provide 
participants with a summary of the annual report within two 
months after the due date of the annual report (i.e., by the 
end of the ninth month after the end of the plan year unless an 
extension applies). In addition, a copy of the full annual 
report must be provided to participants on written request.

                           REASONS FOR CHANGE

    The Committee recognizes that, over time, coverage under 
defined benefit pension plans has declined and coverage under 
defined contribution plans, particularly section 401(k) plans, 
has grown. Defined benefit pension plans play a valuable role 
in providing retirement income security; for example, benefits 
are payable in the form of an annuity and benefits are 
guaranteed by the PBGC. In addition, providing defined benefit 
pension plan coverage in combination with a section 401(k) plan 
offers the opportunity for enhanced retirement savings. 
However, maintaining multiple plans may result in burdensome 
administrative costs, especially for smaller employers. 
Moreover, present law does not allow benefits provided under a 
defined benefit pension plan to be taken into account for 
purposes of the nondiscrimination test applicable to section 
401(k) plans. The Committee believes that employers should be 
encouraged to provide defined benefit pension plans in 
combination with section 401(k) plans in a manner that reduces 
administrative costs and provides meaningful benefits to both 
rank-and-file and highly compensated employees.

                        EXPLANATION OF PROVISION

In general

    The provision provides rules for an ``eligible combined 
plan.'' An eligible combined plan is a plan: (1) which consists 
of a defined benefit plan and an ``applicable'' defined 
contribution plan; (2) the assets of which are held in a single 
trust forming part of the plan and are clearly identified and 
allocated to the defined benefit plan and the applicable 
defined contribution plan to the extent necessary for the 
separate application of the Code and ERISA; and (3) that meets 
certain benefit, contribution, and vesting requirements as 
discussed below. For this purpose, an applicable defined 
contribution plan is a defined contribution plan that includes 
a qualified cash or deferred arrangement (i.e., a section 
401(k) plan).
    Except as specified in the provision, the provisions of the 
Code and ERISA are applied to any defined benefit plan and any 
applicable defined contribution plan that are part of an 
eligible combined plan in the same manner as if each were not 
part of the eligible combined plan. Thus, for example, the 
present-law limits on contributions and benefits apply 
separately to contributions under an applicable defined 
contribution plan that is part of an eligible combined plan and 
to benefits under the defined benefit plan that is part of the 
eligible combined plan. In addition, the spousal protection 
rules apply to the defined benefit plan, but not to the 
applicable defined contribution plan except to the extent 
provided under present law. Moreover, although the assets of an 
eligible combined plan are held in a single trust, the funding 
rules apply to a defined benefit plan that is part of an 
eligible combined plan on the basis of the assets identified 
and allocated to the defined benefit, and the limits on 
investing defined benefit plan assets in employer securities or 
real property apply to such assets. Similarly, separate 
participant accounts are required to be maintained under the 
applicable defined contribution plan that is part of the 
eligible combined plan, and earnings (or losses) on 
participants' account are based on the earnings (or losses) 
with respect to the assets of the applicable defined 
contribution plan.

Requirements with respect to defined benefit plan

    Under the provision, a defined benefit plan that is part of 
an eligible combined plan is required to provide each 
participant with a benefit of not less than the applicable 
percentage of the participant's final average pay. The 
applicable percentage is the lesser of: (1) one percent 
multiplied by the participant's years of service; or (2) 20 
percent. For this purpose, final average pay is determined 
using the consecutive-year period (not exceeding five years) 
during which the participant has the greatest aggregate 
compensation.
    If the defined benefit plan is a qualified cash balance 
plan,\131\ the plan is treated as meeting the benefit 
requirement under the provision if each participant receives a 
pay credit for each plan year of not less than the percentage 
of compensation determined in accordance with the following 
table:
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    \131\ Qualified cash balance plan is defined as under the provision 
relating to the treatment of cash balance and other hybrid defined 
benefit pension plans and means a cash balance plan (or other hybrid 
plan as provided under regulations) that meets certain vesting and 
interest credit requirements.
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                  TABLE 3.--PERCENTAGE OF COMPENSATION

        Participant's age as of the beginning of the plan yearPercentage
30 or less........................................................     2
Over 30 but less than 40..........................................     4
Over 40 but less than 50..........................................     6
50 or over........................................................     8

    A defined benefit that is part of an eligible combined plan 
must provide the required benefit to each participant, 
regardless of whether the participant makes elective deferrals 
to the applicable defined contribution plan that is part of the 
eligible combined plan.
    Any benefits provided under the defined benefit plan 
(including any benefits provided in addition to required 
benefits) must be fully vested after three years of service.

Requirements with respect to applicable defined contribution plan

    Under the provision, certain automatic enrollment and 
matching contribution requirements must be met with respect to 
an applicable defined contribution plan that is part of an 
eligible combined plan. First, the qualified cash or deferred 
arrangement under the plan must constitute an automatic 
contribution arrangement, under which each employee eligible to 
participate is treated as having elected to make deferrals of 
four percent of compensation unless the employee elects 
otherwise (i.e., elects not to make deferrals or to make 
deferrals at a different rate). Participants must be given 
notice of their right to elect otherwise and must be given a 
reasonable period of time after receiving notice in which to 
make an election. In addition, participants must be given 
notice of their rights and obligations within a reasonable 
period before each year.
    Under the applicable defined contribution plan, the 
employer must make matching contributions on behalf of each 
employee eligible to participate in the arrangement in an 
amount equal to 50 percent of the employee's elective deferrals 
up to four percent of compensation, and the rate of matching 
contribution with respect to any elective deferrals for highly 
compensated employees is not greater than the rate of match for 
nonhighly compensated employees.\132\ Matching contributions in 
addition to the required matching contributions may also be 
made. The employer may also make nonelective contributions 
under the applicable defined contribution plan, but any 
nonelective contributions are not taken into account in 
determining whether the matching contribution requirement is 
met.
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    \132\ As under present law, matching contributions may be provided 
at a different rate, provided that: (1) the rate of matching 
contribution doesn't increase as the rate of elective deferral 
increases; and (2) the aggregate amount of matching contributions with 
respect to each rate of elective deferral is not less than the amount 
that would be provided under the general rule.
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    Any matching contributions under the applicable defined 
contribution plan (including any in excess of required matching 
contributions) must be fully vested when made. Any nonelective 
contributions made under the applicable defined contribution 
plan must be fully vested after three years of service.

Nondiscrimination and other rules

    An applicable defined contribution plan satisfies the ADP 
test on a safe-harbor basis. Matching contributions under an 
applicable defined contribution plan must satisfy the ACP test 
or may satisfy the matching contribution safe harbor under 
present law, as modified to reflect the matching contribution 
requirements applicable under the provision.
    Nonelective contributions under an applicable defined 
contribution plan and benefits under a defined benefit plan 
that are part of an eligible combined plan are generally 
subject to the nondiscrimination rules as under present law. 
However, neither a defined benefit plan nor an applicable 
defined contribution plan that is part of an eligible combined 
plan may be combined with another plan in determining whether 
the nondiscrimination requirements are met.\133\
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    \133\ The permitted disparity rules do not apply in determining 
whether an applicable defined contribution plan or a defined benefit 
plan that is part of an eligible combined plan satisfies (1) the 
contribution or benefit requirements under the provision or (2) the 
nondiscrimination requirements.
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    An applicable defined contribution plan and a defined 
benefit plan that are part of an eligible combined plan are 
treated as meeting the top-heavy requirements.
    The provision requires that all contributions, benefits, 
and other rights and features that are provided under a defined 
benefit plan or an applicable defined contribution plan that is 
part of an eligible combined plan must be provided uniformly to 
all participants. This requirement applies regardless of 
whether nonuniform contributions, benefits, or other rights or 
features could be provided without violating the 
nondiscrimination rules. However, it is intended that a plan 
will not violate the uniformity requirement merely because 
benefits accrued for periods before a defined benefit or 
defined contribution plan became part of an eligible combined 
plan are protected (as required under the anticutback rules).

Annual reporting

    An eligible combined plan is treated as a single plan for 
purposes of annual reporting. Thus, only a single Form 5500 is 
required. All of the information required under present law 
with respect to a defined benefit plan or a defined 
contribution plan must be provided in the Form 5500 for the 
eligible combined plan. In addition, only a single summary 
annual report must be provided to participants.

                             EFFECTIVE DATE

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

                               K. Studies


(Secs. 451 and 452 of the bill)

1. Study on revitalizing the defined benefit plans

                              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.

                           REASONS FOR CHANGE

    The Committee has a continuing interest in retirement 
income security and in the role that defined benefit plans pay 
in providing that security. The Committee bill address a number 
of issues with respect to defined benefit plans, including 
funding reforms and providing clear rules for cash balance and 
other hybrid plans. The Committee believes it appropriate to 
continue to study issues relating to defined benefit plans to 
determine further ways in which retirement security may be 
enhanced.

                        EXPLANATION OF PROVISION

    The Department of the 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 
provisions 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.

                             EFFECTIVE DATE

    The provision is effective on the date of enactment.

2. Study on floor-offset ESOPs

                              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.\134\
---------------------------------------------------------------------------
    \134\ 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.\135\ This 10-percent limitation does not 
apply to eligible individual account plans.
---------------------------------------------------------------------------
    \135\ 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

    Concerns have been raised with respect to the impact of 
grandfathered floor-offset arrangements on benefit security. 
For example, the Administration's Fiscal Year 2006 Budget 
includes a proposal to eliminate the grandfather for pre-1988 
floor-offset arrangements. The rationale behind this proposal 
is that if a company with such a plan goes out of business, the 
employer stock held in the related defined contribution plan 
typically becomes worthless, with the result that the defined 
benefit plan is left with a large unfunded liability.\136\ The 
Committee believes it appropriate to study the effects these 
arrangements may have on benefit security.
---------------------------------------------------------------------------
    \136\ Department of the Treasury, General Explanations of the 
Administration's Fiscal Year 2006 Revenue Proposals (February 2005) at 
95.
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                        EXPLANATION OF PROVISION

    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 provisions to address the 
risks posed by floor-offset ESOPs.
    Within one year after the date of enactment, the Department 
of the 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 provision is effective on the date of enactment.

  TITLE IV--DISCLOSURE AND BENEFIT STATEMENT REQUIREMENTS FOR SINGLE-
              EMPLOYER DEFINED BENEFIT PENSION PLANS \137\

---------------------------------------------------------------------------
    \137\ In addition to the provisions described here, the bill also 
contains notice requirements that apply with respect to benefit 
limitations for underfunded single-employer defined benefit pension 
plans and bankruptcy of an employer. These notices are described 
respectively under Title III-B (above) and Title VI-B (below).
---------------------------------------------------------------------------

            A. Actuarial Reports and Summary Annual Reports


(Sec. 401 of the bill, sec. 6059 and new sec. 4980K of the Code, and 
        secs. 103, 104, 502, 4010 and 4011 of ERISA)

                              PRESENT LAW

Actuarial report

    The plan administrator of a qualified retirement plan 
generally must file an annual return with the Secretary of the 
Treasury, an annual report with the Secretary of Labor, and 
certain information with the Pension Benefit Guaranty 
Corporation (``PBGC'').\138\ Form 5500, 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 with the Department of 
Labor.
---------------------------------------------------------------------------
    \138\ Code secs. 6058 and 6059; ERISA secs. 103 and 4065.
---------------------------------------------------------------------------
    In the case of a defined benefit pension plan, the annual 
report must include an actuarial report (filed on Schedule B of 
the Form 5500).\139\ The actuarial report must include, for 
example, information as to the value of plan assets, the plan's 
accrued and current liabilities, expected disbursements from 
the plan for the year, plan contributions, the plan's actuarial 
cost method and actuarial assumptions, and amortization bases 
established in the year. The report must be signed by an 
actuary enrolled to practice before the IRS, Department of 
Labor and the PBGC.
---------------------------------------------------------------------------
    \139\ Code sec. 6059; ERISA sec. 103(d). Once the actuarial report 
for a plan year is filed, the actuarial assumptions used for that plan 
year may not be changed.
---------------------------------------------------------------------------
    The Form 5500 is due by the last day of the seventh month 
following the close of the plan year. The due date may be 
extended up to two and one-half months. Copies of filed Form 
5500s are available for public examination at the U.S. 
Department of Labor.

Summary annual report

    A plan administrator must provide a summary of the annual 
report to participants, and beneficiaries receiving benefits 
under the plan, within two months after the due date of the 
annual report (i.e., by the end of the ninth month after the 
end of the plan year unless an extension applies).\140\ The 
summary annual report must include information about the assets 
and liabilities of the plan, plan receipts and disbursements, 
the plan's funded status, and such other material as is 
necessary to fairly summarize the latest annual report. The 
summary annual report must also include a statement whether 
contributions were made to keep the plan funded in accordance 
with minimum funding requirements, or whether contributions 
were not made and the amount of the deficit. If an extension 
applies for the Form 5500, the summary annual report must be 
provided within two months after the extended due date. A plan 
administrator who fails to provide a summary annual report to a 
participant or beneficiary within 30 days of a written request 
may be liable to the participant or beneficiary for a civil 
penalty of up to $100 a day from the date of the failure. \141\
---------------------------------------------------------------------------
    \140\ ERISA sec. 104(b). A participant must also be provided with a 
copy of the full annual report on written request.
    \141\ ERISA sec. 502(c)(1)(B).
---------------------------------------------------------------------------
    Certain notices must be provided to participants in a 
single-employer defined benefit pension plan relating to the 
funding status of the plan. 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. \142\
---------------------------------------------------------------------------
    \142\ ERISA sec. 4011.
---------------------------------------------------------------------------

Required reporting to the PBGC

    Certain financial information with respect to the members 
of a controlled group and actuarial information with respect to 
plans maintained by members of the controlled group must be 
reported annually to the PBGC.\143\ This information (referred 
to as ``section 4010 information'') must be reported if: (1) 
the aggregate unfunded vested benefits under all plans 
maintained by controlled-group members exceed $50 million; (2) 
required contributions totaling more than $1 million have not 
been made with respect to an underfunded plan maintained by a 
controlled-group member; or (3) any portion of a waived funding 
deficiency exceeding $1 million is outstanding with respect to 
a plan maintained by a controlled-group member. Section 4010 
information provided to the PBGC is not available to the 
public.
---------------------------------------------------------------------------
    \143\ ERISA sec. 4010.
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    The Committee believes that additional information 
affecting the funding status of single-employ defined benefit 
pension plans should be available to plan participants, the 
Treasury and Labor Departments and the PBGC, and the public, in 
order to provide a more accurate picture of the funding status 
of such plans and the security of benefits promised under the 
plan. The Committee further believes that such information 
should be provided on a more timely basis. In addition, the 
Committee wishes to reduce administrative burdens by 
consolidating information required to be provided to plan 
participants and to strengthen enforcement of the summary 
annual report requirement.

                        EXPLANATION OF PROVISION

Actuarial report

    Under the provision, an actuarial report with respect to a 
single-employer defined benefit pension plan must include the 
following information: (1) the fair market value of the plan's 
assets; (2) the plan's target liability and target normal cost; 
(3) the plan's at-risk target liability and at-risk normal cost 
(determined as if the plan sponsor is a financially-weak 
employer for the plan year and the four immediately preceding 
plan years); and (4) any other information prescribed by the 
Secretary of Labor.\144\
---------------------------------------------------------------------------
    \144\ Target liability, target normal cost, at-risk target 
liability, at-risk normal cost, and financially-weak status are defined 
under the provision relating to funding requirements for single-
employer plans.
---------------------------------------------------------------------------
    Under the provision, if quarterly contributions are 
required with respect to a single-employer plan, the deadline 
for the actuarial report is accelerated.\145\ The actuarial 
report is due on the 15th day of the second month following the 
close of the plan year (e.g., February 15 for calendar year 
plans).\146\ If any contribution is subsequently made for the 
plan year, the additional contribution is required to be 
reflected in an amended actuarial report with the Form 5500.
---------------------------------------------------------------------------
    \145\ Because a plan covering 100 or fewer participants is not 
subject to the quarterly contributions requirements, the acceleration 
of the due date for the actuarial report does not apply to such a plan.
    \146\ It is intended that, once the actuarial report for a plan 
year is filed, the actuarial assumptions used for that plan year may 
not be changed.
---------------------------------------------------------------------------

Summary annual report

    The provision changes the information that must be included 
in a summary annual report and the time by which the summary 
annual report must be provided. The provision also amends the 
Code to add a summary annual report requirement.
    Under the provision, the summary annual report under ERISA 
must be provided to participants, and beneficiaries receiving 
benefits under the plan, within 15 days of the due date of the 
annual report and must include the following additional 
information: (1) a statement of the plan's funded target 
liability percentage (i.e., the value of the plan's assets as a 
percentage of the plan's target liability) for the plan year 
and the two preceding plan years; (2) a statement of whether 
the plan sponsor was a financially-weak employer for the plan 
year and the two preceding plan years; and (3) the limits on 
benefits guaranteed by the PBGC if the plan is terminated while 
underfunded.\147\ In the case of a failure to provide the 
summary annual report to a participant or beneficiary, 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.
---------------------------------------------------------------------------
    \147\ This information replaces the present-law requirement under 
ERISA section 4011 that plan participants be notified of the plan's 
funding status and the limits on the PBGC benefit guarantee.
---------------------------------------------------------------------------
    The provision adds a Code requirement of a summary annual 
report, similar to the summary annual report required under 
ERISA. The summary annual report is to be provided by the date 
prescribed by the Secretary of the Treasury. The Secretary of 
Labor may prescribe the form and manner of the summary annual 
report required under the Code. The summary annual report 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. It is intended 
that providing participants and beneficiaries with a summary 
annual report, containing the information required under the 
Code and ERISA, within the required timeframe, will satisfy the 
requirements under both the Code and ERISA.
    Under the provision, an excise tax is generally imposed on 
the employer in the case of a failure to provide the summary 
annual report required under the Code. The excise tax is $100 
per day for each participant or beneficiary with respect to 
whom the failure occurs, until the summary annual report 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. The $500,000 limit is applied separately with respect 
to each type of notice required.
    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 uses reasonable 
diligence to comply and provides the summary annual report 
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.

Public disclosure of section 4010 information

    Under the provision, section 4010 information provided to 
the PBGC is available to the public.

                             EFFECTIVE DATE

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

   TITLE V--IMPROVEMENTS IN FUNDING RULES FOR MULTIEMPLOYER DEFINED 
                             BENEFIT PLANS


                    A. Increase in Deduction Limits


(Secs. 322 and 501 of the bill and sec. 404 of the Code)

                              PRESENT LAW

    Employer contributions to qualified retirement plans are 
deductible subject to certain limits.\148\ In general, the 
deduction limit depends on the kind of plan. 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.
---------------------------------------------------------------------------
    \148\ Code 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 10 years, but limited to the full funding 
limitation for the year.\149\ The maximum amount otherwise 
deductible generally is not less than the plan's unfunded 
current liability.\150\
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    \149\ The full funding limitation is the excess, if any, of (1) the 
accrued liability of 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. However, the full funding limit is not 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.
    \150\ In the case of a plan with 100 or fewer participants, current 
liability for this purpose does not include the liability attributable 
to benefit increases for highly compensated employees resulting from an 
amendment that is made or becomes effective, whichever is later, within 
the last two years.
---------------------------------------------------------------------------
    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 pension 
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. 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, but not less than the amount of the plan's 
unfunded current liability.

                           REASONS FOR CHANGE

    The Committee is concerned that the present-law deduction 
limits play a role in the underfunding of multiemployer defined 
benefit pension plans by creating the potential that 
contributions required under collective bargaining agreements 
might not be deductible by the employers obligated to make the 
contributions. In that case, employers' contribution 
obligations may be waived, or plan benefits (and thus plan 
liabilities) may be increased in order to assure that 
contributions are deductible. However, such measures may cause 
the plan's funded status to deteriorate, especially in a period 
of economic downturn. The Committee believes that the deduction 
limit for contributions to multiemployer defined benefit 
pension plans should be increased in order to reduce the 
possibility that contributions required under collective 
bargaining agreements are not deductible and to encourage 
contributions in amounts sufficient to assure that promised 
benefits are adequately funded. The Committee further believes 
that the overall limit on deductible contributions should not 
apply to multiemployer plans.

                        EXPLANATION OF PROVISION

    The provision increases the limits on deductions for 
contributions to multiemployer plans. Under the provision, the 
maximum amount otherwise deductible for contributions to a 
multiemployer defined benefit pension plan 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.\151\
---------------------------------------------------------------------------
    \151\ The provision does not include the present-law rule under 
which, in the case of a plan with 100 or fewer participants, the 
liability attributable to certain benefit increases for highly 
compensated employees is disregarded.
---------------------------------------------------------------------------
    In addition, under the provision, multiemployer plans are 
not taken into account in applying the overall limit on 
deductions for contributions to combinations of defined benefit 
and defined contribution plans. Thus, the deduction for 
contributions to a defined benefit pension plan or a defined 
contribution plan is not affected by the overall deduction 
limit merely because employees are covered by both plans if 
either plan is a multiemployer plan (i.e., the separate 
deduction limits for contributions to defined contribution 
plans and defined benefit pension plans apply).

                             EFFECTIVE DATE

    The provision is effective for contributions for years 
beginning after December 31, 2005.

                  B. Multiemployer Plan Funding Notice


(Sec. 502 of the bill and new sec. 4980L of the Code)

                              PRESENT LAW

    Under ERISA, effective for plan years beginning after 
December 31, 2004, the plan administrator of a multiemployer 
plan must provide an annual funding notice to: (1) each 
participant and beneficiary; (2) each labor organization 
representing such participants or beneficiaries; (3) each 
employer that has an obligation to contribute under the plan; 
and (4) the PBGC.\152\
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    \152\ ERISA sec. 101(f).
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    Such a notice must 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 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); (3) 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; (4) a summary of the rules 
governing insolvent multiemployer plans, including the 
limitations on benefit payments and any potential benefit 
reductions and suspensions (and the potential effects of such 
limitations, reductions, and suspensions on the plan); (5) a 
general description of the benefits under the plan which are 
eligible to be guaranteed by the PBGC and the limitations of 
the guarantee and circumstances in which such limitations 
apply; and (6) any additional information which the plan 
administrator elects to include to the extent it is not 
inconsistent with regulations prescribed by the Secretary of 
Labor.
    The annual funding notice must be provided no later than 
two months after the deadline (including extensions) for filing 
the plan's annual report for the plan year to which the notice 
relates (i.e., generally nine or eleven months after the end of 
the plan year). The funding notice must be provided in a form 
and manner prescribed in regulations by the Secretary of Labor. 
Additionally, it must be written so as to be understood by the 
average plan participant and may be provided in written, 
electronic, or some other appropriate form to the extent that 
it is reasonably accessible to persons to whom the notice is 
required to be provided.
    A plan administrator that fails to provide the required 
notice to a participant or beneficiary may be liable to the 
participant or beneficiary in the amount of up to $100 a day 
from the time of the failure and for such other relief as a 
court may deem proper.

                           REASONS FOR CHANGE

    The Committee believes that providing participants in 
multiemployer defined benefit pension plans with annual notices 
regarding plan funding and solvency, and the potential effect 
on plan benefits, increases participants' understanding of the 
security of their retirement benefits. In addition, providing 
such notices to employee representatives, employers, and the 
PBGC increases the likelihood that possible funding problems 
are addressed promptly. The Committee believes that enhancing 
enforcement of the present-law notice requirement will help to 
ensure that required notices are provided.

                        EXPLANATION OF PROVISION

    The provision amends the Code to include a multiemployer 
plan funding notice requirement similar to the present-law 
ERISA requirement.
    Under the provision, an excise tax is generally imposed on 
the plan if a funding notice is not provided as required under 
the Code. The excise tax is $100 per day for each person with 
respect to whom the failure occurred, until notice is provided 
or the failure is otherwise corrected. If the plan 
administrator 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 plan administrator 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 plan administrator 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.

                             EFFECTIVE DATE

    The provision is effective for failures to provide the 
required notice after the date of enactment.

   C. Permit Qualified Transfers of Excess Pension Assets to Retiree 
                 Health Accounts by Multiemployer Plan


(Sec. 503 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.\153\ 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.
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    \153\ Sec. 420.
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    Excess assets generally means the excess, if any, of the 
value of the plan's assets \154\ over the greater of (1) the 
accrued liability under the plan (including normal cost) or (2) 
125 percent of the plan's current liability.\155\ 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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    \154\ The value of plan assets for this purpose is the lesser of 
fair market value or actuarial value.
    \155\ 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.
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    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 receiveretiree 
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 for 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, 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.\156\
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    \156\ ERISA sec. 101(e). ERISA also provides that a qualified 
transfer is not a prohibited transaction under ERISA or a prohibited 
reversion.
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    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.\157\
---------------------------------------------------------------------------
    \157\ Code sec. 404(c).
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                           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.

          TITLE VI--IMPROVEMENTS IN PBGC GUARANTEE PROVISIONS


        A. Increases in PBGC Premiums for Single-Employer Plans


(Sec. 601 of the bill and sec. 4006 of ERISA)

                              PRESENT LAW

The PBGC

    The minimum funding requirements permit an employer to fund 
defined benefit plan benefits over a period of time. Thus, it 
is possible that a plan may be terminated at a time when plan 
assets are not sufficient to provide all benefits accrued by 
employees under the plan. In order to protect plan participants 
from losing retirement benefits in such circumstances, the 
Pension Benefit Guaranty Corporation (``PBGC''), a corporation 
within the Department of Labor, was created in 1974 under ERISA 
to provide an insurance program for benefits under most defined 
benefit plans maintained by private employers.

Termination of single-employer defined benefit plans

    An employer may voluntarily terminate a single-employer 
plan only in a standard termination or a distress termination. 
The PBGC may also involuntarily terminate a plan (that is, the 
termination is not voluntary on the part of the employer).
    A standard termination is permitted only if plan assets are 
sufficient to cover benefit liabilities. If assets in a defined 
benefit plan are not sufficient to cover benefit liabilities, 
the employer may not terminate the plan unless the employer 
(and members of the employer's controlled group) meets one of 
four criteria of financial distress.\158\
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    \158\ The four criteria for a distress termination are: (1) the 
contributing sponsor, and every member of the controlled group of which 
the sponsor is a member, is being liquidated in bankruptcy or any 
similar Federal law or other similar State insolvency proceedings; (2) 
the contributing sponsor and every member of the sponsor's controlled 
group is being reorganized in bankruptcy or similar State proceeding; 
(3) the PBGC determines that termination is necessary to allow the 
employer to pay its debts when due; or (4) the PBGC determines that 
termination is necessary to avoid unreasonably burdensome pension costs 
caused solely by a decline in the employer's work force.
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    The PBGC may institute proceedings to terminate a plan if 
it determines that the plan in question has not met the minimum 
funding standards, will be unable to pay benefits when due, has 
a substantial owner who has received a distribution greater 
than $10,000 (other than by reason of death) while the plan has 
unfunded nonforfeitable benefits, or may reasonably be expected 
to increase PBGC's long-run loss unreasonably. The PBGC must 
institute proceedings to terminate a plan if the plan is unable 
to pay benefits that are currently due.

Guaranteed benefits

    When an underfunded plan terminates, the amount of benefits 
that the PBGC will pay depends on legal limits, asset 
allocation, and recovery on the PBGC's employer liability 
claim. The PBGC guarantee applies to ``basic benefits.'' Basic 
benefits generally are benefits accrued before a plan 
terminates, including (1) benefits at normal retirement age; 
(2) most early retirement benefits; (3) disability benefits for 
disabilities that occurred before the plan was terminated; and 
(4) certain benefits for survivors of plan participants. 
Generally only that part of the retirement benefit that is 
payable in monthly installments (rather than, for example, 
lump-sum benefits payable to encourage early retirement) is 
guaranteed.\159\
---------------------------------------------------------------------------
    \159\ ERISA sec. 4022(b) and (c).
---------------------------------------------------------------------------
    Retirement benefits that begin before normal retirement age 
are guaranteed, provided they meet the other conditions of 
guarantee (such as that before the date the plan terminates, 
the participant had satisfied the conditions of the plan 
necessary to establish the right to receive the benefit other 
than application for the benefit). Contingent benefits (for 
example, subsidized early retirement benefits) are guaranteed 
only if the triggering event occurs before plan termination.
    For plans terminating in 2005, the maximum guaranteed 
benefit for an individual retiring at age 65 is $3,698.86 per 
month or $44,386.32 per year.\160\ The dollar limit is indexed 
annually for inflation. The guaranteed amount is reduced for 
benefits starting before age 65.
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    \160\ The PBGC generally pays the greater of the guaranteed benefit 
amount and the amount that was covered by plan assets when it 
terminated. Thus, depending on the amount of assets in the terminating 
plan, participants may receive more than the amount guaranteed by PBGC.
    Special rules limit the guaranteed benefits of individuals who are 
substantial owners covered by plans whose benefits have not been 
increased by reason of any plan amendment. A substantial owner 
generally is an individual who: (1) owns the entire interest in an 
unincorporated trade or business; (2) in the case of a partnership, is 
a partner who owns, directly or indirectly, more than 10 percent of 
either the capital interest or the profits interest in the partnership; 
(3) in the case of a corporation, owns, directly or indirectly, more 
than 10 percent in value of either the voting stock of the corporation 
or all the stock of the corporation; or (4) at any time within the 
preceding 60 months was a substantial owner under the plan. ERISA sec. 
4022(b)(5).
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    In the case of a plan or a plan amendment that has been in 
effect for less than five years before a plan termination, the 
amount guaranteed is phased in by 20 percent a year.\161\
---------------------------------------------------------------------------
    \161\ The phase in does not apply if the benefit is less than $20 
per month.
---------------------------------------------------------------------------

PBGC premiums

            In general
    The PBGC is funded by assets in terminated plans, amounts 
recovered from employers who terminate underfunded plans, 
premiums paid with respect to covered plans, and investment 
earnings. All covered single-employer plans are required to pay 
a flat per-participant premium and underfunded plans are 
subject to an additional rate variable premium based on the 
level of underfunding. The amount of both the flat rate premium 
and the variable rate premium are set by statute; the premiums 
are not indexed for inflation.
            Flat rate premiums
    The annual flat rate per participant premium is $19 per 
participant.
            Variable rate premiums
    The variable rate premium is equal to $9 per $1,000 of 
unfunded vested benefits. ``Unfunded vested benefits'' is the 
amount which would be the unfunded current liability (as 
defined under the minimum funding rules) if only vested 
benefits were taken into account and if benefits were valued at 
the variable premium interest rate. No variable rate premium is 
imposed for a year if contributions to the plan for the prior 
year were at least equal to the full funding limit for that 
year.
    In determining the amount of unfunded vested benefits, the 
interest rate used is generally 85 percent of the interest rate 
on 30 year Treasury securities for the month preceding the 
month in which the plan year begins (100 percent of the 
interest rate on 30 year Treasury securities for plan years 
beginning in 2002 and 2003). Under PFEA 2004, in determining 
the amount of unfunded vested benefits for PBGC variable rate 
premium purposes for plan years beginning after December 31, 
2003, and before January 1, 2006, the interest rate used is 85 
percent of the annual rate of interest determined by the 
Secretary of the Treasury on amounts invested conservatively in 
long term investment-grade corporate bonds for the month 
preceding the month in which the plan year begins.

                           REASONS FOR CHANGE

    Modifications to the PBGC premium structure, in conjunction 
with the Committee's proposals relating to defined benefit plan 
funding, will provide for increased retirement income security. 
The current flat-rate premium has not been modified since 1991 
and has not kept pace with increases in wages, which are 
typically reflected in pension benefits. Thus, the Committee 
bill increases the PBGC premium to reflect past increases in 
wages and provides for automatic increases in the future to 
reflect wage increases.
    Changes to the variable rate premium are also appropriate 
to better reflect the risk that underfunded plans present to 
the pension insurance system. Thus, the Committee bill modifies 
the base for the premium to conform to the funding targets 
under the funding provisions of the bill.

                        EXPLANATION OF PROVISION

Flat rate premiums

    The provision increases the flat-rate premium to $30 per 
participant for years beginning after December 31, 2005. After 
2006, the flat-rate premium is indexed for increases in the 
social security contribution and benefit base (rounded to the 
nearest dollar).

Variable rate premium

    Under the provision, for years beginning in 2006, the 
variable rate premium is equal to $9.00 for each $1,000 of a 
plan's unfunded current liability as of the close of the 
preceding plan year. The interest rate used in determining 
current liability for plan years beginning in 2005 continues to 
apply for plan years beginning in 2006.
    For years beginning after 2006, the variable rate premium 
is equal to $9.00 for each $1,000 of a plan's unfunded target 
liability (determined as under the minimum funding rules) as of 
the close of the preceding plan year.\162\ 
---------------------------------------------------------------------------
    \162\ The rule providing that no variable rate premium is required 
if contributions for the prior plan year were at least equal to the 
full funding limit no longer applies under the provision for years 
beginning after December 31, 2006.
---------------------------------------------------------------------------

                             EFFECTIVE DATE

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

              B. Rules Relating to Bankruptcy of Employer


(Secs. 403 and 602 of the bill and secs. 4022 and 4044 of ERISA)

                              PRESENT LAW

Guaranteed benefits

    When an underfunded plan terminates, the amount of benefits 
that the PBGC will pay depends on legal limits, asset 
allocation, and recovery on the PBGC's employer liability 
claim. The PBGC guarantee applies to ``basic benefits.'' Basic 
benefits generally are benefits accrued before a plan 
terminates, including (1) benefits at normal retirement age; 
(2) most early retirement benefits; (3) disability benefits for 
disabilities that occurred before the plan was terminated; and 
(4) certain benefits for survivors of plan participants. 
Generally only that part of the retirement benefit that is 
payable in monthly installments is guaranteed.\163\
---------------------------------------------------------------------------
    \163\ ERISA sec. 4022(b) and (c).
---------------------------------------------------------------------------
    Retirement benefits that begin before normal retirement age 
are guaranteed, provided they meet the other conditions of 
guarantee (such as that before the date the plan terminates, 
the participant had satisfied the conditions of the plan 
necessary to establish the right to receive the benefit other 
than application for the benefit). Contingent benefits (for 
example, subsidized early retirement benefits) are guaranteed 
only if the triggering event occurs before plan termination.
    For plans terminating in 2005, the maximum guaranteed 
benefit for an individual retiring at age 65 is $3,698.86 per 
month or $44,386.32 per year.\164\ The dollar limit is indexed 
annually for inflation. The guaranteed amount is reduced for 
benefits starting before age 65.
---------------------------------------------------------------------------
    \164\ The PBGC generally pays the greater of the guaranteed benefit 
amount and the amount that was covered by plan assets when it 
terminated. Thus, depending on the amount of assets in the terminating 
plan, participants may receive more than the amount guaranteed by PBGC.
    Special rules limit the guaranteed benefits of individuals who are 
substantial owners covered by a plans whose benefits have not been 
increased by reason of any plan amendment. A substantial owner 
generally is an individual who: (1) owns the entire interest in an 
unincorporated trade or business; (2) in the case of a partnership, is 
a partner who owns, directly or indirectly, more than 10 percent of 
either the capital interest or the profits interest in the partnership; 
(3) in the case of a corporation, owns, directly or indirectly, more 
than 10 percent in value of either the voting stock of the corporation 
or all the stock of the corporation; or (4) at any time within the 
preceding 60 months was a substantial owner under the plan.
---------------------------------------------------------------------------
    In the case of a plan or a plan amendment that has been in 
effect for less than five years before a plan termination, the 
amount guaranteed is phased in by 20 percent a year.\165\
---------------------------------------------------------------------------
    \165\ The phase in does not apply if the benefit is less than $20 
per month.
---------------------------------------------------------------------------

Asset allocation

    ERISA contains rules for allocating the assets of a single-
employer plan when the plan terminates. Plan assets available 
to pay for benefits under a terminating plan include all plan 
assets remaining after subtracting all liabilities (other than 
liabilities for future benefit payments), paid or payable from 
plan assets under the provisions of the plan. On termination, 
the plan administrator must allocate plan assets available to 
pay for benefits under the plan in the manner prescribed by 
ERISA. In general, plan assets available to pay for benefits 
under the plan are allocated to six priority categories. If the 
plan has sufficient assets to pay for all benefits in a 
particular priority category, the remaining assets are 
allocated to the next lower priority category. This process is 
repeated until all benefits in the priority categories are 
provided or until all available plan assets have been 
allocated.

                           REASONS FOR CHANGE

    The PBGC reports that many plan sponsors continue to 
operate their plans until late in the bankruptcy process, and 
then terminate the plan just prior to emerging from bankruptcy 
or prior to liquidation. During the time the sponsor is in 
bankruptcy, payment of lump sums and annuity purchases may 
drain plan assets, which may reduce assets available for 
payment of non-guaranteed benefits to other participants. 
Benefits may also continue to accrue during bankruptcy and the 
PBGC limits on guarantees may continue to increase as a result 
of inflation adjustments, which may further increase unfunded 
benefits and the liability of the pension insurance system. In 
addition, the longer a company is in bankruptcy, the more 
participants earn a higher priority claim under the plan to 
share in limited plan assets and recoveries for payment of non-
guaranteed benefits. This increase in the number of 
participants with higher priority claims dilutes the potential 
payments to those who have been retired or eligible to retire 
for the longest time.

                        EXPLANATION OF PROVISION

    Under the provision, the amount of guaranteed benefits 
payable by the PBGC is frozen when a contributing sponsor 
enters bankruptcy or a similar proceeding.\166\ If the plan 
terminates during the contributing sponsor's bankruptcy, the 
amount of guaranteed benefits payable by the PBGC is determined 
based on plan provisions, salary, service, and the guarantee in 
effect on the date the employer entered bankruptcy. The 
priority among participants for purposes of allocating plan 
assets and employer recoveries to non-guaranteed benefits in 
the event of plan termination is determined as of the date the 
sponsor enters bankruptcy or a similar proceeding.
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    \166\ For purposes of the provision, a contributing sponsor is 
considered to have entered bankruptcy if the sponsor files or has had 
filed against it a petition seeking liquidation or reorganization in a 
case under title 11 of the United States Code or under any similar 
Federal law or law of a State or political subdivision.
---------------------------------------------------------------------------
    A contributing sponsor of a single-employer plan is 
required to notify the plan administrator when the sponsor 
enters bankruptcy or a similar proceeding. Within a reasonable 
time after a plan administrator knows or has reason to know 
that a contributing sponsor has entered bankruptcy (or similar 
proceeding), the administrator is required to notify 
planparticipants and beneficiaries of the bankruptcy and the 
limitations on benefit guarantees if the plan is terminated while 
underfunded, taking into account the bankruptcy.
    The Secretary of Labor is to prescribe the form and manner 
of notices required under this provision. The notice is to 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 may assess a civil penalty of up to 
$100 a day for each failure to provide the notice required by 
the provision. Each violation with respect to any single 
participant or beneficiary is treated as a separate violation.

                             EFFECTIVE DATE

    The provision is effective with respect to Federal 
bankruptcy or similar proceedings or arrangements for the 
benefit of creditors which are initiated on or after the date 
that is 30 days after enactment.

     C. Limitation on PBGC Guarantee of Shutdown and Other Benefits


(Sec. 603 of the bill and sec. 4022 of ERISA)

                              PRESENT LAW

    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. Under present law, 
unpredictable contingent event benefits generally are not taken 
into account for funding purposes until the event has occurred.
    Under present law, defined benefit pension plans are not 
permitted to provide ``layoff'' benefits (i.e., severance 
benefits).\167\ However, defined benefit pension plans may 
provide subsidized early retirement benefits, including early 
retirement window benefits.\168\ 
---------------------------------------------------------------------------
    \167\ Treas. Reg. sec. 1.401-1(b)(1)(i).
    \168\ Treas. Reg. secs. 1.401(a)(4)-3(f)(4) and 1.411(a)-7(c).
---------------------------------------------------------------------------
    Within certain limits, the PBGC guarantees any retirement 
benefit that was vested on the date of plan termination (other 
than benefits that vest solely on account of the termination), 
and any survivor or disability benefit that was owed or was in 
payment status at the date of plan termination.\169\ Generally 
only that part of the retirement benefit that is payable in 
monthly installments is guaranteed.\170\
---------------------------------------------------------------------------
    \169\ ERISA sec. 4022(a).
    \170\ ERISA sec. 4022(b) and (c).
---------------------------------------------------------------------------
    Retirement benefits that begin before normal retirement age 
are guaranteed, provided they meet the other conditions of 
guarantee (such as that, before the date the plan terminates, 
the participant had satisfied the conditions of the plan 
necessary to establish the right to receive the benefit other 
than application for the benefit). Contingent benefits (for 
example, early retirement benefits provided only if a plant 
shuts down) are guaranteed only if the triggering event occurs 
before plan termination.
    In the case of a plan or a plan amendment that has been in 
effect for less than five years before a plan termination, the 
amount guaranteed is phased in by 20 percent a year.

                           REASONS FOR CHANGE

    Under present law, unpredictable contingent event benefits 
can create significant losses for the PBGC pension insurance 
system because such benefits cannot be funded due to the 
contingent nature of the event. In some cases, the PBGC has 
been faced with terminating a plan just prior to a plant 
shutdown in order to protect the system against further losses.

                        EXPLANATION OF PROVISION

    The provision provides that the PBGC guarantee of certain 
benefits phases in under the rules relating to plan amendments. 
Under the provision, if a benefit is payable by reason of (1) a 
plant shutdown or similar event, or (2) any event other than 
attainment of any age, performance of any service, receipt or 
derivation of any compensation, or the occurrence of death or 
disability, the PBGC guarantee provisions apply as if a plan 
amendment had been adopted on the date such event occurred that 
provides for the payment of such benefits.

                             EFFECTIVE DATE

    The provision is effective for benefits that become payable 
as a result of a plant shutdown or other covered event that 
occurs after July 26, 2005.

                D. PBGC Premiums for Small and New Plans


(Secs. 604 and 605 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 provision relating to flat-rate premiums for 
new plans of small employers.

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, 
2005. The reduction of the variable-rate premium for small 
plans applies to plan years beginning after December 31, 2005.

   E. Authorization for PBGC To Pay Interest on Premium Overpayment 
                                Refunds


(Sec. 606 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.

      F. Rules for Substantial Owner Benefits in Terminated Plans


(Sec. 607 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, 2005.

    G. Acceleration of PBGC Computation of Benefits Attributable to 
                       Recoveries from Employers


(Sec. 608 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.\171\ 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 2005, the maximum guaranteed benefit for an 
individual retiring at age 65 is $3,698.86 per month, or 
$44,386.32 per year.
---------------------------------------------------------------------------
    \171\ 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 a 
recovery ratio based on plan terminations during a specified 
period, rather than the actual amount recovered for each 
specific plan. The recovery ratio that applies to a plan 
includes the PBGC's actual recovery experience for plan 
terminations in the five-Federal fiscal year period immediately 
preceding the Federal fiscal year in which falls the notice of 
intent to terminate for the particular plan.
    The 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 recovery ratio for unfunded benefit 
liabilities so that the period begins two years earlier. Thus, 
under the bill, the recovery ratio that applies to a plan 
includes the PBGC's actual recovery experience for plan 
terminations in the five-Federal fiscal year period ending with 
the third fiscal year preceding the fiscal year in which falls 
the notice of intent to terminate for the particular plan.
    In addition, the provision creates a 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.

                 TITLE VII--SPOUSAL PENSION PROTECTION


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


(Sec. 701 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.
---------------------------------------------------------------------------
    \172\ Code secs. 401(a)(11) and 417; ERISA sec. 205.
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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 pensions 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 the 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 the 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. 702 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. 703 and 704 of the bill 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. 705 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 
more options 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 relating to plan amendments, a plan 
amendment made pursuant to a provision under 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, 2005. 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, 2006, and the last date 
on which an applicable collective bargaining agreement 
terminates (without regard to extensions), and (2) January 1, 
2007.

     TITLE VIII--IMPROVEMENTS IN PORTABILITY AND DISTRIBUTION RULES


                A. Purchase of Permissive Service Credit


(Sec. 801 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.\180\ 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 ($170,000 for 2005) or (2) 100 percent of the 
participant's average compensation for his or her high three 
years.
---------------------------------------------------------------------------
    \180\ 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.\181\
---------------------------------------------------------------------------
    \181\ 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.\182\
---------------------------------------------------------------------------
    \182\ 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).\183\
---------------------------------------------------------------------------
    \183\ 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 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.

         B. Rollover of After-Tax Amounts in Annuity Contracts


(Sec. 802 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.\184\
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    \184\ Sec. 402(c)(2); IRS Notice 2002-3, 2002-2 I.R.B. 289.
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                           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, 2005.

   C. Application of Minimum Distribution Rules to Governmental Plans


(Sec. 803 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, the 
remaining 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.

 D. Waiver of 10-Percent Early Withdrawal Tax on Certain Distributions 
             From Pension Plans for Public Safety Employees


(Sec. 804 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.

  E. Rollovers by Nonspouse Beneficiaries of Certain Retirement Plan 
                             Distributions


(Sec. 805 of the bill 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.\185\
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    \185\ 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.\186\ 
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.\187\ 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.
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    \186\ 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.
    \187\ 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.\188\ 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.
---------------------------------------------------------------------------
    \188\ In the case of five-percent owners and distributions from an 
IRA, distributions must begin by the 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, 2005.

        F. Faster Vesting of Employer Nonelective Contributions


(Sec. 806 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.\189\
---------------------------------------------------------------------------
    \189\ 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 generally effective for contributions 
(including allocations of forfeitures) for plan years beginning 
after December 31, 2005. In the case of a plan maintained 
pursuant to one or more collective bargaining agreements, the 
provision is not effective for contributions (including 
allocations of forfeitures) for plan years beginning before the 
earlier of (1) the later of the date on which the last of such 
collective bargaining agreements terminates (determined without 
regard to any extension thereof on or after the date of 
enactment) or January 1, 2006, or, or (2) January 1, 2008. 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.

      G. Allow Direct Rollovers From Retirement Plans to Roth IRAs


(Sec. 807 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 $4,000 for 2005) 
\190\ or the individual's compensation if neither the 
individual nor the individual's spouse is an active participant 
in an employer-sponsored retirement plan.\191\ 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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    \190\ The dollar limit is scheduled to increase until it is $5,000 
in 2008-2010. Individuals age 50 and older may make additional, catch-
up contributions.
    \191\ 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.
---------------------------------------------------------------------------
    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 individuals 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, 2005.

 H. Elimination of Higher Early Withdrawal Tax on Certain SIMPLE Plan 
                             Distributions


(Sec. 808 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'') \192\ for 
each employee or part of a qualified cash or deferred 
arrangement (a ``section 401(k) plan'').\193\ The rules 
applicable to SIMPLE IRAs and SIMPLE section 401(k) plans are 
similar, but not identical.
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    \192\ A SIMPLE IRA may not be in the form of a Roth IRA. References 
herein to IRAs do not refer to Roth IRAs.
    \193\ 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 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.
    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, 2005.

                       I. SIMPLE Plan Portability


(Sec. 809 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 retirement arrangement (an ``IRA'') \194\ for 
each employee or part of a qualified cash or deferred 
arrangement (a ``section 401(k) plan'').\195\ The rules 
applicable to SIMPLE IRAs and SIMPLE section 401(k) plans are 
similar, but not identical.
---------------------------------------------------------------------------
    \194\ A SIMPLE IRA may not be in the form of a Roth IRA. References 
herein to IRAs do not refer to Roth IRAs.
    \195\ 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 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, 2005.

  J. Eligibility for Participation in Eligible Deferred Compensation 
                                 Plans


(Sec. 810 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.

                    K. Benefit Transfers to the PBGC


(Sec. 811 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, the participant's spouse, 
if the present value of the benefit does not exceed 
$5,000.\196\ 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.
---------------------------------------------------------------------------
    \196\ 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.\197\ 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.
---------------------------------------------------------------------------
    \197\ 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 harbors 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 
providethe 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.\198\
---------------------------------------------------------------------------
    \198\ 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.\199\ 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.
---------------------------------------------------------------------------
    \199\ The provision applies to all automatic rollovers, not just 
those for missing participants or from terminating plans.
---------------------------------------------------------------------------
    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.
    Under the provision, on a transfer of benefits to the PBGC, 
a plan administrator must provide information required by the 
PBGC with respect to the benefits transferred. The PBGC may 
charge a reasonable fee for costs incurred in connection with 
the transfer and management of transferred amounts.
    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, 2006.

                        L. Missing Participants


(Sec. 812 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.\200\
---------------------------------------------------------------------------
    \200\ 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 pension plans that provide benefits based upon the 
separate accounts of participants and therefore are treated as 
defined contribution plans under ERISA.

                             EFFECTIVE DATE

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

                  TITLE IX--ADMINISTRATIVE PROVISIONS


       A. Updating of Employee Plans Compliance Resolution System


(Sec. 901 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.\201\ EPCRS permits employers to correct compliance 
failures and continue to provide their employees with 
retirement benefits on a tax-favored basis.
---------------------------------------------------------------------------
    \201\ 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.

B. Extension to all Governmental Plans of Moratorium on Application of 
                    Certain Nondiscrimination Rules


(Sec. 902 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.\202\
---------------------------------------------------------------------------
    \202\ 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, 2005.

          C. Notice and Consent Period Regarding Distributions


(Sec. 903 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,\203\ 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.
---------------------------------------------------------------------------
    \203\ 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, 
2005. In the case of a description of the consequences of a 
participant's failure to defer receipt of a distribution that 
is made before the date, 90 days after the date on which the 
Secretary of the Treasury makes modifications to the applicable 
regulations, the plan administrator is required to make a 
reasonable attempt to comply with the requirements of the 
provision.

                D. Pension Plan Reporting Simplification


(Sec. 904 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.\204\ 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.
---------------------------------------------------------------------------
    \204\ 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, in consultation with the 
Secretary of Labor, is 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, 2006, 
for certain plans with fewer than 25 participants.

                             EFFECTIVE DATE

    The provision relating to one-participant retirement plans 
is effective for plan years beginning on or after January 1, 
2006. The provision relating to simplified reporting for plans 
with fewer than 25 participants is effective on the date of 
enactment.

E. Voluntary Early Retirement Incentive and Employment Retention Plans 
      Maintained by Local Educational Agencies and Other Entities


(Sec. 904 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 ($14,000 for 2005). 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 retirement benefit or social security 
supplements pursuant to ADEA \205\, and employers may lawfully 
provide a voluntary early retirement incentive plan that is 
consistent with the purposes of ADEA.\206\
---------------------------------------------------------------------------
    \205\ See ADEA sec. 4(l)(1).
    \206\ 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

            In general
    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.\207\
---------------------------------------------------------------------------
    \207\ 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 welfare benefit plans for purposes of 
ERISA (other than governmental plans that are 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 ($14,000 for 2005). 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.

  F. No Reduction in Unemployment Compensation as a Result of Pension 
                               Rollovers


(Sec. 906 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 provision 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 provision is effective for weeks beginning on or after 
the date of enactment.

  G. Withholding on Certain Distributions From Governmental Eligible 
                      Deferred Compensation Plans


(Sec. 907 of the bill and sec. 457 of the Code)

                              PRESENT LAW

    Before the Economic Growth and Tax Relief Reconciliation 
Act of 2001 \208\ (``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.
---------------------------------------------------------------------------
    \208\ 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.\209\ 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.
---------------------------------------------------------------------------
    \209\ 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 section 641 of 
EGTRRA.

       H. Defined Benefit Plans Maintained by Tribal Governments


(Sec. 908 of the bill)

                              PRESENT LAW

    Under present law, in some cases governmental plans are 
subject to different rules than other qualified plans. For 
example, governmental plans generally are not subject to the 
same nondiscrimination rules as other plans and the minimum 
funding rules do not apply to such plans.

                           REASONS FOR CHANGE

    Questions have arisen with respect to the application of 
the qualified plan rules to plans of tribal governments. 
Clarification of the status of such plans would provide greater 
certainty for plan sponsors, plan participants, and the IRS.

                        EXPLANATION OF PROVISION

    The bill provides that, in the case of defined benefit 
plans, the term ``governmental plan'' under the Code and ERISA 
includes a plan established or maintained for its employees by 
an Indian tribal government (as defined in section 
7701(a)(40)), a subdivision of an Indian tribal government 
(determined in accordance with section 7871(d)), an agency 
instrumentality (or subdivision) of an Indian tribal 
government, or an entity established under Federal, State, or 
tribal law which is wholly owned or controlled by any of the 
foregoing. In addition, under the provision, certain special 
rules applicable to defined benefit plans maintained by State 
or local governments apply also to defined benefit plans 
maintained by Indian tribal governments, and such plans are not 
subject to the PBGC insurance program. No inference is intended 
that the provision is not present law or that defined 
contributions plans maintained by an employer described in the 
proposal are not governmental plans.

                             EFFECTIVE DATE

    The provision is effective for any year beginning before, 
on, or after the date of enactment.

      I. Treatment of Plan of Certain Nonprofit Organization as a 
                           Governmental Plan


(Sec. 909 of the bill)

                              PRESENT LAW

    Under present law, in some cases governmental plans are 
subject to different rules than other qualified plans. For 
example, governmental plans generally are not subject to the 
same nondiscrimination rules as other plans and the minimum 
funding rules do not apply to such plans.

                           REASONS FOR CHANGE

    Questions have arisen as to the application of the 
qualified plan rules to a plan of a nonprofit organization that 
is a governmental entity under applicable State law. 
Clarification of the status of such plan would provide greater 
certainty for the plan sponsor, plan participants, and the IRS.

                        EXPLANATION OF PROVISION

    The bill provides that a defined benefit plan of a 
nonprofit organization is treated as a governmental plan under 
the Code and ERISA if the organization was: (1) incorporated on 
September 16, 1998, under a State nonprofit corporation 
statute; and (2) organized for the express purpose of 
supporting the missions and goals of a public corporation which 
was (a) created by a State statute effective on July 1, 1995, 
(b) is a governmental entity under State law, and (c) is a 
member of the nonprofit corporation.

                             EFFECTIVE DATE

    The provision is effective for any year beginning before, 
on, or after the date of enactment.

               J. Provisions Relating to Plan Amendments


(Sec. 910 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.\210\ 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.
---------------------------------------------------------------------------
    \210\ Sec. 401(b).
---------------------------------------------------------------------------
    The Code and ERISA provide that, in general, accrued 
benefits cannot be reduced by a plan amendment.\211\ This 
prohibition on the reduction of accrued benefits is commonly 
referred to as the ``anticutback rule.''
---------------------------------------------------------------------------
    \211\ Code sec. 411(d)(6); 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 \212\ (``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.
---------------------------------------------------------------------------
    \212\ 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 under 
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 under 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.\213\ 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.
---------------------------------------------------------------------------
    \213\ 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 X--UNITED STATES TAX COURT MODERNIZATION


                 A. Tax Court Pension and Compensation


1. Judges of the Tax Court (secs. 1001-1007 and 1013 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.\214\ The salary of a Tax 
Court judge is the same salary as received by a U.S. District 
Court judge.\215\ 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.\216\
---------------------------------------------------------------------------
    \214\ Sec. 7441.
    \215\ Sec. 7443(c).
    \216\ 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.
    Under the retirement program for Tax Court judges, retired 
judges generally receive retired pay equal to the rate of 
salary of an active judge and must be available for recall to 
perform judicial duties as needed by the court for up to 90 
days a year (unless the judge consents to more). However, 
retired judges may elect to freeze the amount of their retired 
pay, and those who do so are not available for recall.
    Retired Tax Court judges on recall are subject to the 
limitations on outside earned income that apply to active 
Federal employees under the Ethics in Government Act of 1978. 
However, retired District Court judges on recall may receive 
compensation for teaching without regard to the limitations on 
outside earned income. Retired Tax Court judges who elect to 
freeze the amount of their retired pay (thus making themselves 
unavailable for recall) are not subject to the limitations on 
outside earned income.

                           REASONS FOR CHANGE

    Tax Court judges receive compensation at the same rate as 
District Court judges. In addition, the benefit programs for 
Tax Court judges are intended to accord with similar programs 
applicable to District Court judges.\217\ However, subsequent 
legislative changes in the benefits provided to District Court 
judges and judges in certain other Article I courts have not 
applied to Tax Court judges, thus creating disparities between 
the treatment of Tax Court judges and the treatment of other 
Federal judges.
---------------------------------------------------------------------------
    \217\ See, e.g., S. Rep. No. 91-552, at 303 (1969).
---------------------------------------------------------------------------
    The Committee believes that, as a general matter, parity 
should exist between the benefits provided to Tax Court judges 
and those provided to District Court judges. Thus, the benefits 
provided to Tax Court judges should be updated to reflect 
benefits currently provided to District Court judges.
    In addition, the Committee is concerned that certain 
aspects of the present-law rules relating to Tax Court judges 
may be inequitable in that Tax Court judges are treated less 
favorably than District Court judges and judges in certain 
other Article I courts. With respect to increases in FEGLI 
premiums for Tax Court judges age 65 or older, the Committee 
believes that the Tax Court should be authorized to pay for 
such increases, similar to authority in other Federal courts. 
In addition, because Tax Court judges are not covered by the 
leave system for Federal Executive Branch employees, a judge 
who has unused accrued annual leave for service with the 
Federal Executive Branch should be able to receive a lump sum 
payment for such accrued annual leave. Moreover, the Committee 
believes that exempting from the limitation on outside earned 
income compensation received by retired Tax Court judges for 
teaching will encourage such judges to remain available for 
recall by the court.

                        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,\218\ 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).
---------------------------------------------------------------------------
    \218\ 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 FEGLI coverage applies to any individual serving as 
a Tax Court judge or any retired Tax Court judge on or after 
the date of enactment; (3) 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; 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.

2. Special trial judges of the Tax Court (secs. 1008-1013 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.\219\ The chief judge of the 
Tax Court may appoint special trial judges to handle certain 
cases.\220\ 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.
---------------------------------------------------------------------------
    \219\ Sec. 7441.
    \220\ 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. This will better enable the 
Tax Court to attract and retain qualified persons to serve in 
this capacity.

                        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: (1) 
twelve months after the date of enactment of the provision; (2) 
six months after the date the judge takes office; or (3) six 
months after 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 up to 
90 days a year.

                             EFFECTIVE DATE

    The provisions are effective on date of enactment.

                         B. Tax Court Procedure


1. Jurisdiction of Tax Court over collection due process cases (sec. 
        1021 of the bill and sec. 6330 of the Code)

                              PRESENT LAW

    In general, the Internal Revenue Service (``IRS'') is 
required to notify taxpayers that they have a right to a fair 
and impartial hearing before levy may be made on any property 
or right to property.\221\ Similar rules apply with respect to 
liens.\222\ The hearing is held by an impartial officer from 
the IRS Office of Appeals, who is required to issue a 
determination with respect to the issues raised by the taxpayer 
at the hearing. The taxpayer is entitled to appeal that 
determination to a court. The appeal must be brought to the 
United States Tax Court (the ``Tax Court''), unless the Tax 
Court does not have jurisdiction over the underlying tax 
liability. If that is the case, then the appeal must be brought 
in the district court of the United States.\223\ If a court 
determines that an appeal was not made to the correct court, 
the taxpayer has 30 days after such determination to file with 
the correct court.
---------------------------------------------------------------------------
    \221\ Sec. 6330(a).
    \222\ Sec. 6320.
    \223\ Sec. 6330(d).
---------------------------------------------------------------------------
    The Tax Court is established under Article I of the United 
States Constitution \224\ and is a court of limited 
jurisdiction.\225\ The Tax Court only has the jurisdiction that 
is expressly conferred on it by statute. For example, the 
jurisdiction of the Tax Court includes the authority to 
redetermine the correct amount of an income, estate, or gift 
tax deficiency, to make certain types of declaratory judgments, 
and to determine certain worker classification status issues, 
but does not include jurisdiction over most excise taxes 
imposed by the Internal Revenue Code. Thus, the Tax Court lacks 
jurisdiction over the appeal of a due process hearing relating 
to certain collections matters.
---------------------------------------------------------------------------
    \224\ Sec. 7441.
    \225\ Sec. 7442.
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    The Tax Court does not have jurisdiction over all of the 
tax issues underlying collection due process cases. For 
example, the jurisdiction of the Tax Court does not extend to 
issues involving most excise taxes. Thus, a taxpayer seeking to 
appeal the collection due process determination must know 
whether the Tax Court or a district court has jurisdiction over 
the underlying tax liability.
    The judicial appeals structure of present law was designed 
in recognition of these jurisdictional limitations; however, in 
many cases the underlying taxes are not involved in determining 
the due process issue. The present-law structure can lead to 
taxpayer confusion over which court is the proper court in 
which to file an appeal. Some believe that this confusion may 
also be used by some taxpayers seeking to delay the collection 
process. Accordingly, the Committee believes that the Tax Court 
should have jurisdiction over all appeals of collection due 
process determinations. The Committee believes that the 
simplification provided by the provision will benefit the 
taxpayers seeking judicial review and benefit the IRS by 
eliminating confusion over which court is the proper venue for 
appeal and will reduce the period of time before judicial 
review. This provision will also eliminate the opportunity to 
use the present-law rules in unintended ways to delay or defeat 
the collection process.

                        EXPLANATION OF PROVISION

    The provision modifies the jurisdiction of the Tax Court by 
providing that all appeals of collection due process 
determinations are to be made to the Tax Court.

                             EFFECTIVE DATE

    The provision applies to determinations made by the IRS 
after the date which is 60 days after the date of enactment.

2. Authority for magistrate judges to hear and decide certain 
        employment status cases (sec. 1022 of the bill and sec. 7443A 
        of the Code)

                              PRESENT LAW

    In connection with the audit of any person, if there is an 
actual controversy involving a determination by the IRS as part 
of an examination that (1) one or more individuals performing 
services for that person are employees of that person or (2) 
that person is not entitled to relief under section 530 of the 
Revenue Act of 1978, the Tax Court has jurisdiction to 
determine whether the IRS is correct and the proper amount of 
employment tax under such determination.\226\ Any 
redetermination by the Tax Court has the force and effect of a 
decision of the Tax Court and is reviewable.
---------------------------------------------------------------------------
    \226\ Sec. 7436.
---------------------------------------------------------------------------
    An election may be made by the taxpayer for small case 
procedures if the amount of the employment taxes in dispute is 
$50,000 or less for each calendar quarter involved.\227\ The 
decision entered under the small case procedure is not 
reviewable in any other court and should not be cited as 
authority.
---------------------------------------------------------------------------
    \227\ Sec. 7436(c).
---------------------------------------------------------------------------
    The chief judge of the Tax Court may assign proceedings to 
special trial judges. The Code enumerates certain types of 
proceedings that may be so assigned and may be decided by a 
special trial judge.\228\ In addition, the chief judge may 
designate any other proceeding to be heard by a special trial 
judge.\229\
---------------------------------------------------------------------------
    \228\ Sec. 7443A(b) and (c).
    \229\ Sec. 7443A(b)(5).
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    The Committee believes that it is important for special 
trial judges to preside over and enter decisions in proceedings 
involving a determination of employment status in which the 
amount of employment taxes in dispute is $50,000 or less for 
each calendar quarter. The Committee believes that this 
clarification will improve the operations and internal 
functioning of the Tax Court.

                        EXPLANATION OF PROVISION

    The provision clarifies that the chief judge of the Tax 
Court may assign to special trial judges any employment tax 
cases that are subject to the small case procedure and may 
authorize special trial judges to decide such small tax 
cases.\230\
---------------------------------------------------------------------------
    \230\ Under another provision of the bill, the position of special 
trial judge is renamed magistrate judge.
---------------------------------------------------------------------------

                             EFFECTIVE DATE

    The provision is effective for any employment status 
proceeding in the Tax Court with respect to which a decision 
has not become final before the date of enactment.

3. Confirmation of Tax Court authority to apply doctrine of equitable 
        recoupment (sec. 1023 of the bill and sec. 6214 of the Code)

                              PRESENT LAW

    Equitable recoupment is a common-law equitable principle 
that permits the defensive use of an otherwise time-barred 
claim to reduce or defeat an opponent's claim if both claims 
arise from the same transaction. U.S. District Courts and the 
U.S. Court of Federal Claims, the two Federal tax refund 
forums, may apply equitable recoupment in deciding tax refund 
cases.\231\ In Estate of Mueller v. Commissioner,\232\ the 
Court of Appeals for the Sixth Circuit held that the Tax Court 
may not apply the doctrine of equitable recoupment. More 
recently, the Court of Appeals for the Ninth Circuit, in 
Branson v. Commissioner,\233\ held that the Tax Court may apply 
the doctrine of equitable recoupment.
---------------------------------------------------------------------------
    \231\ See Stone v. White, 301 U.S. 532 (1937); Bull v. United 
States, 295 U.S. 247 (1935).
    \232\ 153 F.3d 302 (6th Cir. 1998), cert. den., 525 U.S. 1140 
(1999).
    \233\ 264 F.3d 904 (9th Cir. 2001), cert. den., 535 U.S. 927 
(2002).
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                           REASONS FOR CHANGE

    The conflict among the circuit courts regarding the 
application of the doctrine of equitable recoupment results in 
uncertainty and confusion. For example, the cases of similarly 
situated taxpayers may be resolved differently simply because 
the taxpayers reside in different circuit court jurisdictions. 
The Committee believes that it is important to clarify the 
applicability of the doctrine of equitable recoupment in order 
to eliminate the uncertainty or confusion of differing results 
in differing circuits. The Committee also believes that the 
provision will provide simplification benefits to both 
taxpayers and the IRS.

                        EXPLANATION OF PROVISION

    The provision confirms that the Tax Court may apply the 
principle of equitable recoupment to the same extent that it 
may be applied in Federal civil tax cases by the U.S. District 
Courts or the U.S. Court of Federal Claims. No negative 
inference should be drawn as to whether the Tax Court has the 
authority to continue to apply other equitable principles in 
deciding matters over which it has jurisdiction.

                             EFFECTIVE DATE

    The provision is effective for any action or proceeding in 
the Tax Court with respect to which a decision has not become 
final as of the date of enactment.

4. Tax Court filing fees (sec. 1024 of the bill and sec. 7451 of the 
        Code)

                              PRESENT LAW

    The Tax Court is authorized to impose a fee of up to $60 
for the filing of any petition for the redetermination of a 
deficiency or for declaratory judgments relating to the status 
and classification of 501(c)(3) organizations, the judicial 
review of final partnership administrative adjustments, and the 
judicial review of partnership items if an administrative 
adjustment request is not allowed in full.\234\ The statute 
does not specifically authorize the Tax Court to impose a 
filing fee for the filing of a petition for review of the IRS's 
failure to abate interest or for failure to award 
administrative costs and other areas of jurisdiction for which 
a petition may be filed. The practice of the Tax Court is to 
impose a $60 filing fee in all cases commenced by 
petition.\235\
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    \234\ Sec. 7451.
    \235\ See Rule 20(a) of the Tax Court Rules of Practice and 
Procedure.
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                           Reasons for Change

    The Committee believes it is appropriate to clarify that 
the Tax Court filing fee applies to any case commenced by the 
filing of a petition.

                        EXPLANATION OF PROVISION

    The provision clarifies that the Tax Court is authorized to 
charge a filing fee of up to $60 in all cases commenced by the 
filing of a petition. No negative inference should be drawn as 
to whether the Tax Court has the authority under present law to 
impose a filing fee for any case commenced by the filing of a 
petition.

                             EFFECTIVE DATE

    The provision is effective on the date of enactment.

5. Appointment of Tax Court employees (sec. 1025 of the bill and sec. 
        7471(a) of the Code)

                              PRESENT LAW

    The Tax Court is a legislative court established by the 
Congress pursuant to Article I of the U.S. Constitution (an 
``Article I'' court).\236\ The Tax Court is authorized to 
appoint employees, subject to the rules applicable to 
employment with the Executive Branch of the Federal Government 
(generally referred to as ``competitive service''), as 
administered by the Office of Personnel Management.\237\
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    \236\ Sec. 7441.
    \237\ Sec. 7471.
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    Employment with the Federal Executive Branch is governed by 
certain general statutory principles, such as recruitment of 
qualified individuals, fair and equitable treatment of 
employees and applicants, maintenance of high standards of 
employee conduct, and protection of employees against arbitrary 
action. The rules for employment in the Federal Executive 
Branch address various aspects of such employment, including: 
(1) procedures for the appointment of employees in the 
competitive service, including preferences for certain 
individuals (e.g., veterans); (2) compensation, benefits, and 
leave programs for employees; (3) appraisals of employee 
performance; (4) disciplinary actions; and (5) employee rights, 
including appeal rights. In addition, employees are protected 
from certain personnel practices (referred to as ``prohibited 
personnel practices''), such as discrimination on the basis of 
race, color, religion, age, sex, national origin, political 
affiliation, marital status, or handicapping condition.

                           REASONS FOR CHANGE

    The Tax Court was established as an Article I court in part 
because of its need for independence from the Executive Branch 
and its responsibility for reviewing determinations of a 
Federal Executive Branch agency (i.e., the Internal Revenue 
Service).\238\ Accordingly, the Committee believes that the Tax 
Court should have the authority to establish its own personnel 
system, rather than being subject to the rules administered by 
the Federal Executive Branch. Similar authority has previously 
been provided to other Article I courts and to courts 
established under Article III of the U.S. Constitution 
(``Article III'' courts). Currently, the Tax Court is the only 
Federal court (Article I or III) that does not have its own 
personnel system. Authority to establish its own personnel 
system will also provide the Tax Court with greater flexibility 
in meeting its staffing needs, thus enabling the court to 
operate more effectively. The Committee also believes that a 
personnel system established by the Tax Court should be 
consistent with the general principles that govern other 
employment with the Federal Government and should provide 
certain protections to employees.
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    \238\ See, e.g., S. Rep. No. 91-552, at 302 (1969).
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                        EXPLANATION OF PROVISION

    The provision extends to the Tax Court authority to 
establish its own personnel management system. Any personnel 
management system adopted by the Tax Court must: (1) include 
the merit system principles that govern employment with the 
Federal Executive Branch; (2) prohibit personnel practices that 
are prohibited in the Federal Executive Branch; and (3) in the 
case of an individual eligible for preference for employment in 
the Federal Executive Branch, provide preference for that 
individual in a manner and to an extent consistent with 
preference in the Federal Executive Branch.
    The provision requires the Tax Court to prohibit 
discrimination on the basis of race, color, religion, age, sex, 
national origin, political affiliation, marital status, or 
handicapping condition. The Tax Court is also required to 
promulgate procedures for resolving complaints of 
discrimination by employees and applicants for employment.
    The provision allows the Tax Court to appoint a clerk 
without regard to the Federal Executive Branch rules regarding 
appointments in the competitive service. Under the provision, 
the clerk serves at the pleasure of the Tax Court.
    The provision also allows the Tax Court to appoint other 
necessary employees without regard to the Federal Executive 
Branch rules regarding appointments in the competitive service. 
Under the provision, these deputies and employees are subject 
to removal by the Tax Court.
    The provision allows judges and special trial judges of the 
Tax Court to appoint law clerks and secretaries, in such 
numbers as the Tax Court may approve, without regard to the 
Federal Executive Branch rules regarding appointments in the 
competitive service. Under the provision, a law clerk or 
secretary serves at the pleasure of the appointing judge.
    The provision exempts law clerks from the sick leave and 
annual leave provisions applicable to employees of the Federal 
Executive Branch. Any unused sick or annual leave to the credit 
of a law clerk as of the effective date of the provision 
remains credited to the individual and is available to the 
individual upon separation from the Federal Government, or upon 
transfer to a position subject to such sick leave and annual 
leave provisions.
    The provision allows the Tax Court to fix and adjust the 
compensation of the clerk and other employees without regard to 
the Federal Executive Branch rules regarding employee 
classifications and pay rates. To the maximum extent feasible, 
Tax Court employees are to be compensated at rates consistent 
with those of employees holding comparable positions in the 
Federal Judicial Branch. The Tax Court may also establish 
programs for employee evaluations, premium pay, and resolution 
of employee grievances.
    In the case of an individual who is an employee of the Tax 
Court on the day before the effective date of the provision, 
the provision preserves certain rights that the employee is 
entitled to as of that day. The provision preserves the right 
to: (1) appeal a reduction in grade or removal; (2) appeal an 
adverse action; (3) appeal a prohibited personnel practice; (4) 
make an allegation of a prohibited personnel practice; or (5) 
file an employment discrimination appeal. These rights are 
preserved for as long as the individual remains an employee of 
the Tax Court.
    Under the provision, a Tax Court employee who completes at 
least one year of continuous service under a nontemporary 
appointment with the Tax Court acquires competitive service 
status for appointment to any position in the Federal Executive 
Branch competitive service for which the employee possesses the 
required qualifications.
    The provision also allows the Tax Court to procure the 
services of experts and consultants in accordance with Federal 
Executive Branch rules.

                             EFFECTIVE DATE

    The provision is effective on the date that the Tax Court 
adopts a personnel management system after the date of 
enactment of the provision.

6. Expanded use of practice fees (sec. 1026 of the bill and sec. 7475 
        of the Code)

                              PRESENT LAW

    The Tax Court is authorized to impose on practitioners 
admitted to practice before the Tax Court a fee of up to $30 
per year.\239\ These fees are to be used to employ independent 
counsel to pursue disciplinary matters.
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    \239\ Sec. 7475.
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                           REASONS FOR CHANGE

    The Committee understands that many pro se taxpayers are 
not familiar with Tax Court procedures and applicable legal 
requirements. The Committee believes it is beneficial for Tax 
Court fees imposed on practitioners also to be available to 
provide services to pro se taxpayers.

                        EXPLANATION OF PROVISION

    The provision provides that Tax Court fees imposed on 
practitioners also are available to provide services to pro se 
taxpayers.

                             EFFECTIVE DATE

    The provision is effective on the date of enactment.

                       TITLE XI--OTHER PROVISIONS


A. Transfer of Funds Attributable to Black Lung Trust Funds to Combined 
                              Benefit Fund


(Sec. 1101 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 health 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 
any plan year beginning after December 31, 2002.

                             EFFECTIVE DATE

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

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


(Secs. 1102 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.\240\ No Federal income tax 
generally is imposed on a policyholder with respect to the 
earnings under a life insurance contract (inside buildup).\241\
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    \240\ Sec. 101(a).
    \241\ 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).
---------------------------------------------------------------------------
    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.\242\
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    \242\ 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 \243\
---------------------------------------------------------------------------

    \243\ 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, 278 F. Supp. 
2d 844 (E.D. Mich. 2003).
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            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.\244\
---------------------------------------------------------------------------
    \244\ Sec. 264(a)(1).
---------------------------------------------------------------------------
            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.\245\ 
An exception is provided under this provision for insurance of 
key persons.
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    \245\ Sec. 264(a)(4).
---------------------------------------------------------------------------
    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.\246\
---------------------------------------------------------------------------
    \246\ 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.\247\ 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.
---------------------------------------------------------------------------
    \247\ 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.\248\ 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).\249\ 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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    \248\ Sec. 264(a)(2).
    \249\ 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 $95,000 (for 
2005) or (b) at the election of the employer had compensation 
in excess of $95,000 (for 2005) and was in the highest paid 20 
percent of employees for such year.\250\ The $95,000 dollar 
amount is indexed for inflation.
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    \250\ 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.\251\
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    \251\ 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.
---------------------------------------------------------------------------

                           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.\252\
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    \252\ As under present law, certain employees are disregarded in 
making the determinations regarding the top-paid groups.
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    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 
\253\ 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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    \253\ 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.
---------------------------------------------------------------------------
    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) \254\ 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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    \254\ 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 for whom 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 contract 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 contracts 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.

                    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 1010 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, was ordered favorably reported by 
voice vote, a quorum being present, on July 26, 2005.

Votes on amendments

    No amendments were offered for vote.

                 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) 
improving funding of defined benefit plans and the Pension 
Benefit Guaranty Corporation and clarifying the rules for cash 
balance and other hybrid plans, 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 a variety of pension plan issues. The bill also 
includes directives for a number of studies relating to 
specific issues that affect retirement income security. The 
bill also contains a provision dealing with the tax treatment 
of company-owned life insurance. Some of the provisions of the 
bill 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 funding provisions of the bill 
will require additional plan contributions from some employers 
with currently underfunded plans. These provisions are designed 
to increase the retirement income security of employees covered 
by such plans.
    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.

                     B. Unfunded Mandates Statement

    This information is provided in accordance with section 423 
of the Unfunded Mandates Reform Act of 1995 (Pub. L. No. 104-
4).
    The Committee has determined that the revenue provisions of 
the bill do not contain Federal mandates on the private sector. 
The Committee has determined that the revenue provisions of the 
bill do not impose a Federal intergovernmental mandate on 
State, local, or tribal governments.

                       C. Tax Complexity Analysis

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

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

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

                                  
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