[Senate Report 114-375]
[From the U.S. Government Publishing Office]


                                                      Calendar No. 670
114th Congress     }                                     {      Report
                                 SENATE
 2d Session        }                                     {     114-375

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



 
             RETIREMENT ENHANCEMENT AND SAVINGS ACT OF 2016

                                _______
                                

               November 16, 2016.--Ordered to be printed

                                _______
                                

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

                              R E P O R T

                         [To accompany S. 3471]

    The Committee on Finance, having considered an original 
bill, S. 3471, to amend the Internal Revenue Code of 1986 to 
encourage retirement savings, and for other purposes, having 
considered the same, reports favorably thereon and recommends 
that the bill do pass.

                                CONTENTS

                                                                   Page
  I. LEGISLATIVE BACKGROUND...........................................3
 II. EXPLANATION OF PROVISIONS........................................4
TITLE I--EXPANDING AND PRESERVING RETIREMENT SAVINGS.............     4
          A. Multiple-Employer Plans and Pooled Employer and 
              Multiple-Employer Plan Reporting (secs. 101-102 of 
              the bill, sec. 413 of the Code, and secs. 3 and 
              103-104 of ERISA)..................................     4
          B. Removal of 10 Percent Cap from Automatic Enrollment 
              Safe Harbor After First Plan Year (sec. 103 of the 
              bill and sec. 401(k) of the Code)..................    15
          C. Rules Relating to Election of Safe Harbor 401(k) 
              Status (sec. 104 of the bill and sec. 401(k) of the 
              Code)..............................................    17
          D. Increase in Credit Limitation for Small Employer 
              Pension Plan Start-Up Costs (sec. 105 of the bill 
              and sec. 45E of the Code)..........................    20
          E. Small Employer Automatic Enrollment Credit (sec. 106 
              of the bill and new sec. 45S of the Code)..........    21
          F. Certain Taxable Non-Tuition Fellowship and Stipend 
              Payments Treated as Compensation for IRA Purposes 
              (sec. 107 of the bill and sec. 219 of the Code)....    23
          G. Repeal of Maximum Age for Traditional IRA 
              Contributions (sec. 108 of the bill and sec. 219 of 
              the Code)..........................................    24
          H. Expansion of IRA Ownership of S Corporation Bank 
              Stock (sec. 109 of the bill and secs. 1361 and 4975 
              of the Code).......................................    25
          I. Extended Rollover Period for Plan Loan Offset 
              Amounts (sec. 110 of the bill and sec. 402(c) of 
              the Code)..........................................    26
          J. Modification of Rules Relating to Hardship 
              Withdrawals from Cash or Deferred Arrangements 
              (sec. 111 of the bill and sec. 401(k) of the Code).    28
          K. Qualified Employer Plans Prohibited from Making 
              Loans Through Credit Cards and Other Similar 
              Arrangements (sec. 112 of the bill and sec. 72(p) 
              of the Code).......................................    30
          L. Portability of Lifetime Income Options (sec. 113 of 
              the bill and secs. 401(a), 403(b) and 457(d) of the 
              Code)..............................................    31
          M. Treatment of Custodial Accounts on Termination of 
              Section 403(b) Plans (sec. 114 of the bill and sec. 
              403(b) of the Code)................................    34
          N. Clarification of Retirement Income Account Rules 
              Relating to Church-Controlled Organizations (sec. 
              115 of the bill and sec. 403(b)(9) of the Code)....    36
TITLE II--ADMINISTRATIVE IMPROVEMENTS............................    38
          A. Plan Adopted by Filing Due Date for Year May Be 
              Treated as in Effect as of Close of Year (sec. 201 
              of the bill and sec. 401(b) of the Code)...........    38
          B. Combined Annual Report for Group of Plans (sec. 202 
              of the bill, sec. 6058 of the Code, and sec. 104 of 
              ERISA).............................................    39
          C. Disclosure Regarding Lifetime Income (sec. 203 of 
              the bill and sec. 105 of ERISA)....................    40
          D. Fiduciary Safe Harbor for Selection of Lifetime 
              Income Provider (sec. 204 of the bill and sec. 404 
              of ERISA)..........................................    42
          E. Modification of Nondiscrimination Rules to Protect 
              Older, Longer Service Participation (sec. 205 of 
              the bill and sec. 401(a)(4) of the Code)...........    45
          F. Modification of PBGC Premiums for CSEC Plans (sec. 
              206 of the bill and sec. 4006 of ERISA)............    54
TITLE III--BENEFITS RELATING TO THE UNITED STATES TAX COURT......    56
          A. Provisions Relating to Judges of the Tax Court 
              (secs. 301-302 of the bill and sec. 7447 of the 
              Code)..............................................    56
          B. Provisions Relating to Special Trial Judges of the 
              Tax Court (secs. 303-305 of the bill and secs. 
              7443A and new 7443B and 7443C of the Code).........    59
TITLE IV--OTHER BENEFITS.........................................    62
          A. Benefits for Volunteer Firefighters and Emergency 
              Medical Responders (sec. 401 of the bill and sec. 
              139B of the Code)..................................    62
          B. Treatment of Qualified Equity Grants (sec. 402 of 
              the bill and secs. 83, 3401 and 6051 of the Code)..    63
TITLE V--REVENUE PROVISIONS......................................    71
          A. Modifications to Required Minimum Distribution Rules 
              (sec. 501 of the bill and sec. 401(a)(9) of the 
              Code)..............................................    71
          B. Increase in Penalty for Failure to File (sec. 502 of 
              the bill and sec. 6651(a) of the Code).............    79
          C. Increased Penalties for Failure to File Retirement 
              Plan Returns (sec. 503 of the bill and sec. 
              6652(d), (e), and (h) of the Code).................    81
          D. Modification of User Fee Requirements for 
              Installment Agreements (sec. 504 of the bill and 
              sec. 6159 of the Code).............................    83
          E. Increase Information Sharing to Administer Excise 
              Taxes (sec. 505 of the bill and sec. 6103(o) of the 
              Code)..............................................    84
          F. Repeal of Partnership Technical Terminations (sec. 
              506 of the bill and sec. 708(b)(1)(B) of the Code).    85
          G. Pension Plan Acceleration of PBGC Premium Payment 
              (sec. 507 of the bill and sec. 4007 of ERISA)......    87
III. BUDGET EFFECTS OF THE BILL..................................    87
          A. Committee Estimates.................................    87
          B. Budget Authority and Tax Expenditures...............    91
          C. Consultation with Congressional Budget Office.......    91
 IV. VOTES OF THE COMMITTEE..........................................91
  V. REGULATORY IMPACT AND OTHER MATTERS.............................91
          A. Regulatory Impact...................................    91
          B. Unfunded Mandates Statement.........................    92
          C. Tax Complexity Analysis.............................    92
 VI. CHANGES IN EXISTING LAW MADE BY THE BILL, AS REPORTED...........92

                       I. LEGISLATIVE BACKGROUND

    The Committee on Finance, having considered S. 3471, the 
Retirement Enhancement and Savings Act of 2016, a bill to amend 
the Internal Revenue Code of 1986 to encourage retirement 
savings, and for other purposes, having considered the same, 
reports favorably thereon and recommends that the bill do pass.

Background and need for legislative action

    Background--Based on a proposal recommended by Chairman 
Hatch, the Committee on Finance marked up original legislation 
(the ``Retirement Enhancement and Savings Act of 2016'') on 
September 21, 2016, and, with a majority present, ordered the 
bill favorably reported.
    Need for legislative action--While many Americans have 
accumulated significant amounts in tax-favored retirement 
savings vehicles, studies show that many Americans have little, 
if any, retirement savings. Workplace retirement plans provide 
an effective way for employees to save for retirement, but not 
all employees have access to a plan, and, of those who do, some 
do not participate. Moreover, the shift in recent decades from 
employer-sponsored defined benefit plans, under which the 
default form of benefits is an annuity, to defined 
contributions plans, which generally do not offer annuity 
benefits, creates the risk of employees outliving their 
retirement savings. The Committee believes that legislation is 
necessary to provide new incentives for employers to adopt 
retirement plans (including ways to reduce the costs associated 
with having a plan), new incentives for workers to contribute 
to workplace plans and individual retirement arrangements, and 
other measures to further retirement income security.
    Issues relating to retirement savings were the focus of the 
report issued last year by the Committee's Savings & Investment 
Working Group,\1\ one of the Committee's bipartisan Tax Reform 
Working Groups. Various bills, including bills sponsored by 
Committee Members, have included legislative proposals 
addressing retirement savings issues and other employee 
benefits issues, such as--
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    \1\The report is available at http://www.finance.senate.gov/imo/
media/doc/The%20Savings %20& 
%20Investment%20Bipartisan%20Tax%20Working%20Group%20Report.pdf.
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           S. 1270, 113th Cong., the Secure Annuities 
        for Employee (or SAFE) Retirement Act of 2013, 
        sponsored by Senator Hatch;
           S. 1970, 113th Cong., the Retirement 
        Security Act of 2014, sponsored by Senators Collins and 
        Nelson;
           S. 1979, 113th Cong., the USA Retirement 
        Funds Act, sponsored by Senators Harkin and Brown;
           S. 2855, 113th Cong., the Retirement 
        Security Preservation Act of 2014, sponsored by 
        Senators Cardin and Portman;
           The Retirement Improvements and Savings 
        Enhancements (or RISE) Act of 2016, a discussion draft 
        issued by Senator Wyden on September 8, 2016;
           S. 324, 114th Cong., the Shrinking Emergency 
        Account Losses (or SEAL) Act of 2015, sponsored by 
        Senators Enzi and Nelson;
           S. 609, 114th Cong., the Volunteer Responder 
        Incentive Protection Act of 2015, sponsored by Senators 
        Schumer and Collins;
           S. 1317, 114th Cong., the Lifetime Income 
        Disclosure Act, sponsored by Senators Isakson and 
        Murphy;
           S. 3025, 114th Cong., the Graduate Student 
        Savings Act of 2016, sponsored by Senators Warren and 
        Lee;
           S. 3152, 114th Cong., the Empowering 
        Employees through Stock Ownership Act, sponsored by 
        Senators Warner and Heller;
           S. 3181, 114th Cong., the S Corporation 
        Modernization Act of 2016, sponsored by Senators Thune, 
        Cardin and Roberts; and
           S. 3307, 114th Cong. (an act to avoid 
        duplicative annual reporting), sponsored by Senators 
        Warner and Collins.
    In addition, as noted below, the Committee has held 
hearings at which it received testimony regarding retirement 
savings. These legislative proposals and hearings and the 
Working Group report informed the content of this bill.

Hearings

    On January 28, 2016, the Committee held a hearing on 
Helping Americans Prepare for Retirement: Increasing Access, 
Participation and Coverage in Retirement Savings Plans, which 
included testimony on various proposals to increase retirement 
savings and reduce administrative burdens relating to 
retirement plans.
    On September 16, 2014, the Committee held a hearing on 
Retirement Savings 2.0: Updating Savings Policy for the Modern 
Economy, which included testimony on new approaches to increase 
retirement savings.

                     II. EXPLANATION OF PROVISIONS


          TITLE I--EXPANDING AND PRESERVING RETIREMENT SAVINGS


 A. Multiple-Employer Plans and Pooled Employer and Multiple-Employer 
 Plan Reporting (secs. 101-102 of the bill, sec. 413 of the Code, and 
                     secs. 3 and 103-104 of ERISA)


                              PRESENT LAW

Retirement savings under the Code and ERISA

            Tax-favored arrangements
    The Internal Revenue Code (``Code'') provides two general 
vehicles for tax-favored retirement savings: employer-sponsored 
plans and individual retirement arrangements (``IRAs''). Code 
provisions are generally within the jurisdiction of the 
Secretary of the Treasury (``Secretary''), through his or her 
delegate, the Internal Revenue Service (``IRS'').
    The most common type of tax-favored employer-sponsored 
retirement plan is a qualified retirement plan,\2\ which may be 
a defined contribution plan or a defined benefit plan. Under a 
defined contribution plan, separate individual accounts are 
maintained for participants, to which accumulated 
contributions, earnings and losses are allocated, and 
participants' benefits are based on the value of their 
accounts.\3\ Defined contribution plans commonly allow 
participants to direct the investment of their accounts, 
usually by choosing among investment options offered under the 
plan. Under a defined benefit plan, benefits are determined 
under a plan formula and paid from general plan assets, rather 
than individual accounts.\4\ Besides qualified retirement 
plans, certain tax-exempt employers and public schools may 
maintain tax-deferred annuity plans.\5\
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    \2\Sec. 401(a). A qualified annuity plan under section 403(a) is 
similar to and subject to requirements similar to those applicable to 
qualified retirement plans.
    \3\ Sec. 414(i). Defined contribution plans generally provide for 
contributions by employers and may include a qualified cash or deferred 
arrangement under section 401(k) (commonly called a ``section 401(k) 
plan''), under which employees may elect to contribute to the plan.
    \4\Sec. 414(j).
    \5\Sec. 403(b). Private and governmental employers that are exempt 
from tax under section 501(c)(3), including tax-exempt private schools, 
may maintain tax-deferred annuity plans. State and local governmental 
employers may maintain another type of tax-favored retirement plan, an 
eligible deferred compensation plan under section 457(b).
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    An IRA is generally established by the individual for whom 
the IRA is maintained.\6\ However, in some cases, an employer 
may establish IRAs on behalf of employees and provide 
retirement contributions to the IRAs.\7\ In addition, IRA 
treatment may apply to accounts maintained for employees under 
a trust created by an employer (or an employee association) for 
the exclusive benefit of employees or their beneficiaries, 
provided that the trust complies with the relevant IRA 
requirements and separate accounting is maintained for the 
interest of each employee or beneficiary (referred to herein as 
an ``IRA trust'').\8\ In that case, the assets of the trust may 
be held in a common fund for the account of all individuals who 
have an interest in the trust.
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    \6\Sections 219, 408 and 408A provide rules for IRAs. Under section 
408(a)(2) and (n), only certain entities are permitted to be the 
trustee of an IRA. The trustee of an IRA generally must be a bank, an 
insured credit union, or a corporation subject to supervision and 
examination by the Commissioner of Banking or other officer in charge 
of the administration of the banking laws of the State in which it is 
incorporated. Alternatively, an IRA trustee may be another person who 
demonstrates to the satisfaction of the Secretary that the manner in 
which the person will administer the IRA will be consistent with the 
IRA requirements.
    \7\Simplified employee pension (``SEP'') plans under section 408(k) 
and SIMPLE IRA plans under section 408(p) are employer-sponsored 
retirement plans funded using IRAs for employees.
    \8\Sec. 408(c).
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            ERISA
    Retirement plans of private employers, including qualified 
retirement plans and tax-deferred annuity plans, are generally 
subject to requirements under the Employee Retirement Income 
Security Act of 1974 (``ERISA'').\9\ A plan covering only 
business owners (or business owners and their spouses)--that 
is, it covers no other employees--is exempt from ERISA.\10\ 
Thus, a plan covering only self-employed individuals is exempt 
from ERISA. Tax-deferred annuity plans that provide solely for 
salary reduction contributions by employees may be exempt from 
ERISA.\11\ IRAs are generally exempt from ERISA.
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    \9\ERISA applies to employee welfare benefit plans, such as health 
plans, of private employers, as well as to employer-sponsored 
retirement (or pension) plans. Employer-sponsored welfare and pension 
plans are both referred to under ERISA as employee benefit plans. Under 
ERISA sec. 4(b)(1) and (2), governmental plans and church plans are 
generally exempt from ERISA.
    \10\29 C.F.R. sec. 2510.3-3(b)-(c).
    \11\29 C.F.R. sec. 2510.3-2(f).
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    The provisions of Title I of ERISA are under the 
jurisdiction of the Secretary of Labor.\12\ Many of the 
requirements under Title I of ERISA parallel Code requirements 
for qualified retirement plans. Under ERISA, in carrying out 
provisions relating to the same subject matter, the Secretary 
(of the Treasury) and the Secretary of Labor are required to 
consult with each other and develop rules, regulations, 
practices, and forms which, to the extent appropriate for 
efficient administration, are designed to reduce duplication of 
effort, duplication of reporting, conflicting or overlapping 
requirements, and the burden of compliance by plan 
administrators, employers, and participants and 
beneficiaries.\13\ In addition, interpretive jurisdiction over 
parallel Code and ERISA provisions relating to retirement plans 
is divided between the two Secretaries by Executive Order, 
referred to as the Reorganization Plan No. 4 of 1978.\14\
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    \12\The provisions of Title I of ERISA are codified at 29 U.S.C 
1001-734. Under Title IV of ERISA, defined benefit plans of private 
employers are generally covered by the Pension Benefit Guaranty 
Corporation's pension insurance program.
    \13\ERISA sec. 3004.
    \14\43 Fed. Reg. 47713 (October 17, 1978).
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Multiple-employer plans under the Code

            In general
    Qualified retirement plans, either defined contribution or 
defined benefit plans, are categorized as single-employer plans 
or multiple-employer plans. A single-employer plan is a plan 
maintained by one employer. For this purpose, businesses and 
organizations that are members of a controlled group of 
corporations, a group under common control, or an affiliated 
service group are treated as one employer (referred to as 
``aggregation'').\15\
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    \15\Secs. 414(b), (c), (m) and (o).
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    A multiple-employer plan generally is a single plan 
maintained by two or more unrelated employers (that is, 
employers that are not treated as a single employer under the 
aggregation rules).\16\ Multiple-employer plans are commonly 
maintained by employers in the same industry and are used also 
by professional employer organizations (``PEOs'') to provide 
qualified retirement plan benefits to employees working for PEO 
clients.\17\
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    \16\Sec. 413(c). Multiple-employer status does not apply if the 
plan is a multiemployer plan, defined under sec. 414(f) as a plan 
maintained pursuant to one or more collective bargaining agreements 
with two or more unrelated employers and to which the employers are 
required to contribute under the collective bargaining agreement(s). 
Multiemployer plans are also known as Taft-Hartley plans.
    \17\Rev. Proc. 2003-86, 2003-2 C.B. 1211, and Rev. Proc. 2002-21, 
2002-1 C.B. 911, address the application of the multiple-employer plan 
rules to qualified defined contribution plans maintained by PEOs
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            Application of Code requirements to multiple-employer plans 
                    and EPCRS
    Some requirements are applied to a multiple-employer plan 
on a plan-wide basis.\18\ For example, all employees covered by 
the plan are treated as employees of all employers 
participating in the plan for purposes of the exclusive benefit 
rule. Similarly, an employee's service with all participating 
employers is taken into account in applying the minimum 
participation and vesting requirements. In applying the limits 
on contributions and benefits, compensation, contributions and 
benefits attributable to all employers are taken into 
account.\19\ Other requirements are applied separately, 
including the minimum coverage requirements, nondiscrimination 
requirements (both the general requirements and the special 
tests for section 401(k) plans) and the top-heavy rules.\20\ 
However, the qualified status of the plan as a whole is 
determined with respect to all employers maintaining the plan, 
and the failure by one employer (or by the plan itself) to 
satisfy an applicable qualification requirement may result in 
disqualification of the plan with respect to all employers.\21\
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    \18\Sec. 413(c).
    \19\Treas. Reg. sec. 1.415-1(e).
    \20\Treas. Reg. secs. 1.413-2(a)(3)(ii)-(iii) and 1.416-1, G-2.
    \21\Treas. Reg. secs. 1.413-2(a)(3)(iv) and 1.416-1, G-2.
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    Because of the complexity of the requirements for qualified 
retirement plans, errors in plan documents, as well as plan 
operation and administration, commonly occur. Under a strict 
application of these requirements, such an error would cause a 
plan to lose its tax-favored status, which would fall most 
heavily on plan participants because of the resulting current 
income inclusion of vested amounts under the plan. As a 
practical matter, therefore, the IRS rarely disqualifies a 
plan. Instead, the IRS has established the Employee Plans 
Compliance Resolution System (``EPCRS''), a formal program 
under which employers and other plan sponsors can correct 
compliance failures and continue to provide their employees 
with retirement benefits on a tax-favored basis.\22\
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    \22\Rev. Proc. 2016-51, 2016-42 I.R.B. 465.
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    EPCRS has three components, providing for 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 generally within a two-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.
    Multiple-employer plans are eligible for EPCRS, and certain 
special procedures apply.\23\ A VCP request with respect to a 
multiple-employer plan must be submitted to the IRS by the plan 
administrator, rather than an employer maintaining the plan, 
and must be made with respect to the entire plan, rather than a 
portion of the plan affecting any particular employer. In 
addition, if a failure applies to fewer than all of the 
employers under the plan, the plan administrator may choose to 
have a VCP compliance fee or audit CAP sanction calculated 
separately for each employer based on the participants 
attributable to that employer, rather than having the 
compliance fee calculated based on the participants of the 
entire plan. For example, the plan administrator may choose 
this option when the failure is attributable to the failure of 
an employer to provide the plan administrator with full and 
complete information.
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    \23\Section 10.11 of Rev. Proc. 2016-51.
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ERISA

            Fiduciary and bonding requirements
    Among other requirements, ERISA requires a plan to be 
established and maintained pursuant to a written instrument 
(that is, a plan document) that contains certain terms.\24\ The 
terms of the plan must provide for one or more named 
fiduciaries that jointly or severally have authority to control 
and manage the operation and administration of the plan.\25\ 
Among other required plan terms are a procedure for the 
allocation of responsibilities for the operation and 
administration of the plan and a procedure for amending the 
plan and for identifying the persons who have authority to 
amend the plan. Among other permitted terms, a plan may provide 
also that any person or group of persons may serve in more than 
one fiduciary capacity with respect to the plan (including 
service both as trustee and administrator) and that a person 
who is a named fiduciary with respect to the control or 
management of plan assets may appoint an investment manager or 
managers to manage plan assets.
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    \24\ERISA sec. 402.
    \25\Fiduciary is defined in ERISA section 3(21), and named 
fiduciary is defined in ERISA section 402(a)(2).
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    In general, a plan fiduciary is responsible for the 
investment of plan assets. However, ERISA section 404(c) 
provides a special rule in the case of a defined contribution 
plan that permits participants to direct the investment of 
their individual accounts.\26\ Under the special rule, if 
various requirements are met, a participant is not deemed to be 
a fiduciary by reason of directing the investment of the 
participant's account and no person who is otherwise a 
fiduciary is liable for any loss, or by reason of any breach, 
that results from the participant's investments. Defined 
contribution plans that provide for participant-directed 
investments commonly offer a set of investment options among 
which participants may choose. The selection of investment 
options to be offered under a plan is subject to ERISA 
fiduciary requirements.
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    \26\ERISA sec. 404(c). Under ERISA, a defined contribution plans is 
referred to also as an individual account plan.
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    Under ERISA, any plan fiduciary or person that handles plan 
assets is required to be bonded, generally for an amount not to 
exceed $500,000.\27\ In some cases, the maximum bond amount is 
$1 million, rather than $500,000.
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    \27\ERISA sec. 412.
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            Multiple-employer plan status under ERISA
    Like the Code, ERISA contains rules for multiple-employer 
retirement plans.\28\ However, a different concept of multiple-
employer plan applies under ERISA.
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    \28\ERISA sec. 210(a).
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    Under ERISA, an employee benefit plan (whether a pension 
plan or a welfare plan) must be sponsored by an employer, by an 
employee organization, or by both.\29\ The definition of 
employer is any person acting directly as an employer, or 
indirectly in the interest of an employer, in relation to an 
employee benefit plan, and includes a group or association of 
employers acting for an employer in such capacity.\30\
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    \29\ERISA sec. 3(1) and (2).
    \30\ERISA sec. 3(5).
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    These definitional provisions of ERISA are interpreted as 
permitting a multiple-employer plan to be established or 
maintained by a cognizable, bona fide group or association of 
employers, acting in the interests of its employer members to 
provide benefits to their employees.\31\ This approach is based 
on the premise that the person or group that maintains the plan 
is tied to the employers and employees that participate in the 
plan by some common economic or representational interest or 
genuine organizational relationship unrelated to the provision 
of benefits. Based on the facts and circumstances, the 
employers that participate in the benefit program must, either 
directly or indirectly, exercise control over that program, 
both in form and in substance, in order to act as a bona fide 
employer group or association with respect to the program. 
However, an employer association does not exist where several 
unrelated employers merely execute participation agreements or 
similar documents as a means to fund benefits, in the absence 
of any genuine organizational relationship between the 
employers. In that case, each participating employer 
establishes and maintains a separate employee benefit plan for 
the benefit of its own employees, rather than a multiple-
employer plan.
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    \31\See, for example, Department of Labor Advisory Opinions 2012-
04A, 2003-17A, 2001-04A, and 1994-07A, and other authorities cited 
therein.
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Form 5500 reporting

    Under the Code, an employer maintaining a qualified 
retirement plan generally is required to file an annual return 
containing information required under regulations with respect 
to the qualification, financial condition, and operation of the 
plan.\32\ ERISA requires the plan administrator of certain 
pension and welfare benefit plans to file annual reports 
disclosing certain information to the Department of Labor 
(``DOL'').\33\ These filing requirements are met by filing a 
completed Form 5500, Annual Return/Report of Employee Benefit 
Plan. Forms 5500 are filed with DOL, and information from Forms 
5500 is shared with the IRS.\34\ In the case of a multiple-
employer plan, the annual report must include a list of 
participating employers and a good faith estimate of the 
percentage of total contributions made by the participating 
employers during the plan year. Certain small plans, that is, 
plans covering fewer than 100 participants, are eligible for 
simplified reporting requirements, which are met by filing Form 
5500-SF, Short Form Annual Return/Report of Small Employee 
Benefit Plan.\35\
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    \32\Sec. 6058. In addition, under section 6059, the plan 
administrator of a defined benefit plan subject to the minimum funding 
requirements is required to file an annual actuarial report. Under Code 
section 414(g) and ERISA section 3(16), plan administrator generally 
means the person specifically so designated by the terms of the plan 
document. In the absence of a designation, the plan administrator 
generally is (1) in the case of a plan maintained by a single employer, 
the employer, (2) in the case of a plan maintained by an employee 
organization, the employee organization, or (3) in the case of a plan 
maintained by two or more employers or jointly by one or more employers 
and one or more employee organizations, the association, committee, 
joint board of trustees, or other similar group of representatives of 
the parties that maintain the plan. Under ERISA, the party described in 
(1), (2) or (3) is referred to as the ``plan sponsor.''
    \33\ERISA secs. 103 and 104. Under ERISA section 4065, the plan 
administrator of certain defined benefit plans must provide information 
to the PBGC.
    \34\Information is shared also with the PBGC, as applicable. Form 
5500 filings are also publicly released in accordance with section 
6104(b) and Treas. Reg. sec. 301.6104(b)-1 and ERISA secs. 104(a)(1) 
and 106(a).
    \35\ERISA sec. 104(b).
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                           REASONS FOR CHANGE

    A single, multiple-employer plan can provide economies of 
scale that result in lower administrative costs than apply to a 
group of separate plans covering the employees of different 
employers. However, concern that a violation by another 
participating employer may jeopardize the tax-favored status of 
the plan, or create liability for other employers, may 
discourage use of multiple-employer plans. In addition, under 
ERISA, a plan covering employees of unrelated employers might 
not be eligible for multiple-employer plan treatment. The 
Committee wishes to remove possible barriers to broader use of 
multiple-employer plans, including by providing simplified Form 
5500 reporting in appropriate cases.
    In the case of any multiple-employer plan that, in 
accordance with the Department of Labor's current 
interpretations of the definition of employer in section 3(5) 
of ERISA, is treated currently as a single plan under ERISA, 
the Committee does not intend to modify the existing definition 
and regulatory guidance thereunder, except insofar as 
specifically provided herein with respect to relief from 
disqualification (or other loss of tax-favored status) and 
simplified annual reports.

                        EXPLANATION OF PROVISION

In general

    The provision amends the Code rules relating to multiple-
employer plans to provide that certain plans (referred to 
herein as ``covered multiple-employer plans'') will not fail to 
meet the Code requirements applicable for tax-favored treatment 
merely because one or more employers of employees covered by 
the plan (referred to herein as ``participating employers'') 
fail to take the actions that are required of employers for the 
plan to meet such requirements. The provision applies to a 
multiple-employer qualified defined contribution plan or a plan 
that consists of IRAs (referred to herein as an ``IRA plan''), 
including under an IRA trust,\36\ that either (1) is sponsored 
by employers all of which have both a common interest other 
than having adopted the plan and control of the plan, or (2) in 
the case of a plan not described in (1), has a pooled plan 
provider (referred to herein as a ``pooled provider plan'').
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    \36\Under the provision, in applying the exclusive benefit 
requirement under section 408(c) to an IRA plan with an IRA trust 
covering employees of unrelated employers, all employees covered by the 
plan are treated as employees of all employers participating in the 
plan.
---------------------------------------------------------------------------
    In addition, under the provision, a qualified defined 
contribution plan that is established or maintained for the 
purpose of providing benefits to the employees of two or more 
employers and that meets certain requirements (a ``pooled 
employer plan'') is treated for purposes of ERISA as a single 
plan that is a multiple-employer plan.

Tax-favored status under the Code

            In general
    The provision provides relief from disqualification (or 
other loss of tax-favored status) of the entire plan merely 
because one or more participating employers fail to take 
actions required with respect to the plan.
    Relief under the provision does not apply to a plan unless 
the terms of the plan provide that, in the case of an employer 
failing to take required actions (referred to herein as a 
``noncompliant employer'')--
           plan assets attributable to employees of the 
        noncompliant employer will be transferred to a plan 
        maintained only by that employer (or its successor), to 
        a tax-favored retirement plan for each individual whose 
        account is transferred,\37\ or to any other arrangement 
        that the Secretary determines is appropriate, unless 
        the Secretary determines it is in the best interests of 
        the employees to retain the assets in the plan, and
---------------------------------------------------------------------------
    \37\For this purpose, a tax-favored retirement plan means an 
eligible retirement plan as defined in section 402(c)(8)(B), that is, 
an IRA, a qualified retirement plan, a tax-deferred annuity plan under 
section 403(b), or an eligible deferred compensation plan of a State or 
local government employer under section 457(b).
---------------------------------------------------------------------------
           the noncompliant employer (and not the plan 
        with respect to which the failure occurred or any other 
        participating employer) is, except to the extent 
        provided by the Secretary, liable for any plan 
        liabilities attributable to employees of the 
        noncompliant employer.
    In addition, in the case of a pooled provider plan, if the 
pooled plan provider does not perform substantially all the 
administrative duties required of the provider (as described 
below) for any plan year, the Secretary, in his or her 
discretion, may provide that the determination as to whether 
the plan meets the Code requirements for tax-favored treatment 
will be made in the same manner as would be made without regard 
to the relief under the provision.
            Pooled plan provider
    Under the provision, ``pooled plan provider'' with respect 
to a plan means a person that--
           is designated by the terms of the plan as a 
        named fiduciary under ERISA, as the plan administrator, 
        and as the person responsible to perform all 
        administrative duties (including conducting proper 
        testing with respect to the plan and employees of each 
        participating employer) that are reasonably necessary 
        to ensure that the plan meets the Code requirements for 
        tax-favored treatment and the requirements of ERISA and 
        to ensure that each participating employer takes 
        actions as the Secretary or the pooled plan provider 
        determines necessary for the plan to meet Code and 
        ERISA requirements, including providing to the pooled 
        plan provider any disclosures or other information that 
        the Secretary may require or that the pooled plan 
        provider otherwise determines is necessary to 
        administer the plan or to allow the plan to meet Code 
        and ERISA requirements,
           registers with the Secretary as a pooled 
        plan provider and provides any other information that 
        the Secretary may require, before beginning operations 
        as a pooled plan provider,
           acknowledges in writing its status as a 
        named fiduciary under ERISA and as the plan 
        administrator, and
           is responsible for ensuring that all persons 
        who handle plan assets or are plan fiduciaries are 
        bonded in accordance with ERISA requirements.
    The provision specifies that the Secretary may perform 
audits, examinations, and investigations of pooled plan 
providers as may be necessary to enforce and carry out the 
purposes of the provision.
            Guidance
    The provision directs the Secretary to issue guidance that 
the Secretary determines appropriate to carry out the 
provision, including guidance (1) to identify the 
administrative duties and other actions required to be 
performed by a pooled plan provider, (2) that describes the 
procedures to be taken to terminate a plan that fails to meet 
the requirements to be a covered multiple-employer plan, 
including the proper treatment of, and actions needed to be 
taken by, any participating employer and plan assets and 
liabilities attributable to employees of that employer, and (3) 
to identify appropriate cases in which corrective action will 
apply with respect to noncompliant employers. For purposes of 
(3), the Secretary is to take into account whether the failure 
of an employer or pooled plan provider to provide any 
disclosures or other information, or to take any other action, 
necessary to administer a plan or to allow a plan to meet the 
Code requirements for tax-favored treatment has continued over 
a period of time that clearly demonstrates a lack of commitment 
to compliance. Any guidance issued by the Secretary under the 
provision will not apply to any action or failure occurring 
before the issuance of the guidance.
    The provision also directs the Secretary, in consultation 
with the Secretary of Labor when appropriate, to publish model 
plan language that meets the Code and ERISA requirements under 
the provision and that may be adopted to be treated as a pooled 
provider plan and pooled employer plan under ERISA.

Pooled employer plans under ERISA

            In general
    As described above, under the provision, a pooled employer 
plan is treated for purposes of ERISA as a single plan that is 
a multiple-employer plan. ``Pooled employer plan'' is defined 
as a plan (1) that is a defined contribution plan established 
or maintained for the purpose of providing benefits to the 
employees of two or more employers, (2) that is a qualified 
retirement plan or an IRA plan, and (3) the terms of which meet 
the requirements described below. Pooled employer plan does not 
include a plan with respect to which all the participating 
employers have both a common interest other than having adopted 
the plan and control of the plan.
    In order for a plan to be a pooled employer plan, the plan 
terms must--
           designate a pooled plan provider and provide 
        that the pooled plan provider is a named fiduciary of 
        the plan,
           designate one or more trustees (other than a 
        participating employer)\38\ to be responsible for 
        collecting contributions to, and holding the assets of, 
        the plan, and require the trustees to implement written 
        contribution collection procedures that are reasonable, 
        diligent, and systematic,
---------------------------------------------------------------------------
    \38\Any trustee must meet the requirements under the Code to be an 
IRA trustee.
---------------------------------------------------------------------------
           provide that each participating employer 
        retains fiduciary responsibility for the selection and 
        monitoring, in accordance with ERISA fiduciary 
        requirements, of the person designated as the pooled 
        plan provider and any other person who is also 
        designated as a named fiduciary of the plan, and, to 
        the extent not otherwise delegated to another fiduciary 
        by the pooled plan provider (and subject to the ERISA 
        rules relating to self-directed investments), the 
        investment and management of the portion of the plan's 
        assets attributable to the employees of that 
        participating employer,
           provide that a participating employer, or a 
        participant or beneficiary, is not subject to 
        unreasonable restrictions, fees, or penalties with 
        regard to ceasing participation, receipt of 
        distributions, or otherwise transferring assets of the 
        plan in accordance with applicable rules for plan 
        mergers and transfers,
           require the pooled plan provider to provide 
        to participating employers any disclosures or other 
        information that the Secretary of Labor may require, 
        including any disclosures or other information to 
        facilitate the selection or monitoring of the pooled 
        plan provider by participating employers, and require 
        each participating employer to take any actions that 
        the Secretary of Labor or pooled plan provider 
        determines necessary to administer the plan or to allow 
        for the plan to meet the ERISA and Code requirements 
        applicable to the plan, including providing any 
        disclosures or other information that the Secretary of 
        Labor may require or that the pooled plan provider 
        otherwise determines is necessary to administer the 
        plan or to allow the plan to meet ERISA and Code 
        requirements, and
           provide that any disclosure or other 
        information required to be provided as described above 
        may be provided in electronic form and will be designed 
        to ensure only reasonable costs are imposed on pooled 
        plan providers and participating employers.
    Under the provision, however, a pooled employer plan does 
not include a plan established before January 1, 2016, unless 
the plan administrator elects that the plan will be treated as 
a pooled employer plan and the plan meets the requirements of 
ERISA applicable to a pooled employer plan established on or 
after such date.\39\
---------------------------------------------------------------------------
    \39\A pooled employer plan also does not include a multiemployer 
plan.
---------------------------------------------------------------------------
    In the case of a fiduciary of a pooled employer plan or a 
person handling assets of a pooled employer plan, the maximum 
bond amount under ERISA is $1 million.
            Pooled plan provider
    The definition of pooled plan provider for ERISA purposes 
is generally similar to the definition under the Code portion 
of the provision, described above.\40\ The ERISA definition 
requires a person to register as a pooled plan provider with 
the Secretary of Labor and provide any other information that 
the Secretary of Labor may require, before beginning operations 
as a pooled plan provider.
---------------------------------------------------------------------------
    \40\In determining whether a person meets the requirements to be a 
pooled plan provider with respect to a plan, all persons that are 
members of the same controlled group or group under common control and 
that perform services for the plan are treated as one person.
---------------------------------------------------------------------------
    The provision specifies that the Secretary of Labor may 
perform audits, examinations, and investigations of pooled plan 
providers as may be necessary to enforce and carry out the 
purposes of the provision.
            Guidance
    The provision directs the Secretary of Labor to issue 
guidance that such Secretary determines appropriate to carry 
out the provision, including guidance (1) to identify the 
administrative duties and other actions required to be 
performed by a pooled plan provider, and (2) that requires, in 
appropriate cases of a noncompliant employer, plan assets 
attributable to employees of the noncompliant employer to be 
transferred to a plan maintained only by that employer (or its 
successor), to a tax-favored retirement plan for each 
individual whose account is transferred, or to any other 
arrangement that the Secretary of Labor determines in the 
guidance is appropriate,\41\ and the noncompliant employer (and 
not the plan with respect to which the failure occurred or any 
other participating employer) to be liable for any plan 
liabilities attributable to employees of the noncompliant 
employer, except to the extent provided in the guidance. For 
purposes of (2), the Secretary of Labor is to take into account 
whether the failure of an employer or pooled plan provider to 
provide any disclosures or other information, or to take any 
other action, necessary to administer a plan or to allow a plan 
to meet the requirements of ERISA and the Code requirements for 
tax-favored treatment, has continued over a period of time that 
clearly demonstrates a lack of commitment to compliance. Any 
guidance issued by the Secretary of Labor under the provision 
will not apply to any action or failure occurring before the 
issuance of the guidance.
---------------------------------------------------------------------------
    \41\The Secretary of Labor may waive the requirement to transfer 
assets to another plan or arrangement in appropriate circumstances if 
the Secretary of Labor determines it is in the best interests of the 
employees of the noncompliant employer to retain the assets in the 
pooled employer plan.
---------------------------------------------------------------------------

Form 5500 reporting

    Under the provision, the Form 5500 of a pooled employer 
plan must include the identifying information for the person 
designated under the terms of the plan as the pooled plan 
provider. In addition, with respect to annual reports required 
under ERISA, the Secretary of Labor may by regulation prescribe 
simplified reporting for a multiple-employer plan that covers 
fewer than 1,000 participants, but only if no single 
participating employer has 100 or more participants covered by 
the plan.

                             EFFECTIVE DATE

    The provision applies to years beginning after December 31, 
2019, and to Forms 5500 for plan years beginning after December 
31, 2019.
    Nothing in the Code amendments made by the provision is to 
be construed as limiting the authority of the Secretary of the 
Treasury (or the Secretary's delegate) to provide for the 
proper treatment of a failure to meet any Code requirement with 
respect to any employer (and its employees) in a multiple-
employer plan.

  B. Removal of 10 Percent Cap From Automatic Enrollment Safe Harbor 
  After First Plan Year (sec. 103 of the bill and sec. 401(k) of the 
                                 Code)


                              PRESENT LAW

Section 401(k) plans

    A qualified defined contribution plan may include a 
qualified cash or deferred arrangement, under which employees 
may elect to have contributions made to the plan (referred to 
as ``elective deferrals'') rather than receive the same amount 
as current compensation (referred to as a ``section 401(k) 
plan'').\42\ The maximum annual amount of elective deferrals 
that can be made by an employee for a year is $18,000 (for 
2016) or, if less, the employee's compensation.\43\ For an 
employee who attains age 50 by the end of the year, the dollar 
limit on elective deferrals is increased by $6,000 (for 2016) 
(called catch-up contributions).\44\ An employee's elective 
deferrals must be fully vested. A section 401(k) plan may also 
provide for employer matching and nonelective contributions.
---------------------------------------------------------------------------
    \42\Elective deferrals are generally made on a pretax basis and 
distributions attributable to elective deferrals are includible in 
income. However, a section 401(k) plan is permitted to include a 
``qualified Roth contribution program'' that permits a participant to 
elect to have all or a portion of the participant's elective deferrals 
under the plan treated as after-tax Roth contributions. Certain 
distributions from a designated Roth account are excluded from income, 
even though they include earnings not previously taxed.
    \43\Sec. 402(g).
    \44\Sec. 414(v).
---------------------------------------------------------------------------

Automatic enrollment

    A section 401(k) plan must provide each eligible employee 
with an effective opportunity to make or change an election to 
make elective deferrals at least once each plan year.\45\ 
Whether an employee has an effective opportunity is determined 
based on all the relevant facts and circumstances, including 
the adequacy of notice of the availability of the election, the 
period of time during which an election may be made, and any 
other conditions on elections.
---------------------------------------------------------------------------
    \45\Treas. Reg. sec. 1.401(k)-1(e)(2)(ii).
---------------------------------------------------------------------------
    Section 401(k) plans are generally designed so that an 
employee will receive cash compensation unless the employee 
affirmatively elects to make elective deferrals to the section 
401(k) plan. Alternatively, a plan may provide that elective 
deferrals are made at a specified rate (referred to as a 
``default rate'') when an employee becomes eligible to 
participate unless the employee elects otherwise (that is, 
affirmatively elects not to make contributions or to make 
contributions at a different rate). This plan design is 
referred to as automatic enrollment.

Nondiscrimination test and automatic enrollment safe harbor

    An annual nondiscrimination test, called the actual 
deferral percentage test (the ``ADP'' test) applies to elective 
deferrals under a section 401(k) plan.\46\ The ADP test 
generally compares the average rate of deferral for highly 
compensated employees to the average rate of deferral for 
nonhighly compensated employees and requires that the average 
deferral rate for highly compensated employees not exceed the 
average rate for nonhighly compensated employees by more than 
certain specified amounts. If a plan fails to satisfy the ADP 
test for a plan year based on the deferral elections of highly 
compensated employees, the plan is permitted to distribute 
deferrals to highly compensated employees (``excess 
deferrals'') in a sufficient amount to correct the failure. The 
distribution of the excess deferrals must be made by the close 
of the following plan year.\47\
---------------------------------------------------------------------------
    \46\Sec. 401(k)(3).
    \47\Sec. 401(k)(8).
---------------------------------------------------------------------------
    The ADP test is deemed to be satisfied if a section 401(k) 
plan includes certain minimum matching or nonelective 
contributions under either of two plan designs (``401(k) safe 
harbor plan''), as well as certain required rights and features 
and satisfies a notice requirement.\48\ One type of 401(k) safe 
harbor includes automatic enrollment.
---------------------------------------------------------------------------
    \48\Sec. 401(k)(12) and (13). If certain additional requirements 
are met, matching contributions under 401(k) safe harbor plan may also 
satisfy a nondiscrimination test applicable under section 401(m).
---------------------------------------------------------------------------
    An automatic enrollment safe harbor plan must provide that, 
unless an employee elects otherwise, the employee is treated as 
electing to make elective deferrals at a default rate equal to 
a percentage of compensation as stated in the plan and at least 
(1) three percent of compensation for the first year the deemed 
election applies to the participant, (2) four percent during 
the second year, (3) five percent during the third year, and 
(4) six percent during the fourth year and thereafter. Although 
an automatic enrollment safe harbor plan generally may provide 
for default rates higher than these minimum rates, the default 
rate cannot exceed 10 percent for any year.

                           REASONS FOR CHANGE

    The 10-percent cap on the default rate that may be used 
under an automatic enrollment safe harbor plan reflects a 
concern that too high a default rate may cause employees to 
elect out and not contribute at all, thus undercutting the 
purpose of the safe harbor. An initial default rate that is too 
high may have that effect. However, such an effect is less 
likely with respect to automatic increases in default rates for 
years after default contributions have begun. In such a case, 
the cap may instead have the effect of limiting how much is 
contributed and, thus, also limiting retirement savings. The 
Committee therefore believes the cap should be removed for 
years after default contributions have begun.

                        EXPLANATION OF PROVISION

    Under the provision, the 10-percent limitation on the 
default rates under an automatic enrollment safe harbor plan is 
removed after the first year that an employee's deemed election 
applies.

                             EFFECTIVE DATE

    The provision applies to plan years beginning after 
December 31, 2016.

C. Rules Relating to Election of Safe Harbor 401(k) Status (sec. 104 of 
                 the bill and sec. 401(k) of the Code)


                              PRESENT LAW

Section 401(k) plans

    A qualified defined contribution plan may include a 
qualified cash or deferred arrangement, under which employees 
may elect to have contributions made to the plan (referred to 
as ``elective deferrals'') rather than receive the same amount 
as current compensation (referred to as a ``section 401(k) 
plan'').\49\ The maximum annual amount of elective deferrals 
that can be made by an employee for a year is $18,000 (for 
2016) or, if less, the employee's compensation.\50\ For an 
employee who attains age 50 by the end of the year, the dollar 
limit on elective deferrals is increased by $6,000 (for 2016) 
(called catch-up contributions).\51\ An employee's elective 
deferrals must be fully vested. A section 401(k) plan may also 
provide for employer matching and nonelective contributions.
---------------------------------------------------------------------------
    \49\Elective deferrals are generally made on a pretax basis and 
distributions attributable to elective deferrals are includible in 
income. However, a section 401(k) plan is permitted to include a 
``qualified Roth contribution program'' that permits a participant to 
elect to have all or a portion of the participant's elective deferrals 
under the plan treated as after-tax Roth contributions. Certain 
distributions from a designated Roth account are excluded from income, 
even though they include earnings not previously taxed.
    \50\Sec. 402(g).
    \51\Sec. 414(v).
---------------------------------------------------------------------------

Automatic enrollment

    A section 401(k) plan must provide each eligible employee 
with an effective opportunity to make or change an election to 
make elective deferrals at least once each plan year.\52\ 
Whether an employee has an effective opportunity is determined 
based on all the relevant facts and circumstances, including 
the adequacy of notice of the availability of the election, the 
period of time during which an election may be made, and any 
other conditions on elections.
---------------------------------------------------------------------------
    \52\Treas. Reg. sec. 1.401(k)-1(e)(2)(ii).
---------------------------------------------------------------------------
    Section 401(k) plans are generally designed so that an 
employee will receive cash compensation unless the employee 
affirmatively elects to make elective deferrals to the section 
401(k) plan. Alternatively, a plan may provide that elective 
deferrals are made at a specified rate when an employee becomes 
eligible to participate unless the employee elects otherwise 
(that is, affirmatively elects not to make contributions or to 
make contributions at a different rate). This plan design is 
referred to as automatic enrollment.

Nondiscrimination test

            General rule and design-based safe harbors
    An annual nondiscrimination test, called the actual 
deferral percentage test (the ``ADP'' test) applies to elective 
deferrals under a section 401(k) plan.\53\ The ADP test 
generally compares the average rate of deferral for highly 
compensated employees to the average rate of deferral for 
nonhighly compensated employees and requires that the average 
deferral rate for highly compensated employees not exceed the 
average rate for nonhighly compensated employees by more than 
certain specified amounts. If a plan fails to satisfy the ADP 
test for a plan year based on the deferral elections of highly 
compensated employees, the plan is permitted to distribute 
deferrals to highly compensated employees (``excess 
deferrals'') in a sufficient amount to correct the failure. The 
distribution of the excess deferrals must be made by the close 
of the following plan year.\54\
---------------------------------------------------------------------------
    \53\Sec. 401(k)(3).
    \54\Sec. 401(k)(8).
---------------------------------------------------------------------------
    The ADP test is deemed to be satisfied if a section 401(k) 
plan includes certain minimum matching or nonelective 
contributions under either of two plan designs (``401(k) safe 
harbor plan''), described below, as well as certain required 
rights and features and satisfies a notice requirement.\55\
---------------------------------------------------------------------------
    \55\Sec. 401(k)(12) and (13). If certain additional requirements 
are met, matching contributions under a 401(k) safe harbor plan may 
also satisfy a nondiscrimination test applicable under section 401(m).
---------------------------------------------------------------------------
            Safe harbor contributions
    Under one type of 401(k) safe harbor plan (``basic 401(k) 
safe harbor plan''), the plan either (1) satisfies a matching 
contribution requirement (``matching contribution basic 401(k) 
safe harbor plan'') or (2) provides for 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 plan (``nonelective basic 401(k) safe harbor plan''). 
The matching contribution requirement under the matching 
contribution basic 401(k) safe harbor requires a matching 
contribution equal to at least 100 percent of elective 
contributions of the employee for contributions not in excess 
of three percent of compensation, and 50 percent of elective 
contributions for contributions that exceed three percent of 
compensation but do not exceed five percent, for a total 
matching contribution of up to four percent of compensation. 
The required matching contributions and the three percent 
nonelective contribution under the basic 401(k) safe harbor 
must be immediately nonforfeitable (that is, 100 percent 
vested) when made.
    Another safe harbor applies for a section 401(k) plan that 
include automatic enrollment (``automatic enrollment 401(k) 
safe harbor''). Under an automatic enrollment 401(k) safe 
harbor, unless an employee elects otherwise, the employee is 
treated as electing to make elective deferrals equal to a 
percentage of compensation as stated in the plan, not in excess 
of 10 percent and at least (1) three percent of compensation 
for the first year the deemed election applies to the 
participant, (2) four percent during the second year, (3) five 
percent during the third year, and (4) six percent during the 
fourth year and thereafter.\56\ Under the automatic enrollment 
401(k) safe harbor, the matching contribution requirement is 
100 percent of elective contributions of the employee for 
contributions not in excess of one percent of compensation, and 
50 percent of elective contributions for contributions that 
exceed one percent of compensation but do not exceed six 
percent, for a total matching contribution of up to 3.5 percent 
of compensation (``matching contribution automatic enrollment 
401(k) safe harbor''). The rate of nonelective contribution 
under the automatic enrollment 401(k) safe harbor plan is three 
percent, as under the basic 401(k) safe harbor (``nonelective 
contribution automatic enrollment 401(k) safe harbor''). 
However, under the automatic enrollment 401(k) safe harbors, 
the matching and nonelective contributions are allowed to 
become 100 percent vested only after two years of service 
(rather than being required to be immediately vested when 
made).
---------------------------------------------------------------------------
    \56\These automatic increases in default contribution rates are 
required for plans using the safe harbor. Rev. Rul. 2009-30, 2009-39 
I.R.B. 391, provides guidance for including automatic increases in 
other plans using automatic enrollment, including under a plan that 
includes an eligible automatic contribution arrangement.
---------------------------------------------------------------------------
            Safe harbor notice
    The notice requirement for a 401(k) safe harbor plan is 
satisfied if each employee eligible to participate is given, 
within a reasonable period before any year, written notice of 
the employee's rights and obligations under the arrangement and 
the notice meets certain content and timing requirements 
(``safe harbor notice''). To meet the content requirements, a 
safe harbor notice must be sufficiently accurate and 
comprehensive to inform an employee of the employee's rights 
and obligations under the plan, and be written in a manner 
calculated to be understood by the average employee eligible to 
participate in the plan. A safe harbor notice must provide 
certain information, including the plan's safe harbor 
contributions, any other plan contributions, the type and 
amount of compensation that may be deferred under the plan, how 
to make cash or deferred elections, the plan's withdrawal and 
vesting provisions, and specified contact information. In 
addition, a safe harbor notice for an automatic enrollment 
401(k) safe harbor must describe certain additional information 
items, including the deemed deferral elections under the plan 
if the employee does not make an affirmative election and how 
contributions will be invested.

Delay in adopting nonelective 401(k) safe harbor

    Generally the plan provisions for the requirements that 
must be satisfied to be a 401(k) safe harbor plan must be 
adopted before the first day of the plan year and remain in 
effect for an entire 12-month plan year. However, in the case 
of a nonelective 401(k) safe harbor plan (but not the matching 
contribution 401(k) safe harbor), a plan may be amended after 
the first day of the plan year but no later than 30 days before 
the end of the plan year to adopt the safe harbor plan 
provisions including providing the 3 percent of compensation 
nonelective contribution. The plan must also provide a 
contingent and follow-up notice. The contingent notice must be 
provided before the beginning of the plan year and specify that 
the plan may be amended to include the safe harbor nonelective 
contribution and, if it is so amended, a follow-up notice will 
be provided. If the plan is amended, the follow-up notice must 
be provided no later than 30 days before the end of the plan 
year stating that the safe harbor nonelective contribution will 
be provided.

                           REASONS FOR CHANGE

    A nonelective contribution 401(k) safe harbor plan is 
beneficial to employees because it provides employer 
contributions regardless of whether employees make 
contributions. However, some aspects of the current procedural 
rules relating to adoption of the nonelective contribution 
401(k) safe harbor, intended to protect employees, may serve as 
a barrier. The Committee believes that more flexible rules, 
combined with employee protections, will better facilitate the 
adoption of nonelective contribution 401(k) safe harbor plans.

                        EXPLANATION OF PROVISION

In general

    The provision makes a number of changes to the rules for 
the nonelective contribution 401(k) safe harbor.

Elimination of notice requirement

    The provision eliminates the safe harbor notice requirement 
with respect to nonelective 401(k) safe harbor plans. However, 
the general rule under present law requiring a section 401(k) 
plan to provide each eligible employee with an effective 
opportunity to make or change an election to make elective 
deferrals at least once each plan year still applies. As 
described above, relevant factors used in determining if this 
requirement is satisfied include the adequacy of notice of the 
availability of the election and the period of time during 
which an election may be made.

Delay in adopting provisions for nonelective 401(k) safe harbor

    Under the provision, a plan can be amended to become a 
nonelective 401(k) safe harbor plan for a plan year, that is, 
amended to provide the required nonelective contributions and 
thereby satisfy the safe harbor requirements, at any time 
before the 30th day before the close of the plan year.
    Further, the provision allows a plan to be amended after 
the 30th day before the close of the plan year to become a 
nonelective contribution 401(k) safe harbor plan for the plan 
year if (1) the plan is amended to provide for a nonelective 
contribution of at least four percent of compensation (rather 
than at least three percent) for all eligible employees for 
that plan year and (2) the plan is amended no later than the 
last day for distributing excess contributions for the plan 
year, that is, by the close of the following plan year.

                             EFFECTIVE DATE

    The provision applies to plan years beginning after 
December 31, 2016.

D. Increase in Credit Limitation for Small Employer Pension Plan Start-
        Up Costs (sec. 105 of the bill and sec. 45E of the Code)


                              PRESENT LAW

    Present law provides a nonrefundable income tax credit for 
qualified start-up costs of an eligible small employer that 
adopts a new qualified retirement plan, SIMPLE IRA plan or SEP 
(referred to as an eligible employer plan), provided that the 
plan covers at least one nonhighly compensated employee.\57\ 
Qualified start-up costs are expenses connected with the 
establishment or administration of the plan or retirement-
related education for employees with respect to the plan. The 
credit is the lesser of (1) a flat dollar amount of $500 per 
year or (2) 50 percent of the qualified start-up costs. The 
credit applies for up to three years beginning with the year 
the plan is first effective, or, at the election of the 
employer, with the year preceding the first plan year.
---------------------------------------------------------------------------
    \57\A nonhighly compensated employee is an employee who is not a 
highly compensated employee as defined under section 414(q).
---------------------------------------------------------------------------
    An eligible employer is an employer that, for the preceding 
year, had no more than 100 employees, each with compensation of 
$5,000 or more. In addition, the employer must not have had a 
plan covering substantially the same employees as the new plan 
during the three years preceding the first year for which the 
credit would apply. Members of controlled groups and affiliated 
service groups are treated as a single employer for purposes of 
these requirements.\58\ All eligible employer plans of an 
employer are treated as a single plan.
---------------------------------------------------------------------------
    \58\Sec. 52 (a) or (b) and 414(m) or (o).
---------------------------------------------------------------------------
    No deduction is allowed for the portion of qualified start-
up costs paid or incurred for the taxable year equal to the 
amount of the credit.

                           REASONS FOR CHANGE

    Studies show that small employers are less likely to offer 
retirement plans than large employers. The credit for small 
employer pension plan start-up costs is intended to encourage 
small employers to adopt plans. The Committee believes that 
increasing the amount of the credit will encourage more small 
employers to adopt plans.

                        EXPLANATION OF PROVISION

    The provision changes the calculation of the flat dollar 
amount limit on the credit. The flat dollar amount for a 
taxable year is the greater of (1) $500 or (2) the lesser of 
(a) $250 multiplied by the number of nonhighly compensated 
employees of the eligible employer who are eligible to 
participate in the plan or (b) $5,000. As under present law, 
the credit applies for up to three years.

                             EFFECTIVE DATE

    The provision applies to taxable years beginning after 
December 31, 2016.

E. Small Employer Automatic Enrollment Credit (sec. 106 of the bill and 
                       new sec. 45S of the Code)


                              PRESENT LAW

Small employer startup credit

    Present law provides a nonrefundable income tax credit for 
qualified start-up costs of an eligible small employer that 
adopts a new qualified retirement plan, SIMPLE IRA plan or SEP 
(referred to as an eligible employer plan), provided that the 
plan covers at least one nonhighly compensated employee.\59\ 
Qualified start-up costs are expenses connected with the 
establishment or administration of the plan or retirement-
related education for employees with respect to the plan. The 
credit is the lesser of (1) a flat dollar amount of $500 per 
year or (2) 50 percent of the qualified start-up costs. The 
credit applies for up to three years beginning with the year 
the plan is first effective, or, at the election of the 
employer, with the year preceding the first plan year.
---------------------------------------------------------------------------
    \59\Sec. 45E. A nonhighly compensated employee is an employee who 
is not a highly compensated employee as defined under section 414(q).
---------------------------------------------------------------------------
    An eligible employer is an employer that, for the preceding 
year, had no more than 100 employees with compensation of 
$5,000 or more. In addition, the employer must not have had a 
plan covering substantially the same employees as the new plan 
during the three years preceding the first year for which the 
credit would apply. Members of controlled groups and affiliated 
service groups are treated as a single employer for purposes of 
these requirements.\60\ All eligible employer plans of an 
employer are treated as a single plan.
---------------------------------------------------------------------------
    \60\Sec. 52 (a) or (b) and 414(m) or (o).
---------------------------------------------------------------------------
    No deduction is allowed for the portion of qualified start-
up costs paid or incurred for the taxable year equal to the 
amount of the credit.

Automatic enrollment

    A qualified defined contribution plan may include a 
qualified cash or deferred arrangement under which employees 
may elect to have plan contributions (``elective deferrals'') 
made rather than receive cash compensation (commonly called a 
``section 401(k) plan''). A SIMPLE IRA plan is an employer-
sponsored retirement plan funded with individual retirement 
arrangements (``IRAs'') that also allows employees to make 
elective deferrals.\61\ Section 401(k) plans and SIMPLE IRA 
plans may be designed so that the employee will receive cash 
compensation unless the employee affirmatively elects to make 
elective deferrals to the plan. Alternatively, a plan may 
provide that elective deferrals are made at a specified rate 
(when the employee becomes eligible to participate) unless the 
employee elects otherwise (i.e., affirmatively elects not to 
make contributions or to make contributions at a different 
rate). This alternative plan design is referred to as automatic 
enrollment.
---------------------------------------------------------------------------
    \61\Sec. 408(p).
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    Studies show that automatic enrollment increases employee 
participation in section 401(k) and SIMPLE IRA plans, resulting 
in higher retirement savings. The Committee believes that 
providing a credit to small employers may encourage more 
employers to use an automatic enrollment design.

                        EXPLANATION OF PROVISION

    Under the provision, an eligible employer is allowed a 
credit of $500 per year for up to three years for startup costs 
for new section 401(k) plans and SIMPLE IRA plans that include 
automatic enrollment, in addition to the plan start-up credit 
allowed under present law. An eligible employer is also allowed 
a credit of $500 per year for up to three years if it converts 
an existing plan to an automatic enrollment design.

                             EFFECTIVE DATE

    The provision applies to taxable years beginning after 
December 31, 2016.

F. Certain Taxable Non-Tuition Fellowship and Stipend Payments Treated 
as Compensation for IRA Purposes (sec. 107 of the bill and sec. 219 of 
                               the Code)


                              PRESENT LAW

    There are two general types of individual retirement 
arrangements (``IRAs''): traditional IRAs and Roth IRAs.\62\ 
The total amount that an individual may contribute to one or 
more IRAs for a year is generally limited to the lesser of: (1) 
a dollar amount ($5,500 for 2016); and (2) the amount of the 
individual's compensation that is includible in gross income 
for the year.\63\ In the case of an individual who has attained 
age 50 by the end of the year, the dollar amount is increased 
by $1,000. In the case of a married couple, contributions can 
be made up to the dollar limit for each spouse if the combined 
compensation of the spouses that is includible in gross income 
is at least equal to the contributed amount.
---------------------------------------------------------------------------
    \62\Secs. 408 and 408A.
    \63\Sec. 219(b)(2) and (5), as referenced in secs. 408(a)(1) and 
(b)(2)(B) and 408A(c)(2). Under section 4973, IRA contributions in 
excess of the applicable limit are generally subject to an excise tax 
of six percent per year until withdrawn.
---------------------------------------------------------------------------
    An individual may make contributions to a traditional IRA 
(up to the contribution limit) without regard to his or her 
adjusted gross income. An individual may deduct his or her 
contributions to a traditional IRA if neither the individual 
nor the individual's spouse is an active participant in an 
employer-sponsored retirement plan. If an individual or the 
individual's spouse is an active participant in an employer-
sponsored retirement plan, the deduction is phased out for 
taxpayers with adjusted gross income over certain levels.\64\
---------------------------------------------------------------------------
    \64\Sec. 219(g).
---------------------------------------------------------------------------
    Individuals with adjusted gross income below certain levels 
may make contributions to a Roth IRA (up to the contribution 
limit).\65\ Contributions to a Roth IRA are not deductible.
---------------------------------------------------------------------------
    \65\Sec. 408A(c)(3).
---------------------------------------------------------------------------
    As described above, an individual's IRA contributions 
generally cannot exceed the amount of his or her compensation 
that is includible in gross income. Subject to the rule for 
spouses, described above, an individual who has no includible 
compensation income generally is not eligible to make IRA 
contributions, even if the individual has other income that is 
includible in gross income.\66\
---------------------------------------------------------------------------
    \66\Under a special rule in section 219(f)(1), alimony that is 
includible in gross income under section 71 is treated as compensation 
for IRA contribution purposes.
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    Graduate and postdoctoral students often receive stipends 
and similar amounts that are not treated as compensation and 
thus cannot be the basis for IRA contributions. This delays the 
ability to accumulate tax-favored retirement savings, in some 
cases for a number of years. The Committee believes that 
treating such amounts as compensation for IRA contribution 
purposes will enable some graduate and postdoctoral students to 
begin saving for retirement.

                        EXPLANATION OF PROVISION

    Under the provision, an amount that is includible in income 
and is paid to an individual to aid the individual in the 
pursuit of graduate or postdoctoral study or research, such as 
a fellowship, stipend or similar amount, is treated as 
compensation taken into account for IRA contribution purposes.

                             EFFECTIVE DATE

    This provision applies for taxable years beginning after 
December 31, 2016.

G. Repeal of Maximum Age for Traditional IRA Contributions (sec. 108 of 
                   the bill and sec. 219 of the Code)


                              PRESENT LAW

    Under present law, an individual may make deductible 
contributions to a traditional IRA up to the IRA contribution 
limit if neither the individual nor the individual's spouse is 
an active participant in an employer-sponsored retirement 
plan.\67\ If an individual (or the individual's spouse) is an 
active participant in an employer-sponsored retirement plan, 
the deduction is phased out for taxpayers with adjusted gross 
income (``AGI'') for the taxable year over certain indexed 
levels.\68\ To the extent an individual cannot or does not make 
deductible contributions to a traditional IRA, the individual 
may make nondeductible contributions to a traditional IRA 
(without regard to AGI limits). Alternatively, subject to AGI 
limits, an individual may make nondeductible contributions to a 
Roth IRA.\69\
---------------------------------------------------------------------------
    \67\Sec. 219.
    \68\Sec. 219(g).
    \69\Sec. 408(o). The annual contribution limit for IRAs is 
coordinated so that the maximum amount that can be contributed to all 
of an individual's IRAs (both traditional and Roth) for a taxable year 
is the lesser of a certain dollar amount ($5,500 for 2016) or the 
individual's compensation.
---------------------------------------------------------------------------
    An individual who has attained age 70\1/2\ by the close of 
a year is not permitted to make contributions to a traditional 
IRA.\70\ This restriction does not apply to contributions to a 
Roth IRA.\71\ In addition, employees over age 70\1/2\ are not 
precluded from contributing to employer-sponsored plans.
---------------------------------------------------------------------------
    \70\Sec. 219(d)(1).
    \71\Sec. 408A(c)(4).
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    More and more older Americans are continuing to work past 
traditional retirement ages. This provides current income, as 
well as the potential for additional retirement savings. An 
individual working past age 70\1/2\ may contribute to an 
employer-sponsored retirement plan, if available, or to a Roth 
IRA, but not to a traditional IRA. The Committee wishes to 
remove this impediment to retirement savings.

                        EXPLANATION OF PROVISION

    The provision repeals the prohibition on contributions to a 
traditional IRA by an individual who has attained age 70\1/2\.

                             EFFECTIVE DATE

    The provision applies to contributions made for taxable 
years beginning after December 31, 2016.

H. Expansion of IRA Ownership of S Corporation Bank Stock (sec. 109 of 
             the bill and secs. 1361 and 4975 of the Code)


                              PRESENT LAW

IRAs

    An individual retirement account (``IRA'') is a tax-exempt 
trust or account established for the exclusive benefit of an 
individual and his or her beneficiaries.\72\ There are two 
general types of IRAs: traditional IRAs, to which both 
deductible and nondeductible contributions may be made, and 
Roth IRAs, contributions to which are not deductible. In 
general, amounts held in a traditional IRA are includible in 
income when withdrawn (except to the extent the withdrawal is a 
return of nondeductible contributions). Amounts held in a Roth 
IRA that are withdrawn as a qualified distribution are not 
includible in income; distributions from a Roth IRA that are 
not qualified distributions are includible in income to the 
extent attributable to earnings. A qualified distribution is a 
distribution that is made (1) 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) after 
attainment of age 59\1/2\, on account of death or disability, 
or for first-time homebuyer expenses of up to $10,000.
---------------------------------------------------------------------------
    \72\Secs. 408 and 408A.
---------------------------------------------------------------------------

S corporations and permissible shareholders

    In general, an S corporation is not subject to corporate-
level income tax on its items of income and loss.\73\ Instead, 
an S corporation passes through its items of income and loss to 
its shareholders. The shareholders take into account separately 
their shares of these items on their individual income tax 
returns.
---------------------------------------------------------------------------
    \73\The rules for S corporations are in Subchapter S of the Code, 
sections 1361-1379.
---------------------------------------------------------------------------
    Only certain tax-exempt organizations are permitted to be 
shareholders of an S corporation, including qualified 
retirement plans. Under present law, an IRA, including a Roth 
IRA, is permitted to be a shareholder of an S corporation only 
if the S corporation is a bank and only to the extent of bank 
stock held by the IRA on October 22, 2004.\74\ In the case of a 
tax-exempt S corporation shareholder, including an IRA, the 
shareholder's interest in the S corporation is treated as an 
unrelated trade or business and its share of S corporation 
items of income and loss (and gain or loss on disposition of 
the S corporation stock) is taken into account in determining 
its unrelated business taxable income.\75\
---------------------------------------------------------------------------
    \74\This is the date of enactment of the American Jobs Creation 
Act, Pub. L. No. 108-357, which allowed an IRA to be a shareholder of 
an S corporation that is a bank. A related exemption under section 
4975(d)(16) of the prohibited transaction rules allowed stock held by 
an IRA at the time a bank elected to become an S corporation to be sold 
to the IRA owner.
    \75\Sec. 512(e). This rule does not apply to employee stock 
ownership plans.
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    The Committee wishes to remove the limit on individuals' 
ability to invest IRA assets in stock of an S corporation that 
is a bank.

                        EXPLANATION OF PROVISION

    Under the provision, an IRA, including a Roth IRA, is 
permitted to be a shareholder of an S corporation that is a 
bank without regard to whether the IRA held the bank stock on 
October 22, 2004. Thus, any IRA is permitted to be a 
shareholder of any S corporation that is a bank.\76\ As under 
present law, an IRA's interest in an S corporation is treated 
as an unrelated trade or business and its share of S 
corporation items of income and loss (and gain or loss on 
disposition of the S corporation stock) is taken into account 
in determining its unrelated business taxable income.
---------------------------------------------------------------------------
    \76\The provision also amends the exemption under section 
4975(d)(16) of the prohibited transaction rules to allow stock held by 
an IRA at the time a bank elects to become an S corporation to be sold 
to the IRA owner.
---------------------------------------------------------------------------

                             EFFECTIVE DATE

    The provision is effective January 1, 2016.

 I. Extended Rollover Period for Plan Loan Offset Amounts (sec. 110 of 
                 the bill and sec. 402(c) of the Code)


                              PRESENT LAW

Taxation of retirement plan distributions

            General rule
    A distribution from a tax-favored employer-sponsored 
retirement plan (that is, a qualified retirement plan, section 
403(b) plan, or a governmental section 457(b) plan) is 
generally includible in gross income, except to the extent that 
the distribution is a recovery of basis under the plan, or the 
amount of the distribution is contributed to an eligible 
retirement plan (that is, another tax-favored employer-
sponsored retirement plan or an individual retirement 
arrangement (``IRA'')) in a tax-free rollover. In the case of a 
distribution from a retirement plan to a participant under age 
59\1/2\, the distribution (other than a distribution from a 
governmental section 457(b) plan) is also subject to a 10-
percent early distribution tax, unless an exception 
applies.\77\
---------------------------------------------------------------------------
    \77\Sec. 72(t).
---------------------------------------------------------------------------
            Rollovers
    A distribution from a tax-favored employer-sponsored 
retirement plan that is an eligible rollover distribution may 
be rolled over to an eligible retirement plan. The rollover 
generally can be achieved by direct rollover (direct payment 
from the distributing plan to the recipient plan) or by 
contributing the distribution to the eligible retirement plan 
within 60 days of receiving the distribution (``60-day 
rollover''). Amounts that are rolled over are usually not 
included in gross income. Generally, any distribution of the 
balance to the credit of a participant is an eligible rollover 
distribution with exceptions, for example, certain periodic 
payments, required minimum distributions, and hardship 
distributions.\78\
---------------------------------------------------------------------------
    \78\Sec. 402(c)(4). Treas. Reg. sec. 1.402(c)-1 identifies certain 
other payments that are not eligible for rollover, including, for 
example, certain corrective distributions, loans that are treated as 
deemed distributions under section 72(p), and dividends on employer 
securities as described in section 404(k). In addition, pursuant to 
section 402(c)(11), any distribution to a beneficiary other than the 
participant's surviving spouse is only permitted to be rolled over to 
an IRA using a direct rollover; 60-day rollovers are not available to 
nonspouse beneficiaries.
---------------------------------------------------------------------------
    Tax-favored employer-sponsored retirement plans are 
required to offer a direct rollover with respect to any 
eligible rollover distribution before paying the amount to the 
participant or beneficiary.\79\ If an eligible rollover 
distribution is not directly rolled over into an eligible 
retirement plan, the taxable portion of the distribution 
generally is subject to mandatory 20-percent income tax 
withholding.\80\
---------------------------------------------------------------------------
    \79\Sec. 401(a)(31). Unless a participant elects otherwise, a 
mandatory cash-out of more than $1,000 must be directly rolled over to 
an IRA chosen by the plan administrator or the payor.
    \80\Treas. Reg. sec. 1.402(c)-2, Q&A-1(b)(3).
---------------------------------------------------------------------------

Plan loan as a deemed distribution

    Tax-favored employer-sponsored retirement plans may provide 
loans to participants. Unless the loan satisfies certain 
requirements in both form and operation, the amount of a 
retirement plan loan is a deemed distribution from the 
retirement plan.\81\ These requirements include the following: 
the amount of the loan must not exceed the lesser of 50 percent 
of the participant's account balance or $50,000; the terms of 
the loan must provide for a repayment period of not more than 
five years\82\ and provide for level amortization of loan 
payments (with payments not less frequently than quarterly); 
and the terms of the loan must be legally enforceable. The 
rules do not limit the number of loans an employee may obtain 
from a plan.
---------------------------------------------------------------------------
    \81\Sec. 72(p).
    \82\Loans specifically for home purchases may be repaid over a 
longer period.
---------------------------------------------------------------------------
    If a plan participant ceases to make payments on a loan 
before it is repaid according to the required schedule, a 
deemed distribution of the outstanding loan balance generally 
occurs. This deemed distribution of an unpaid loan balance is 
generally taxed as though an actual distribution occurred, 
including being subject to a 10-percent early distribution tax, 
if applicable. However, a deemed distribution is not eligible 
for rollover to another eligible retirement plan.

Loan offset amount

    A plan may also provide that, in certain circumstances, for 
example, when a participant terminates employment with the 
employer, a participant's obligation to repay a loan is 
accelerated and, if the loan is not repaid, the loan is 
cancelled and the amount in participant's account balance is 
offset by the amount attributable to the loan (that is, the 
amount of the unpaid loan balance), referred to as a plan loan 
offset. In the case of a plan loan offset, an actual 
distribution equal to the unpaid loan balance is considered to 
occur, rather than a deemed distribution as described above, 
and, unlike a deemed distribution, the amount of the 
distribution is eligible for tax-free rollover to another 
eligible retirement plan.\83\ However, the plan is not required 
to offer a direct rollover with respect to a plan loan offset 
amount that is an eligible rollover distribution, and the plan 
loan offset amount is generally not subject to 20-percent 
income tax withholding.\84\
---------------------------------------------------------------------------
    \83\Treas. Reg. sec.1.402(c)-2, A-9.
    \84\Treas. Reg. sec. 1.401(a)(31)-1, A-16, and Treas. Reg. sec. 
31.3405(c)-1, A-11.
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    A plan loan offset does not involve the current payment of 
funds to a participant. Thus, in order to roll over a plan 
offset amount, a participant must have other funds in that 
amount available. If a loan offset occurs at the time of a 
participant's termination of employment, the participant might 
not have funds immediately available for the rollover, 
particularly in the case of an involuntary termination. In 
addition, the participant may not know the precise date when 
the 60-day rollover period begins. The Committee believes that 
providing a longer rollover period with respect to plan loan 
offsets may result in more rollovers, thus preserving 
retirement savings.

                        EXPLANATION OF PROVISION

    Under the provision, the period during which a qualified 
plan loan offset amount may be contributed to an eligible 
retirement plan as a rollover contribution is extended from 60 
days after the date of the offset to the due date (including 
extensions) for filing the Federal income tax return for the 
taxable year in which the plan loan offset occurs (meaning the 
taxable year in which the amount is treated as distributed by 
the plan). The extended rollover period applies with respect to 
a rollover of all, or a portion, of a qualified plan loan 
offset amount. Under the provision, a qualified plan loan 
offset amount is a plan loan offset amount which is treated as 
distributed from a tax-favored employer-sponsored retirement 
plan to a participant or beneficiary solely by reason of either 
the termination of the plan, or the failure to meet the 
repayment terms of the loan from such plan because of the 
separation from service of the participant (whether due to 
layoff, cessation of business, termination of employment, or 
otherwise). As under present law, a loan offset amount under 
the provision is the amount by which a participant's accrued 
benefit under the plan is reduced to repay a loan from the 
plan.

                             EFFECTIVE DATE

    The provision applies to loan offsets made in taxable years 
beginning after December 31, 2016.

J. Modification of Rules Relating to Hardship Withdrawals From Cash or 
  Deferred Arrangements (sec. 111 of the bill and sec. 401(k) of the 
                                 Code)


                              PRESENT LAW

    A qualified defined contribution plan may include a 
qualified cash or deferred arrangement, under which employees 
may elect to have contributions made to the plan (referred to 
as ``elective deferrals'') rather than receive the same amount 
as current compensation (referred to as a ``section 401(k) 
plan''). Amounts attributable to elective deferrals generally 
are subject to distribution restrictions. Such amounts cannot 
be distributed before the earliest of the employee's severance 
from employment, death, disability or attainment of age 59\1/
2\, or termination of the plan. However, in certain 
circumstances, elective deferrals, but not associated earnings, 
can also be distributed on account of hardship.\85\
---------------------------------------------------------------------------
    \85\Sec. 401(k)(2)(B)(i)(IV). Under section 72(t), distributions on 
account of hardship may be subject to an additional 10-percent early 
distribution tax.
---------------------------------------------------------------------------
    An employer may also make nonelective and matching 
contributions for employees under a section 401(k) plan. 
Elective deferrals, and matching contributions and after-tax 
employee contributions, are subject to special tests 
(``nondiscrimination tests'') to prevent discrimination in 
favor of highly compensated employees. Nonelective 
contributions and matching contributions that satisfy certain 
requirements (``qualified nonelective contributions and 
qualified matching contributions'') may be used to enable the 
plan to satisfy these nondiscrimination tests. One of the 
requirements is that these contributions be subject to the same 
distribution restrictions as elective deferrals, except that 
these contributions (and attributable earnings) are not 
permitted to be distributed on account of hardship.
    Applicable Treasury regulations provide that a distribution 
is made on account of hardship only if the distribution is made 
on account of an immediate and heavy financial need of the 
employee and is necessary to satisfy the heavy need.\86\ 
Generally, the determination of whether these two requirements 
are met is based on the relevant facts and circumstances. 
However, a safe harbor applies under which a distribution may 
be deemed to be on account of hardship. One requirement of the 
safe harbor is that the employee represent that the need cannot 
be satisfied through currently available plan loans. This in 
effect requires an employee to take any available plan loan 
before receiving a hardship distribution. Another requirement 
is that the employee be prohibited from making elective 
deferrals and employee contributions to the plan and all other 
plans maintained by the employer for at least six months after 
receipt of the hardship distribution.
---------------------------------------------------------------------------
    \86\Treas. Reg. sec. 1.401(k)-1(d)(3).
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    The rules relating to hardship distributions contain fine 
distinctions that create complexity for employers and plan 
administrators. These distinctions may lead to inadvertent 
errors, correction of which increases plan costs, and may also 
cause confusion for employees. In addition, the rule 
prohibiting employees from making contributions for six months 
after receiving a hardship distribution impedes employees' 
ability to replace distributed funds. The Committee believes 
that the rules relating to hardship withdrawals should be more 
consistent and should not impede retirement savings.

                        EXPLANATION OF PROVISION

    The provision allows earnings on elective deferrals under a 
section 401(k) plan, as well as qualified nonelective 
contributions and qualified matching contributions (and 
attributable earnings), to be distributed on account of 
hardship. Further, a distribution is not treated as failing to 
be on account of hardship solely because the employee does not 
take any available plan loan.
    In addition, the Secretary of the Treasury is directed, 
within one year of the date of enactment, to revise the 
regulations relating to the hardship safe harbor to eliminate 
the requirement that an employee be prohibited from making 
elective deferrals and employee contributions for six months 
after the receipt of a hardship distribution. It is intended 
that an employee not be prevented for any period after the 
receipt of a hardship distribution from making elective 
deferrals and employee contributions.

                             EFFECTIVE DATE

    The provision applies to plan years beginning after 
December 31, 2016.

K. Qualified Employer Plans Prohibited From Making Loans Through Credit 
  Cards and Other Similar Arrangements (sec. 112 of the bill and sec. 
                           72(p) of the Code)


                              PRESENT LAW

    Qualified employer plans may provide loans to 
participants.\87\ Unless the loan satisfies certain 
requirements in both form and operation as discussed above, the 
amount of a plan loan is a deemed distribution from the plan. 
These requirements include the following: the amount of the 
loan must not exceed the lesser of 50 percent of the 
participant's account balance or $50,000 (generally taking into 
account outstanding balances of previous loans); the terms of 
the loan must provide for a repayment period of not more than 
five years\88\ and provide for level amortization of loan 
payments (with payments not less frequently than quarterly); 
and the terms of the loan must be legally enforceable. Subject 
to the limit on the amount of loans, which precludes any 
additional loan that would cause the limit to be exceeded, the 
rules relating to loans do not limit the number of loans an 
employee may obtain from a plan. Some arrangements have 
developed under which an employee can access plan loans through 
the use of a credit card or similar mechanism.
---------------------------------------------------------------------------
    \87\A qualified employer plan is a qualified retirement plan under 
section 401(a) or 403(a), a tax-deferred annuity plan under section 
403(b), or a plan established and maintained for its employees by the 
United States, a State or political subdivision, or an agency or 
instrumentality of any of the foregoing.
    \88\Loans specifically for home purchases may be repaid over a 
longer period.
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    The availability of plan loans may encourage employees to 
contribute to a retirement plan with the knowledge that funds 
may be accessed if needed. However, loans that are not repaid 
have the effect of depleting retirement savings. Easy access to 
plan loans through credit or debit cards and similar 
arrangements may lead to the use of retirement plan assets for 
routine or small purchases and, over time, result in an 
accumulated loan balance that an employee cannot repay. The 
Committee believes that appropriate limits should be placed on 
such arrangements.

                        EXPLANATION OF PROVISION

    Under the provision, a plan loan that is made through the 
use of a credit card or similar arrangement generally does not 
meet the requirements for loan treatment and is therefore a 
deemed distribution. However, an exception applies to the 
extent a loan is provided through an electronic card system 
which, as of September 21, 2016, was available for use to 
provide loans under qualified employer plans. The exception 
does not apply to a loan resulting from a transaction of 
$1,000\89\ or less or to a transaction with or on the premises 
of a liquor store, casino, gaming establishment, or any retail 
establishment that provides adult-oriented entertainment.\90\
---------------------------------------------------------------------------
    \89\For loans made in plan years beginning after December 31, 2017, 
this amount is increased to reflect cost-of-living increases, with any 
increase rounded down to the next lowest multiple of $50.
    \90\These establishments are described by reference to section 
408(a)(12)(A)(i), (ii) and (iii) of the Social Security Act.
---------------------------------------------------------------------------
    The provision directs the Government Accountability Office 
(``GAO'') to conduct a study of the impact of loans provided 
through credit cards and similar arrangements on the use of 
retirement savings for purposes other than funding retirement 
(referred to as ``leakage''). GAO is to report the results of 
its study within one year after enactment of the provision to 
the Chairman and Ranking Member of the Senate Committee on 
Finance of the Senate and the Committee on Ways and Means of 
the House of Representatives. If the study shows that such 
loans, after implementation of the restrictions under the 
provision, result in greater leakage than other loans from 
retirement plans, the report must include recommendations to 
reduce leakage.

                             EFFECTIVE DATE

    The provision applies to plan years beginning after 
December 31, 2016.

  L. Portability of Lifetime Income Options (sec. 113 of the bill and 
              secs. 401(a), 403(b) and 457(d) of the Code)


                              PRESENT LAW

Distribution restrictions for accounts under employer-sponsored plans

            Types of plans and contributions
    Tax-favored employer-sponsored retirement plans under which 
individual accounts are maintained for employees include 
qualified defined contribution plans, tax-deferred annuity 
plans (referred to as ``section 403(b)'' plans), and eligible 
deferred compensation plans of State and local government 
employers (referred to as ``governmental section 457(b)'' 
plans).
    Contributions to a qualified defined contribution plan or 
section 403(b) plan may include some or all of the following 
types of contributions:
           pretax elective deferrals (that is, pretax 
        contributions made at the election of an employee in 
        lieu of receiving cash compensation),
           after-tax designated Roth contributions 
        (that is, elective deferrals made on an after-tax basis 
        to a Roth account under the plan),
           after-tax employee contributions (other than 
        designated Roth contributions),
           pretax employer matching contributions (that 
        is, employer contributions made as a result of an 
        employee's elective deferrals, designated Roth 
        contributions, or after-tax contributions), and
           pretax employer nonelective contributions 
        (that is, employer contributions made without regard to 
        whether an employee makes elective deferrals, 
        designated Roth contributions, or after-tax 
        contributions).
    Contributions to a governmental section 457(b) plan 
generally consist of pretax elective deferrals and, if provided 
for under the plan, designated Roth contributions.
            Restrictions on in-service distributions
    The terms of an employer-sponsored retirement plan 
generally determine when distributions are permitted. However, 
in some cases, statutory restrictions on distributions may 
apply.
    Elective deferrals under a qualified defined contribution 
plan are subject to statutory restrictions on distribution 
before severance from employment, referred to as ``in-service'' 
distributions.\91\ In-service distributions of elective 
deferrals (and related earnings) generally are permitted only 
after attainment of age 59\1/2\ or termination of the plan. In-
service distributions of elective deferrals (but not related 
earnings) are also permitted in the case of hardship.
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    \91\Sec. 401(k)(2)(B). Similar restrictions apply to certain other 
contributions, such as employer matching or nonelective contributions 
required under the nondiscrimination safe harbors under section 401(k).
---------------------------------------------------------------------------
    Other distribution restrictions may apply to contributions 
under certain types of qualified defined contribution plans. A 
profit-sharing plan generally may allow an in-service 
distribution of an amount contributed to the plan only after a 
fixed number of years (not less than two).\92\ A money purchase 
pension plan generally may not allow an in-service distribution 
before attainment of age 62 (or attainment of normal retirement 
age under the plan if earlier) or termination of the plan.\93\
---------------------------------------------------------------------------
    \92\Rev. Rul. 71-295, 1971-2 C.B. 184, and Treas. Reg. sec. 1.401-
1(b)(1)(ii). Similar rules apply to a stock bonus plan. Treas. Reg. 
sec. 1.401-1(b)(1)(iii).
    \93\Sec. 401(a)(36) and Treas. Reg. secs. 1.401-1(b)(1)(i) and 
1.401(a)-1(b).
---------------------------------------------------------------------------
    Elective deferrals under a section 403(b) plan are subject 
to in-service distribution restrictions similar to those 
applicable to elective deferrals under a qualified defined 
contribution plan, and, in some cases, other contributions to a 
section 403(b) plan are subject to similar restrictions.\94\ 
Deferrals under a governmental section 457(b) plan are subject 
to in-service distribution restrictions similar to those 
applicable to elective deferrals under a qualified defined 
contribution plan, except that in-service distributions under a 
governmental section 457(b) plan apply until age 70\1/2\ 
(rather than age 59\1/2\).\95\
---------------------------------------------------------------------------
    \94\Secs. 403(b)(7)(A)(ii) and 403(b)(11).
    \95\Sec. 457(d)(1)(A).
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Distributions and rollovers

    A distribution from an employer-sponsored retirement plan 
is generally includible in income except for any portion 
attributable to after-tax contributions, which result in 
basis.\96\ Unless an exception applies, in the case of a 
distribution before age 59\1/2\ from a qualified retirement 
plan or a section 403(b) plan, any amount included in income is 
subject to an additional 10-percent tax, referred to as the 
``early withdrawal'' tax.\97\
---------------------------------------------------------------------------
    \96\Secs. 402(a), 403(b)(1) and 457(a)(1). Under section 402A(d), a 
qualified distribution from a designated Roth account under an 
employer-sponsored plan is not includible in income.
    \97\Sec. 72(t).
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    A distribution from an employer-sponsored retirement plan 
generally may be rolled over on a nontaxable basis to another 
such plan or to an individual retirement arrangement (``IRA''), 
either by a direct transfer to the recipient plan or IRA or by 
contributing the distribution to the recipient plan or IRA 
within 60 days of receiving the distribution.\98\ If the 
distribution from an employer-sponsored retirement plan 
consists of property, the rollover is accomplished by a 
transfer or contribution of the property to the recipient plan 
or IRA.
---------------------------------------------------------------------------
    \98\Secs. 402(c), 402A(c)(3), 403(b)(8) and 457(e)(16).
---------------------------------------------------------------------------

Investment of accounts under employer-sponsored plans

    Qualified defined contribution plans, section 403(b) plans, 
and governmental section 457(b) plans commonly allow employees 
to direct the manner in which their accounts are invested. 
Employees may be given a choice among specified investment 
options, such as a choice of specified mutual funds, and, in 
some cases, may be able to direct the investment of their 
accounts in any product, instrument or investment offered in 
the market.
    The investment options under a particular employer-
sponsored retirement plan may change at times.\99\ Similarly, a 
plan that allows employees to direct the investment of their 
accounts in any product, instrument or investment offered in 
the market may be amended to limit the investments that can be 
held in the plan. In these cases, employees may be required to 
change the investments held within their accounts without the 
option of receiving a distribution of the existing investment.
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    \99\In the case of a plan subject to the Employee Retirement Income 
Security Act of 1974 (``ERISA''), a participant's exercise of control 
over the investment of the assets in his or her account by choosing 
among the investment options offered under the plan does not relieve a 
plan fiduciary from the duty to prudently select and monitor the 
investment options offered to participants. 29 C.F.R. sec. 2550.404c-
1(d)(2)(iv) (2010); Tibble v. Edison International, No. 13-550, 135 S. 
Ct. 1823 (2015). The duty to monitor investment options may result in a 
change in the options offered.
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                           REASONS FOR CHANGE

    The terms of some investments impose a charge or fee when 
the investment is liquidated, particularly if the investment is 
liquidated within a particular period after acquisition. For 
example, a lifetime income product, such as an annuity 
contract, may impose a surrender charge if the investment is 
discontinued. If an employee has to liquidate an investment 
held in an employer-sponsored retirement plan, for example, 
because of a change in investment options or a limit on 
investments held in the plan, the employee may be subject to 
such a charge or fee. Restrictions on in-service distributions 
may prevent the employee from avoiding such a charge or fee, 
and also from preserving the investment, through a distribution 
and rollover of the existing investment. The Committee wishes 
to allow distributions in such cases.

                        EXPLANATION OF PROVISION

    Under the provision, if a lifetime income investment is no 
longer authorized to be held as an investment option under a 
qualified defined contribution plan, section 403(b) plan, or 
governmental section 457(b) plan, except as otherwise provided 
in guidance, the plan does not fail to satisfy the Code 
requirements applicable to the plan solely by reason of 
allowing (1) qualified distributions of a lifetime income 
investment, or (2) distributions of a lifetime income 
investment in the form of a qualified plan distribution annuity 
contract. Such a distribution must be made within the 90-day 
period ending on the date when the lifetime income investment 
is no longer authorized to be held as an investment option 
under the plan.
    For purposes of the provision, a qualified distribution is 
a direct trustee-to-trustee transfer to another employer-
sponsored retirement plan or IRA. A lifetime income investment 
is an investment option designed to provide an employee with 
election rights (1) that are not uniformly available with 
respect to other investment options under the plan and (2) that 
are to a lifetime income feature available through a contract 
or other arrangement offered under the plan (or under another 
employer-sponsored retirement plan or IRA through a direct 
trustee-to-trustee transfer to the other plan or IRA of the 
contract or other arrangement). A lifetime income feature is 
(1) a feature that guarantees a minimum level of income 
annually (or more frequently) for at least the remainder of the 
life of the employee or the joint lives of the employee and the 
employee's designated beneficiary, or (2) an annuity payable on 
behalf of the employee under which payments are made in 
substantially equal periodic payments (not less frequently than 
annually) over the life of the employee or the joint lives of 
the employee and the employee's designated beneficiary. 
Finally, a qualified plan distribution annuity contract is an 
annuity contract purchased for a participant and distributed to 
the participant by an employer-sponsored retirement plan.

                             EFFECTIVE DATE

    The provision applies to plan years beginning after 
December 31, 2016.

  M. Treatment of Custodial Accounts on Termination of Section 403(b) 
        Plans (sec. 114 of the bill and sec. 403(b) of the Code)


                              PRESENT LAW

Tax-sheltered annuities (section 403(b) plans)

    Section 403(b) plans are a form of tax-favored employer-
sponsored plan that provide tax benefits similar to qualified 
retirement plans. Section 403(b) plans may be maintained only 
by (1) charitable tax-exempt organizations, and (2) educational 
institutions of State or local governments (that is, public 
schools, including colleges and universities). Many of the 
rules that apply to section 403(b) plans are similar to the 
rules applicable to qualified retirement plans, including 
section 401(k) plans. Employers may make nonelective or 
matching contributions to such plans on behalf of their 
employees, and the plan may provide for employees to make pre-
tax elective deferrals, designated Roth contributions (held in 
designated Roth accounts)\100\ or other after-tax 
contributions. Generally section 403(b) plans provide for 
contributions toward the purchase of annuity contracts or 
provide for contributions to be held in custodial accounts for 
each employee. In the case of contributions to custodial 
accounts under a section 403(b) plan, the amounts must be 
invested only in regulated investment company stock.\101\ 
Contributions to a custodial account are not permitted to be 
distributed before the employee dies, attains age 59\1/2\, has 
a severance from employment, or, in the case of elective 
deferrals, encounters financial hardship.
---------------------------------------------------------------------------
    \100\Sec. 402A.
    \101\Sec. 403(b)(7).
---------------------------------------------------------------------------
    A section 403(b) plan is permitted to contain provisions 
for plan termination and that allow accumulated benefits to be 
distributed on termination.\102\ In order for a plan 
termination to be effectuated, however, all plan assets must be 
distributed to participants.
---------------------------------------------------------------------------
    \102\Treas. Reg. sec. 1.403(b)-10(a).
---------------------------------------------------------------------------

Rollovers

    A distribution from a section 403(b) plan that is an 
eligible rollover distribution may be rolled over to an 
eligible retirement plan (which include another 403(b) plan, a 
qualified retirement plan, and an IRA).\103\ The rollover 
generally can be achieved by direct rollover (direct payment 
from the distributing plan to the recipient plan) or by 
contributing the distribution to the eligible retirement plan 
within 60 days of receiving the distribution (``60-day 
rollover'').\104\ Amounts that are rolled over are usually not 
included in gross income. Generally, a distribution of any 
portion of the balance to the credit of a participant is an 
eligible rollover distribution with exceptions, for example, 
certain periodic payments, required minimum distributions, and 
hardship distributions.\105\
---------------------------------------------------------------------------
    \103\Sec. 403(b)(8). Similar rules apply to distributions from 
qualified retirement plans and governmental section 457(b) plans.
    \104\Under section 402(c)(11), any distribution to a beneficiary 
other than the participant's surviving spouse is only permitted to be 
rolled over to an IRA using a direct rollover; 60-day rollovers are not 
available to nonspouse beneficiaries.
    \105\Sec. 402(c)(4). Treas. Reg. sec. 1.402(c)-1 identifies certain 
other payments that are not eligible for rollover, including, for 
example, certain corrective distributions, loans that are treated as 
deemed distributions under section 72(p), and dividends on employer 
securities as described in section 404(k).
---------------------------------------------------------------------------

Roth conversions

    Distributions from section 403(b) plans may be rolled into 
a Roth IRA.\106\ Distributions from these plans that are rolled 
over into a Roth IRA and that are not distributions from a 
designated Roth account must be included in gross income. 
Further, a section 403(b) plan that allows employees to make 
designated Roth contributions may also allow employees to elect 
to transfer amounts held in accounts that are not designated 
Roth accounts into designated Roth accounts, but the amount 
transferred must be included in income as though it were 
distributed.\107\
---------------------------------------------------------------------------
    \106\Sec. 408A(d)(3). Similar rules apply to qualified retirement 
plans and governmental section 457(b) plans.
    \107\Sec. 402A(d)(4). Similar rules apply to qualified retirement 
plans and governmental section 457(b) plans.
---------------------------------------------------------------------------

Approved nonbank trustees required for IRAs

    An IRA can be a trust, a custodial account, or an annuity 
contract. The Code requires that the trustee or custodian of an 
IRA be a bank (which is generally subject to Federal or State 
supervision) or an IRS approved nonbank trustee, that an 
annuity contract be issued by an insurance company (which is 
subject to State supervision), and that an IRA trust or 
custodial account be created and organized in the United 
States.
    In order for a trustee or custodian that is not a bank to 
be an IRA trustee or custodian, the entity must apply to the 
IRS for approval. Treasury Regulations list a number of factors 
that are taken into account in approving an applicant to be a 
nonbank trustee.\108\ The applicant must demonstrate fiduciary 
ability (ability to act within accepted rules of fiduciary 
conduct including continuity and diversity of ownership), 
capacity to account (experience and competence with other 
activities normally associated with handling of retirement 
funds), and ability to satisfy other rules of fiduciary conduct 
which includes a net worth requirement. Because it is an 
objective requirement that may be difficult for some applicants 
to satisfy, the net worth requirement is the most significant 
of the requirements for nonbank trustees.
---------------------------------------------------------------------------
    \108\Treas. Reg. sec. 1.408-2(e).
---------------------------------------------------------------------------
    To be approved, the entity must have a net worth of at 
least $250,000 at the time of the application. There is a 
maintenance rule that varies depending on whether the trustee 
is an active trustee or a passive trustee and that includes 
minimum dollar amounts and minimum amounts as a percentage of 
assets held in fiduciary accounts. A special rule is provided 
for nonbank trustees that are members of the Security Investor 
Protection Corporation (``SIPC'').

                           REASONS FOR CHANGE

    In general, assets of section 403(b) plans can be invested 
only in annuity contracts or mutual funds. Unlike most 
qualified defined contribution plans, under which assets are 
held in a trust, historically, assets associated with section 
403(b) plans have often consisted of annuity contracts issued 
in the name of the particular participant or mutual funds held 
in a custodial account in the participant's name. In many 
cases, this prevents an employer from distributing these assets 
in order to effectuate a plan termination. The Committee wishes 
to provide a mechanism under which the plan termination may 
proceed while keeping assets that cannot otherwise be 
distributed in a tax-favored retirement savings vehicle.

                        EXPLANATION OF PROVISION

    Under the provision, if an employer terminates a section 
403(b) plan under which amounts are contributed to custodial 
accounts, and the person holding the assets of the accounts is 
an IRS approved nonbank trustee, then, as of the date of the 
termination, the custodial accounts are deemed to be IRAs. Only 
a custodial account under a section 403(b) plan that is a 
designated Roth account is treated as a Roth IRA upon 
termination of the section 403(b) plan.

                             EFFECTIVE DATE

    The provision applies to plan terminations occurring after 
December 31, 2016.

N. Clarification of Retirement Income Account Rules Relating to Church-
 Controlled Organizations (sec. 115 of the bill and sec. 403(b)(9) of 
                               the Code)


                              PRESENT LAW

    Assets of a tax-sheltered annuity plan (``section 403(b)'' 
plan), generally must be invested in annuity contracts or 
mutual funds.\109\ However, the restrictions on investments do 
not apply to a retirement income account, which is a defined 
contribution program established or maintained by a church, or 
a convention or association of churches, to provide benefits 
under the plan to employees of a religious, charitable or 
similar tax-exempt organization.\110\
---------------------------------------------------------------------------
    \109\Sec. 403(b)(1)(A) and (7).
    \110\ Sec. 403(b)(9)(B), referring to organizations exempt from tax 
under section 501(c)(3). For this purpose, a church or a convention or 
association of churches includes an organization described in section 
414(e)(3)(A), that is, an organization, the principal purpose or 
function of which is the administration or funding of a plan or program 
for the provision of retirement benefits or welfare benefits, or both, 
for the employees of a church or a convention or association of 
churches, provided that the organization is controlled by or associated 
with a church or a convention or association of churches.
---------------------------------------------------------------------------
    Certain rules prohibiting discrimination in favor of highly 
compensated employees, which apply to section 403(b) plans 
generally, do not apply to a plan maintained by a church or 
qualified church-controlled organization.\111\ For this 
purpose, church means a church, a convention or association of 
churches, or an elementary or secondary school that is 
controlled, operated, or principally supported by a church or 
by a convention or association of churches, and includes a 
qualified church-controlled organization. A qualified church-
controlled organization is any church-controlled tax-exempt 
organization other than an organization that (1) offers goods, 
services, or facilities for sale, other than on an incidental 
basis, to the general public, other than goods, services, or 
facilities that are sold at a nominal charge substantially less 
than the cost of providing the goods, services, or facilities, 
and (2) normally receives more than 25 percent of its support 
from either governmental sources, or receipts from admissions, 
sales of merchandise, performance of services, or furnishing of 
facilities, in activities that are not unrelated trades or 
businesses, or from both. Church-controlled organizations that 
are not qualified church-controlled organizations are generally 
referred to as ``nonqualified church-controlled 
organizations.''
---------------------------------------------------------------------------
    \111\ Sec. 403(b)(1)(D) and (12).
---------------------------------------------------------------------------
    In recent years, a question has arisen as to whether 
employees of nonqualified church-controlled organizations may 
be covered under a section 403(b) plan that consists of a 
retirement income account.

                           REASONS FOR CHANGE

    The Committee wishes to clarify the individuals who may be 
covered by a retirement income account.

                        EXPLANATION OF PROVISION

    The provision clarifies that a retirement income account 
may cover a duly ordained, commissioned, or licensed minister 
of a church in the exercise of his ministry, regardless of the 
source of his compensation; an employee of a tax-exempt 
organization, whether a civil law corporation or otherwise, 
that is controlled by or associated with a church or a 
convention or association of churches; and certain employees 
after separation from service with a church, a convention or 
association of churches, or an organization described 
above.\112\
---------------------------------------------------------------------------
    \112\ These individuals are described in section 414(e)(3)(B).
---------------------------------------------------------------------------

                             EFFECTIVE DATE

    The provision applies to years beginning before, on, or 
after the date of enactment of the provision.

                 TITLE II--ADMINISTRATIVE IMPROVEMENTS


A. Plan Adopted by Filing Due Date for Year May Be Treated as in Effect 
 as of Close of Year (sec. 201 of the bill and sec. 401(b) of the Code)


                              PRESENT LAW

    In order for a qualified retirement plan to be treated as 
maintained for a taxable year, the plan must be adopted by the 
last day of the taxable year.\113\ However, the trust under the 
plan will not fail to be treated as in existence due to lack of 
corpus merely because it holds no assets on the last day of the 
taxable year.\114\ Contributions made by the due date (plus 
extensions) of the tax return for the employer maintaining the 
plan for a taxable year are treated as contributed on account 
of that taxable year.\115\ Thus a plan can be established on 
the last day of a taxable year even though the first 
contribution is not made until the due date of the employer's 
taxable year. Further, if the terms of a plan adopted during an 
employer's taxable year fail to satisfy the qualification 
requirements that apply to the plan for the year, the plan may 
also be amended retroactively by the due date (including 
extensions) of the employer's return, provided that the 
amendment is made retroactively effective.\116\ However, this 
provision does not allow a plan to be adopted after the end of 
a taxable year and made retroactively effective, for 
qualification purposes, for the taxable year prior to the 
taxable year in which the plan was adopted by the 
employer.\117\
---------------------------------------------------------------------------
    \113\Rev. Rul. 76-28; 1976-1 C.B. 106.
    \114\Rev. Rul. 81-114; 1981-1 C.B. 207.
    \115\Sec. 404(a)(6).
    \116\ Sec. 401(b).
    \117\Treas. Reg. sec. 1.401(b)-1(a).
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    An employer, particularly a small employer, might not know 
until after the end of a taxable year (the ``preceding year'') 
that its profits for the preceding year are sufficient to 
support the expenses and contributions associated with the 
establishment of a retirement plan. However, under present law, 
a plan established at that time can be effective only for the 
current year, not for the preceding year. The Committee 
believes that allowing a plan to be effective for the preceding 
year provides the opportunity for employees to receive 
contributions for that earlier year and begin to accumulate 
retirement savings.

                        EXPLANATION OF PROVISION

    Under the provision, if an employer adopts a qualified 
retirement plan after the close of a taxable year but before 
the time prescribed by law for filing the return of the 
employer for the taxable year (including extensions thereof), 
the employer may elect to treat the plan as having been adopted 
as of the last day of the taxable year.
    The provision does not override rules requiring certain 
plan provisions to be in effect during a plan year, such as the 
provision for elective deferrals under a qualified cash or 
deferral arrangement (``generally referred to as a 401(k) 
plan'').\118\
---------------------------------------------------------------------------
    \118\ Treas. Reg. sec. 1.401(k)-1(e)(2)(ii).
---------------------------------------------------------------------------

                             EFFECTIVE DATE

    The provision applies to plans adopted for taxable years 
beginning after December 31, 2016.

  B. Combined Annual Report for Group of Plans (sec. 202 of the bill, 
             sec. 6058 of the Code, and sec. 104 of ERISA)


                              PRESENT LAW

    Under the Code, an employer maintaining a qualified 
retirement plan generally is required to file an annual return 
containing information required under regulations with respect 
to the qualification, financial condition, and operation of the 
plan.\119\ ERISA requires the plan administrator of certain 
pension and welfare benefit plans to file annual reports 
disclosing certain information to the Department of Labor 
(``DOL'').\120\ These filing requirements are met by filing a 
completed Form 5500, Annual Return/Report of Employee Benefit 
Plan. Forms 5500 are filed with DOL, and information from Forms 
5500 is shared with the IRS.\121\ A separate Form 5500 is 
required for each plan.\122\
---------------------------------------------------------------------------
    \119\Sec. 6058. In addition, under section 6059, the plan 
administrator of a defined benefit plan subject to the minimum funding 
requirements is required to file an annual actuarial report. Under Code 
section 414(g) and ERISA section 3(16), plan administrator generally 
means the person specifically so designated by the terms of the plan 
document. In the absence of a designation, the plan administrator 
generally is (1) in the case of a plan maintained by a single employer, 
the employer, (2) in the case of a plan maintained by an employee 
organization, the employee organization, or (3) in the case of a plan 
maintained by two or more employers or jointly by one or more employers 
and one or more employee organizations, the association, committee, 
joint board of trustees, or other similar group of representatives of 
the parties that maintain the plan. Under ERISA, the party described in 
(1), (2) or (3) is referred to as the ``plan sponsor.''
    \120\ERISA secs. 103 and 104. Under ERISA section 4065, the plan 
administrator of certain defined benefit plans must provide information 
to the PBGC.
    \121\Information is shared also with the PBGC, as applicable. Form 
5500 filings are also publicly released in accordance with section 
6104(b) and Treas. Reg. sec. 301.6104(b)-1 and ERISA secs. 104(a)(1) 
and 106(a).
    \122\Under section 6011(a) and (e), the IRS is required to provide 
standards for electronically filed returns, but may not require a 
person to file a return electronically unless the person is required to 
file at least 250 returns during the calendar year (``250 return 
threshold for electronic filing''). Under Treas. Reg. sec. 301.6058-2, 
Form 5500 for a plan year must be filed electronically if the filer is 
required to file at least 250 tax returns (including information 
returns) during the calendar year that includes the first day of the 
plan year.
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    Forms 5500 provide valuable information about plans to plan 
participants, administrative agencies, and the public, 
including researchers. However, the preparation of Form 5500 
also involves administrative costs that increase plan expenses. 
The Committee believes that, in the case of identical plans 
(that is, plans with the same plan year, trustee, administrator 
and investments) maintained by unrelated employers, permitting 
a single Form 5500, containing information specific to each 
plan, rather than requiring a separate Form 5500 for each plan 
as under present law, can reduce aggregate administrative 
costs, making it easier for small employers to sponsor a 
retirement plan and thus improving retirement savings.

                        EXPLANATION OF PROVISION

    The provision directs the IRS and DOL to work together to 
modify Form 5500 so that all members of a group of plans 
described below may file a single consolidated Form 5500. In 
developing the consolidated Form 5500, IRS and DOL may require 
it to include all information for each plan in the group as IRS 
and DOL determine is necessary or appropriate for the 
enforcement and administration of the Code and ERISA.\123\
---------------------------------------------------------------------------
    \123\Under the provision, for purposes of applying the 250 return 
threshold for electronic filing to Forms 5500 for plan years beginning 
after December 31, 2016, information regarding each plan for which 
information is provided on the Form 5500 is treated as a separate 
return.
---------------------------------------------------------------------------
    For purposes of the provision, a group of plans is eligible 
for a consolidated Form 5500 if all the plans in the group (1) 
are defined contribution plans, (2) have the same trustee, the 
same named fiduciary (or named fiduciaries) under ERISA, and 
the same administrator, (3) use the same plan year, and (4) 
provide the same investments or investment options to 
participants and beneficiaries. A plan not subject to ERISA may 
be included in the group if the same person that performs each 
of the previous functions, as applicable, for all the other 
plans in the group performs each of the functions for the plan 
not subject to ERISA.

                             EFFECTIVE DATE

    The consolidated Form 5500 is to be implemented not later 
than January 1, 2020, and shall be effective for returns and 
reports for plan years beginning after December 31, 2019.

C. Disclosure Regarding Lifetime Income (sec. 203 of the bill and sec. 
                             105 of ERISA)


                              PRESENT LAW

    ERISA requires the administrator of a defined contribution 
plan to provide benefit statements to participants.\124\ In the 
case of a participant who has the right to direct the 
investment of the assets in his or her account, a benefit 
statement must be provided at least quarterly. Benefit 
statements must be provided at least annually to other 
participants.
---------------------------------------------------------------------------
    \124\ERISA sec. 105. Benefits statements are required also with 
respect to defined benefit plans. A civil penalty may apply for a 
failure to provide a required benefit statement.
---------------------------------------------------------------------------
    Among other items, a benefit statement provided with 
respect to a defined contribution plan generally must include 
(1) the participant's total benefits accrued, that is, the 
participant's account balance, (2) the vested portion of the 
account balance or the earliest date on which the account 
balance will become vested, and (3) the value of each 
investment to which assets in the participant's account are 
allocated. A quarterly benefit statement provided to a 
participant who has the right to direct investments must 
provide additional information, including information relating 
to investment principles.
    In May 2013, the Department of Labor issued an advance 
notice of proposed rulemaking providing rules under which a 
benefit provided to a defined contribution plan participant 
would include an estimated lifetime income stream of payments 
based on the participant's account balance.\125\ However, 
information about lifetime income that might be provided by 
funds in a defined contribution plan is not currently required 
to be included in a benefit statement.
---------------------------------------------------------------------------
    \125\78 Fed. Reg. 26727 (May 8, 2013).
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    Retirees are generally eligible for annuity benefits under 
the Social Security system, but, for many retirees, additional 
income that will last for life is needed. Defined contribution 
plans provide a valuable source of retirement savings, but 
generally, unlike defined benefit plans, do not offer benefits 
in the form of annuities or other distribution forms that 
provide lifetime income. In addition, most plan participants do 
not understand how to correlate the funds in a defined 
contribute plan account with an annuity or other lifetime 
income form. The Committee wishes to require information on 
equivalent lifetime income to be included in benefit statements 
with respect to defined contribution plan accounts, in a manner 
that is both useful to participants and practicable for plan 
administrators.

                        EXPLANATION OF PROVISION

    The provision requires a benefit statement provided to a 
defined contribution plan participant to include a lifetime 
income disclosure as described in the provision. However, the 
lifetime income disclosure is required to be included in only 
one benefit statement during any 12-month period.
    A lifetime income disclosure is required to set forth the 
lifetime income stream equivalent of the participant's total 
account balance under the plan. The lifetime income stream 
equivalent to the account balance is the amount of monthly 
payments the participant would receive if the total account 
balance were used to provide lifetime income streams, based on 
assumptions specified in guidance prescribed by the Secretary 
of Labor (referred to as the ``Secretary'' in this 
explanation). The required lifetime income streams are (1) a 
qualified joint and survivor annuity for the participant and 
the participant's surviving spouse, based on assumptions 
specified in guidance, including the assumption that the 
participant has a spouse of equal age, and (2) a single life 
annuity. The lifetime income streams may have a term certain or 
other features to the extent permitted under guidance.
    The Secretary is directed to issue, not later than a year 
after the provision is enacted, a model lifetime income 
disclosure, written in a manner to be understood by the average 
plan participant. The model must include provisions to (1) 
explain that the lifetime income stream equivalent is only 
provided as an illustration, (2) explains that the actual 
payments under the lifetime income stream that may be purchased 
with the account balance will depend on numerous factors and 
may vary substantially from the lifetime income stream 
equivalent in the disclosure, (3) explain the assumptions on 
which the lifetime income stream equivalent is determined, and 
(4) provides other similar explanations as the Secretary 
considers appropriate.
    In addition, the Secretary is directed, not later than a 
year after the provision is enacted, (1) to prescribe 
assumptions that defined contribution plan administrators may 
use in converting account balances into lifetime income stream 
equivalents, and (2) issue interim final rules under the 
provision. In prescribing assumptions, the Secretary may 
prescribe a single set of specific assumptions (in which case 
the Secretary may issue tables or factors that facilitate 
conversions of account balances) or ranges of permissible 
assumptions. To the extent that an account balance is or may be 
invested in a lifetime income stream, the prescribed 
assumptions are to allow, to the extent appropriate, plan 
administrators to use the amounts payable under the lifetime 
income stream as a lifetime income stream equivalent.
    Under the provision, no plan fiduciary, plan sponsor, or 
other person has any liability under ERISA solely by reason of 
the provision of lifetime income stream equivalents that are 
derived in accordance with the assumptions and guidance under 
the provision and that include the explanations contained in 
model disclosure. This protection applies without regard to 
whether the lifetime income stream equivalent is required to be 
provided.

                             EFFECTIVE DATE

    The requirement to provide a lifetime income disclosure 
applies with respect to benefit statements provided more than 
12 months after the latest of the issuance by the Secretary of 
(1) interim final rules, (2) the model disclosure, or (3) 
prescribed assumptions.

  D. Fiduciary Safe Harbor for Selection of Lifetime Income Provider 
              (sec. 204 of the bill and sec. 404 of ERISA)


                              PRESENT LAW

    ERISA imposes certain standards of care with respect to the 
actions of a plan fiduciary. Specifically, a fiduciary is 
required to discharge its duties with respect to the plan 
solely in the interest of the participants and beneficiaries, 
for the exclusive purpose of providing benefits to participants 
and beneficiaries and defraying reasonable administration 
expenses of the plan, with the care, skill, prudence, and 
diligence under the circumstances then prevailing that a 
prudent man acting in a like capacity and familiar with 
relevant matters would use in the conduct of an enterprise of a 
like character and with like aims (the ``prudent man'' 
requirement), by diversifying plan investments so as to 
minimize the risk of large losses unless, under the 
circumstances, it is clearly prudent not to do so, and in 
accordance with plan documents and governing instruments 
insofar as the documents and instruments are consistent with 
ERISA.
    Department of Labor regulations provide a safe harbor for a 
fiduciary to satisfy the prudent man requirement in selecting 
an annuity provider and a contract for benefit distributions 
from a defined contribution plan.\126\
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    \126\29 C.F.R. sec. 2550.404a-4.
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                           REASONS FOR CHANGE

    Unlike defined benefit plans, defined contribution plans 
generally do not offer benefits in the form of annuities or 
other distribution forms that provide lifetime income, which, 
under a defined contribution plan, generally must be provided 
through a contract issued by an insurance company. In the case 
of a defined contribution plan subject to ERISA, the selection 
of a lifetime income provider (such as an insurance company) is 
a fiduciary act. Uncertainty about the applicable fiduciary 
standard may discourage plan sponsors and administrators from 
offering lifetime income benefit options under a defined 
contribution plan.

                        EXPLANATION OF PROVISION

    The provision specifies measures that a plan fiduciary may 
take with respect to the selection of an insurer and a 
guaranteed retirement income contract in order to assure that 
the fiduciary meets the prudent man requirement. The measures 
under the provision are an optional means by which a fiduciary 
will be considered to satisfy the prudent man requirement with 
respect to the selection of insurers and guaranteed retirement 
income contracts and do not establish minimum requirements or 
the exclusive means for satisfying the prudent man requirement.
    For purposes of the provision, an insurer is an insurance 
company, insurance service or insurance organization qualified 
to do business in a State and includes affiliates of those 
entities to the extent the affiliate is licensed to offer 
guaranteed retirement income contracts. A guaranteed retirement 
income contract is an annuity contract for a fixed term or a 
contract (or provision or feature thereof) designed to provide 
a participant guaranteed benefits annually (or more frequently) 
for at least the remainder of the life of the participant or 
joint lives of the participant and the participant's designated 
beneficiary as part of a defined contribution plan.
    With respect to the selection of an insurer and a 
guaranteed retirement income contract (as defined below), the 
prudent man requirement will be deemed met if a fiduciary--
           engages in an objective, thorough and 
        analytical search for the purpose of identifying 
        insurers from which to purchase guaranteed retirement 
        income contracts,
           with respect to each insurer identified 
        through the search, considers the financial capability 
        of the insurer to satisfy its obligations under the 
        guaranteed retirement income contract and considers the 
        cost (including fees and commissions) of the guaranteed 
        retirement income contract offered by the insurer in 
        relation to the benefits and product features of the 
        contract and administrative services to be provided 
        under the contract, and
           on the basis of the foregoing, concludes 
        that, at the time of the selection (as described 
        below), the insurer is financially capable of 
        satisfying its obligations under the guaranteed 
        retirement income contract and that the cost (including 
        fees and commissions) of the selected guaranteed 
        retirement income contract is reasonable in relation to 
        the benefits and product features of the contract and 
        the administrative services to be provided under the 
        contract.
    A fiduciary will be deemed to satisfy the requirements 
above with respect to the financial capability of the insurer 
if--
           the fiduciary obtains written 
        representations from the insurer that it is licensed to 
        offer guaranteed retirement income contracts; that the 
        insurer, at the time of selection and for each of the 
        immediately preceding seven years operates under a 
        certificate of authority from the Insurance 
        Commissioner of its domiciliary State that has not been 
        revoked or suspended, has filed audited financial 
        statements in accordance with the laws of its 
        domiciliary State under applicable statutory accounting 
        principles, maintains (and has maintained) reserves 
        that satisfy all the statutory requirements of all 
        States where the insurer does business, and is not 
        operating under an order of supervision, 
        rehabilitation, or liquidation; and that the insurer 
        undergoes, at least every five years, a financial 
        examination (within the meaning of the law of its 
        domiciliary State) by the Insurance Commissioner of the 
        domiciliary State (or representative, designee, or 
        other party approved thereby);
           in the case that, following the issuance of 
        the insurer representations described above, there is 
        any change that would preclude the insurer from making 
        the same representations at the time of issuance of the 
        guaranteed retirement income contract, the insurer is 
        required to notify the fiduciary, in advance of the 
        issuance of any guaranteed retirement income contract, 
        that the fiduciary can no longer rely on one or more of 
        the representations; and
           the fiduciary has not received such a 
        notification and has no other facts that would cause it 
        to question the insurer representations.
    The provision specifies that nothing in these requirements 
is to be construed to require a fiduciary to select the lowest 
cost contract. Accordingly, a fiduciary may consider the value, 
including features and benefits of the contract and attributes 
of the insurer in conjunction with the contract's cost. For 
this purpose, attributes of the insurer that may be considered 
include, without limitation, the issuer's financial strength.
    For purposes of the provision, the time of selection may be 
either the time that the insurer and contract are selected for 
distribution of benefits to a specific participant or 
beneficiary or the time that the insurer and contract are 
selected to provide benefits at future dates to participants or 
beneficiaries, provided that the selecting fiduciary 
periodically reviews the continuing appropriateness of its 
conclusions with respect to the insurer's financial capability 
and cost, taking into account the considerations described 
above.\127\ A fiduciary will be deemed to have conducted a 
periodic review of the financial capability of the insurer if 
the fiduciary obtains the written representations described 
above on an annual basis unless, in the interim, the fiduciary 
has received notification from the insurer that representations 
cannot be relied on or the fiduciary otherwise becomes aware of 
facts that would cause it to question the representations.
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    \127\However, a fiduciary is not required to review the 
appropriateness of its conclusions following the purchase of any 
contract or contracts for specific participants or beneficiaries.
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    A fiduciary that satisfies the requirements of the 
provision is not liable following the distribution of any 
benefit, or the investment by or on behalf of a participant or 
beneficiary pursuant to the selected guaranteed retirement 
income contract, for any losses that may result to the 
participant or beneficiary due to an insurer's inability to 
satisfy its financial obligations under the terms of the 
contract.

                             EFFECTIVE DATE

    The provision is effective on the date of enactment.

  E. Modification of Nondiscrimination Rules to Protect Older, Longer 
 Service Participation (sec. 205 of the bill and sec. 401(a)(4) of the 
                                 Code)


                              PRESENT LAW

In general

    Qualified retirement plans are subject to nondiscrimination 
requirements, under which the group of employees covered by a 
plan (``plan coverage'') and the contributions or benefits 
provided to employees, including benefits, rights, and features 
under the plan, must not discriminate in favor of highly 
compensated employees.\128\ The timing of plan amendments must 
also not have the effect of discriminating significantly in 
favor of highly compensated employees. In addition, in the case 
of a defined benefit plan, the plan must benefit at least the 
lesser of (1) 50 employees and (2) the greater of 40 percent of 
all employees and two employees (or one employee if the 
employer has only one employee), referred to as the ``minimum 
participation'' requirements.\129\ These nondiscrimination 
requirements are designed to help ensure that qualified 
retirement plans achieve the goal of retirement security for 
both lower and higher paid employees.
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    \128\Secs. 401(a)(3)-(5) and 410(b). Detailed rules are provided in 
Treas. Reg. secs. 1.401(a)(4)-1 through -13 and secs. 1.410(b)-2 
through -10. In applying the nondiscrimination requirements, certain 
employees, such as those under age 21 or with less than a year of 
service, generally may be disregarded. In addition, employees of 
controlled groups and affiliated service groups under the aggregation 
rules of section 414(b), (c), (m) and (o) are treated as employed by a 
single employer.
    \129\Sec. 401(a)(26).
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    For nondiscrimination purposes, an employee generally is 
treated as highly compensated if the employee (1) was a five-
percent owner of the employer at any time during the year or 
the preceding year, or (2) had compensation for the preceding 
year in excess of $120,000 (for 2016).\130\ Employees who are 
not highly compensated are referred to as nonhighly compensated 
employees.
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    \130\Section 414(q). At the election of the employer, employees who 
are highly compensated based on the amount of their compensation may be 
limited to employees who were among the top 20 percent of employees 
based on compensation.
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Nondiscriminatory plan coverage

    Whether plan coverage of employees is nondiscriminatory is 
determined by calculating a plan's ratio percentage, that is, 
the ratio of the percentage of nonhighly compensated employees 
covered under the plan to the percentage of highly compensated 
employees covered. For this purpose, certain portions of a 
defined contribution plan are treated as separate plans to 
which the plan coverage requirements are applied separately, 
referred to as mandatory disaggregation. Specifically, the 
following, if provided under a plan, are treated as separate 
plans: the portion of a plan consisting of employee elective 
deferrals, the portion consisting of employer matching 
contributions, the portion consisting of employer nonelective 
contributions, and the portion consisting of an employee stock 
ownership plan (``ESOP'').\131\ Subject to mandatory 
disaggregation, different qualified retirement plans may 
otherwise be aggregated and tested together as a single plan, 
provided that they use the same plan year. The plan determined 
under these rules for plan coverage purposes generally is also 
treated as the plan for purposes of applying the other 
nondiscrimination requirements.
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    \131\Elective deferrals are contributions that an employee elects 
to have made to a defined contribution plan that includes a qualified 
cash or deferred arrangement (referred to as ``section 401(k) plan'') 
rather than receive the same amount as current compensation. Employer 
matching contributions are contributions made by an employer only if an 
employee makes elective deferrals or after-tax employee contributions. 
Employer nonelective contributions are contributions made by an 
employer regardless of whether an employee makes elective deferrals or 
after-tax employee contributions. Under section 4975(e)(7), an ESOP is 
a defined contribution plan, or portion of a defined contribution plan, 
that is designated as an ESOP and is designed to invest primarily in 
employer stock.
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    A plan's coverage is nondiscriminatory if the ratio 
percentage, as determined above, is 70 percent or greater. If a 
plan's ratio percentage is less than 70 percent, a multi-part 
test applies, referred to as the average benefit test. First, 
the plan must meet a ``nondiscriminatory classification 
requirement,'' that is, it must cover a group of employees that 
is reasonable and established under objective business criteria 
and the plan's ratio percentage must be at or above a level 
specified in the regulations, which varies depending on the 
percentage of nonhighly compensated employees in the employer's 
workforce. In addition, the average benefit percentage test 
must be satisfied.
    Under the average benefit percentage test, in general, the 
average rate of employer-provided contributions or benefit 
accruals for all nonhighly compensated employees under all 
plans of the employer must be at least 70 percent of the 
average contribution or accrual rate of all highly compensated 
employees.\132\ In applying the average benefit percentage 
test, elective deferrals made by employees, as well as employer 
matching and nonelective contributions, are taken into account. 
Generally, all plans maintained by the employer are taken into 
account, including ESOPs, regardless of whether plans use the 
same plan year.
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    \132\Contribution and benefit rates are generally determined under 
the rules for nondiscriminatory contributions or benefit accruals, 
described below. These rules are generally based on benefit accruals 
under a defined benefit plan, other than accruals attributable to 
after-tax employee contributions, and contributions allocated to 
participants' accounts under a defined contribution plan, other than 
allocations attributable to after-tax employee contributions. (Under 
these rules, contributions allocated to a participants accounts are 
referred to as ``allocations,'' with the related rates referred to as 
``allocation rates,'' but ``contribution rates'' is used herein for 
convenience.) However, as discussed below, benefit accruals can be 
converted to actuarially equivalent contributions, and contributions 
can be converted to actuarially equivalent benefit accruals.
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    Under a transition rule applicable in the case of the 
acquisition or disposition of a business, or portion of a 
business, or a similar transaction, a plan that satisfied the 
plan coverage requirements before the transaction is deemed to 
continue to satisfy them for a period after the transaction, 
provided coverage under the plan is not significantly changed 
during that period.\133\
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    \133\Sec. 410(b)(6)(C).
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Nondiscriminatory contributions or benefit accruals

            In general
    There are three general approaches to testing the amount of 
benefits under qualified retirement plans: (1) design-based 
safe harbors under which the plan's contribution or benefit 
accrual formula satisfies certain uniformity standards, (2) a 
general test, described below, and (3) cross-testing of 
equivalent contributions or benefit accruals. Employee elective 
deferrals and employer matching contributions under defined 
contribution plans are subject to special testing rules and 
generally are not permitted to be taken into account in 
determining whether other contributions or benefits are 
nondiscriminatory.\134\
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    \134\Secs. 401(k) and (m), the latter of which applies also to 
after-tax employee contributions under a defined contribution plan.
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    The nondiscrimination rules allow contributions and benefit 
accruals to be provided to highly compensated and nonhighly 
compensated employees at the same percentage of 
compensation.\135\ Thus, the various testing approaches 
described below are generally applied to the amount of 
contributions or accruals provided as a percentage of 
compensation, referred to as a contribution rate or accrual 
rate. In addition, under the ``permitted disparity'' rules, in 
calculating an employee's contribution or accrual rate, credit 
may be given for the employer paid portion of Social Security 
taxes or benefits.\136\ The permitted disparity rules do not 
apply in testing whether elective deferrals, matching 
contributions, or ESOP contributions are nondiscriminatory.
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    \135\For this purpose, under section 401(a)(17), compensation 
generally is limited to $265,000 per year (for 2016).
    \136\See sections 401(a)(5)(C) and (D) and 401 (l) and Treas. Reg. 
section 1. 401(a)(4)-7 and 1.401(l)-1 through -6 for rules for 
determining the amount of contributions or benefits that can be 
attributed to the employer-paid portion of Social Security taxes or 
benefits.
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    The general test is generally satisfied by measuring the 
rate of contribution or benefit accrual for each highly 
compensated employee to determine if the group of employees 
with the same or higher rate (a ``rate'' group) is a 
nondiscriminatory group, using the nondiscriminatory plan 
coverage standards described above. For this purpose, if the 
ratio percentage of a rate group is less than 70 percent, a 
simplified standard applies, which includes disregarding the 
reasonable classification requirement, but requires 
satisfaction of the average benefit percentage test.
            Cross-testing
    Cross-testing involves the conversion of contributions 
under a defined contribution plan or benefit accruals under a 
defined benefit plan to actuarially equivalent accruals or 
contributions, with the resulting equivalencies tested under 
the general test. However, employee elective deferrals and 
employer matching contributions under defined contribution 
plans are not permitted to be taken into account for this 
purpose, and cross-testing of contributions under a defined 
contribution plan, or cross-testing of a defined contribution 
plan aggregated with a defined benefit plan, is permitted only 
if certain threshold requirements are satisfied.
    In order for a defined contribution plan to be tested on an 
equivalent benefit accrual basis, one of the following three 
threshold conditions must be met:
           The plan has broadly available allocation 
        rates, that is, each allocation rate under the plan is 
        available to a nondiscriminatory group of employees 
        (disregarding certain permitted additional 
        contributions provided to employees as a replacement 
        for benefits under a frozen defined benefit plan, as 
        discussed below);
           The plan provides allocations that meet 
        prescribed designs under which allocations gradually 
        increase with age or service or are expected to provide 
        a target level of annuity benefit; or
           The plan satisfies a minimum allocation 
        gateway, under which each nonhighly compensated 
        employee has an allocation rate of (a) at least one-
        third of the highest rate for any highly compensated 
        employee, or (b) if less, at least five percent.
    In order for an aggregated defined contribution and defined 
benefit plan to be tested on an aggregate equivalent benefit 
accrual basis, one of the following three threshold conditions 
must be met:
           The plan must be primarily defined benefit 
        in character, that is, for more than fifty percent of 
        the nonhighly compensated employees under the plan, 
        their accrual rate under the defined benefit plan 
        exceeds their equivalent accrual rate under the defined 
        contribution plan;
           The plan consists of broadly available 
        separate defined benefit and defined contribution 
        plans, that is, the defined benefit plan and the 
        defined contribution plan would separately satisfy 
        simplified versions of the minimum coverage and 
        nondiscriminatory amount requirements; or
           The plan satisfies a minimum aggregate 
        allocation gateway, under which each nonhighly 
        compensated employee has an aggregate allocation rate 
        (consisting of allocations under the defined 
        contribution plan and equivalent allocations under the 
        defined benefit plan) of (a) at least one-third of the 
        highest aggregate allocation rate for any nonhighly 
        compensated employee, or (b) if less, at least five 
        percent in the case of a highest nonhighly compensated 
        employee's rate up to 25 percent, increased by one 
        percentage point for each five-percentage-point 
        increment (or portion thereof) above 25 percent, 
        subject to a maximum of 7.5 percent.
            Benefits, rights, and features
    Each benefit, right, or feature offered under the plan 
generally must be available to a group of employees that has a 
ratio percentage that satisfies the minimum coverage 
requirements, including the reasonable classification 
requirement if applicable, except that the average benefit 
percentage test does not have to be met, even if the ratio 
percentage is less than 70 percent.

Multiple-employer and section 403(b) plans

    A multiple-employer plan generally is a single plan 
maintained by two or more unrelated employers, that is, 
employers that are not treated as a single employer under the 
aggregation rules for related entities.\137\ The plan coverage 
and other nondiscrimination requirements are applied separately 
to the portions of a multiple-employer plan covering employees 
of different employers.\138\
---------------------------------------------------------------------------
    \137\Sec. 413(c). Multiple-employer status does not apply if the 
plan is a multi-employer plan, defined under sec. 414(f) as a plan 
maintained pursuant to one or more collective bargaining agreements 
with two or more unrelated employers and to which the employers are 
required to contribute under the collective bargaining agreement(s). 
Multi-employer plans are also known as Taft-Hartley plans.
    \138\Treas. Reg. sec. 1.413-2(a)(3)(ii)-(iii).
---------------------------------------------------------------------------
    Certain tax-exempt charitable organizations may offer their 
employees a tax-deferred annuity plan (``section 403(b) 
plan).\139\ The nondiscrimination requirements, other than the 
requirements applicable to elective deferrals, generally apply 
to section 403(b) plans of private tax-exempt organizations. 
For purposes of applying the nondiscrimination requirements to 
a section 403(b) plan, subject to mandatory disaggregation, a 
qualified retirement plan may be combined with the section 
403(b) plan and treated as a single plan.\140\ However, a 
section 403(b) plan and qualified retirement plan may not be 
treated as a single plan for purposes of applying the 
nondiscrimination requirements to the qualified retirement 
plan.
---------------------------------------------------------------------------
    \139\Sec. 403(b). These plans are available to employers that are 
tax-exempt under section 501(c)(3), as well as to educational 
institutions of State or local governments.
    \140\Treas. Reg. sec. 1.410(b)-7(f).
---------------------------------------------------------------------------

Closed and frozen defined benefit plans

    A defined benefit plan may be amended to limit 
participation in the plan to individuals who are employees as 
of a certain date. That is, employees hired after that date are 
not eligible to participate in the plan. Such a plan is 
sometimes referred to as a ``closed'' defined benefit plan 
(that is, closed to new entrants). In such a case, it is common 
for the employer also to maintain a defined contribution plan 
and to provide employer matching or nonelective contributions 
only to employees not covered by the defined benefit plan or at 
a higher rate to such employees.
    Over time, the group of employees continuing to accrue 
benefits under the defined benefit plan may come to consist 
more heavily of highly compensated employees, for example, 
because of greater turnover among nonhighly compensated 
employees or because increasing compensation causes nonhighly 
compensated employees to become highly compensated. In that 
case, the defined benefit plan may have to be combined with the 
defined contribution plan and tested on a benefit accrual 
basis. However, under the regulations, if none of the threshold 
conditions is met, testing on a benefits basis may not be 
available. Notwithstanding the regulations, recent IRS guidance 
provides relief for a limited period, allowing certain closed 
defined benefit plans to be aggregated with a defined 
contribution plan and tested on an aggregate equivalent 
benefits basis without meeting any of the threshold 
conditions.\141\ When the group of employees continuing to 
accrue benefits under a closed defined benefit plan consists 
more heavily of highly compensated employees, the benefits, 
rights, and features provided under the plan may also fail the 
tests under the existing nondiscrimination rules.
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    \141\Notice 2014-5, 2014-2 I.R.B. 276, extended by Notice 2016-57 
(released September 19, 2016). Proposed regulations revising the 
nondiscrimination requirements for closed plans were also issued 
earlier this year, subject to various conditions. 81 Fed. Reg. 4976 
(January 29, 2016).
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    In some cases, if a defined benefit plan is amended to 
cease future accruals for all participants, referred to as a 
``frozen'' defined benefit plan, additional contributions to a 
defined contribution plan may be provided for participants, in 
particular for older participants, in order to make up in part 
for the loss of the benefits they expected to earn under the 
defined benefit plan (``make-whole'' contributions). As a 
practical matter, testing on a benefit accrual basis may be 
required in that case, but may not be available because the 
defined contribution plan does not meet any of the threshold 
conditions.

                           REASONS FOR CHANGE

    Some employers sponsoring defined benefit plans have 
determined that it is no longer feasible financially to 
continue the plans in their current form and have therefore 
closed their plans to new entrants. Existing employees continue 
to earn benefits under the plan, consistent with their 
expectations as to retirement income, which is particularly 
important for employees close to retirement. However, without 
greater flexibility in the nondiscrimination rules, employers 
may be forced to freeze their defined benefit plans, thus 
preventing employees from earning their expected benefits. When 
a defined benefit plan is frozen, make-whole contributions can 
offset some of the resulting benefit loss for employees. 
However, in that case, too, greater flexibility in the 
nondiscrimination rules is needed. The Committee wishes to 
provide such flexibility in order to protect benefits for 
older, longer-service employees.

                        EXPLANATION OF PROVISION

Closed or frozen defined benefit plans

            In general
    The provision provides nondiscrimination relief with 
respect to benefits, rights, and features for a closed class of 
participants (``closed class''),\142\ and with respect to 
benefit accruals for a closed class, under a defined benefit 
plan that meets the requirements described below (referred to 
herein as an ``applicable'' defined benefit plan). In addition, 
the provision treats a closed or frozen applicable defined 
benefit plan as meeting the minimum participation requirements 
if the plan met the requirements as of the effective date of 
the plan amendment by which the plan was closed or frozen.
---------------------------------------------------------------------------
    \142\References under the provision to a closed class of 
participants and similar references to a closed class include 
arrangements under which one or more classes of participants are 
closed, except that one or more classes of participants closed on 
different dates are not aggregated for purposes of determining the date 
any such class was closed.
---------------------------------------------------------------------------
    If a portion of an applicable defined benefit plan eligible 
for relief under the provision is spun off to another employer, 
and if the spun-off plan continues to satisfy any ongoing 
requirements applicable for the relevant relief as described 
below, the relevant relief for the spun-off plan will continue 
with respect to the other employer.
            Benefits, rights, or features for a closed class
    Under the provision, an applicable defined benefit plan 
that provides benefits, rights, or features to a closed class 
does not fail the nondiscrimination requirements by reason of 
the composition of the closed class, or the benefits, rights, 
or features provided to the closed class, if (1) for the plan 
year as of which the class closes and the two succeeding plan 
years, the benefits, rights, and features satisfy the 
nondiscrimination requirements without regard to the relief 
under the provision, but taking into account the special 
testing rules described below,\143\ and (2) after the date as 
of which the class was closed, any plan amendment modifying the 
closed class or the benefits, rights, and features provided to 
the closed class does not discriminate significantly in favor 
of highly compensated employees.
---------------------------------------------------------------------------
    \143\Other testing options available under present law are also 
available for this purpose.
---------------------------------------------------------------------------
    For purposes of requirement (1) above, the following 
special testing rules apply:
           In applying the plan coverage transition 
        rule for business acquisitions, dispositions, and 
        similar transactions, the closing of the class of 
        participants is not treated as a significant change in 
        coverage;
           Two or more plans do not fail to be eligible 
        to be a treated as a single plan solely by reason of 
        having different plan years;\144\ and
---------------------------------------------------------------------------
    \144\This rule applies also for purposes applying the plan coverage 
and other nondiscrimination requirements to an applicable defined 
benefit plan and one or more defined contributions that, under the 
provision, may be treated as a single plan as described below.
---------------------------------------------------------------------------
           Changes in employee population are 
        disregarded to the extent attributable to individuals 
        who become employees or cease to be employees, after 
        the date the class is closed, by reason of a merger, 
        acquisition, divestiture, or similar event.
            Benefit accruals for a closed class
    Under the provision, an applicable defined benefit plan 
that provides benefits to a closed class may be aggregated, 
that is, treated as a single plan, and tested on a benefit 
accrual basis with one or more defined contribution plans 
(without having to satisfy the threshold conditions under 
present law) if (1) for the plan year as of which the class 
closes and the two succeeding plan years, the plan satisfies 
the plan coverage and nondiscrimination requirements without 
regard to the relief under the provision, but taking into 
account the special testing rules described above,\145\ and (2) 
after the date as of which the class was closed, any plan 
amendment modifying the closed class or the benefits provided 
to the closed class does not discriminate significantly in 
favor of highly compensated employees.
---------------------------------------------------------------------------
    \145\Other testing options available under present law are also 
available for this purpose.
---------------------------------------------------------------------------
    Under the provision, defined contribution plans that may be 
aggregated with an applicable defined benefit plan and treated 
as a single plan include the portion of one or more defined 
contribution plans consisting of matching contributions, an 
ESOP, or matching or nonelective contributions under a section 
403(b) plan. If an applicable defined benefit plan is 
aggregated with the portion of a defined contribution plan 
consisting of matching contributions, any portion of the 
defined contribution plan consisting of elective deferrals must 
also be aggregated. In addition, the matching contributions are 
treated in the same manner as nonelective contributions, 
including for purposes of permitted disparity.
            Applicable defined benefit plan
    An applicable defined benefit plan to which relief under 
the provision applies is a defined benefit plan under which the 
class was closed (or the plan frozen) before September 21, 
2016, or that meets the following alternative conditions: (1) 
taking into account any predecessor plan, the plan has been in 
effect for at least five years as of the date the class is 
closed (or the plan is frozen) and (2) under the plan, during 
the five-year period preceding that date, (a) for purposes of 
the relief provided with respect to benefits, rights, and 
features for a closed class, there has not been a substantial 
increase in the coverage or value of the benefits, rights, or 
features, or (b) for purposes of the relief provided with 
respect to benefit accruals for a closed class or the minimum 
participation requirements, there has not been a substantial 
increase in the coverage or benefits under the plan.
    For purposes of (2)(a) above, a plan is treated as having a 
substantial increase in coverage or value of benefits, rights, 
or features only if, during the applicable five-year period, 
either the number of participants covered by the benefits, 
rights, or features on the date the period ends is more than 50 
percent greater than the number on the first day of the plan 
year in which the period began, or the benefits, rights, and 
features have been modified by one or more plan amendments in 
such a way that, as of the date the class is closed, the value 
of the benefits, rights, and features to the closed class as a 
whole is substantially greater than the value as of the first 
day of the five-year period, solely as a result of the 
amendments.
    For purposes of (2)(b) above, a plan is treated as having 
had a substantial increase in coverage or benefits only if, 
during the applicable five-year period, either the number of 
participants benefiting under the plan on the date the period 
ends is more than 50 percent greater than the number of 
participants on the first day of the plan year in which the 
period began, or the average benefit provided to participants 
on the date the period ends is more than 50 percent greater 
than the average benefit provided on the first day of the plan 
year in which the period began. In applying this requirement, 
the average benefit provided to participants under the plan is 
treated as having remained the same between the two relevant 
dates if the benefit formula applicable to the participants has 
not changed between the dates and, if the benefit formula has 
changed, the average benefit under the plan is considered to 
have increased by more than 50 percent only if the target 
normal cost for all participants benefiting under the plan for 
the plan year in which the five-year period ends exceeds the 
target normal cost for all such participants for that plan year 
if determined using the benefit formula in effect for the 
participants for the first plan year in the five-year period by 
more than 50 percent.\146\ In applying these rules, a multiple-
employer plan is treated as a single plan, rather than as 
separate plans separately covering the employees of each 
participating employer.
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    \146\Under the funding requirements applicable to defined benefit 
plans, target normal cost for a plan year (defined in section 
430(b)(1)(A)(i)) is generally the sum of the present value of the 
benefits expected to be earned under the plan during the plan year plus 
the amount of plan-related expenses to be paid from plan assets during 
the plan year. Under the provision, in applying this average benefit 
rule to certain defined benefit plans maintained by cooperative 
organizations and charities, referred to as CSEC plans (defined in 
section 414(y)), which are subject to different funding requirements, 
the CSEC plan's normal cost under section 433(j)(1)(B) is used instead 
of target normal cost.
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    In applying these standards, any increase in coverage or 
value, or in coverage or benefits, whichever is applicable, is 
generally disregarded if it is attributable to coverage and 
value, or coverage and benefits, provided to employees who (1) 
became participants as a result of a merger, acquisition, or 
similar event that occurred during the 7-year period preceding 
the date the class was closed, or (2) became participants by 
reason of a merger of the plan with another plan that had been 
in effect for at least five years as of the date of the merger 
and, in the case of benefits, rights, or features for a closed 
class, under the merger, the benefits, rights, or features 
under one plan were conformed to the benefits, rights, or 
features under the other plan prospectively.

Make-whole contributions under a defined contribution plan

    Under the provision, a defined contribution plan is 
permitted to be tested on an equivalent benefit accrual basis 
(without having to satisfy the threshold conditions under 
present law) if the following requirements are met:
           The plan provides make-whole contributions 
        to a closed class of participants whose accruals under 
        a defined benefit plan have been reduced or ended 
        (``make-whole class'');
           For the plan year of the defined 
        contribution plan as of which the make-whole class 
        closes and the two succeeding plan years, the make-
        whole class satisfies the nondiscriminatory 
        classification requirement under the plan coverage 
        rules, taking into account the special testing rules 
        described above;
           After the date as of which the class was 
        closed, any amendment to the defined contribution plan 
        modifying the make-whole class or the allocations, 
        benefits, rights, and features provided to the make-
        whole class does not discriminate significantly in 
        favor of highly compensated employees; and
           Either the class was closed before September 
        21, 2016, or the defined benefit plan is an applicable 
        defined benefit plan under the alternative conditions 
        applicable for purposes of the relief provided with 
        respect to benefit accruals for a closed class.
    With respect to one or more defined contribution plans 
meeting the requirements above, in applying the plan coverage 
and nondiscrimination requirements, the portion of the plan 
providing make-whole or other nonelective contributions may 
also be aggregated and tested on an equivalent benefit accrual 
basis with the portion of one or more other defined 
contribution plans consisting of matching contributions, an 
ESOP, or matching or nonelective contributions under a section 
403(b) plan. If the plan is aggregated with the portion of a 
defined contribution plan consisting of matching contributions, 
any portion of the defined contribution plan consisting of 
elective deferrals must also be aggregated. In addition, the 
matching contributions are treated in the same manner as 
nonelective contributions, including for purposes of permitted 
disparity.
    Under the provision, ``make-whole contributions'' generally 
means nonelective contributions for each employee in the make-
whole class that are reasonably calculated, in a consistent 
manner, to replace some or all of the retirement benefits that 
the employee would have received under the defined benefit plan 
and any other plan or qualified cash or deferred arrangement 
under a section 401(k) plan if no change had been made to the 
defined benefit plan and other plan or arrangement.\147\ 
However, under a special rule, in the case of a defined 
contribution plan that provides benefits, rights, or features 
to a closed class of participants whose accruals under a 
defined benefit plan have been reduced or eliminated, the plan 
will not fail to satisfy the nondiscrimination requirements 
solely by reason of the composition of the closed class, or the 
benefits, rights, or features provided to the closed class, if 
the defined contribution plan and defined benefit plan 
otherwise meet the requirements described above but for the 
fact that the make-whole contributions under the defined 
contribution plan are made in whole or in part through matching 
contributions.
---------------------------------------------------------------------------
    \147\For this purpose, consistency is not required with respect to 
employees who were subject to different benefit formulas under the 
defined benefit plan.
---------------------------------------------------------------------------
    If a portion of a defined contribution plan eligible for 
relief under the provision is spun off to another employer, and 
if the spun-off plan continues to satisfy any ongoing 
requirements applicable for the relevant relief as described 
above, the relevant relief for the spun-off plan will continue 
with respect to the other employer.

                             EFFECTIVE DATE

    The provision is generally effective on the date of 
enactment of the provision, without regard to whether any plan 
modifications referred to in the provision are adopted or 
effective before, on, or after the date of enactment. However, 
at the election of a plan sponsor, the provision will apply to 
plan years beginning after December 31, 2013. For purposes of 
the provision, a closed class of participants under a defined 
benefit plan is treated as being closed before September 21, 
2016, if the plan sponsor's intention to create the closed 
class is reflected in formal written documents and communicated 
to participants before that date. In addition, a plan does not 
fail to be eligible for the relief under the provision solely 
because (1) in the case of benefits, rights, or features for a 
closed class under a defined benefit plan, the plan was amended 
before the date of enactment to eliminate one or more benefits, 
rights, or features and is further amended after the date of 
enactment to provide the previously eliminated benefits, 
rights, or features to a closed class of participants, or (2) 
in the case of benefit accruals for a closed class under a 
defined benefit plan or application of the minimum benefit 
requirements to a closed or frozen defined benefit plan, the 
plan was amended before the date of the enactment to cease all 
benefit accruals and is further amended after the date of 
enactment to provide benefit accruals to a closed class of 
participants. In either case, the relevant relief applies only 
if the plan otherwise meets the requirements for the relief, 
and, in applying the relevant relief, the date the class of 
participants is closed is the effective date of the later 
amendment.

 F. Modification of PBGC Premiums for CSEC Plans (sec. 206 of the bill 
                        and sec. 4006 of ERISA)


                              PRESENT LAW

    Qualified retirement plans, including defined benefit 
plans, are categorized as single-employer plans or multiple-
employer plans.\148\ A single-employer plan is a plan 
maintained by one employer.\149\ A multiple-employer plan 
generally is a single plan maintained by two or more unrelated 
employers (that is, employers that are not treated as a single 
employer under the aggregation rules).\150\
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    \148\A third type of plan is a multiemployer plan, defined under 
sec. 414(f) as a plan maintained pursuant to one or more collective 
bargaining agreements with two or more unrelated employers and to which 
the employers are required to contribute under the collective 
bargaining agreement(s). Multiemployer plans are also known as Taft-
Hartley plans. Multiemployer plans are subject to different minimum 
funding requirements from those applicable to single-employer and 
multiple-employer plans, as well as to different PBGC premium and 
benefit guarantee structures.
    \149\For this purpose, businesses and organizations that are 
members of a controlled group of corporations, a group under common 
control, or an affiliated service group are treated as one employer 
(referred to as ``aggregation''). Secs. 414(b), (c), (m) and (o).
    \150\Sec. 413(c). multiple-employer status does not apply if the 
plan is a multiemployer plan.
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    Defined benefit plans maintained by private employers are 
generally subject to minimum funding requirements.\151\ 
Historically, single-employer and multiple-employer defined 
benefit plans have been subject to the same minimum funding 
requirements. However, when the funding requirements for 
single-employer plans were substantially revised by the Pension 
Protection Act of 2006,\152\ effective 2008, a delayed 
effective date was provided for certain multiple-employer plans 
in order to allow time for further congressional consideration 
of appropriate rules for these plans. Such consideration 
resulted in the enactment in 2014 of the Cooperative and Small 
Employer Charity Pension Flexibility Act (``CSEC Act''),\153\ 
which provides specific funding rules for certain multiple-
employer plans, referred to as CSEC plans.\154\
---------------------------------------------------------------------------
    \151\Secs. 412 and 430-433 and ERISA secs. 301-306. Unless a 
funding waiver is obtained, an employer may be subject to a two-tier 
excise tax under section 4971 if the funding requirements are not met.
    \152\Pub. L. No. 109-280.
    \153\Pub. L. No. 113-197.
    \154\As defined in section 414(y) and ERISA section 210(f), CSEC 
plans include defined benefit plans maintained by certain cooperative 
organizations, such as rural electric or telephone cooperatives, or by 
certain tax-exempt organizations.
---------------------------------------------------------------------------
    Private defined benefit plans are also covered by the 
Pension Benefit Guaranty Corporation (``PBGC'') insurance 
program, under which the PBGC guarantees the payment of certain 
plan benefits, and plans are required to pay annual premiums to 
the PBGC.\155\ Single-employer and multiple-employer plans, 
including CSEC plans, are subject to the same PBGC premium 
requirements, consisting of flat-rate, per participant premiums 
and variable rate premiums, based on the unfunded vested 
benefits under the plan.\156\ For 2016, flat-rate premiums are 
$64 per participant, and variable rate premiums are $30 for 
each $1,000 of unfunded vested benefits, subject to a limit of 
$500 multiplied by the number of plan participants.\157\ For 
this purpose, unfunded vested benefits under a plan for a plan 
year is the excess (if any) of (1) the plan's funding target 
for the plan year, determined by taking into account only 
vested benefits and using specified interest rates, over (2) 
the fair market value of plan assets.
---------------------------------------------------------------------------
    \155\Title IV of ERISA.
    \156\The same PBGC benefit guarantee structure also applies to 
single-employer and multiple-employer plans.
    \157\These premium rates have been increased several times by 
legislation since 2005 and are subject to automatic increases to 
reflect inflation (referred to as ``indexing'').
---------------------------------------------------------------------------
    Under the funding rules applicable to single-employer 
plans, a plan's funding target is the present value of all 
benefits accrued or earned under the plan as of the beginning 
of the plan year, determined using certain specified actuarial 
assumptions, including specified interest rates and mortality. 
A single-employer plan's funding target is a factor taken into 
account in determining required contributions for the plan. 
Although a CSEC plan's funding target is used under present law 
to determine variable rate premiums, it does not apply in 
determining required contributions for a CSEC plan. Instead, a 
CSEC plan's funding liability applies, which is the present 
value of all benefits accrued or earned under the plan as of 
the beginning of the plan year, determined using reasonable 
actuarial assumptions chosen by the plan's actuary.

                           REASONS FOR CHANGE

    In 2014, Congress passed legislation resulting in different 
sets of funding rules for three types of pension plans: single-
employer, multiemployer and CSEC plans. In line with this 
change, the Committee believes that the three types of pension 
plans also should have individualized rules for calculating 
PBGC premiums.

                        EXPLANATION OF PROVISION

    Under the provision, for CSEC plans, flat-rate premiums are 
$19 per participant, and variable rate premiums are $9 for each 
$1,000 of unfunded vested benefits.\158\ In addition, for 
purposes of determining a CSEC plan's variable rate premiums, 
unfunded vested benefits for a plan year is the excess (if any) 
of (1) the plan's funding liability, determined by taking into 
account only vested benefits, over (2) the fair market value of 
plan assets.
---------------------------------------------------------------------------
    \158\These are the premium rates that applied to single-employer 
and multiple-employer plans in 2005 and are not subject to indexing.
---------------------------------------------------------------------------

                             EFFECTIVE DATE

    The provision applies to plan years beginning after 
December 31, 2015.

      TITLE III--BENEFITS RELATING TO THE UNITED STATES TAX COURT


     A. Provisions Relating to Judges of the Tax Court (secs. 301-
               302 of the bill and sec. 7447 of the Code)

                              PRESENT LAW

In general

    The United States Tax Court (``Tax Court'') is established 
by the Congress pursuant to Article I of the U.S. Constitution 
(an ``Article I'' court).\159\ The salary of a Tax Court judge 
is the same salary as received by a U.S. District Court 
judge.\160\ As discussed below, judges of the Tax Court are 
provided also 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.\161\
---------------------------------------------------------------------------
    \159\Sec. 7441.
    \160\Sec. 7443(c).
    \161\Secs. 7447 and 7448.
---------------------------------------------------------------------------

Retirement and survivors benefits

    A Tax Court judge may be covered under the Federal 
Employees Retirement System (``FERS'') or, depending on when 
the judge began Federal employment, the Civil Service 
Retirement System (``CSRS''). FERS and CSRS provide annuity 
benefits to a retired employee and, in some cases, to survivors 
of a deceased employee. Employees covered by FERS are also 
covered by the Social Security program.\162\ Employees covered 
by FERS and CSRS may contribute to the Thrift Savings Plan 
(``TSP''). Employees covered by FERS (but not CSRS) generally 
are also eligible for agency contributions (that is, 
nonelective contributions and matching contributions). A Tax 
Court judge is eligible to contribute to the Thrift Savings 
Plan, but is not eligible for agency contributions, regardless 
of which Federal retirement plan the judge is covered by.
---------------------------------------------------------------------------
    \162\Wages of employees covered by Social Security are subject to 
old-age, survivors and disability insurance (``OASDI'') taxes under the 
Federal Insurance Contributions Act (``FICA''), consisting of employer 
and portions, each at a rate of 6.2 percent of covered wages up to the 
OASDI wage base ($118,500 for 2016). Wages up to the OASDI wage base 
are taken into account in determining Social Security benefits.
---------------------------------------------------------------------------
    A Tax Court judge may elect at any time while serving as a 
Tax Court judge to be covered by a ``retired pay'' program of 
the Tax Court rather than under another Federal retirement 
program, such as FERS or CSRS.\163\ 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 ``Tax 
Court survivors' annuity plan'').\164\ Generally, benefits 
under the Tax Court survivors' annuity plan are payable only if 
the judge has performed at least five years of service and made 
contributions to the plan for at least five years of 
service.\165\
---------------------------------------------------------------------------
    \163\Secs. 7447. Retired pay is generally equal to the salary of an 
active Tax Court judge.
    \164\Sec. 7448. Special trial judges may also elect into the Tax 
Court survivors' annuity plan.
    \165\For this purpose, a judge may make contributions with respect 
to service performed before electing to participate in the plan.
---------------------------------------------------------------------------
    The rules governing the retired pay plan for Tax Court 
judges and the Tax Court survivors' annuity plan provide for 
coordination between CSRS and the retired pay or survivors' 
annuity plan when a judge covered by CSRS elects into those 
plans. For example, if a judge covered by CSRS elects retired 
pay, the accumulated CSRS contributions previously made by the 
judge are refunded to the judge with interest. However, the 
rules do not address coordination with FERS.

Limit on outside earned income of a judge receiving retired pay

    Under the retired pay plan for Tax Court judges, retired 
judges generally receive retired pay equal to the 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 a longer period). 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. 
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

    The benefit programs for Tax Court judges are intended to 
accord with similar programs applicable to District Court 
judges.\166\ However, over time, differences have developed 
between the benefits provided to Tax Court judges and to 
District Court judges and similar judges in certain other 
Article I courts. 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 
and judges in other Article I courts. Thus, the benefits 
provided to Tax Court judges should be updated to reflect 
benefits currently provided to these other Federal judges. 
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.
---------------------------------------------------------------------------
    \166\See, for example, S. Rep. No. 91-552, at 303 (1969).
---------------------------------------------------------------------------

                       EXPLANATION OF PROVISIONS

Retirement and survivors benefits

    The provision allows a Tax Court judge who is covered by 
FERS to receive agency contributions to the TSP, similar to 
other employees covered by FERS. If a judge covered by FERS 
elects retired pay, rather than FERS benefits, the judge's 
retired pay is offset by the amount of previous TSP 
distributions attributable to agency contributions (without 
regard to earnings on the agency contributions) made during 
years of service as a Tax Court judge while covered by FERS.
    Under the provision, benefits under the survivors' annuity 
plan are payable if a Tax Court judge has performed at least 18 
months of service and made contributions for at least 18 months 
(rather than five years). In addition, benefits under the 
survivors' annuity plan are payable if a Tax Court judge is 
assassinated before the judge has performed 18 months of 
service and made contributions for 18 months.\167\
---------------------------------------------------------------------------
    \167\These changes apply also to special trial judges who elect 
into the Tax Court survivors' annuity plan.
---------------------------------------------------------------------------
    The provision amends the rules governing the retired pay 
plan for Tax Court judges and the Tax Court survivors' annuity 
plan to provide for coordination between FERS and those plans 
when a judge covered by FERS elects into those plans, similar 
to coordination with CSRS under present law.

Limit on outside earned income of a judge receiving retired pay

    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 the provision relating to TSP contributions applies 
to basic pay earned while serving as a Tax Court judge and the 
provision relating to outside earned income of a judge 
receiving retired pay applies to any individual serving as a 
retired Tax Court judge on or after the date of enactment.

B. Provisions Relating to Special Trial Judges of the Tax Court (secs. 
  303-305 of the bill and secs. 7443A and new 7443B and 7443C of the 
                                 Code)


                              PRESENT LAW

    The chief judge of the Tax Court may appoint special trial 
judges to handle certain cases.\168\ 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. Special trial 
judges do not have authority to impose punishment in the case 
of contempt of the authority of the Tax Court.\169\
---------------------------------------------------------------------------
    \168\Sec. 7443A.
    \169\Sec. 7456(c) deals with contempt authority.
---------------------------------------------------------------------------
    Special trial judges generally are covered by the benefit 
programs that apply to Federal executive branch employees, 
including CSRS or FERS (depending on when the judge began 
Federal employment). Special trial judges may contribute to 
TSP, and those covered by FERS are also eligible for agency 
contributions. Special trial judges covered by FERS are also 
covered by the Social Security program. Special trial judges 
may also elect to participate in the Tax Court survivors' 
annuity plan. An election into the Tax Court survivors' annuity 
plan must be made not later than six months after the later of 
the date the special trial judge takes office or the date the 
judge marries.
    Special trial judges are required to be covered by a leave 
program under which they earn annual and sick leave during 
their period of employment. At termination of employment, a 
lump-sum payment is made to the special trial judge for unused 
annual leave, and unused sick leave is credited as additional 
service for certain purposes under CSRS or FERS. Group-term 
life insurance is available to Federal employees, including 
special trial judges, under the Federal Employees Group Life 
Insurance (``FEGLI'') program. Under changes made to the FEGLI 
program in 1999, higher premiums apply to older employees than 
to younger employees (``age-based premiums'').

                           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 PROVISIONS

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 judge''). Magistrate judges are appointed (or 
reappointed) to serve for eight-year terms and are subject to 
removal in limited circumstances. A magistrate judge receives a 
salary of 92 percent of the salary of a Tax Court judge.

Contempt authority

    Under the provision, magistrate judges have the authority 
to impose punishment in the case of contempt of the authority 
of the Tax Court, subject to a limit on the sentence that may 
be imposed.

Leave, FEGLI and survivors' annuity plan

    Under the provision, magistrate judges are not required to 
be covered by a leave program. Existing leave balances will be 
maintained and made available if a magistrate judge changes to 
a Federal position covered by a leave program. Otherwise, at 
separation from Federal employment, a lump-sum payment will be 
made to the magistrate judge for unused annual leave, and 
unused sick leave will be credited as additional service for 
certain purposes under CSRS or FERS.
    In the case of magistrate judges age 65 or older, the 
provision allows the Tax Court to pay the portion of FEGLI 
premiums attributable to increases resulting from the 1999 
FEGLI changes.
    Under the provision, a magistrate judge may elect to 
participate in the Tax Court survivors' annuity plan at any 
time while serving as a magistrate judge.

Retirement plan for magistrate judges

            In general
    The provision establishes a new retirement plan for 
magistrate judges, under which a magistrate judge may elect to 
receive a retirement annuity from the Tax Court in lieu of 
benefits under CSRS or FERS. A magistrate judge who elects to 
be covered by the retirement program generally receives a 
refund of contributions (with interest) made to CSRS or FERS. A 
magistrate judge who elects to be covered by the retirement 
program may contribute to the TSP, but not receive agency 
contributions. The judge's retired pay is offset by the amount 
of previous TSP distributions attributable to agency 
contributions (without regard to earnings on the agency 
contributions) made during years of service as a Tax Court 
judge while covered by FERS. A special trial judge covered by 
the retirement program is not covered by the Social Security 
program.
    Under the new plan, 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, with coordination of total benefits. 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 after 
serving at least one full term.
    A magistrate judge receiving a retirement annuity is 
entitled to cost-of-living increases based on cost-of-living 
increases in benefits paid under CSRS. However, such an 
increase cannot cause the retirement annuity to exceed the 
current salary of a magistrate judge. A magistrate judge's 
retirement annuity is subject to freezing or suspension if the 
retired magistrate judge practices law or accepts other Federal 
employment.
    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 or 
retirement before 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.
            Establishment of Tax Court Judicial Officers' Retirement 
                    Fund
    The provision establishes the Tax Court Judicial Officers' 
Retirement Fund (the ``Fund''), which is 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 requires there to be deposited into the 
Fund, by the end of each fiscal year, 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.

Recall of retired magistrate judges

    Under the provision, a retired magistrate judge may be 
recalled to perform services for up to 90 days a year. A 
retired magistrate judge who is receiving an annuity under the 
retirement plan for magistrate judges and is recalled is to be 
paid the difference between the annuity and the current rate of 
salary for magistrate judges. For years after any year in which 
the retired judge was recalled, the retirement annuity is 
increased to the rate of salary for magistrate judges during 
the last year in which the judge was recalled.

                             EFFECTIVE DATE

    The provisions are generally effective on the date of 
enactment of the provisions. In addition, the provision 
relating to the position of magistrate judge, terms of 
appointment, salary, contempt authority, and leave apply to 
individuals serving as special trial judges as of the day 
before the date of enactment. Any individual serving as special 
trial judges as of the day before the date of enactment is 
deemed to be appointed as a magistrate judge on the date of 
enactment.

                        TITLE IV--OTHER BENEFITS


A. Benefits for Volunteer Firefighters and Emergency Medical Responders 
            (sec. 401 of the bill and sec. 139B of the Code)


                              PRESENT LAW

Benefits for volunteer firefighters and emergency medical responders

    In general, a reduction in property tax by persons who 
volunteer their services as emergency responders under a State 
law program is includible in gross income.\170\ However, for 
taxable years beginning after December 31, 2007, and before 
January 1, 2011, an exclusion applied for any qualified State 
or local tax benefit and any qualified reimbursement payment 
provided to members of qualified volunteer emergency response 
organizations.\171\
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    \170\IRS Chief Counsel Advice 200302045 (December 3, 2002).
    \171\Sec. 139B. Under section 3121(a)(23), the exclusion applied 
also for purposes of taxes under the Federal Insurance Contributions 
Act (``FICA'').
---------------------------------------------------------------------------
    A qualified volunteer emergency response organization is a 
volunteer organization that is organized and operated to 
provide firefighting or emergency medical services for persons 
in a State or a political subdivision and is required (by 
written agreement) by the State or political subdivision to 
furnish firefighting or emergency medical services in the State 
or political subdivision.
    A qualified State or local tax benefit is any reduction or 
rebate of certain taxes provided by a State or local government 
on account of services performed by individuals as members of a 
qualified volunteer emergency response organization. These 
taxes are limited to State or local income taxes, State or 
local real property taxes, and State or local personal property 
taxes. A qualified reimbursement payment is a payment provided 
by a State or political subdivision thereof on account of 
reimbursement for expenses incurred in connection with the 
performance of services as a member of a qualified volunteer 
emergency response organization. The amount of excludible 
qualified reimbursement payments is limited to $30 for each 
month during which a volunteer performs services.

Itemized deductions

    Individuals are allowed itemized deductions for (1) State 
and local income taxes, real property taxes, and personal 
property taxes, and (2) subject to certain limitations, 
contributions to charitable organizations, including 
unreimbursed expenses incurred in performing volunteer services 
for such an organization.\172\
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    \172\Secs. 164(a) and 170.
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    The amount of State or local taxes taken into account in 
determining the deduction for taxes is reduced by the amount of 
any excludible qualified State or local tax benefit. Similarly, 
expenses paid or incurred by an individual in connection with 
the performance of services as a member of a qualified 
volunteer emergency response organization are taken into 
account for purposes of the charitable deduction only to the 
extent the expenses exceed the amount of any excludible 
qualified reimbursement payment.

                           REASONS FOR CHANGE

    Emergency response volunteers provide valuable services to 
their communities. In return, communities sometimes provide tax 
discounts or rebates and modest stipends to cover volunteer 
expenses. The Committee wishes to relieve the administrative 
and financial burden associated with applying Federal tax to 
these benefits by reinstating the exclusion for a limited 
period and increasing the exclusion for expense reimbursements.
    Explanation of Provision
    The provision reinstates for one year the exclusions for 
qualified State or local tax benefits and qualified 
reimbursement payments provided to members of qualified 
volunteer emergency response organizations. The provision also 
increases the exclusion for qualified reimbursement payments to 
$50 for each month during which a volunteer performs services. 
Under the provision, the exclusions for qualified State or 
local tax benefits and qualified reimbursement payments do not 
apply for taxable years beginning after December 31, 2017.

                             EFFECTIVE DATE

    The provision is effective for taxable years beginning 
after December 31, 2016. As described above, the exclusions do 
not apply for taxable years beginning after December 31, 2017. 
Thus, the exclusions apply only for taxable years beginning 
during 2017.

B. Treatment of Qualified Equity Grants (sec. 402 of the bill and secs. 
                     83, 3401 and 6051 of the Code)


                              PRESENT LAW

Income tax treatment of employer stock transferred to an employee

    Specific rules apply to property, including employer stock, 
transferred to an employee in connection with the performance 
of services.\173\ These rules govern the amount and timing of 
income inclusion by the employee and the amount and timing of 
the employer's compensation deduction.
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    \173\Sec. 83. Section 83 applies generally to transfers of any 
property, not just employer stock, in connection with the performance 
of services by any service provider, not just an employee. However, the 
provision described herein applies only with respect to certain 
employer stock transferred to employees.
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    Under these rules, an employee generally must recognize 
income for the taxable year in which the employee's right to 
the stock is transferable or is not subject to a substantial 
risk of forfeiture (referred to herein as ``substantially 
vested''). Thus, if the employee's right to the stock is 
substantially vested when the employee receives the stock, 
income is recognized for the taxable year in which received. If 
the employee's right to the stock is not substantially vested 
at the time of receipt, in general, income is recognized for 
the taxable year in which the employee's right becomes 
substantially vested.\174\ The amount includible in the 
employee's income is the excess of the fair market value of the 
stock (at the time of receipt if substantially vested at that 
time or, if not, at the time of substantial vesting) over the 
amount, if any, paid by the employee for the stock.
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    \174\Under section 83(b), if an employee's right to the stock is 
not substantially vested at the time of receipt (nonvested stock), the 
employee may nevertheless elect within 30 days of receipt to recognize 
income for the taxable year of receipt, referred to as a ``section 
83(b)'' election. Under Treas. Reg. sec. 1.83-2, the employee makes an 
election by filing with the Internal Revenue Service a written 
statement that includes the fair market value of the property at the 
time of receipt and the amount (if any) paid for the property. The 
employee must also provide a copy of the statement to the employer.
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    In general, an employee's right to stock or other property 
is subject to a substantial risk of forfeiture if the 
employee's right to full enjoyment of the property is subject 
to a condition, such as the future performance of substantial 
services.\175\ An employee's right to stock or other property 
is transferable if the employee can transfer an interest in the 
property to any person other than the transferor of the 
property.\176\ Thus, generally, employer stock transferred to 
an employee by an employer is not transferable merely because 
the employee can sell it back to the employer.
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    \175\See section 83(c)(1) and Treas. Reg. sec. 1.83-3(c) for the 
definition of substantial risk of forfeiture.
    \176\Treas. Reg. sec. 1.83-3(d). In addition, under section 
83(c)(2), the right to stock is transferable only if any transferee's 
right to the stock would not be subject to a substantial risk of 
forfeiture.
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    In the case of stock transferred to an employee, the 
employer is allowed a deduction (to the extent a deduction for 
a business expense is otherwise allowable) equal to the amount 
included in the employee's income as a result of receipt of the 
stock.\177\ The deduction is allowed for the employer's taxable 
year in which or with which ends the taxable year for which the 
amount is included in the employee's income.
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    \177\Sec. 83(h).
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    These rules do not apply to the grant to an employee of a 
nonqualified option on employer stock unless the option has a 
readily ascertainable fair market value.\178\ Instead, these 
rules apply to the receipt of employer stock by the employee on 
exercise of the option. That is, if the right to the stock is 
substantially vested on receipt, income recognition applies for 
the taxable year of receipt. If the right to the stock is not 
substantially vested on receipt, the timing of income inclusion 
is determined under the rules applicable to the receipt of 
nonvested stock. In either case, the amount includible in 
income by the employee is the excess of the fair market value 
of the stock as of the time of income inclusion, less the 
exercise price paid by the employee and the amount, if any, 
paid by the employee for the option. The employer's deduction 
is also determined under these rules.
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    \178\See section 83(e)(3) and Treas. Reg. sec. 1.83-7. A 
nonqualified option is an option on employer stock that is not a 
statutory option, discussed below.
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    In some cases, the transfer of employer stock to an 
employee may be in settlement of restricted stock units. 
Restricted stock unit (``RSU'') is a term used for an 
arrangement under which an employee has the right to receive at 
a specified time in the future an amount determined by 
reference to the value of one or more shares of employer stock. 
An employee's right to receive the future amount may be subject 
to a condition, such as continued employment for a certain 
period or the attainment of certain performance goals. The 
payment to the employee of the amount due under the arrangement 
is referred to as settlement of the RSU. The arrangement may 
provide for the settlement amount to be paid in cash or in 
employer stock (or either). The receipt of employer stock in 
settlement of an RSU is subject to the same rules as other 
receipts of employer stock with respect to the timing and 
amount of income inclusion by the employee and the employer's 
deduction.

Employment taxes and reporting

    Employment taxes generally consist of taxes under the 
Federal Insurance Contributions Act (``FICA''), tax under the 
Federal Unemployment Tax Act (``FUTA''), and income taxes 
required to be withheld by employers from wages paid to 
employees (``income tax withholding'').\179\ Unless an 
exception applies under the applicable rules, compensation 
provided to an employee constitutes wages subject to these 
taxes.
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    \179\Secs. 3101-3128 (FICA), 3301-3311 (FUTA), and 3401-3404 
(income tax withholding). Instead of FICA taxes, railroad employers and 
employees are subject, under the Railroad Retirement Tax Act 
(``RRTA''), sections 3201-3241, to taxes equivalent to FICA taxes with 
respect to compensation as defined for RRTA purposes. Sections 3501-
3510 provide additional rules relating to all these taxes.
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    FICA imposes tax on employers and employees, generally 
based on the amount of wages paid to an employee during the 
year. The tax imposed on the employer and on the employee is 
each composed of two parts: (1) the Social Security or old age, 
survivors, and disability insurance (``OASDI'') tax equal to 
6.2 percent of covered wages up to the OASDI wage base 
($118,500 for 2016); and (2) the Medicare or hospital insurance 
(``HI'') tax equal to 1.45 percent of all covered wages.\180\ 
The employee portion of FICA tax generally must be withheld and 
remitted to the Federal government by the employer. FICA tax 
withholding applies regardless of whether compensation is 
provided in the form of cash or a noncash form, such as a 
transfer of property (including employer stock) or in-kind 
benefits.\181\
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    \180\The employee portion of the HI tax under FICA (not the 
employer portion) is increased by an additional tax of 0.9 percent on 
wages received in excess of a threshold amount. The threshold amount is 
$250,000 in the case of a joint return, $125,000 in the case of a 
married individual filing a separate return, and $200,000 in any other 
case.
    \181\Under section 3501(b), employment taxes with respect to 
noncash fringe benefits are to be collected (or paid) by the employer 
at the time and in the manner prescribed by the Secretary of the 
Treasury (``Treasury''). Announcement 85-113, 1985-31 I.R.B. 31, 
provides guidance on the application of employment taxes with respect 
to noncash fringe benefits.
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    FUTA imposes a tax on employers of six percent of wages up 
to the FUTA wage base of $7,000.
    Income tax withholding generally applies when wages are 
paid by an employer to an employee, based on graduated 
withholding rates set out in tables published by the Internal 
Revenue Service (``IRS'').\182\ Like FICA tax withholding, 
income tax withholding applies regardless of whether 
compensation is provided in the form of cash or a noncash form, 
such as a transfer of property (including employer stock) or 
in-kind benefits.
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    \182\Sec. 3402. Specific withholding rates apply in the case of 
supplemental wages.
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    An employer is required to furnish each employee with a 
statement of compensation information for a calendar year, 
including taxable compensation, FICA wages, and withheld income 
and FICA taxes.\183\ In addition, information relating to 
certain nontaxable items must be reported, such as certain 
retirement and health plan contributions. The statement, made 
on Form W-2, Wage and Tax Statement, must be provided to each 
employee by January 31 of the succeeding year.\184\
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    \183\Secs. 6041 and 6051.
    \184\Employers send Form W-2 information to the Social Security 
Administration, which records information relating to Social Security 
and Medicare and forwards the Form W-2 information to the IRS. 
Employees include a copy of Form W-2 with their income tax returns.
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Statutory options

    Two types of statutory options apply with respect to 
employer stock: incentive stock options (``ISOs'') and options 
provided under an employee stock purchase plan (``ESPP'').\185\ 
Stock received pursuant to a statutory option is subject to 
special rules, rather than the rules for nonqualified options, 
discussed above. No amount is includible in an employee's 
income on the grant or exercise of a statutory option.\186\ In 
addition, no deduction is allowed to the employer with respect 
to the option or the stock transferred to an employee on 
exercise.
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    \185\Sections 421-424 govern statutory options. Section 423(b)(5) 
requires that, under the terms of an ESPP, all employees granted 
options generally must have the same rights and privileges.
    \186\Under section 56(b)(3), this income tax treatment with respect 
to stock received on exercise of an ISO does not apply for purposes of 
the alternative minimum tax under section 55.
---------------------------------------------------------------------------
    If a holding requirement is met with respect to the stock 
received on exercise of a statutory option and the employee 
later disposes of the stock, the employee's gain generally is 
treated as capital gain rather than ordinary income. Under the 
holding requirement, the employee must not dispose of the stock 
within two years after the date the option is granted or one 
year after the date the option is exercised. If a disposition 
occurs before the end of the required holding periods (a 
``disqualifying disposition''), statutory option treatment no 
longer applies. Instead, the income realized on the 
disqualifying disposition, up to the amount of income that 
would have applied if the option had been a nonqualified 
option, is includible in income by the employee as compensation 
received in the taxable year in which the disposition occurs 
and a corresponding deduction is allowable to the employer for 
the taxable year in which the disposition occurs.
    Employment taxes do not apply with respect to the grant of 
a statutory option, the receipt of stock pursuant to the 
option, or a disqualifying disposition of the stock.\187\
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    \187\Secs. 3121(a)(22), 3306(b)(19), and the last sentence of 
section 421(b).
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Nonqualified deferred compensation

    Compensation is generally includible in an employee's 
income when paid to the employee. However, in the case of a 
nonqualified deferred compensation plan,\188\ unless the 
arrangement meets certain requirements, the amount of deferred 
compensation is includible in income for the taxable year when 
earned (or, if later, when not subject to a substantial risk of 
forfeiture) even if payment will not occur until a later 
year.\189\ In general, under these requirements, the time when 
nonqualified deferred compensation will be paid must be 
specified at the time of deferral with limits on further 
deferral after the time for payment.
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    \188\Compensation earned by an employee is generally paid to the 
employee shortly after being earned. However, in some cases, payment is 
deferred to a later period, referred to as ``deferred compensation.'' 
Deferred compensation may be provided through a plan that receives tax-
favored treatment, such as a qualified retirement plan under section 
401(a). Deferred compensation provided through a plan that is not 
eligible for tax-favored treatment is referred to as ``nonqualified'' 
deferred compensation.
    \189\Section 409A and the regulations thereunder provide rules for 
nonqualified deferred compensation.
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    Nonqualified options on employer stock may be structured so 
as not to be considered nonqualified deferred compensation and 
thus not subject to these rules.\190\ An arrangement providing 
RSUs is considered a nonqualified deferred compensation plan 
and is subject to these rules, including the limits.
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    \190\Treas. Reg. sec. 1.409A-1(b)(5). In addition, statutory option 
arrangements are not nonqualified deferred compensation arrangements.
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                           REASONS FOR CHANGE

    Employer stock may provide a valuable form of employee 
compensation. In some cases, the receipt of employer stock with 
a high fair market value may result in compensation income, and 
a related tax liability, disproportionately large in comparison 
to an employee's regular salary or wages. In the case of 
publicly traded employer stock, an employee may sell some of 
the stock to provide funds to cover that tax liability. 
However, that approach often is not available in the case of a 
closely held company that restricts the transferability of its 
stock. This may make employer stock a less attractive form of 
compensation. In the case of stock options, the inability to 
pay the tax liability that would result from the stock received 
on exercise of the option may mean employees let options lapse, 
thus losing compensation they have already earned. The 
Committee wishes to address these situations by allowing 
employees to elect to defer recognition of income attributable 
to stock received on exercise of an option or settlement of an 
RSU until an opportunity to sell some of the stock arises, but 
in no event longer than five years from the date that the 
employee's right to the stock becomes substantially vested.

                        EXPLANATION OF PROVISION

In general

    The provision allows a qualified employee to elect to 
defer, for income tax purposes, the inclusion in income of the 
amount of income attributable to qualified stock transferred to 
the employee by the employer.\191\ An election to defer income 
inclusion (``inclusion deferral election'') with respect to 
qualified stock must be made no later than 30 days after the 
first time the employee's right to the stock is substantially 
vested.\192\ Absent an inclusion deferral election under the 
provision, the income is includable for the taxable year in 
which the qualified employee's right to the qualified stock is 
substantially vested under present law.
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    \191\The provision does not apply to income with respect to 
nonvested stock that is includible as a result of a section 83(b) 
election.
    \192\An inclusion deferral election is made in a manner similar to 
the manner in which a section 83(b) election is made. Thus, as in the 
case of a section 83(b) election under present law, the employee must 
provide a copy of the inclusion deferral election to the employer.
---------------------------------------------------------------------------
    If an employee elects to defer income inclusion, the income 
must be included in the employee's income for the taxable year 
that includes the earliest of (1) the first date the qualified 
stock becomes transferable, including, solely for this purpose, 
transferable to the employer;\193\ (2) the date the employee 
first becomes an excluded employee (as described below); (3) 
the first date on which any stock of the employer becomes 
readily tradable on an established securities market;\194\ (4) 
the date five years after the date the employee's right to the 
stock becomes substantially vested; and (5) the date on which 
the employee revokes his or her inclusion deferral 
election.\195\
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    \193\Thus, for this purpose, the qualified stock is considered 
transferable if the employee has the ability to sell the stock to the 
employer (or any other person).
    \194\An established securities market is determined for this 
purpose by the Secretary, but does not include any market unless the 
market is recognized as an established securities market for purposes 
of another Code provision.
    \195\An inclusion deferral election is revoked at the time and in 
the manner as the Secretary provides.
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    An employee may not make an inclusion deferral election for 
a year with respect to qualified stock if, in the preceding 
calendar year, the corporation purchased any of its outstanding 
stock unless at least 25 percent of the total dollar amount of 
the stock so purchased is stock with respect to which an 
inclusion deferral election is in effect (``deferral stock'') 
and the determination of which individuals from whom deferral 
stock is purchased is made on a reasonable basis.\196\ For 
purposes of this requirement, stock purchased from an 
individual is not treated as deferral stock (and the purchase 
is not treated as a purchase of deferral stock) if, immediately 
after the purchase, the individual holds any deferral stock 
with respect to which an inclusion deferral election has been 
in effect for a longer period than the election with respect to 
the purchased stock. Thus, in general, in applying the purchase 
requirement, an individual's deferral stock with respect to 
which an inclusion deferral election has been in effect for the 
longest periods must be purchased first. A corporation that has 
deferral stock outstanding as of the beginning of any calendar 
year and that purchases any of its outstanding stock during the 
calendar year must report on its income tax return for the 
taxable year in which, or with which, the calendar year ends 
the total dollar amount of the outstanding stock purchased 
during the calendar year and such other information as the 
Secretary may require for purposes of administering this 
requirement.
---------------------------------------------------------------------------
    \196\This requirement is met if the stock purchased by the 
corporation includes all the corporation's outstanding deferral stock.
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    A qualified employee may make an inclusion deferral 
election with respect to qualified stock attributable to a 
statutory option.\197\ In that case, the option is not treated 
as a statutory option and the rules relating to statutory 
options and related stock do not apply. In addition, an 
arrangement under which an employee may receive qualified stock 
is not treated as a nonqualified deferred compensation plan 
solely because of an employee's inclusion deferral election or 
ability to make an election.
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    \197\For purposes of the requirement that an ESPP provide employees 
with the same rights and privileges, the rules of the provision apply 
in determining which employees have the right to make an inclusion 
deferral election with respect to stock received under the ESPP.
---------------------------------------------------------------------------
    Deferred income inclusion applies also for purposes of the 
employer's deduction of the amount of income attributable to 
the qualified stock. That is, if an employee makes an inclusion 
deferral election, the employer's deduction is deferred until 
the employer's taxable year in which or with which ends the 
taxable year of the employee for which the amount is included 
in the employee's income as described in (1)-(5) above.

Qualified employee and qualified stock

    Under the provision, a qualified employee means an 
individual who is not an excluded employee and who agrees, in 
the inclusion deferral election, to meet the requirements 
necessary (as determined by the Secretary) to ensure the income 
tax withholding requirements of the employer corporation with 
respect to the qualified stock (as described below) are met. 
For this purpose, an excluded employee with respect to a 
corporation is any individual (1) who was a one-percent owner 
of the corporation at any time during the 10 preceding calendar 
years,\198\ (2) who is, or has been at any prior time, the 
chief executive officer or chief financial officer of the 
corporation or an individual acting in either capacity, (3) who 
is a family member of an individual described in (1) or 
(2),\199\ or (4) who has been one of the four highest 
compensated officers of the corporation for any of the 10 
preceding taxable years.\200\
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    \198\One-percent owner status is determined under the top-heavy 
rules for qualified retirement plans, that is, section 
416(i)(1)(B)(ii).
    \199\In the case of one-percent owners, this results from 
application of the attribution rules of section 318 under section 
416(i)(1)(B)(i)(II). Family members are determined under section 
318(a)(1) and generally include an individual's spouse, children, 
grandchildren and parents.
    \200\Highest paid employee status is determined at the close of the 
corporation's taxable year.
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    Qualified stock is any stock of a corporation if--
           an employee receives the stock in connection 
        with the exercise of an option or in settlement of an 
        RSU, and
           the option or RSU was granted by the 
        corporation to the employee in connection with the 
        performance of services and in a year in which the 
        corporation was an eligible corporation (as described 
        below).
    However, qualified stock does not include any stock if, at 
the time the employee's right to the stock becomes 
substantially vested, the employee may sell the stock to, or 
otherwise receive cash in lieu of stock from, the corporation.
    A corporation is an eligible corporation with respect to a 
calendar year if (1) no stock of the employer corporation (or 
any predecessor) is readily tradable on an established 
securities market during any preceding calendar year,\201\ and 
(2) the corporation has a written plan under which, in the 
calendar year, not less than 80 percent of all employees who 
provide services to the corporation in the United States (or 
any U.S. possession) are granted stock options, or restricted 
stock units (``RSUs''), with the same rights and privileges to 
receive qualified stock (``80-percent requirement'').\202\ For 
this purpose, in general, the determination of rights and 
privileges with respect to stock is determined in a similar 
manner as provided under the present-law ESPP rules.\203\ 
However, employees will not fail to be treated as having the 
same rights and privileges to receive qualified stock solely 
because the number of shares available to all employees is not 
equal in amount, provided that the number of shares available 
to each employee is more than a de minimis amount. In addition, 
rights and privileges with respect to the exercise of a stock 
option are not treated for this purpose as the same as rights 
and privileges with respect to the settlement of an RSU.\204\
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    \201\This requirement continues to apply up to the time an 
inclusion deferral election is made. That is, under the provision, no 
inclusion deferral election may be made with respect to qualified stock 
if any stock of the corporation is readily tradable on an established 
securities market at any time before the election is made.
    \202\In applying the requirement that 80 percent of employees 
receive stock options or RSUs, excluded employees and part-time 
employees are not taken into account. For this purpose, part-time 
employee is defined as under section 4980E(d)(4), that is, an employee 
customarily employed for fewer than 30 hours per week.
    \203\Sec. 423(b)(5).
    \204\Under a transition rule, in the case of a calendar year 
beginning before January 1, 2017, the 80-percent requirement is applied 
without regard to whether the rights and privileges with respect to the 
qualified stock are the same.
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    For purposes of the provision, corporations that are 
members of the same controlled group are treated as one 
corporation.

Notice, withholding and reporting requirements

    Under the provision, a corporation that transfers qualified 
stock to a qualified employee must provide a notice to the 
qualified employee at the time (or a reasonable period before) 
the employee's right to the qualified stock is substantially 
vested (and income attributable to the stock would be 
includible absent an inclusion deferral election). The notice 
must (1) certify to the employee that the stock is qualified 
stock, and (2) notify the employee (a) that the employee may 
elect to defer income inclusion with respect to the stock and 
(b) that, if the employee makes an inclusion deferral election, 
the amount of income required to be included at the end of the 
deferral period will be based on the value of the stock at the 
time the employee's right to the stock is substantially vested, 
notwithstanding whether the value of the stock has declined 
during the deferral period, and the amount of income to be 
included at the end of the deferral period will be subject to 
withholding as provided under the provision, as well as of the 
employee's responsibilities with respect to required 
withholding. Failure to provide the notice may result in the 
imposition of a penalty of $100 for each failure, subject to a 
maximum penalty of $50,000 for all failures during any calendar 
year.
    An inclusion deferral election applies only for income tax 
purposes. The application of FICA and FUTA are not affected. 
The provision includes specific income tax withholding and 
reporting requirements with respect to income subject to an 
inclusion deferral election.
    For the taxable year for which income subject to an 
inclusion deferral election is required to be included in 
income by the employee (as described above), the amount 
required to be included in income is treated as wages with 
respect to which the employer is required to withhold income 
tax at a rate not less than the highest income tax rate 
applicable to individual taxpayers.\205\ The employer must 
report on Form W-2 the amount of income covered by an inclusion 
deferral election (1) for the year of deferral and (2) for the 
year the income is required to be included in income by the 
employee. In addition, for any calendar year, the employer must 
report on Form W-2 the aggregate amount of income covered by 
inclusion deferral elections, determined as of the close of the 
calendar year.
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    \205\That is, the maximum rate of tax in effect for the year under 
section 1. The provision specifies that qualified stock is treated as a 
noncash fringe benefit for income tax withholding purposes.
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                             EFFECTIVE DATE

    The provision generally applies with respect to stock 
attributable to options exercised or RSUs settled after 
December 31, 2016. Under a transition rule, until the Secretary 
(or the Secretary's delegate) issues regulations or other 
guidance implementing the 80-percent and employer notice 
requirements under the provision, a corporation will be treated 
as complying with those requirements (respectively) if it 
complies with a reasonable good faith interpretation of the 
requirements. The penalty for a failure to provide the notice 
required under the provision applies to failures after December 
31, 2016.

                      TITLE V--REVENUE PROVISIONS


 A. Modifications to Required Minimum Distribution Rules (sec. 501 of 
                the bill and sec. 401(a)(9) of the Code)


                              PRESENT LAW

In general

    Minimum distribution rules apply to tax-favored employer-
sponsored retirement plans and IRAs.\206\ Employer-sponsored 
retirement plans are of two general types: defined benefit 
plans, under which benefits are determined under a plan formula 
and paid from general plan assets, rather than individual 
accounts; and defined contribution plans, under which benefits 
are based on a separate account for each participant, to which 
are allocated contributions, earnings and losses.
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    \206\Secs. 401(a)(9), 403(b)(1), 408(a)(6), 408(b)(3), and 
457(d)(2). Tax-favored employer-sponsored retirement plans include 
qualified retirement plans and annuities under sections 401(a) and 
403(a), tax-deferred annuity plans under section 403(b), and 
governmental eligible deferred compensation plans under section 457(b). 
Minimum distribution requirements also apply to eligible deferred 
compensation plans under section 457(b) of tax-exempt employers.
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    In general, under the minimum distribution rules, 
distribution of minimum benefits must begin to an employee (or 
IRA owner) no later than a required beginning date and a 
minimum amount must be distributed each year (sometimes 
referred to as ``lifetime'' minimum distribution requirements). 
These lifetime requirements do not apply to a Roth IRA.\207\ 
Minimum distribution rules also apply to benefits payable with 
respect to an employee (or IRA owner) who has died (sometimes 
referred to as ``after-death'' minimum distribution 
requirements). The regulations provide a methodology for 
calculating the required minimum distribution from an 
individual account under a defined contribution plan or from an 
IRA.\208\ In the case of annuity payments under a defined 
benefit plan or an annuity contract, the regulations provide 
requirements that the stream of annuity payments must satisfy.
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    \207\Sec. 408A(c)(5).
    \208\Reflecting the directive in section 823 of the Pension 
Protection Act of 2006 (Pub. L. No. 109-280), pursuant to Treas. Reg. 
sec. 1.401(a)(9)-1, A-2(d), a governmental plan within the meaning of 
section 414(d) or a governmental eligible deferred compensation plan is 
treated as having complied with the statutory minimum distribution 
rules if the plan complies with a reasonable and good faith 
interpretation of those rules.
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    Failure to comply with the minimum distribution requirement 
results in an excise tax imposed on the individual who was 
required to take the distributions equal to 50 percent of the 
required minimum amount not distributed for the year.\209\ The 
excise tax may be waived in certain cases. For employer-
sponsored retirement plans, satisfying the minimum distribution 
requirement under the plan terms and in operation is also a 
requirement for tax-favored treatment.
---------------------------------------------------------------------------
    \209\Sec. 4974.
---------------------------------------------------------------------------

Required beginning date

    For traditional IRAs, the required beginning date is April 
1 following the calendar year in which the employee (or IRA 
owner) attains age 70\1/2\. For employer-sponsored retirement 
plans, for an employee other than an employee who is a five-
percent owner in the year the employee attains age 70\1/2\, the 
required beginning date is April 1 after the later of the 
calendar year in which the employee attains age 70\1/2\ or 
retires. For an employee who is a five-percent owner under an 
employer-sponsored tax-favored retirement plan in the year the 
employee attains age 70\1/2\, the required beginning date is 
the same as for IRAs even if the employee continues to work 
past age 70\1/2\.

Lifetime rules

    While an employee (or IRA owner) is alive, distributions of 
the individual's interest are required to be made (in 
accordance with regulations) over the life or life expectancy 
of the employee (or IRA owner), or over the joint lives or 
joint life expectancy of the employee (or IRA owner) and a 
designated beneficiary.\210\ For defined contribution plans and 
IRAs, the required minimum distribution for each year is 
determined by dividing the account balance as of the end of the 
prior year by a distribution period which, while the employee 
(or IRA owner) is alive, is the factor for the employee (or IRA 
owner's) age from the uniform lifetime table included in the 
Treasury regulations.\211\ The distribution period for annuity 
payments under a defined benefit plan or annuity contract (to 
the extent not limited to the life of the employee (or IRA 
owner) or the joint lives of the employee (or IRA owner) and a 
designated beneficiary) is generally subject to the same 
limitations as apply to individual accounts.
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    \210\Sec. 401(a)(9)(A).
    \211\Treas. Reg. sec. 1.401(a)(9)-5. This table is based on the 
joint life and last survivor expectancy of the individual and a 
hypothetical beneficiary 10 years younger. For an individual with a 
spouse as designated beneficiary who is more than 10 years younger (and 
thus the number of years in the couple's joint life and last survivor 
expectancy is greater than the uniform lifetime table), the joint life 
expectancy and last survivor expectancy of the couple (calculated using 
the table in the regulations) is used. For this purpose and other 
special rules that apply to the surviving spouse as beneficiary, a 
former spouse to whom all or a portion of an employee's benefit is 
payable pursuant to a qualified domestic relations order (within the 
meaning of section 414(p)) is treated as the spouse (including a 
surviving spouse) of the employee for purposes of section 401(a)(9).
---------------------------------------------------------------------------

After-death rules

            Payments over a distribution period
    The after-death minimum distributions rules vary depending 
on (i) whether an employee (or IRA owner) dies on or after the 
required beginning date or before the required beginning date, 
and (ii) whether there is a designated beneficiary for the 
benefit.\212\ Under the regulations, a designated beneficiary 
is an individual designated as a beneficiary under the plan or 
IRA.\213\ Similar to the lifetime rules, for defined 
contribution plans and IRAs (``individual accounts''), the 
required minimum distribution for each year after the death of 
the employee (or IRA owner) is generally determined by dividing 
the account balance as of the end of the prior year by a 
distribution period.
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    \212\In the case of amounts for which the employee or IRA owner's 
surviving spouse is the beneficiary, the surviving spouse generally is 
permitted to do a tax-free rollover of such amounts into an IRA (or 
account of a tax-favored employer-sponsored plan of the spouse's 
employer) established in the surviving spouse's name as IRA owner or 
employee. The rules applicable to the rollover account, including the 
minimum distribution rules, are the same rules that apply to an IRA 
owner or employee. In the case of an IRA for which the spouse is sole 
beneficiary, this can be accomplished by simply renaming the IRA as an 
IRA held by the spouse as IRA owner rather than as a beneficiary.
    \213\Treas. Reg. sec. 1.401(a)(9)-4, A-1. The individual need not 
be named as long as the individual is identifiable under the terms of 
the plan (or IRA). There are special rules for multiple beneficiaries 
and for trusts named as beneficiary (where the beneficiaries of the 
trust are individuals). However, the fact that an interest under a plan 
or IRA passes to a certain individual under a will or otherwise under 
State law does not make that individual a designated beneficiary unless 
the individual is designated as a beneficiary under the plan or IRA.
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    If an employee (or IRA owner) dies on or after the required 
beginning date, the basic statutory rule is that the remaining 
interest must be distributed at least as rapidly as under the 
method of distribution being used before death.\214\ Under the 
regulations, for individual accounts, this rule is also 
interpreted as requiring the minimum required distribution to 
be calculated using a distribution period. If there is no 
designated beneficiary, the distribution period is equal to the 
remaining years of the employee's (or IRA owner's) life, as of 
the year of death.\215\ If there is a designated beneficiary, 
the distribution period (if longer) is the beneficiary's life 
expectancy calculated using the life expectancy table in the 
regulations, determined in the year after the year of 
death.\216\
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    \214\Sec. 401(a)(9)(B)(i).
    \215\Treas. Reg. sec. 1.401(a)(9)-5, A-5(a)(2).
    \216\Treas. Reg. sec. 1.401(a)(9)-5, A-5(a)(1).
---------------------------------------------------------------------------
    If an employee (or IRA owner) dies before the required 
beginning date and any portion of the benefit is payable to a 
designated beneficiary, the statutory rule is that 
distributions are generally required to begin within one year 
of the employee's (or IRA owner's) death (or such later date as 
prescribed in regulations) and are permitted to be paid (in 
accordance with regulations) over the life or life expectancy 
of the designated beneficiary. If the beneficiary of the 
employee (or IRA owner) is the individual's surviving spouse, 
distributions are not required to commence until the year in 
which the employee (or IRA owner) would have attained age 70\1/
2\. If the surviving spouse dies before the employee (or IRA 
owner) would have attained age 70\1/2\, the after-death rules 
apply after the death of the spouse as though the spouse were 
the employee (or IRA owner). Under the regulations, for 
individual accounts, the required minimum distribution for each 
year is determined using a distribution period and the period 
is measured by the designated beneficiary's life expectancy, 
calculated in the same manner as if the individual died on or 
after the required beginning date.\217\
---------------------------------------------------------------------------
    \217\Treas. Reg. sec. 1.401(a)(9)-5, A-5(b).
---------------------------------------------------------------------------
    In cases where distribution after death is based on life 
expectancy (either the remaining life expectancy of the 
employee (or IRA owner) or a designated beneficiary), the 
distribution period generally is fixed at the employee's (or 
IRA owner's) death and then reduced by one for each year that 
elapses after the year in which it is calculated. If the 
designated beneficiary dies during the distribution period, 
distributions continue to the subsequent beneficiaries over the 
remaining years in the distribution period.\218\
---------------------------------------------------------------------------
    \218\If the distribution period is based on the surviving spouse's 
life expectancy (whether the employee or IRA owner's death is before or 
after the required beginning date), the spouse's life expectancy 
generally is recalculated each year while the spouse is alive and then 
fixed the year after the spouse's death.
---------------------------------------------------------------------------
    The distribution period for annuity payments under a 
defined benefit plan or annuity contract (to the extent not 
limited to the life of a designated beneficiary) is generally 
subject to the same limitations as apply to individual 
accounts.
            Five-year rule
    If an employee (or IRA owner) dies before the required 
beginning date and there is no designated beneficiary, then the 
entire remaining interest of the employee (or IRA owner) must 
generally be distributed by the end of the fifth calendar year 
following the individual's death.\219\
---------------------------------------------------------------------------
    \219\Section 401(a)(9)(B)(ii) provides that the entire interest 
must be distributed within five years of the employee's death. Treas. 
Reg. sec. 1.401(a)(9)-3, A-2, provides that this requirement is 
satisfied if the entire interest is distributed by the end of the fifth 
calendar year following the employee's death. There are provisions in 
the regulations allowing a designated beneficiary to take advantage of 
the five-year rule. See Treas. Reg. secs. 1.401(a)(9)-4, A-4, and 
1.4974-2, A-7(b).
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Defined benefit plans and annuity distributions

    The regulations provide rules for the amount of annuity 
distributions from a defined benefit plan, or from an annuity 
purchased by the plan from an insurance company, that are paid 
over life or life expectancy. Annuity distributions are 
generally required to be nonincreasing with certain exceptions, 
which include, for example, (i) increases to the extent of 
certain specified cost-of-living indices, (ii) a constant 
percentage increase (for a qualified defined benefit plan, the 
constant percentage cannot exceed five percent per year), (iii) 
certain accelerations of payments, and (iv) increases to 
reflect when an annuity is converted to a single life annuity 
after the death of the beneficiary under a joint and survivor 
annuity or after termination of the survivor annuity under a 
qualified domestic relations order.\220\ If distributions are 
in the form of a joint and survivor annuity and the survivor 
annuitant both is not the surviving spouse and is younger than 
the employee (or IRA owner), the survivor annuity benefit is 
limited to a percentage of the life annuity benefit for the 
employee (or IRA owner). The survivor benefit as a percentage 
of the benefit of the primary annuitant is required to be 
smaller (but not required to be less than 52 percent) as the 
difference in the ages of the primary annuitant and the 
survivor annuitant become greater.
---------------------------------------------------------------------------
    \220\Treas. Reg. sec. 1.401(a)(9)-6, A-14.
---------------------------------------------------------------------------

Plan amendment and anti-cut-back requirements

    Present law provides a remedial amendment period during 
which, under certain circumstances, a qualified retirement plan 
may be amended retroactively in order to comply with the 
qualification requirements.\221\ 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 may extend the time by which plan 
amendments need to be made.
---------------------------------------------------------------------------
    \221\Sec. 401(b).
---------------------------------------------------------------------------
    The Code and ERISA generally prohibit plan amendment that 
reduce accrued benefits, including amendments that eliminate or 
reduce optional forms of benefit with respect to benefits 
already accrued except to the extent prescribed in 
regulations.\222\ This prohibition on the reduction of accrued 
benefits is commonly referred to as the ``anti-cut-back rule.''
---------------------------------------------------------------------------
    \222\Sec. 411(d)(6) and ERISA sec. 204(g).
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    The tax subsidy for retirement savings is intended to 
encourage the accumulation of funds that will provide adequate 
income during retirement. Because of the uncertainty as to how 
much income will be needed during retirement, individuals may 
accumulate more than is actually needed during the individual's 
lifetime (and surviving spouse's lifetime, if applicable), 
leaving some amount to other surviving beneficiaries. Present 
law generally allows other beneficiaries to withdraw inherited 
amounts from a tax-favored account or plan over the 
beneficiary's lifetime, thus allowing funds to remain in tax-
favored form long after the original purpose of adequate 
retirement income has been served. In some cases, the inherited 
amount may be so large that tax-favored retirement savings 
includes an estate-planning element, rather than just providing 
retirement income security. The Committee believes that the tax 
subsidy for retirement savings should be limited once the needs 
of the individual and surviving spouse, and certain other 
beneficiaries, have been met.

                        EXPLANATION OF PROVISION

Change in after-death rules for defined contribution plans and IRAs

    The provision changes the after-death required minimum 
distribution rules applicable to defined contribution plans and 
IRAs, as described below. However, the provision applies only 
to the extent that the amount of an individual's aggregate 
account balances under all IRAs and defined contributions 
plans, determined as of the date of death, exceeds $450,000 
(indexed for inflation). Thus for example if an individual dies 
with aggregate account balances of $600,000, as of the date of 
death, present law continues to apply to $450,000, and the 
provision applies to the remaining $150,000.
    If an employee has multiple defined contribution plan 
accounts and IRAs, the $450,000 threshold is allocated among 
the accounts as provided in regulations. If the individual has 
more than one beneficiary, the portion of the amount above 
$450,000 that is subject to the provision with respect to each 
beneficiary is the amount that is the same proportion of the 
excess as the portion of the total to which the individual is 
entitled. The result is the same whether or not the beneficiary 
is an eligible beneficiary (as described below). Thus, under 
the example above, if the individual has two beneficiaries, one 
who is an eligible designated beneficiary, as discussed below, 
and one who is not an eligible designated beneficiary, each 
with a right to 50 percent of the aggregate amount, then 
present law applies for determining required minimum 
distributions for each beneficiary with respect to $225,000 and 
the provision applies to $75,000.
    The provision does not apply for determining after-death 
required minimum distributions from defined benefit plans.

Expansion of five-year after-death rule for defined contributions plans

            In general
    Under the provision, the five-year rule is the general rule 
for all distributions after death (regardless of whether the 
employee (or IRA owner) dies before, on, or after the required 
beginning date) unless the designated beneficiary is an 
eligible beneficiary as defined in the provision. Thus, in the 
case of an ineligible beneficiary, distribution of the employee 
(or IRA owner's) entire benefit is required to be distributed 
by the end of the fifth calendar year following the year of the 
employee or IRA owner's death.
            Eligible beneficiaries
    For eligible beneficiaries, an exception to the five-year 
rule (for death before the required beginning date under 
present law) applies whether or not the employee (or IRA owner) 
dies before, on, or after the required beginning date. The 
exception (similar to present law) generally allows 
distributions over life or life expectancy of an eligible 
beneficiary beginning in the year following the year of death. 
Eligible beneficiaries includes any beneficiary who, as of the 
date of death, is the surviving spouse of the employee (or IRA 
owner),\223\ is disabled, is a chronically ill individual, is 
an individual who is not more than 10 years younger than the 
employee (or IRA owner), or is a child of the employee (or IRA 
owner) who has not reached the age of majority. In the case of 
a child who has not reached the age of majority, calculation of 
the minimum required distribution under this exception is only 
allowed through the year that the child reaches the age of 
majority.
---------------------------------------------------------------------------
    \223\As in the case of the present law special rule in section 
401(a)(9)(B)(iv) for surviving spouses, spouse is not defined in the 
provision. Under Treas. Reg. sec. 1.401(a)(9)-8, A-5, a spouse is the 
employee's spouse under applicable State law. In the case of a special 
rule for a surviving spouse, that determination is generally made based 
on the employee's marital status on the date of death. An exception is 
provided in Treas. Reg. sec. 1.401(a)(9)-6, A-6, under which a former 
spouse to whom all or a portion of the employee's benefits is payable 
pursuant to a qualified domestics relations order as defined in section 
414(p) is treated as the employee's spouse (including a surviving 
spouse). In the case of a qualified joint and survivor annuity under 
section 401(a)(11) and 417, the spouse is generally determined as of 
the annuity starting date.
---------------------------------------------------------------------------
    Further, under the provision, the five-year rule also 
applies after the death of an eligible beneficiary or after a 
child reaches the age of majority. Thus, for example, if a 
disabled child of an employee (or IRA owner) is an eligible 
beneficiary of a parent who dies when the child is age 20 and 
the child dies at age 30, even though 52.1 years remain in 
measurement period,\224\ the disabled child's remaining 
beneficiary interest must be distributed by the end of the 
fifth year following the death of the disabled child. If a 
child is an eligible beneficiary based on having not reached 
the age of majority before the employee's (or IRA owner's) 
death, the five-year rule applies beginning with the earlier of 
the date of the child's death or the date that the child 
reaches the age of majority. The child's entire interest must 
be distributed by the end of the fifth year following that 
date.
---------------------------------------------------------------------------
    \224\The measurement period is the life expectancy of the child 
calculated for the child's age in the year after the employee's (or IRA 
owner's) death (age 21 (20 plus 1)).
---------------------------------------------------------------------------
    As under present law, if the surviving spouse is the 
beneficiary, a special rule allows the commencement of 
distribution to be delayed until end of the year that the 
employee (or IRA owner) would have attained age 70\1/2\. If the 
spouse dies before distributions were required to begin to the 
spouse, the surviving spouse is treated as the employee (or IRA 
owner) in determining the required distributions to 
beneficiaries of the surviving spouse.
            Definitions of disabled and chronically ill individual
    Under the provision, disabled means unable to engage in any 
substantial gainful activity by reason of any medically 
determinable physical or mental impairment which can be 
expected to end in death or to be for long-continued and 
indefinite duration.\225\ Further, under the definition, an 
individual is not considered to be disabled unless proof of the 
disability is furnished in such form and manner as the 
Secretary may require. Substantial gainful activity for this 
purpose is the activity, or a comparable activity, in which the 
individual customarily engaged prior to the arising of the 
disability (or prior to retirement if the individual was 
retired at the time the disability arose).\226\
---------------------------------------------------------------------------
    \225\The definition of disabled in section 72(m)(7) is incorporated 
by reference.
    \226\Treas. Reg. sec. 1.72-17(f). Under the regulations, in 
determining whether an individual is disabled, primary consideration is 
given to the nature and severity of the individual's impairment. 
However, consideration is also given to other factors such as the 
individual's education, training, and work experience. Whether an 
impairment in a particular case constitutes a disability is determined 
with reference to all the facts in the case.
---------------------------------------------------------------------------
    Under the provision, the definition of a chronically ill 
individual for purposes of qualified long-term care 
insurance\227\ is incorporated by reference with a 
modification. Under this definition, a chronically ill 
individual is any individual who (1) is unable to perform 
(without substantial assistance from another individual) at 
least two activities of daily living for an indefinite period 
(expected to be lengthy in nature)\228\ due to a loss of 
functional capacity, (2) has a level of disability similar (as 
determined under regulations prescribed by the Secretary in 
consultation with the Secretary of Health and Human Services) 
to the level of disability described above requiring assistance 
with daily living based on loss of functional capacity, or (3) 
requires substantial supervision to protect the individual from 
threats to health and safety due to severe cognitive 
impairment. The activities of daily living for which assistance 
is needed for purposes of determining loss of functional 
capacity are eating, toileting, transferring, bathing, 
dressing, and continence.
---------------------------------------------------------------------------
    \227\Sec. 7702B(c)(2).
    \228\Section 7702B(c) only requires this period to be at least 90 
days.
---------------------------------------------------------------------------
            Annuity payments under commercial annuities
    The provision applies to after-death required minimum 
distributions under defined contribution plans and IRAs, 
including annuity contracts purchased from insurance companies 
under defined contribution plans or IRAs.

                             EFFECTIVE DATE

General effective date

    In determining required minimum distributions after the 
death of an employee (or IRA owner), the provision is generally 
effective for required minimum distributions with respect to 
employees (or IRA owners) with a date of death after December 
31, 2016.

Delayed effective date for governmental and collectively bargained 
        plans

    In the case of a governmental plan (as defined in section 
414(d)), in determining required minimum distributions after 
the death of an employee, the provision applies to 
distributions with respect to employees who die after December 
31, 2018.
    In the case of a collectively bargained plan,\229\ in 
determining required minimum distributions after the death of 
an employee, the provision applies to distributions with 
respect to employees who die in calendar years beginning after 
the earlier of two dates. The first date is the later of (1) 
the date on which the last collective bargaining agreement 
ratified before date of enactment of the provision 
terminates,\230\ or (2) December 31, 2016. The second date is 
December 31, 2018.
---------------------------------------------------------------------------
    \229\A collectively bargained plan is a plan maintained pursuant to 
one or more collective bargaining agreements between employee 
representatives and one or more employers.
    \230\The date that the last agreement terminates is determined 
without regard to any extension thereof agreed to on or after the date 
of enactment of the provision. Further, any plan amendment made 
pursuant to a collective bargaining agreement relating to the plan that 
amends the plan solely to conform to any requirement added by the 
provision shall not be treated as a termination of the collective 
bargaining agreement.
---------------------------------------------------------------------------

Five-year rule after the death of a beneficiary

    In the case of an employee (or IRA owner) who dies before 
the effective date (as described below) for the plan (or IRA), 
if the designated beneficiary of the employee (or IRA owner) 
dies on or after the effective date, the provision applies to 
any beneficiary of the designated beneficiary as though the 
designated beneficiary were an eligible beneficiary. Thus, the 
entire interest must be distributed by the end of the fifth 
calendar year after the death of the designated beneficiary. 
For this purpose, the effective date is the date of death of 
the employee (or IRA owner) used to determine when the 
provision applies to the plan (or IRA), for example, before 
January 1, 2017, under the general effective date.

Certain annuities grandfathered

    The modification to the after-death minimum distribution 
rules does not apply to a qualified annuity that is a binding 
annuity contract in effect on the date of enactment of the 
provision and at all times thereafter. A qualified annuity with 
respect to an individual is a commercial annuity,\231\ under 
which the annuity payments are made over the lives of the 
individual and a designated beneficiary (or over a period not 
extending beyond the life expectancy of the individual or the 
life expectancy of the individual and a designated beneficiary) 
in accordance with the required minimum distribution 
regulations for annuity payments as in effect before enactment 
of this proposal. In addition to these requirements, annuity 
payments to the individual must begin before the date of 
enactment, and the individual must have made an irrevocable 
election before that date as to the method and amount of the 
annuity payments to the individual or any designated 
beneficiaries. Alternatively, if an annuity is not a qualified 
annuity solely based on annuity payments not having begun 
irrevocably before the date of enactment, an annuity can be a 
qualified annuity if the individual has made an irrevocable 
election before the date of enactment as to the method and 
amount of the annuity payments to the individual or any 
designated beneficiaries.
---------------------------------------------------------------------------
    \231\For this purpose, commercial annuity is defined in section 
3405(e)(6).
---------------------------------------------------------------------------

Plan amendments made pursuant to the provision

    A plan amendment made pursuant to the provision (or 
regulations issued thereunder) may be retroactively effective 
and (except as provided by the Secretary) will not violate the 
anti-cut-back rule, if, in addition to meeting the other 
applicable requirements described below, the amendment is made 
on or before the last day of the first plan year beginning 
after December 31, 2018 (or in the case of a governmental or 
collectively bargained plan, December 31, 2020), or a later 
date prescribed by the Secretary. In addition, the plan will be 
treated as operated in accordance with plan terms during the 
period beginning with the date of the provision or regulations 
take effect (or the date specified by the plan if the amendment 
is not required by the provision or regulations) and ending on 
the last permissible date for the amendment (or, if earlier, 
the date the amendment is adopted).
    A plan amendment will not be considered to be pursuant to 
the provision (or applicable regulations) if it has an 
effective date before the effective date of the provision under 
the provision (or regulations) to which it relates. Similarly, 
the provision does not provide relief from the anti-cut-back 
rule for periods prior to the effective date of the relevant 
portion of the provision (or regulations) or the plan 
amendment. In order for an amendment to be retroactively 
effective and not violate the anti-cut-back rule, the plan 
amendment must apply retroactively for the period described in 
the preceding paragraph, and the plan must be operated in 
accordance with the amendment during that period.

 B. Increase in Penalty for Failure To File (sec. 502 of the bill and 
                       sec. 6651(a) of the Code)


                              PRESENT LAW

    The Federal tax system is one of ``self-assessment,'' i.e., 
taxpayers are required to declare their income, expenses, and 
ultimate tax due, while the IRS has the ability to propose 
subsequent changes. This voluntary system requires that 
taxpayers comply with deadlines and adhere to the filing 
requirements. While taxpayers may obtain extensions of time in 
which to file their returns, the Federal tax system consists of 
specific due dates of returns. In order to foster compliance in 
meeting these deadlines, Congress has enacted a penalty for the 
failure to timely file tax returns.\232\
---------------------------------------------------------------------------
    \232\See United States v. Boyle, 469 U.S. 241, 245 (1985).
---------------------------------------------------------------------------
    A taxpayer who fails to file a tax return on or before its 
due date is subject to a penalty equal to five percent of the 
net amount of tax due for each month that the return is not 
filed, up to a maximum of 25 percent of the net amount.\233\ If 
the failure to file a return is fraudulent, the taxpayer is 
subject to a penalty equal to 15 percent of the net amount of 
tax due for each month the return is not filed, up to a maximum 
of 75 percent of the net amount.\234\ The net amount of tax due 
is the amount of tax required to be shown on the return reduced 
by the amount of any part of the tax which is paid on or before 
the date prescribed for payment of the tax and by the amount of 
any credits against tax which may be claimed on the 
return.\235\ The penalty will not apply if it is shown that the 
failure to file was due to reasonable cause and not willful 
neglect.\236\
---------------------------------------------------------------------------
    \233\Sec. 6651(a)(1).
    \234\Sec. 6651(f).
    \235\Sec. 6651(b)(1).
    \236\Sec. 6651(a)(1).
---------------------------------------------------------------------------
    If a return is filed more than 60 days after its due date, 
and unless it is shown that such failure is due to reasonable 
cause, then the failure to file penalty may not be less than 
the lesser of $205 or 100 percent of the amount required to be 
shown as tax on the return. If a penalty for failure to file 
and a penalty for failure to pay tax shown on a return both 
apply for the same month, the amount of the penalty for failure 
to file for such month is reduced by the amount of the penalty 
for failure to pay tax shown on a return.\237\ If a return is 
filed more than 60 days after its due date, then the penalty 
for failure to pay tax shown on a return may not reduce the 
penalty for failure to file below the lesser of $205 or 100 
percent of the amount required to be shown on the return.\238\
---------------------------------------------------------------------------
    \237\Sec. 6651(c)(1).
    \238\Ibid.
---------------------------------------------------------------------------
    The failure to file penalty applies to all returns required 
to be filed under subchapter A of Chapter 61 (relating to 
income tax returns of an individual, fiduciary of an estate or 
trust, or corporation; self-employment tax returns, and estate 
and gift tax returns), subchapter A of chapter 51 (relating to 
distilled spirits, wines, and beer), subchapter A of chapter 52 
(relating to tobacco, cigars, cigarettes, and cigarette papers 
and tubes), and subchapter A of chapter 53 (relating to machine 
guns and certain other firearms).\239\ The failure to file 
penalty is adjusted annually to account for inflation. The 
failure to file penalty does not apply to any failure to pay 
estimated tax required to be paid by sections 6654 or 
6655.\240\
---------------------------------------------------------------------------
    \239\Sec. 6651(a)(1).
    \240\Sec. 6651(e).
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    The Committee believes the present law penalties are too 
low to discourage noncompliance. The Committee believes that 
increasing the penalties will encourage the filing of timely 
and accurate returns which, in turn, will improve overall tax 
administration.

                        EXPLANATION OF PROVISION

    Under the provision, if a return is filed more than 60 days 
after its due date, then the failure to file penalty may not be 
less than the lesser of $400 or 100 percent of the amount 
required to be shown as tax on the return.

                             EFFECTIVE DATE

    The provision applies to returns with filing due dates 
(including extensions) after December 31, 2016.

  C. Increased Penalties for Failure To File Retirement Plan Returns 
   (sec. 503 of the bill and sec. 6652(d), (e), and (h) of the Code)


                              PRESENT LAW

Form 5500

    An employer that maintains a pension, annuity, stock bonus, 
profit-sharing or other funded deferred compensation plan (or 
the plan administrator of the plan) is required to file an 
annual return containing information required under regulations 
with respect to the qualification, financial condition, and 
operation of the plan.\241\ The plan administrator of a defined 
benefit plan subject to the minimum funding requirements\242\ 
is required to file an annual actuarial report.\243\ These 
filing requirements are met by filing an Annual Return/Report 
of Employee Benefit Plan, Form 5500 series, and providing the 
information as required on the form and related 
instructions.\244\ A failure to file Form 5500 generally 
results in a civil penalty of $25 for each day during which the 
failure continues, subject to a maximum penalty of 
$15,000.\245\ This penalty may be waived if it is shown that 
the failure is due to reasonable cause.
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    \241\Sec. 6058.
    \242\Sec. 412. Most governmental plans (defined in section 414(d)) 
and church plans (defined in section 414(e)) are exempt from the 
minimum funding requirements.
    \243\Sec. 6059.
    \244\Treas. Reg. secs. 301.6058-1(a) and 301.6059-1.
    \245\Sec. 6652(e). The failure to file penalties in section 6652 
generally apply to certain information returns, including retirement 
plan returns. The failure to file penalties in section 6651(a)(1), 
discussed above in section 502 of the bill, generally apply to income, 
estate, gift, employment and self-employment, and certain excise tax 
returns.
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Annual registration statement and notification of changes

    In the case of a plan subject to the vesting requirements 
under the Employee Retirement Income Security Act of 1974 
(``ERISA''), the plan administrator is required to file a 
registration statement with the IRS with respect to any plan 
participant who (1) separated from service during the year and 
(2) has a vested benefit under the plan, but who was not paid 
the benefit during the year (a ``deferred vested'' 
benefit).\246\ The registration statement must include the name 
of the plan, the name and address of the plan administrator, 
the name and taxpayer identification number of the separated 
participant, and the nature, amount, and form of the 
participant's deferred vested benefit. A failure to file a 
registration statement as required generally results in a civil 
penalty of $1 for each participant with respect to whom the 
failure applies, multiplied by the number of days during which 
the failure continues, subject to a maximum penalty of $5,000 
for a failure with respect to any plan year.\247\ This penalty 
may be waived if it is shown that the failure is due to 
reasonable cause.
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    \246\Code sec. 6057(a). Under Code section 6057(e) and ERISA 
section 105(c), similar information must be provided to the separated 
participant.
    \247\Sec. 6652(d)(1).
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    A plan administrator is also required to notify the IRS if 
certain information in a registration changes, specifically, 
any change in the name of the plan or in the name or address of 
the plan administrator, the termination of the plan, or the 
merger or consolidation of the plan with any other plan or its 
division into two or more plans. A failure to file a required 
notification of change generally results in a penalty of $1 for 
each day during which the failure continues, subject to a 
maximum penalty of $1,000 for any failure.\248\ This penalty 
may be waived if it is shown that the failure is due to 
reasonable cause.
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    \248\Sec. 6652(d)(2).
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Withholding notices

    Withholding requirements apply to distributions from tax-
favored employer-sponsored retirement plans and IRAs, but, 
except in the case of certain distributions, payees may 
generally elect not to have withholding apply.\249\ A plan 
administrator or IRA custodian is required to provide payees 
with notices of the right to elect no withholding. A failure to 
provide a required notice generally results in a civil penalty 
of $10 for each failure, subject to a maximum penalty of $5,000 
for all failures during any calendar year.\250\ This penalty 
may be waived if it is shown that the failure is due to 
reasonable cause and not to willful neglect.
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    \249\Sec. 3405.
    \250\Sec. 6652(h).
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                           REASONS FOR CHANGE

    The Committee notes that the penalties for failing to file 
certain retirement plan returns and statements or provide 
certain notices have not been increased in many years. The 
Committee believes the present law penalties are too low to 
discourage noncompliance. The Committee believes that 
increasing these penalties will encourage the filing of timely 
and accurate information returns and statements and the 
provision of required notices, which, in turn, will improve 
overall tax administration.

                        EXPLANATION OF PROVISION

Form 5500

    Under the provision, a failure to file Form 5500 generally 
results in a penalty of $100 for each day during which the 
failure continues, subject to a maximum but the total amount 
imposed under this subsection on any person for failure to file 
any return shall not exceed $50,000.

Annual registration statement and notification of changes

    Under the provision, a failure to file a registration 
statement as required generally results in a penalty of $2 for 
each participant with respect to whom the failure applies, 
multiplied by the number of days during which the failure 
continues, subject to a maximum penalty of $10,000 for a 
failure with respect to any plan year. A failure to file a 
required notification of change generally results in a penalty 
of $2 for each day during which the failure continues, subject 
to a maximum penalty of $5,000 for any failure.

Withholding notices

    Under the provision, a failure to provide a required 
withholding notice generally results in a penalty of $100 for 
each failure, subject to a maximum penalty of $50,000 for all 
failures during any calendar year.

                             EFFECTIVE DATE

    The provision is effective for returns, statements and 
notifications required to be filed, and withholding notices 
required to be provided, in calendar years beginning after 
December 31, 2016.

  D. Modification of User Fee Requirements for Installment Agreements 
            (sec. 504 of the bill and sec. 6159 of the Code)


                              PRESENT LAW

    The Code authorizes the IRS to enter into written 
agreements with any taxpayer under which the taxpayer agrees to 
pay taxes owed, as well as interest and penalties, in 
installments over an agreed schedule, if the IRS determines 
that doing so will facilitate collection of the amounts 
owed.\251\ This agreement provides for a period during which 
IRS enforcement actions are held in abeyance while payments are 
made.\252\ An installment agreement generally does not reduce 
the amount of taxes, interest, or penalties owed. However, the 
IRS is authorized to enter into installment agreements with 
taxpayers which do not provide for full payment of the 
taxpayer's liability over the life of the agreement. The IRS is 
required to review such partial payment installment agreements 
at least every two years to determine whether the financial 
condition of the taxpayer has significantly changed so as to 
warrant an increase in the value of the payments being made.
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    \251\Sec. 6159.
    \252\Sec. 6331(k).
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    Taxpayers can request an installment agreement by filing 
Form 9465, Installment Agreement Request.\253\ If the request 
for an installment agreement is approved by the IRS, the IRS 
charges a user fee.\254\ Under sections 300.1 and 300.2 of the 
Treasury Regulations, the IRS currently charges $120 for 
entering into an installment agreement.\255\ If the application 
is for a direct debit installment agreement, whereby the 
taxpayer authorizes the IRS to request the monthly electronic 
transfer of funds from the taxpayer's bank account to the IRS, 
the fee is reduced to $52. In addition, regardless of the 
method of payment, the fee is $43 for low-income taxpayers. For 
this purpose, low-income is defined as a person who falls below 
250 percent of the Federal poverty guidelines published 
annually. Finally, there is no user fee if the agreement is for 
a term of 120 days or less (i.e., a short-term agreement).
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    \253\The IRS accepts applications for installment agreements 
online, from individuals and businesses, if the total tax, penalties 
and interest is below $50,000 for the former, and $25,000 for the 
latter.
    \254\31 U.S.C. sec. 9701; Treas. Reg. sec. 300.1. The Independent 
Offices Appropriations Act of 1952 (IOAA), 65 Stat. B70, (June 27, 
1951). A discussion of the IRS practice regarding user fees and a list 
of actions for which fees are charged is included in the Internal 
Revenue Manual. See ``User Fees,'' paragraph 1.32.19 IRM, available at 
https://www.irs.gov/irm/part1/irm_01-032-019.html.
    \255\On August 22, 2016, Treasury issued proposed changes to the 
schedule of user fees for installment agreements, effective January 
2017, based on a biennial review of the costs of administering the 
program. https://www.irs.gov/uac/irs-proposes-revised-fees-for-
installment-agreements. If finalized, the revised schedule imposes user 
fees in the following amounts: $225 for a regular installment 
agreement; $107 for a regular direct debit installment agreement; $149 
for online payment agreement; $31 for a direct debit online payment 
agreement; $89 for a restructured or reinstated agreement; and $43 for 
an agreement with a low-income taxpayer.
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                           REASONS FOR CHANGE

    The Committee believes user fees are a barrier to 
compliance in collection and discourage low-income taxpayers 
from voluntary tax compliance, as many of them do not have the 
means to pay the user fee, even at the reduced rate. Further, 
when negotiating installment agreements, many low-income 
taxpayers are charged the full user fee, despite qualifying for 
the reduced amount.\256\
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    \256\See American Bar Association letter to Mr. Daniel Werfel, 
Acting Commissioner, IRS, ``Comments Concerning User Fees for 
Processing Installment Agreements and Offers in Compromise,'' October 
1, 2013, page 2, available at http://www.americanbar.org/content/dam/
aba/administrative/taxation/policy/100113comments.authcheckdam.pdf.
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                        EXPLANATION OF PROVISION

    The provision generally prohibits increases in the amount 
of user fees charged by the IRS for installment agreements. For 
low-income taxpayers (those whose adjusted gross income, as 
determined for the most recent year for which such information 
is available, does not exceed 250 percent of the applicable 
poverty level as determined by the Secretary), it alleviates 
the user fee requirement in two ways. First, it waives the user 
fee if the low-income taxpayer enters into an installment 
agreement under which the taxpayer agrees to make automated 
installment payments through a debit account. Second, it 
provides that low-income taxpayers who are unable to make 
payments electronically remain subject to the required user 
fee, but the fee is reimbursed upon completion of the 
installment agreement.

                             EFFECTIVE DATE

    The provision applies to agreements entered into on or 
after the date that is 60 days after the date of enactment.

E. Increase Information Sharing to Administer Excise Taxes (sec. 505 of 
                 the bill and sec. 6103(o) of the Code)


                              PRESENT LAW

    Generally, tax returns and return information (``tax 
information'') are confidential and may not be disclosed unless 
authorized in the Code.\257\ Return information includes data 
received, collected or prepared by the Secretary with respect 
to the determination of the existence or possible existence of 
liability of any person under the Code for any tax, penalty, 
interest, fine, forfeiture, or other imposition or offense. 
Criminal penalties apply for the unauthorized inspection or 
disclosure of tax information. Willful unauthorized disclosure 
is a felony under section 7213 and the willful unauthorized 
inspection of tax information is a misdemeanor under section 
7213A. Taxpayers may also pursue a civil cause of action for 
disclosures and inspections not authorized by section 
6103.\258\
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    \257\Sec. 6103(a).
    \258\Sec. 7431.
---------------------------------------------------------------------------
    Section 6103 provides exceptions to the general rule of 
confidentiality, detailing permissible disclosures. Under 
section 6103(h)(1), tax information is open to inspection by or 
disclosure to Treasury officers and employees whose official 
duties require the inspection or disclosure for tax 
administration purposes.
    The heavy vehicle use tax, an annual highway use tax, is 
imposed on the use of any highway motor vehicle that has a 
gross weight of 55,000 pounds or more.\259\ Proof of payment of 
the heavy vehicle use tax must be presented to customs 
officials upon entry into the United States of any highway 
motor vehicle subject to the tax and that has a base in a 
contiguous foreign country.\260\ If the operator of the vehicle 
is unable to present proof of payment of the tax with respect 
to the vehicle, entry into the United States may be 
denied.\261\
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    \259\Sec. 4481(a).
    \260\Treas. Reg. 41.6001-3(a).
    \261\Treas. Reg. 41.6001-3(b).
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    Prior to 2003, customs officials who had responsibility for 
enforcing and/or collecting excise taxes were employees of the 
U.S. Department of the Treasury (``Treasury''). Thus, prior to 
2003, section 6103(h)(1) allowed disclosure of tax information 
by the IRS to these customs officials in the performance of 
their duties. In 2003, U.S. Customs and Border Protection 
became an official agency of the U.S. Department of Homeland 
Security.\262\ At that time, customs officials were transferred 
from Treasury to the Department of Homeland Security.
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    \262\The Homeland Security Act of 2002, Pub. L. No. 107-296 
(``Homeland Security Act''), enacted November 25, 2002 established the 
U.S. Department of Homeland Security. Several agencies were combined 
under this new department.
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    Allowing limited disclosures of tax information will 
facilitate tax administration and improve compliance with the 
heavy vehicle use tax by allowing customs officials to confirm 
payment or nonpayment of the tax.

                        EXPLANATION OF PROVISION

    The provision allows the IRS to share returns and return 
information with employees of U.S. Customs and Border 
Protection whose official duties require such inspection or 
disclosure for purposes of administering and collecting the 
heavy vehicle use tax.

                             EFFECTIVE DATE

    The provision is effective for disclosures made on or after 
the date of enactment.

 F. Repeal of Partnership Technical Terminations (sec. 506 of the bill 
                   and sec. 708(b)(1)(B) of the Code)


                              PRESENT LAW

    Present law provides that a partnership is considered as 
terminated under specified circumstances.\263\ Present law also 
provides rules for the merger, consolidation, or division of a 
partnership.\264\
---------------------------------------------------------------------------
    \263\Sec. 708(b)(1).
    \264\Sec. 708(b)(2). Mergers, consolidations, and divisions of 
partnerships take either an assets-over form or an assets-up form 
pursuant to Treas. Reg. sec. 1.708-1(c).
---------------------------------------------------------------------------
    A partnership is considered as terminated if no part of any 
business, financial operation, or venture of the partnership 
continues to be carried on by any of its partners in a 
partnership.\265\
---------------------------------------------------------------------------
    \265\Sec. 708(b)(1)(A).
---------------------------------------------------------------------------
    A partnership is also considered as terminated if within 
any 12-month period, there is a sale or exchange of 50 percent 
or more of the total interest in partnership capital and 
profits.\266\ This is sometimes referred to as a technical 
termination. Under regulations, the technical termination gives 
rise to a deemed contribution of all the partnership's assets 
and liabilities to a new partnership in exchange for an 
interest in the new partnership, followed by a deemed 
distribution of interests in the new partnership to the 
purchasing partners and the other remaining partners.\267\
---------------------------------------------------------------------------
    \266\Sec. 708(b)(1)(B).
    \267\Treas. Reg. sec. 1.708-1(b)(4).
---------------------------------------------------------------------------
    The effect of a technical termination is the termination of 
the old partnership and the formation of a new partnership. As 
a result of a technical termination, some of the tax attributes 
of the old partnership terminate. Upon a technical termination, 
the partnership's taxable year closes, potentially resulting in 
short taxable years.\268\ Partnership-level elections generally 
cease to apply following a technical termination.\269\ A 
technical termination generally results in the restart of 
partnership depreciation recovery periods.\270\
---------------------------------------------------------------------------
    \268\Sec. 706(c)(1); Treas. Reg. sec. 1.708-1(b)(3).
    \269\Partnership level elections include, for example, the section 
754 election to adjust basis on a transfer or distribution, as well as 
other elections that determine the partnership's tax treatment of 
partnership items. A list of elections can be found at William S. 
McKee, William F. Nelson, and Robert L. Whitmire, Federal Taxation of 
Partnerships and Partners, 4th edition, para. 9.01[7], pp. 9-42--9-44.
    \270\Although section 168(i)(7) provides that for purposes of 
computing the depreciation deduction, generally the transferee 
partnership is treated as the transferor when property is contributed 
in a tax-free transaction governed by section 721, it further provides 
that this rule does not apply in the case of a technical termination. 
Thus, the deemed contribution under Treas. Reg. sec. 1.708-1(b)(4) may 
have the result of restarting depreciation periods applying the current 
adjusted basis of the property deemed contributed.
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    The Committee is concerned that the present-law rule 
providing for technical terminations of partnerships has become 
both a trap for the unwary and a tool subject to manipulation 
for the well-advised. This is because its effects on 
partnership-level tax attributes such as elections, 
depreciation periods, and closing of the partnership taxable 
year can be either unanticipated by the unwary, or planned by 
the well-advised, in the event of a sale or exchange of 
partnership interests. Further, well-advised taxpayers may 
avoid the effects of a technical termination by structuring 
transactions as something other than a sale or exchange of the 
requisite percentage of partnership interests in profits and 
capital in a 12-month period. The Committee believes that tax 
policy or tax administrability purposes served by the 
partnership technical termination rule are outweighed by these 
disadvantages, and therefore, the bill repeals the technical 
termination rule.

                        EXPLANATION OF PROVISION

    The provision repeals the section 708(b)(1)(B) rule 
providing for technical terminations of partnerships.
    The provision does not change the present-law rule of 
section 708(b)(1)(A) that a partnership is considered as 
terminated if no part of any business, financial operation, or 
venture of the partnership continues to be carried on by any of 
its partners in a partnership.

                             EFFECTIVE DATE

    The provision applies to periods beginning after December 
31, 2016. A transition rule provides that in the case of a 
period beginning before January 1, 2017, the present-law 
partnership technical termination rule applies without regard 
to any sale or exchange after December 31, 2016.

 G. Pension Plan Acceleration of PBGC Premium Payment (sec. 507 of the 
                      bill and sec. 4007 of ERISA)


                              PRESENT LAW

    Private defined benefit plans are covered by the Pension 
Benefit Guaranty Corporation (``PBGC'') insurance program, 
under which the PBGC guarantees the payment of certain plan 
benefits, and plans are required to pay annual premiums to the 
PBGC.\271\ PBGC premiums consist of a per-participant premium 
(referred to as ``flat-rate'' premiums) and, in the case of 
single-employer and multiple-employer plans, additional 
premiums (referred to as ``variable-rate'' premiums) based on 
the amount by which the present value of vested benefits under 
the plan exceeds the value of plan assets.
---------------------------------------------------------------------------
    \271\Title IV of ERISA.
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    PBGC premiums for a plan year are generally due by a date 
within that plan year (referred to as the ``premium payment 
year''). In general, premiums are due by the fifteenth day of 
the tenth calendar month that begins on or after the first day 
of the premium payment year.\272\
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    \272\29 C.F.R. sec. 4007.11(a). Under section 502 of the Bipartisan 
Budget Act of 2015, Pub. L. No. 114-74, premiums for plan years 
beginning in 2025 (that is, plan years beginning after December 31, 
2024, and before January 1, 2026) are due by the fifteenth day of the 
ninth calendar month that begins on or after the first day of the 
premium payment year.
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    The Committee believes that accelerating the due date of 
certain variable-rate premiums will strengthen the financial 
status of the PBGC insurance program.

                        EXPLANATION OF PROVISION

    Under the provision, variable-rate premiums for which the 
due date under present law occurs during the period October 1, 
2026, through November 30, 2026, must be paid by September 30, 
2026.
    Effective Date The provision is effective on the date of 
enactment.

                    III. BUDGET EFFECTS OF THE BILL


                         A. Committee Estimates

    In compliance with paragraph 11(a) of rule XXVI of the 
Standing Rules of the Senate and section 308(a)(1) of the 
Congressional Budget and Impoundment Control Act of 1974, as 
amended (the ``Budget Act''), the following statement is made 
concerning the estimated budget effects of the revenue 
provisions of the Retirement Enhancement and Savings Act of 
2016, as reported.
    The bill is estimated to have the following effects on 
Federal budget receipts for fiscal years 2017-2026:


                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 the bill relating to 
the Tax Court and PBGC premiums for CSEC plans involve new or 
increased budget authority.

Tax expenditures

    In compliance with section 308(a)(1) of the Budget Act, the 
Committee states that certain provisions affect the levels of 
tax expenditures, as shown in the revenue table in Part A.

            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 statement from the 
Congressional Budget Office 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 Committee states that, with a 
majority present, the Retirement Enhancement and Savings Act of 
2016, was ordered favorably reported on September 21, 2016, by 
a roll call vote of 26 ayes and 0 nays. The vote was as 
follows:
    Ayes: Hatch, Grassley, Crapo, Roberts, Enzi, Cornyn, Thune 
(proxy), Burr (proxy), Isakson, Portman, Toomey (proxy), Coats, 
Heller, Scott, Wyden, Schumer, Stabenow, Cantwell, Nelson, 
Menendez, Carper, Cardin, Brown, Bennet, Casey, Warner.

                 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.

Impact on individuals and businesses and personal privacy

    The bill includes various provisions relating to tax-
favored retirement savings, including provisions designed to 
expand access to employer-sponsored plans and IRAs, to 
encourage greater participation in tax-favored arrangement, to 
preserve funds held in tax-favored form, and to help ensure 
that savings are sufficient to last through retirement. The 
bill also contains provisions relating to the U.S. Tax Court, 
benefits provided to emergency services volunteers, stock-based 
compensation provided to employees of closely held businesses, 
and tax compliance. Some provisions may involve additional 
record-keeping or reporting by individuals or businesses 
wishing to avail themselves of favorable tax treatment. A 
number of the provisions in the bill are designed to reduce the 
administrative burdens associated with tax-favored savings and 
other employee benefits.
    The provisions of the bill do not impact personal privacy.

                     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 impose any Federal private sector or 
intergovernmental mandates on State, local, or tribal 
governments within the meaning of the Unfunded Mandates Reform 
Act of 1995.

                       C. Tax Complexity Analysis

    Section 4022(b) of the Internal Revenue Service Reform and 
Restructuring Act of 1998 (``IRS Reform Act'') requires the 
staff of the Joint Committee on Taxation (in consultation with 
the Internal Revenue Service and the Treasury Department) 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 
and has widespread applicability to individuals or small 
businesses. The staff of the Joint Committee on Taxation has 
determined that there are no provisions that are of 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).

                                  [all]