[Senate Report 114-375]
[From the U.S. Government Publishing Office]
Calendar No. 670
114th Congress } { Report
SENATE
2d Session } { 114-375
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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.
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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
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\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).
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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,
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\38\Any trustee must meet the requirements under the Code to be an
IRA trustee.
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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\
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\39\A pooled employer plan also does not include a multiemployer
plan.
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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.
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\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.
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\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).
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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\
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\46\Sec. 401(k)(3).
\47\Sec. 401(k)(8).
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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.
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\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).
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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).
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\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.
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\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.
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\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.
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\60\Sec. 52 (a) or (b) and 414(m) or (o).
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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).
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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.
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\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.
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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).
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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\
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\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.
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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\
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\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.
---------------------------------------------------------------------------
\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\
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\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).
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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\
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\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\
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\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.
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\98\Secs. 402(c), 402A(c)(3), 403(b)(8) and 457(e)(16).
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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.
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\100\Sec. 402A.
\101\Sec. 403(b)(7).
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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.
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\102\Treas. Reg. sec. 1.403(b)-10(a).
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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\
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\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).
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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\
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\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.
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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.
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\108\Treas. Reg. sec. 1.408-2(e).
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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\
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\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.
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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.''
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\111\ Sec. 403(b)(1)(D) and (12).
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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\
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\112\ These individuals are described in section 414(e)(3)(B).
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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\
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\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).
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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\
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\118\ Treas. Reg. sec. 1.401(k)-1(e)(2)(ii).
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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\
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\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.
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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\
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\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.
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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.
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\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.
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\125\78 Fed. Reg. 26727 (May 8, 2013).
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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\
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\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).
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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.
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\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).
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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.
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\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.
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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.
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\143\Other testing options available under present law are also
available for this purpose.
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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
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\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.
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\145\Other testing options available under present law are also
available for this purpose.
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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.
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\147\For this purpose, consistency is not required with respect to
employees who were subject to different benefit formulas under the
defined benefit plan.
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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\
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\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.
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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.
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\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'').
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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.
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\158\These are the premium rates that applied to single-employer
and multiple-employer plans in 2005 and are not subject to indexing.
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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\
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\159\Sec. 7441.
\160\Sec. 7443(c).
\161\Secs. 7447 and 7448.
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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.
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\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.
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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\
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\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.
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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.
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\166\See, for example, S. Rep. No. 91-552, at 303 (1969).
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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\
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\167\These changes apply also to special trial judges who elect
into the Tax Court survivors' annuity plan.
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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\
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\168\Sec. 7443A.
\169\Sec. 7456(c) deals with contempt authority.
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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'').
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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.
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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.
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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.
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\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.
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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.
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\209\Sec. 4974.
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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).
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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).
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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\
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\217\Treas. Reg. sec. 1.401(a)(9)-5, A-5(b).
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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\
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\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.
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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\
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\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.
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\220\Treas. Reg. sec. 1.401(a)(9)-6, A-14.
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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.
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\221\Sec. 401(b).
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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.''
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\222\Sec. 411(d)(6) and ERISA sec. 204(g).
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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.
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\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.
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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.
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\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)).
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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\
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\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.
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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.
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\227\Sec. 7702B(c)(2).
\228\Section 7702B(c) only requires this period to be at least 90
days.
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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.
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\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.
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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\
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\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\
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\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\
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\239\Sec. 6651(a)(1).
\240\Sec. 6651(e).
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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.
---------------------------------------------------------------------------
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).
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
\248\Sec. 6652(d)(2).
---------------------------------------------------------------------------
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).
---------------------------------------------------------------------------
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.
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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.
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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\
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\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).
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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\
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\265\Sec. 708(b)(1)(A).
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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\
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\266\Sec. 708(b)(1)(B).
\267\Treas. Reg. sec. 1.708-1(b)(4).
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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\
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\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.
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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.
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\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.
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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).
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