II
109th CONGRESS
1st Session
S. 547
IN THE SENATE OF THE UNITED STATES
March 8, 2005
Mr. Thomas (for himself and Mr. Kyl) introduced the following bill; which was read twice and referred to the Committee on Finance
A BILL
To amend the Internal Revenue Code of 1986 to provide for employer retirement savings accounts, and for other purposes.
Employer Retirement Savings Accounts
In general
Subpart A of part 1 of subchapter D of chapter 1 of the Internal Revenue Code of 1986 is amended by inserting after section 401 the following new section:
Employer Retirement Savings Accounts
In general
A defined contribution plan shall not fail to meet the requirements of section 401(a) merely because the plan includes an employer retirement savings account arrangement.
Employer retirement savings account arrangement
An employer retirement savings account arrangement is any arrangement which is part of a plan which meets the requirements of section 401(a)—
under which a covered employee may elect to have the employer make payments as contributions to a trust under the plan on behalf of the employee, or to the employee directly in cash,
under which amounts held by the trust which are attributable to employer contributions made pursuant to the employee’s election—
may not be distributable to participants or other beneficiaries earlier than—
severance from employment, death, or disability,
an event described in subsection (g),
the attainment of age 59½, or
upon hardship of the employee, and
will not be distributable merely by reason of the completion of a stated period of participation or the lapse of a fixed number of years,
which provides that an employee’s right to the employee's accrued benefit derived from employer contributions made to the trust pursuant to the employee's election is nonforfeitable, and
which does not require, as a condition of participation in the arrangement, that an employee complete a period of service with the employer (or employers) maintaining the plan extending beyond the period permitted under section 410(a)(1) (determined without regard to subparagraph (B)(i) thereof).
Application of nondiscrimination standards
Contribution percentage requirement
An arrangement shall not be treated as an employer retirement savings account arrangement for any plan year unless—
the contribution percentage for eligible highly compensated employees for the plan year does not exceed 200 percent of such percentage for all other eligible employees for the preceding plan year, or
the contribution percentage of nonhighly compensated employees for the preceding plan year exceeded 6 percent.
Alternative methods of meeting nondiscrimination requirements
In general
An arrangement shall be treated as meeting the requirements of paragraph (1)(A) if such arrangement—
meets the contribution requirements of subparagraph (B), and
meets the notice requirements of subparagraph (D).
Contribution requirement
The requirements of this subparagraph are met if, under the arrangement, the employer is required to make contributions to a defined contribution plan on behalf of each eligible employee who is not a highly compensated employee in an amount equal to at least 3 percent of the employee’s compensation. For purposes of this subparagraph, elective deferrals and employee contributions shall not be taken into account in determining the amount of contributions the employer makes to the plan.
Special rules for matching contributions
In general
If an employer takes matching contributions into account for purposes of subparagraph (B), the requirements of such subparagraph shall be treated as met only if the matching contributions on behalf of each employee who is not a highly compensated employee are equal to 50 percent of the elective deferrals of the employee to the extent that such elective deferrals do not exceed 6 percent of the employee’s compensation.
Alternative plan designs
If the rate of any matching contribution with respect to any rate of elective deferral is not equal to the percentage required under clause (i), an arrangement shall not be treated as failing to meet the requirements of clause (i) if—
the rate of an employer’s matching contribution does not increase as an employee’s rate of elective contributions increases, and
the aggregate amount of matching contributions at such rate of elective contribution is at least equal to the aggregate amount of matching contributions which would be made if matching contributions were made on the basis of the percentages described in clause (i).
Rate for highly compensated employees
The requirements of this subparagraph are not met if, under the arrangement, the rate of matching contribution with respect to any elective deferral of a highly compensated employee at any rate of elective deferral is greater than that with respect to an employee who is not a highly compensated employee.
Notice requirement
An arrangement meets the requirements of this subparagraph if, under the arrangement, each employee eligible to participate is, within a reasonable period before any year, given written notice of the employee’s rights and obligations under the arrangement which—
is sufficiently accurate and comprehensive to apprise the employee of such rights and obligations, and
is written in a manner calculated to be understood by the average employee eligible to participate.
Other requirements
Withdrawal and vesting restrictions
An arrangement shall not be treated as meeting the requirements of subparagraph (B) unless the requirements of paragraphs (2) and (3) of subsection (b) are met with respect to all employer contributions (including matching contributions) taken into account in determining whether the requirements of subparagraph (B) are met.
Social security and similar contributions not taken into account
An arrangement shall not be treated as meeting the requirements of subparagraph (B) unless such requirements are met without regard to section 401(l), and, for purposes of section 401(l), employer contributions under subparagraph (B) shall not be taken into account.
Other plans
An arrangement shall be treated as meeting the requirements of subparagraph (B) if any other plan maintained by the employer meets such requirements with respect to employees eligible under the arrangement.
Contribution percentage
For purposes of paragraph (1), the contribution percentage for an eligible employee for a specified group of employees for a plan year shall be the average of the ratios (calculated separately for each employee in such group) of—
the sum of the elective deferrals, matching contributions, employee contributions, and qualified nonelective contributions paid under the plan on behalf of each such employee for such plan year, to
the employee’s compensation for such plan year.
Special rules
For purposes of this subsection—
Multiple arrangements
If 2 or more plans which include employer retirement savings account arrangements are considered as 1 plan for purposes of section 401(a)(4) or 410(b), all such arrangements included in such plans shall be treated as 1 arrangement.
Employees in more than 1 arrangement
If any highly compensated employee is a participant under 2 or more employer retirement savings account arrangements of the employer, for purposes of determining the contribution percentage with respect to such employee, all such arrangements shall be treated as 1 arrangement.
Use of current year
An employer may elect to apply paragraph (1) (A) or (B) by using the plan year rather than the preceding plan year. An employer may change such an election only with the consent of the Secretary.
1st plan year
In the case of the first plan year of any plan (other than a successor plan), the amount taken into account as the contribution percentage of nonhighly compensated employees for the preceding plan year shall be—
3 percent, or
if the employer makes an election under this clause, the contribution percentage of nonhighly compensated employees determined for such first plan year.
Special rule for early participation
If an employer elects to apply section 410(b)(4)(B) in determining whether an employer retirement savings account arrangement meets the requirements of section 410(b)(1), the employer may, in determining whether the arrangement meets the requirements of this subsection, exclude from consideration all eligible employees (other than highly compensated employees) who have not met the minimum age and service requirements of section 410(a)(1)(A).
Exceptions
Governmental plans
A governmental plan (within the meaning of section 414(d)) maintained by a State or local government or political subdivision thereof (or agency or instrumentality thereof) shall be treated as meeting the requirements of this subsection.
Tax exempt plans
In general
A plan not described in subparagraph (A) which is maintained by an organization described in section 501(c)(3) shall be treated as meeting the requirements of this subsection for any plan year if the plan provides that all employees of such organization may elect to have the employer make contributions of more than $200 pursuant to a salary reduction agreement if any employee of the organization may elect to have the organization make contributions pursuant to such agreement.
Exception
Clause (i) shall not apply to any plan if under the plan—
matching contributions may be made on behalf of any employee, or
an employee may make contributions other than elective deferrals.
Exclusion
For purposes of clause (i), there may be excluded any employee who is—
a participant in another employer retirement savings account arrangement of the organization,
a nonresident alien described in section 410(b)(3)(C), or
subject to the conditions applicable under section 410(b)(4), a student performing services described in section 3121(b)(10) or an employee who normally works less than 20 hours per week.
Coordination with subsection (a)(4)
A cash or deferred arrangement shall be treated as meeting the requirements of subsection (a)(4) with respect to contributions if the requirements of paragraph (1) are met.
Other requirements
For purposes of this section—
Benefits (other than matching contributions) must not be contingent on election to defer
An employer retirement savings account arrangement of any employer shall not be treated as such an arrangement if any other benefit is conditioned (directly or indirectly) on the employee electing to have the employer make or not make contributions under the arrangement in lieu of receiving cash. The preceding sentence shall not apply to any matching contribution made by reason of such an election.
Coordination with other plans
Any employer contribution made pursuant to an employee’s election under an employer retirement savings account arrangement shall not be taken into account for purposes of determining whether any other plan meets the requirements of section 401(a) or 410(b). This paragraph shall not apply for purposes of determining whether a plan meets the average benefit requirement of section 410(b)(2)(A)(ii).
Definitions
For purposes of this section—
Eligible employee
The term eligible employee means any employee who is eligible to benefit under the employer retirement savings account arrangement.
Highly compensated employee
For purposes of this subsection, the term highly compensated employee has the meaning given such term by section 414(q).
Matching contribution
The term matching contribution means—
any employer contribution made to a defined contribution plan on behalf of an employee on account of an employee contribution made by such employee, and
any employer contribution made to a defined contribution plan on behalf of an employee on account of an employee’s elective deferral.
Elective deferral
The term elective deferral means any employer contribution described in section 402(g)(3).
Qualified nonelective contributions
The term qualified nonelective contribution means any employer contribution (other than a matching contribution) with respect to which—
the employee may not elect to have the contribution paid to the employee in cash instead of being contributed to the plan, and
the requirements of paragraphs (2) and (3) of subsection (b) are met.
Compensation
The term compensation has the meaning given such term by section 414(s).
Arrangement not disqualified if excess contributions distributed
In general
An employer retirement savings account arrangement shall not be treated as failing to meet the requirements of subsection (c)(1)(A) for any plan year if, before the close of the following plan year—
the amount of the excess contributions for such plan year (and any income allocable to such contributions) is distributed, or
to the extent provided in regulations, the employee elects to treat the amount of the excess contributions as an amount distributed to the employee and then contributed by the employee to the plan.
Excess contributions
For purposes of paragraph (1), the term excess contributions means, with respect to any plan year, the excess of—
the aggregate amount of employer contributions actually paid over to the trust on behalf of highly compensated employees for such plan year, over
the maximum amount of such contributions permitted under the limitations of subsection (c)(1)(A) (determined by reducing contributions made on behalf of highly compensated employees in order of the contribution percentages beginning with the highest of such percentages).
Method of distributing excess contributions
Any distribution of the excess contributions for any plan year shall be made to highly compensated employees on the basis of the amount of contributions by, or on behalf of, each of such employees.
Additional tax under Section 72(t) not to apply
No tax shall be imposed under section 72(t) on any amount required to be distributed under this subsection.
Treatment of matching contributions forfeited by reason of excess deferral or contribution
For purposes of subsection (b)(3), a matching contribution shall not be treated as forfeitable merely because such contribution is forfeitable if the contribution to which the matching contribution relates is treated as an excess contribution under paragraph (2) or an excess deferral under section 402(g)(2)(A).
Cross reference
For excise tax on certain excess contributions, see section 4979.
Distributions upon termination of plan
In general
An event described in this subsection is the termination of the plan without establishment or maintenance of another defined contribution plan (other than an employee stock ownership plan as defined in section 4975(e)(7)).
Distributions must be lump sum distributions
In general
A termination shall not be treated as described in paragraph (1) with respect to any employee unless the employee receives a lump sum distribution by reason of the termination.
Lump-sum distribution
For purposes of this paragraph, the term lump-sum distribution has the meaning given such term by section 402(e)(4)(D) (without regard to subclauses (I), (II), (III), and (IV) of clause (i) thereof). Such term includes a distribution of an annuity contract from—
a trust which forms a part of a plan described in section 401(a) and which is exempt from tax under section 501(a), or
an annuity plan described in section 403(a).
Special rules for small employers
In general
An arrangement maintained by an eligible employer shall not fail to meet the requirements of this section merely because contributions under the arrangement on behalf of any employee are made to an individual retirement plan (as defined under section 7701(a)(37)) established on behalf of the employee.
Eligible employer
For purposes of paragraph (1), the term eligible employer means, with respect to any year, an employer which had no more than 10 employees who received at least $5,000 of compensation from the employer for the preceding year. An eligible employer who establishes and maintains an arrangement under this subsection for 1 or more years and who fails to be an eligible employer for any subsequent year shall be treated as an eligible employer for the 2 years following the last year the employer was an eligible employer. If such failure is due to any acquisition, disposition, or similar transaction involving an eligible employer, the preceding sentence shall not apply.
Regulations
The Secretary shall prescribe such regulations as may be necessary to carry out the purposes of this section, including regulations permitting appropriate aggregation of plans and contributions.
Transition rules
Deemed ersas
Any arrangement which, as of December 31, 2005—
is part of a plan meeting the requirements of section 401(a), and
is—
a qualified cash or deferred arrangement (as defined in section 401(k)(2)), or
subject to the requirements of section 401(m),
Electable ersas
In general
If an employer makes an election under this paragraph with respect to any applicable arrangement, such arrangement shall be treated as an employer retirement savings account arrangement and subject to the requirements of this title applicable to such an arrangement for plan years beginning after December 31, 2005.
Applicable arrangement
For purposes of subparagraph (A), the term applicable arrangement means an arrangement which, as of December 31, 2005, is—
an arrangement under which amounts are contributed by an individual’s employer for an annuity contract described in section 403(b),
an eligible deferred compensation plan (within the meaning of section 457(b)) maintained by an eligible employer described in section 457(e)(1)(A),
a simplified employee pension (within the meaning of section 408(k)) for which an election is in effect under paragraph (6) thereof, or
a simple retirement account (within the meaning of section 408(p).
.
Elective deferrals
Section 402 of such Code is amended—
in subsection (e)(3), by inserting , an employer
retirement savings account arrangement (as defined in section 401A(b)),
after section 401(k)(2))
, and
in subsection (g)(3)(A), by inserting , or an employer
retirement savings account arrangement (as defined in section 401A(b)),
before to the extent
.
Termination of contributions to other plans
401(k) plans
Section 401(k) of such Code is amended by adding at the end the following new paragraph:
Termination
This subsection shall not apply to any plan year beginning after December 31, 2005.
.
403(b) annuity contracts
Section 403(b) of such Code is amended by adding at the end the following new paragraph:
Termination
No elective deferral (as defined in section 402(g)(3)) may be contributed under this subsection by an employer, and no amount may be transferred under an eligible rollover, for an annuity contract after December 31, 2006.
.
Governmental 457 plans
Section 457 of such Code is amended by adding at the end the following new subsection:
Termination
No amount may be deferred under this subsection under a plan maintained by an eligible employer described in subsection (e)(1)(A), and no amount may be transferred under an eligible rollover to an eligible deferred compensation plan maintained by such an employer, after December 31, 2006.
.
Sarseps
Subparagraph (H) of section 408(k)(6) of such Code is amended by
adding at the end the following new sentence: No amount may be
contributed under this paragraph to a simplified employee pension by an
employer, and no amount may be transferred to a simplified employee pension
maintained under this paragraph under an eligible rollover, after December 31,
2006.
.
Simple iras
Section 408(p) of such Code is amended by adding at the end the following new paragraph:
Termination
No amount may be contributed under this paragraph to a simple retirement account after December 31, 2006.
.
Other conforming changes
Section 401 of such Code is amended by striking subsection (m).
Section 7701(j) of such Code (relating to tax treatment of Federal Thrift Savings Fund) is amended—
in paragraph
(1)(C), by striking section 401(k)(4)(B)
and inserting
section 401A(d)(1)
, and
in paragraph (2),
by striking section 401(k)
and inserting section
401A
.
The Secretary of the Treasury shall, not later than 90 days after the date of the enactment of this Act, submit such technical and other conforming changes as are necessary to carry out the amendments made by this section.
Clerical amendment
The table of sections for subpart A of part 1 of subchapter D of chapter 1 of such Code is amended by inserting after the item relating to section 401 the following new item:
Sec. 401A. Employer Retirement Savings Accounts.
.
Effective date
The amendments made by this section shall apply to years beginning after December 31, 2005.
Provisions relating to plan amendments
In general
If this subsection applies to any plan or contract amendment—
such plan or contract shall be treated as being operated in accordance with the terms of the plan during the period described in paragraph (2)(C)(i), and
except as provided by the Secretary of the Treasury, such plan shall not fail to meet the requirements of section 401A of the Internal Revenue Code of 1986 by reason of such amendment.
Amendments to which Section applies
In general
This subsection shall apply to any amendment to any plan or annuity contract which is made—
pursuant to any amendment made by this section, or pursuant to any regulation issued by the Secretary of the Treasury or the Secretary of Labor under this section, and
on or before the last day of the first plan year beginning on or after January 1, 2007.
Governmental plan
In the case of a governmental plan (as defined in section 414(d)
of the Internal Revenue Code of 1986), subparagraph (A) shall be applied by
substituting 2009
for 2007
.
Conditions
This subsection shall not apply to any amendment unless—
during the period—
beginning on the date the legislative or regulatory amendment described in subparagraph (A)(i) takes effect (or in the case of a plan or contract amendment not required by such legislative or regulatory amendment, the effective date specified by the plan), and
ending on the date described in subparagraph (A)(ii) (or, if earlier, the date the plan or contract amendment is adopted), the plan or contract is operated as if such plan or contract amendment were in effect; and
such plan or contract amendment applies retroactively for such period.