Order Code 98-171 EPW
CRS Report for Congress
Received through the CRS Web
Retirement Plans With Individual Accounts:
Federal Rules and Limits
Updated May 18, 2000
James R. Storey
Specialist in Social Legislation
Paul Graney
Analyst in Social Legislation
Domestic Social Policy Division
Congressional Research Service ˜ The Library of Congress

Retirement Plans With Individual Accounts:
Federal Rules and Limits
Summary
As the federal income tax grew in importance during the 1940s, 1950s, and
1960s, employers devised ways in which employees could defer receipt of a part of
their pay to postpone taxation of that income. These salary deferrals often are
intended to be used in retirement, and most of these plans penalize cash withdrawals
before a certain age, except in case of death, disability, or financial hardship. Thus,
they often are called salary reduction retirement plans. Use of salary reduction
retirement plans is widespread. In 1993, 37% of civilian nonagricultural wage and
salary employees were covered by these plans, an increase from 27% in 1988.
The manner in which deferred compensation plans were initially established
varied among employment sectors. Business firms’ plans differed from those of
educational organizations, which in turn differed from government plans. The various
plan types were codified over the years as Congress responded to regulatory
initiatives by the Internal Revenue Service and to concerns about loss of revenue and
the fairness and integrity of these plans. The resulting statutes reflected the unique
history of each plan type. Congress began to move toward more uniformity in the
rules governing the different types of salary reduction plans in 1986 with passage of
the Tax Reform Act of 1986 (P.L. 99-514), which contained several provisions that
reduced disparities in plan rules. In 1996, Congress made additional changes in plan
rules in the Small Business Job Protection Act of 1996 (P.L. 104-188), and further
changes were made a year later by the Taxpayer Relief Act of 1997 (P.L. 105-34).
This report describes each type of salary reduction retirement plan authorized by
federal law: individual retirement accounts (IRAs), §401(k) plans, the Federal
Employees’ Thrift Savings Plan, §403(b) plans, §457 plans, salary reduction simplified
employee pension (SARSEP) plans, and savings incentive match plans for employees
of small employers (SIMPLE). The rules governing plans are then presented in regard
to: eligibility, vesting, tax treatment of contributions, limits on contributions, limits
on investments, withdrawal options, and tax treatment of withdrawals. Exceptions
to the general rules are noted. This report is updated annually.
An employee becomes eligible to participate in a plan once minimum
requirements regarding age and length of service are met. An employee’s
contributions must be vested (i.e., become the individual’s legal property) at once;
employer contributions need not be vested until a tenure requirement has been met,
which generally cannot exceed 5 years. Contributions to these plans and the
investment earnings they accrue usually are not subject to the federal income tax until
the funds are withdrawn. Annual contributions are limited, the ceilings varying by
plan type. There are some statutory controls on allowable types of investments. An
individual accountholder often may borrow from vested funds. Withdrawals may be
made in the form of annuities, lump sums, or as untaxed rollovers into other tax-
deferred plans.

Contents
Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Summary Description of Retirement Plans With Individual Accounts . . . . . . . . . 2
Individual Retirement Accounts (IRAs) . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Traditional IRAs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Roth IRAs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Section 401(k) Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
The Federal Employees’ Thrift Savings Plan . . . . . . . . . . . . . . . . . . . . . . . 6
Section 403(b) Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Section 457 Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Salary Reduction Arrangements in Simplified Employee Pension Plans
(SARSEPs) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Savings Incentive Match Plans for Employees
of Small Employers (SIMPLE) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Plan Rules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Eligibility Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Vesting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Tax Treatment of Contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Limits on Contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Limits on Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Withdrawal Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Rollovers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Annuities and Cash Withdrawals . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Required Minimum Distributions . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Tax Treatment of Withdrawals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
General Rules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Early Withdrawals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Late Withdrawals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Large Distributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Income Averaging . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Appendix A: Comparison of Federal Rules
for Retirement Plans by Plan Type . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Appendix B: Abbreviations Used in This Report . . . . . . . . . . . . . . . . . . . . . . . 41
Appendix C: Location of Statutory Provisions
For Retirement Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43

List of Tables
Table 1. Determinants of Eligibility to Deduct Contribution
to Traditional IRA in 2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Table 2. Limits Defining Highly Compensated Group, 1987-2000 . . . . . . . . . . 10
Table 3. Minimum Requirements for Vesting of Employer Contributions to Qualified
Retirement Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Table 4. Limits on Salary Deferrals by Highly Compensated
Employees Under the Nondiscrimination Test . . . . . . . . . . . . . . . . . . . . . 14
Table 5. Limits on Annual Compensation That Can Be Used to
Determine Plan Contributions, 1989-2000 . . . . . . . . . . . . . . . . . . . . . . . . 15
Table 6. Limits on Annual Contributions to Salary Deferral Plans
by Plan Type, 2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Table 7. Annual Dollar Limits on Elective Salary Deferrals,
1975-2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Table 8. Limits on Plan Distributions, 1987-1997 . . . . . . . . . . . . . . . . . . . . . . 24
Table A-1. Eligibility Rules by Retirement Plan Type . . . . . . . . . . . . . . . . . . . 26
Table A-2. Rules for Employee Contributions by Retirement Plan Type . . . . . 29
Table A-3. Employer Contribution Rules by Retirement Plan Type . . . . . . . . . 31
Table A-4. Nondiscrimination and Integration Rules by Retirement Plan Type
33
Table A-5. Plan Distribution Rules by Retirement Plan Typea . . . . . . . . . . . . . 35
Table A-6. Rulesa for Reporting, Disclosure, Fiduciary Responsibility and Allowable
Investments by Retirement Plan Type . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38

Retirement Plans With Individual Accounts:
Federal Rules and Limits
Background
Numerous tax incentives have been established in federal law for voluntary
retirement saving. Each type of incentive plan was begun for a specific purpose with
its own set of rules. While the different plan types shared one trait in common — a
deferral of current income taxation on salary contributed to a retirement plan — rules
governing eligibility, contributions, and withdrawals varied significantly, reflecting the
variety of practices that had developed among employers in different sectors of the
economy. The Tax Reform Act of 1986 (P.L. 99-514) introduced a greater degree
of uniformity to the rules for the various plan types and made their use for
nonretirement purposes less attractive. Extensive changes were also made by the
Small Business Job Protection Act of 1996 (P.L. 104-188) to encourage wider plan
coverage.1 Further changes were made in the Taxpayer Relief Act of 1997 (P.L. 105-
34).2
This report provides a general description of the rules under which individual
account retirement saving plans operate. First, it describes each of the following plan
types:
! individual retirement accounts (IRAs);
! §401(k) plans;
! the Federal Employees’ Thrift Savings Plan;
! §403(b) plans;
! §457 plans;
! salary reduction arrangements in simplified employee pension
(SARSEP) plans; andsavings incentive match plans for employees of
small employers (SIMPLE).
The report then summarizes the federal rules for these plans. These rules, which vary
by type of plan, set standards that plans must meet to qualify for tax advantages. A
plan’s specific rules may differ from those described here so long as they are not in
conflict with the relevant federal requirements.
1 The pension provisions of this law are described in: CRS Report 95-1028, Pension
Proposals for Simplification and Increased Access
, by James R. Storey.
2 See CRS Report 97-796, Changes Made by the Taxpayer Relief Act of 1997, by James R.
Storey. Also, see CRS Report 97-935, Individual Retirement Accounts (IRAs): Changes
Made by the Taxpayer Relief Act of 1997
, by James R. Storey.

CRS-2
Readers interested in a brief summary of how a particular type of plan works will
find that information in the next section. For more detail on specific provisions,
readers should locate topics of interest in the Plan Rules sections, which set forth the
general rules regarding eligibility, vesting, contribution limits and tax treatment,
investment limits, withdrawal options, and taxation of withdrawals. Exceptions to the
general rules pertaining to each plan type are then noted.
Appendix A compares the rules in chart form by plan type. Appendix B
identifies the abbreviations used in this report. Appendix C specifies the sections of
federal statutes in which the various rules are located.
Summary Description of Retirement Plans With
Individual Accounts
If an employer offers an individual account retirement plan, employees may
instruct the employer to withhold payment of a specified portion of current salary for
investment in the plan. The employer often contributes to the plan as well.
Employees usually have a choice of several investment vehicles within the plan to
which they may direct contributed funds.
Salary deferral arrangements are intended to help employees accumulate assets
that can be used to provide retirement income. For most employees, the income from
these plans will supplement benefits from Social Security. Many are covered also by
an employer-sponsored defined benefit pension plan and/or another defined
contribution plan,3 but, for 44% of workers covered by a §401(k) plan, that plan is the
only tax-deferred retirement arrangement made available by employers to employees.4
To participate in a salary deferral plan, an employee elects to give up a part of
current wages and have those foregone earnings contributed to the plan by the
employer. These “elective” contributions often are supplemented by “matching”
and/or “nonelective” contributions from the employer. Employee and employer
contributions that are in compliance with the law are not subject to the federal income
tax in the year that the funds are contributed. Investment earnings on contributions
also receive tax-deferred treatment.5 However, when tax-deferred funds eventually
3 A defined benefit plan promises a retirement benefit amount that is usually determined by
salary level and length of service. A defined contribution plan specifies the contributions to
be made, but the benefits depend on investment performance. Salary reduction plans are
defined contribution plans.
4 The proportion with only a §401(k) plan rose from 41% in 1994 to 44% in 1995. Source:
U.S. Dept. of Labor. Pension and Welfare Benefits Administration. Abstract of 1995 Form
5500 Annual Reports. Private Pension Plan Bulletin, no. 8, spring 1999. (Hereafter cited
as Pension and Welfare Benefits Administration, Private Pension Plan Bulletin)
5 When an amount of income is “tax-deferred,” that amount is not included in the taxpayer’s
adjusted gross income for the year of deferral. Although the mechanism through which
deferral is achieved may be called a “deduction” or an “exclusion,” the amount on which tax
(continued...)

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are withdrawn from the plan, they are then subject to the federal income tax.6 If
withdrawals are premature or tardy, as defined in tax law, special excise taxes may
also apply.
Tax deferral offers two possible advantages to the employee. First, compound
interest accrues on the portion of savings that would have been used to pay taxes,
thereby yielding a larger after-tax asset in retirement. Second, the employee may be
in a lower tax bracket in retirement and pay a smaller tax than would have been due
if tax had been paid at the time the deferred wages were actually earned. (This second
advantage became less important after the Tax Reform Act of 1986 lowered tax rates
and reduced the number of tax brackets.) Except for New Jersey and Pennsylvania,
states with income taxes follow federal law on tax deferral for these plans. Thus,
federal tax advantages are reinforced by state tax laws for most participants.
To obtain these potential tax advantages, an employee must be willing to give
up the current use of the wages contributed to the plan and abide by the plan’s rules
regarding investment and withdrawal. Rules on withdrawals were tightened for most
types of plans by the Tax Reform Act of 1986.
A brief description of each plan type is given below.
Individual Retirement Accounts (IRAs)
Individual retirement accounts (IRAs) were authorized by the Employee
Retirement Income Security Act (ERISA) of 1974 (P.L. 93-406) for persons not
covered by employer pension plans. Eligibility was broadened to all employed
individuals and their spouses by the Economic Recovery Tax Act of 1981 (P.L. 97-
34). The Tax Reform Act of 1986 restricted the tax advantage of IRAs for certain
taxpayers with income above specified levels. The Taxpayer Relief Act of 1997
relaxed those restrictions somewhat and authorized Roth IRAs, which are funded
from after-tax contributions and provide tax-free income in retirement. The IRA is
not a true salary deferral plan, since it is available to workers without any involvement
of the employer and does not directly reduce the salary received by the worker.
However, IRAs are included in this report since they are similar to salary deferral
plans (i.e., they are based on elective contributions from tax filers with some earned
income) and they serve as the investment vehicle for two types of employer plans
(SEPs and SIMPLE IRAs).
In 1985, 16.2 million tax filing units (19% of all units with wage or salary
income) reported IRA deductions, but the number of accountholders actively
5 (...continued)
is deferred eventually will be subject to taxation when it is withdrawn from the retirement
plan.
6 An exception is the Roth IRA, which accepts only after-tax contributions but permits tax-
free withdrawals of both principal and investment earnings.

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contributing fell after the 1986 law took effect.7 Only 4.1 million tax filers (4% of all
units with wage or salary income) reported IRA contributions for 1997. Participation
rates fell at all income levels, the decline being greater, the higher the income.
Traditional IRAs. Anyone with wage income can contribute the lesser of
$2,000 a year or 100% of annual earnings to an IRA. An IRA can be established for
a nonworking spouse, whose annual contribution cannot exceed the lesser of (1)
$2,000, or (2) 100% of the couple’s combined earnings less the working spouse’s
IRA contribution.8
While any worker (and spouse) can contribute to an IRA, contributions are
assured of income tax deferral only if at least one of two conditions is met: (1) the
contributor is not eligible to participate in an employer-sponsored retirement plan;9
or (2) the contributor has adjusted gross income (AGI) below $32,000 ($52,000 for
a joint filer). A deduction for contributions of less than $2,000 is allowed if AGI falls
between this level and $42,000 ($62,000 for a joint filer).10 These rules are arrayed
in Table 1. Nondeductible contributions are tax-free when withdrawn, but deductible
contributions are taxed upon withdrawal. Taxes are deferred on IRA investment
earnings until withdrawal occurs, whether or not the contributions that produced
these investment earnings were deductible.
Roth IRAs. A Roth IRA can receive after-tax contributions of up to $2,000
annually. Qualified withdrawals are tax free. Contributions up to $2,000 are allowed
only for taxpayers with AGI not in excess of $95,000 ($150,000 for joint filers).
Allowable contributions are phased out at an AGI of $110,000 ($160,000 for joint
filers). Traditional IRAs can be converted to Roth IRAs by payment of income tax
on the IRA assets that have not been taxed. (For conversions made during 1998, this
tax liability can be averaged over 4 years.) Eligibility for conversion is limited to tax
filing units with AGI not in excess of $100,000.
7 U.S. Internal Revenue Service. Statistics of Income. Washington, various years.
8 Before 1997, the combined annual contribution to the IRAs of a working and a nonworking
spouse could not exceed $2,250. This provision was changed by P.L. 104-188.
9 A person’s eligibility for a deductible IRA may be limited by a spouse’s employer plan
coverage as well. Under new rules established in P.L. 105-34, a person whose spouse is in
an employer plan can still deduct a full $2,000 IRA contribution from taxable income if the
couple’s AGI does not exceed $150,000. Partial deductibility is allowed if AGI is less than
$160,000.
10 The limits on annual IRA contributions and the income thresholds for tax deferral are not
indexed for inflation. However, the tax deferral thresholds will rise until 2007 according to
a schedule adopted in P.L. 105-34.

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Table 1. Determinants of Eligibility to Deduct Contribution
to Traditional IRA in 2000
Tax filing and
employment

Eligibility for employer
2000 Adjusted gross
Eligibility to deduct
status
pension plan
income (AGI)
IRA contribution
Single/employed
Not eligible
Any amount
Full
Single/employed
Eligible
$0-$32,000
Full
Single/employed
Eligible
$32,001-$41,999
Limiteda
Single/employed
Eligible
$42,000 or more
None
Joint/employed
Not eligible
Any amount
Full
Joint/employed
Eligible
$0-$52,000
Full
Joint/employed
Eligible
$52,001-$61,999
Limiteda
Joint/employed
Eligible
$62,000 or more
None
Joint/nonworking Not eligible, nor is working
spouse
spouse
Any amount
Full
Joint/nonworking
Not eligible, but working
spouse
spouse is eligible
$0-$150,000
Full
Joint/nonworking
Not eligible, but working
spouse
spouse is eligible
$150,001-$159,999
Limiteda
Joint/nonworking
Not eligible, but working
spouse
spouse is eligible
$160,000 or more
None
a The ceiling on deductible contributions declines proportionately from $2,000 at the lower
end of the AGI range to $0 at the upper end.
Section 401(k) Plans11
The §401(k) plan, also called a cash-or-deferred arrangement (CODA), was
formally authorized by the Revenue Act of 1978 (P.L. 95-600) as a salary reduction
arrangement for employees of profitmaking firms, although such plans had existed
earlier under Internal Revenue Service (IRS) revenue rulings. Subsequently, certain
nonprofit organizations were permitted to establish §401(k) plans. This authority was
rescinded in the 1986 Tax Reform Act, with the following exceptions: rural electric
cooperatives and associations of such cooperatives; rural telephone cooperatives; the
Tennessee Valley Authority; government plans started before May 6, 1986; and
private tax-exempt organizations’ plans started before July 2, 1986. Effective in 1997
(P.L. 104-188), authority to establish §401(k) plans was regained by nonprofit
employers but not by governments. This authority was restored to government
agencies that operate water conservation and irrigation districts by P.L. 105-34.
11 Treatment similar to that for §401(k) plans is granted to employee contributions to certain
trusts by §501(c)(18) of the tax code. This section, added by the Tax Reform Act of 1969
(P.L. 91-172), allows tax deferrals for contributions to trusts that were established as
retirement saving plans for union members before June 25, 1959.

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In 1995, 29.9 million workers were covered by §401(k) plans. Most of the
covered group (28.1 million) were active participants.12 Participation rates rise as
earnings levels increase. While 87% of §401(k) plans are the primary retirement plans
offered by employers, many of these are small firms. Only 44% of §401(k) active
participants are in §401(k) plans that are their firms’ primary retirement plans.13
A §401(k) plan permits employees to elect to contribute a part of wages on a
tax-deferred basis to a plan that usually offers several investment options. Employers
usually make contributions, which also are treated as tax-deferred income of the
employees. In a typical plan, the employer puts in 50 cents for each dollar of
employee contributions up to 6% of salary.
An individual’s elective contributions are limited to $10,500 in 2000. (The limit
was set at $7,000, effective in 1987, and has since been adjusted annually for price
inflation.)14 Further restrictions apply to “highly compensated” participants under
“nondiscrimination” rules, which are intended to assure that plans benefit rank-and-file
workers.15
The Federal Employees’ Thrift Savings Plan
The Federal Employees’ Retirement System Act of 1986 (P.L. 99-335), in
establishing the Federal Employees’ Retirement System (FERS) for federal employees
covered by Social Security, created a salary reduction retirement plan modeled on the
§401(k) plan. This plan also was made available, on different terms, to employees
under the predecessor Civil Service Retirement System (CSRS). According to
Federal Thrift Board data, as of March 1999, there were 1.9 million federal employees
currently contributing through salary reductions.16 Contributing employees
represented 86% of FERS enrollees and 61% of CSRS enrollees. The plan’s assets
totaled $85 billion as of December 31, 1999.17
12 Pension and Welfare Benefits Administration, Private Pension Plan Bulletin, p. 49. Active
participants are those who are current employees of the plan sponsor and eligible to contribute
to the plan.
13 Ibid., p. 51.
14 The §401(k) employee contribution limit is adjusted annually. The adjustment is made by
comparing the average Consumer Price Index (CPI-U) figure for the third quarter of the
preceding calendar year to the corresponding figure for the prior year. The adjusted figure
is rounded down to the nearest multiple of $500. Thus, the 2000 limit of $10,500 will not rise
until inflation drives the adjusted figure to $11,000 or more.
15 Beginning in 1999, a §401(k) plan that meets a “safe harbor” plan design set forth in P.L.
104-188 is exempt from nondiscrimination testing. In tax law, taxpayers who meet safe
harbor
criteria generally are presumed to be in compliance with the tax law related to those
criteria.
16 Another 0.2 million FERS enrollees received a government contribution to their thrift
accounts equal to 1% of salary but chose not to make elective contributions.
17 Pensions and Investments, New York, January 24, 2000.

CRS-7
Federal employees under FERS may contribute up to 10% of salary but no more
than $10,500 in 2000; federal matching contributions apply to the first 5% of salary
contributed. Employees under CSRS may contribute up to 5% of salary to the thrift
plan, but they receive no government contributions.
The thrift plan offers participants a choice among three investment funds:
government securities, common stocks, and fixed-income securities. New investment
funds (a small capitalization stock index fund and an international stock index fund)
were approved in P.L. 104-208 and will become available in October 2000.
Section 403(b) Plans
These plans, which are tax-sheltered annuities that permit employee salary
deferrals, were established in law in 1958 (P.L. 85-866). They provide annuities for
employees of public educational organizations and organizations that qualify for tax-
exempt status under §501(c)(3) of the Internal Revenue Code. This latter group
generally consists of nonprofit research, scientific, educational, and charitable
organizations.
Employee tax-deferred contributions are generally subject to an annual ceiling
of $10,500. This ceiling is adjusted for inflation in tandem with the indexed ceiling
for §401(k) plans. (It was fixed at $9,500 from 1987 through 1997, however.) Total
contributions from both employee and employer are subject to the overall limit on all
retirement contributions on behalf of an employee. The nondiscrimination rules apply
to contributions made by the employer to §403(b) plans and may limit contributions
for highly compensated employees.
A large number of §403(b) plans are invested with the Teachers Insurance
Annuity Association and the College Retirement Equity Fund (TIAA-CREF). At the
end of 1999, TIAA-CREF managed assets worth $288 billion for 2.2 million
participants from about 9,700 institutions.18
Section 457 Plans
Section 457 was added to the Internal Revenue Code by the Revenue Act of
1978. This legislation codified a practice of state and local governments that had
developed over the years. These plans provide for salary deferrals by employees of
state and local governments and other tax-exempt organizations. All states now offer
§457 plans, but these plans generally are not offered to all their employees. At the
end of 1998, §457 plans held $57 billion in assets.19
Unlike §401(k) and §403(b) plans, which are considered retirement plans
“qualified” for preferred treatment under federal tax law, §457 plans are not
18 College Retirement Equities Fund Prospectus. CREF, New York. May 1, 2000.
19 Pensions and Investments, July 26, 1999.

CRS-8
“qualified” plans.20 Thus, the conditions for tax deferral of contributions to §457
plans are specified only in §457, and many of these rules differ from those of qualified
plans.
Contributions are limited in 2000 to the lesser of $8,000 or one-third of
compensation. This limit is reduced dollar for dollar for any contributions an
employee makes to a §401(k) or §403(b) plan. The limit had been fixed at $7,500
from 1986 through 1997, but it became subject to inflation adjustments in $500
intervals in 1997 and received its first increase (to $8,000) in 1998.
Salary Reduction Arrangements in Simplified Employee Pension
Plans (SARSEPs)

A SEP consists of IRAs that are funded completely by the employer on behalf
of all eligible employees. Contributions are allowed up to the lesser of 15% of
earnings or $30,000 annually and must apply to each employee account uniformly as
a percent of salary. In 1992, no more than 4% of employees of small businesses
participated in SEPs.21
This employer-provided retirement arrangement was expanded by a provision
of the Tax Reform Act of 1986 to permit employees to make elective tax-deferred
contributions to SEPs through salary reduction (SAR). SARSEPs were allowed only
for firms with 25 or fewer employees. An employee with this option can make
elective contributions that are in addition to amounts contributed by the employer, but
total contributions from both sources are limited to the lesser of 25% of earnings or
$30,000. Elective contributions are subject to the same $10,500 limit as a §401(k)
plan. The authority to establish new SARSEPs expired on December 31, 1996,
because of provisions in P.L. 104-188 authorizing SIMPLE (discussed below).
Savings Incentive Match Plans for Employees of Small Employers
(SIMPLE)

P.L. 104-188 authorized employers with 100 or fewer employees and no
employer-sponsored retirement plan to offer “salary incentive match plans for
employees of small employers” (SIMPLE) in years beginning on or after January 1,
1997. These plans can be set up as either: (1) SIMPLE retirement accounts for all
eligible employees; or (2) §401(k) plans operating under special rules. Employees can
defer up to $6,000 a year (indexed in $500 intervals) from salary as contributions to
the plan, which the employer must either match according to a specified formula or
20 The term “qualified plan” refers to a plan that is qualified as a tax-deferred plan by an
Internal Revenue Service (IRS) determination and is, therefore, eligible for certain advantages
under the tax laws. Of the plans described in this report, only §457 plans and IRAs are not
qualified plans. The tax treatment of these plans is specified separately in the law.
21 U.S. General Accounting Office. Private Pensions: Changes Can Produce A Modest
Increase in Use of Simplified Employee Pensions
. GAO/HRD 92-119, July 1992.
Washington, GPO, 1992.

CRS-9
augment with a contribution of 3% of each participant’s wages. SIMPLEs are
exempt from certain nondiscrimination rules and reporting requirements.22
Plan Rules
Although the Tax Reform Act of 1986 made great strides toward bringing the
different types of salary reduction plans under uniform rules, there still are significant
variations by plan type. This section reviews the current rules for eligibility, vesting,
contributions, investments, and withdrawals. The general rules are stated first;
important exceptions that pertain to particular types of plans are then provided.

Eligibility Requirements
A plan offered by an employer must be available to all employees on a
nondiscriminatory basis. Employees can be excluded on the basis of age (under 21)
and length of service with the employer (less than 1 year). A 2-year eligibility limit
can be imposed if benefits are fully vested at that time. No maximum age for
eligibility is permitted.
There are also rules relating to a plan’s breadth of coverage of the employer’s
workforce. A plan must cover either: (1) at least 70% of all “nonhighly
compensated” employees; or (2) a percentage of such employees that equals at least
70% of the percentage of “highly compensated” employees the plan covers. If neither
of these tests is met, the plan must meet the “average benefits test.” This test requires
that employer contributions for the nonhighly compensated, expressed as a percent
of total employee compensation, equal at least 70% of the corresponding percentage
figure for the highly compensated.
A highly compensated employee includes anyone who falls into one of two
categories: (1) those who own at least 5% of the firm (5% owners); or (2) those with
annual compensation above $85,000 in 2000 (adjusted annually for price inflation in
$5,000 intervals). Employers can restrict the latter group further by requiring that
they also fall within the top 20% of employees ranked by pay.23 (The history of these
inflation-adjusted amounts is shown in Table 2.)
Exceptions. In the case of a SEP, accounts must be established for all
employees except those in categories that are excludible under federal law. A
SARSEP may be offered only by employers with 25 or fewer employees. At least half
of the employees must make elective salary deferrals.
An IRA is not subject to these eligibility rules since it is not employer-sponsored.
To be eligible to contribute to an IRA, the only requirement is that the taxpayer either
22 For more information, see: CRS Report 96-758, Pension Reform: SIMPLE Plans for Small
Employers
, by James R. Storey.
23 This definition of highly compensated was included in P.L. 104-188 to simplify provisions
of prior law.

CRS-10
have earned income or have a spouse with earned income. (Whether or not IRA
contributions are tax-deferred is discussed below under Tax Treatment of
Contributions
.)
A SIMPLE must extend eligibility to all employees who were paid at least $5,000
in any 2 prior years and are expected to earn at least $5,000 in the current year.
Federal eligibility requirements do not apply to §457 plans, which are not
considered “qualified” retirement plans under the tax law. However, the state and
local governments and the nonprofit organizations that sponsor §457 plans apply their
own eligibility rules.
Table 2. Limits Defining Highly Compensated Group, 1987-2000
Minimum annual salary to be in highly compensated group:a
For employees with pay
Year(s)
For employees generally
in top 20% of workforce
1987
$75,000
$50,000
1988
78,353
52,235
1989
81,720
54,480
1990
85,485
56,990
1991
90,803
60,535
1992
93,518
62,345
1993
96,368
64,245
1994
99,000
66,000
1995-96
100,000
66,000b
1997-99
80,000c
80,000c
2000
85,000
85,000
a Prior to 1987, there were no statutory limits defining the highly compensated group.
b The 1994 limit remained unchanged from year to year because of a new rounding rule that
allows the limits to rise only in $5,000 intervals.
c The 1997 limits were set by P.L. 104-188. They are indexed in $5,000 intervals.
A special set of rules applies to eligibility for elective deferrals under §403(b)
plans. The opportunity to make deferrals of more than $200 must be available to all
employees on a basis that does not favor the highly compensated. Employees may be
excluded from the plan only if they are either: (1) nonresident aliens with no U.S.
income; (2) students in the employing institution who work for the institution fewer
than 20 hours per week; or (3) employees who participate in another deferred
compensation arrangement offered by the employer. A §403(b) plan maintained for
church employees is exempt from rules for coverage and nondiscrimination. An
educational institution may exclude all employees under age 26 in a §403(b) plan with
vesting of 1 year or less.

CRS-11
A plan that has received no employer contributions since September 2, 1974, is
not subject to these eligibility rules if it met the corresponding rules that were in effect
before that date. This exception covers §501(c)(18) plans.
Vesting
Employer contributions deposited in a retirement plan may not become the
property of the individual concerned until some condition is met. When an individual
does gain legal ownership of retirement funds, those funds are said to be “vested” in
that individual.
All salary deferral contributions by an employee must vest at once. Employer
contributions must vest at least as quickly as one of the following schedules requires:
100% after 5 years (5-year cliff vesting); or 20% a year beginning with 3 years of
service and reaching full vesting after 7 years (graded vesting). These vesting
standards are displayed in Table 3.
Table 3. Minimum Requirements for Vesting of Employer
Contributions to Qualified Retirement Plans
Minimum percentage of employer contribution that must be vested
Top-heavy plan rule
Completed
Cliff
Graded
years of
Cliff vesting
Graded vesting
vesting
vesting
participation
1
0
0
0
0
2
0
0
0
20
3
0
20
100
40
4
0
40
100
60
5
100
60
100
80
6
100
80
100
100
7 or more
100
100
100
100
Exceptions. “Top-heavy” plans must vest more quickly under one of two
schedules: either 100% vesting after 3 years, or 20% a year beginning with 2 years
of service. A top-heavy plan is one in which 60% or more of the assets are
concentrated in the accounts of owners, officers, and highly compensated employees.
Employer contributions to SIMPLEs must vest at once.
Slower vesting had been allowed in collectively bargained multiemployer plans,
which could use 10-year cliff vesting. However, P.L. 104-188 eliminated this special
treatment as of the earlier of 1999 or the year in which the bargaining agreement
expired.

CRS-12
Federal vesting standards do not apply to §457 plans. Vesting rules are not
needed for IRAs since all contributions are from the participant.
Tax Treatment of Contributions
Amounts contributed by employees and employers that fall within the allowable
limits discussed below (see Limits on Contributions) are not subject to the federal
income tax in the year in which they are made. Taxation occurs in the year that the
funds are withdrawn from the plan. Investment earnings on the contributions also
receive tax-deferred treatment. However, contributions are subject to FICA (Social
Security) and FUTA (unemployment) taxes in the year the funds are contributed.
A 10% excise tax is applied against the employer for any contributions in excess
of the allowable limits. The employer can avoid this excise tax by refunding the
excess contributions, together with earnings on those contributions, to plan
participants within 2½ months after the plan year’s end.
Excess deferrals by an employee that are withdrawn to avoid a penalty, if
withdrawn by the April 15 following the employee’s taxable year, are not subject to
penalties for early or excess withdrawals (discussed later in the section entitled Tax
Treatment of Withdrawals
).
Exceptions. Income tax deferral is not allowed for contributions to Roth IRAs.
Contributions to traditional IRAs are not tax-deferred if the contributor is an
active participant in an employer-sponsored plan and has AGI above a certain level.
These AGI levels are not adjusted for inflation, but they will rise annually through
2007 according to a schedule adopted in P.L. 105-34. In 2000, if AGI is above
$42,000 ($62,000 for a joint filer), no deduction is allowed. If AGI is between
$32,000 and $42,000 ($52,000 and $62,000 for a joint filer), a deduction is allowed
up to a ceiling. The deductible ceiling equals $2,000 times the following quantity:
1.0 minus the quotient of (1) the excess AGI over the lower end of the income range
divided by (2) $10,000. An active participant in an employer plan includes anyone
whose employer would have been obligated to contribute to the plan had the
employee chosen to contribute, whether or not contributions were actually made.
The AGI thresholds for deductibility of IRA contributions formerly applied to
an uncovered spouse of a person who has employer plan coverage. However, a
higher threshold was adopted for uncovered spouses by P.L. 105-34. Full
deductibility for noncovered spouses is now allowed for AGI of $150,000 or less.
Partial deductibility is permitted up to an AGI of $160,000.
The AGI thresholds for full deductibility of IRA contributions by a single filer
will increase to the following levels: $33,000 in 2001; $34,000 in 2002; $40,000 in
2003; $45,000 in 2004; and $50,000 in 2005 and thereafter. The phaseout interval
for deductibility will continue to be $10,000. For joint filers, the AGI thresholds for
full deductibility will increase to the following levels: $53,000 in 2001; $54,000 in
2002; $60,000 in 2003; $65,000 in 2004; $70,000 in 2005; $75,000 in 2006; and
$80,000 in 2007 and thereafter. The phaseout interval for deductibility by joint filers

CRS-13
will continue to be $10,000 until 2007, when it will increase to $20,000. Thus, in
2007, partial deductibility will be allowed for joint filers with AGI up to $100,000.
A contribution to an IRA in excess of the $2,000 annual limit is subject to a 6%
excise tax if not withdrawn from the IRA before April 15 following completion of the
tax year.
The FICA and FUTA taxes do not apply to SARSEP salary reduction
contributions.
Excise taxes do not apply to §457 plans, but excess contributions are treated as
the employee’s taxable income in the current year.
Limits on Contributions
Individual plans may set their own limits on the amounts that can be contributed.
However, all plans must abide by the limits established in the Internal Revenue Code.
Employee contributions from salary deferrals are limited to $10,500 in 2000 (indexed
for inflation in $500 intervals). Persons who participate in more than one plan have
the sum of their contributions to all plans subject to this $10,500 ceiling.
There is also an overall limit on combined contributions that can be made by
employee and employer to an employee’s accounts in all available defined contribution
retirement plans. That limit is the lesser of $30,000 a year or 25% of compensation.
In 1996, the $30,000 limit equaled one-fourth of the corresponding $120,000 indexed
limit on benefits payable from defined benefit plans. Attainment of this ratio meant
that the contribution limit thereafter would be indexed, but only in $5,000 intervals.
Thus, the annual defined contribution limit will remain at $30,000 until the inflation-
adjusted amount reaches $35,000.
A further limit may apply to elective salary deferrals by highly compensated
employees and to employer matching.24 The average deferral percentage of the highly
compensated is limited by a formula tied to the average deferral percentage for
nonhighly compensated employees (Table 4). This formula is called the
“nondiscrimination test.” The history of salary deferral limits is shown in Table 7.
24 The definition of a highly compensated employee is given in the section entitled Eligibility
Requirements
.

CRS-14
Table 4. Limits on Salary Deferrals by Highly Compensated
Employees Under the Nondiscrimination Test
If average deferral ratea of nonhighly
Then average deferral ratea of highly
compensated is:
compensated may not exceed:b
0%
0%
1
2
2
4
3
5
4
6
5
7
6
8
7
9
8
10
9
11.25
10
12.50
11
13.75
12
15
13
16.25
14
17.50
15
18.75
16
20
17
21.25
18
22.50
19
23.75
20
25
21
25
22
25
23
25
24
25
25
25
a A group’s deferral rate is determined by averaging the elective deferrals as a percent of salary for each
employee in the group. A plan has the option to include qualified matching and nonelective
contributions to the employee’s account in performing this calculation.
b These limits on deferrals as a percent of salary apply to §401(k) and §501(c)(18) plans, to SARSEPs, and to
employer contributions to §403(b) plans. However, they do not apply to SIMPLE §401(k) plans.

CRS-15
The level of annual compensation on which contributions can be based is limited
to $170,000 in 2000. This limit was reduced from the 1993 level ($235,840) by P.L.
103-66. (See Table 5 for the complete history of this limit.) The limit is indexed for
inflation annually but can rise only in $10,000 steps. This limit on includible
compensation constitutes an indirect limit on amounts that can be contributed by the
highly compensated and, therefore, can affect a plan’s nondiscrimination test
calculations.
Table 5. Limits on Annual Compensation That Can Be Used to
Determine Plan Contributions, 1989-2000
Year(s)
Maximum countable compensationa
1989
$200,000
1990
209,200
1991
222,220
1992
228,860
1993
235,840
1994-96
150,000b
1997-99
160,000
2000
170,000
a P.L. 99-514 extended to all qualified plans a $200,000 limit that had applied before 1989 only
to SEPs and to collectively bargained plans.
b The 1993 limit was reduced to $150,000 for 1994 by P.L. 103-465. It may remain unchanged
from year to year because it can rise with inflation only in $10,000 intervals.
Exceptions. Variations in limits on elective salary deferrals by plan type are
shown in Table 6. IRA contributions are limited to the lesser of 100% of earnings or
$2,000 (or a total of $4,000 for a worker and a nonworking spouse). The overall
limit (the lesser of $30,000 or 25% of earnings) does not apply to IRAs, nor does the
rule coordinating the limit on salary deferrals for persons in more than one plan.
However, the IRA limit does govern contributions to all of the IRAs an individual
owns.
Higher salary deferral limits apply for §403(b) plan participants with more than
15 years of service. These “catch-up” contributions cannot exceed $3,000 in any 1
year or $15,000 in total. However, catch-up contributions cannot be made if an
employee’s lifetime salary reductions exceed $5,000 times years of service.
Salary deferrals in a §457 plan are limited to the lesser of $8,000 (indexed in
$500 intervals) or one-third of compensation. Up to $15,000 of unused deferrals may
be contributed in one or more of an employee’s last 3 years prior to retirement. §457
plan participants who also contribute to a §401(k) plan or a §403(b) plan have their
combined deferrals for all plans limited to the $8,000 annual §457 ceiling.

CRS-16
The Federal Employees’ Thrift Savings Plan limits salary deferrals to 10% of
salary for employees covered by FERS and 5% of salary for those under CSRS. The
limits established by the nondiscrimination test do not apply to the Thrift Savings Plan
because of legislation included in the FY1988 Continuing Resolution (P.L. 100-202).
The §401(k) annual limit on elective contributions of $10,500 does apply, however.
Annual salary deferrals in a SIMPLE are limited to $6,000 (indexed in $500
intervals). The nondiscrimination test is waived for deferrals to these plans.
Beginning in 1999, §401(k) plans that meet one of two employer contribution
goals set forth in P.L. 104-188 have the nondiscrimination test waived. These “safe
harbor §401(k)s” must have (1) employer contributions to the accounts of all eligible
nonhighly compensated employees of at least 3% of pay or (2) matching contributions
at least as generous as the following: $1 for each $1 of salary deferral up to 3% of
pay, plus $0.50 for each $1 of salary deferral over the next 2% of pay.

CRS-17
Table 6. Limits on Annual Contributions to Salary Deferral Plans by
Plan Type, 2000
Limit is lesser of:
Is dollar
Does nondis-
Annual
Percent
limit
crimination test
dollar
of earn-
inflation
apply to elective
Plan type
limit
ingsa
indexed?b
salary deferrals?
IRA-employee
$2,000
100%
No
No
IRA-nonworking
spouse
2,000c
c
No
No
401(k)
10,500d
25%
Yes
Yese
403(b)
10,500d
25%f
Yes
Nog
457
8,000d
33a%
Yes
No
501(c)(18)
10,500d
25%
Yes
Yes
SARSEP
10,500d
25%
Yes
Yes
Federal thrift
plan—FERS
10,500d
10%
Yes
No
Federal thrift
plan—CSRS
10,500d
5%
Yes
No
SIMPLE retirement
account
6,000
h
Yes
No
SIMPLE 401(k)
6,000
25%
Yes
No
a The 25% limit for qualified plans applies to the sum of employer contributions and employee
salary deferrals.
b A provision in P.L. 103-465 changed the indexing of these limits. The adjusted limit is now
rounded down to the nearest amount divisible by 500.
c Contributions of a worker and a nonworking spouse in combination cannot exceed 100% of the
worker’s earnings.
d For persons participating in more than one plan, the $10,500 limit applies to the combined
salary deferral contributions to §401(k), §403(b), and §501(c)(18) plans, to SARSEPs, and
to the federal thrift plan. The lower $8,000 limit applies to the combined contributions to
a §457 plan and any other plan.
e Effective in 1999, a §401(k) plan is exempt from the nondiscrimination test if it meets a “safe
harbor” plan design set forth in P.L. 104-188.
f Salary deferral amounts in §403(b) plans are also limited by a formula that takes into account
current salary, length of service, and amounts contributed in prior years.
g The nondiscrimination test applies only to employer contributions for §403(b) plans.
h No percentage limit is stated in the law for salary deferrals to SIMPLE retirement accounts.

CRS-18
Table 7. Annual Dollar Limits on Elective Salary Deferrals,
1975-2000
Annual elective deferral limit by plan type:
Year(s)
§401(k)a
§403(b)b
§457 b
IRA
SIMPLE
c
1975-78
—-
—-
$1,500
—-
c
1979
—-
$7,500
1,500
—-
c
c
1980-81
7,500
1,500
—-
c
c
1982-86
7,500
2,000
—-
1987
$7,000
$9,500
7,500
2,000
—-
1988
7,313
9,500
7,500
2,000
—-
1989
7,627
9,500
7,500
2,000
—-
1990
7,979
9,500
7,500
2,000
—-
1991
8,475
9,500
7,500
2,000
—-
1992
8,728
9,500
7,500
2,000
—-
1993
8,994
9,500
7,500
2,000
—-
1994-95
9,240d
9,500
7,500
2,000
—-
1996
9,500
9,500e
7,500
2,000
—-
1997
9,500
9,500
7,500e
2,000
$6,000e
1998-99
10,000
10,000
8,000
2,000
6,000
2000
10,500
10,500
8,000
2,000
6,000
a These limits also apply to §501(c)(18) plans, SARSEPs, and the Federal Employees’ Thrift Savings
Plan.
b Limits may be higher in some cases. See text for explanation.
c P.L. 99-514 placed dollar limits on §401(k) and §403(b) salary deferrals. Before that, deferrals
were subject only to the overall limit on combined employee/employer contributions to
qualified plans.
d Inflation indexing was changed so that the limit can rise only in $500 intervals.
e Beginning of inflation adjustments on the same basis as for §401(k) plans.
The $170,000 limit on the annual compensation that can be used as the basis for
plan contributions is not effective for collectively bargained plans before the later of
the bargaining agreement’s expiration or January 1, 1997. Exempt plans have a
$250,000 limit. The $170,000 limit also does not apply to §401(k) or §403(b) plans
sponsored by governmental employers
. These plans may operate under the
compensation limit in effect on July 1, 1993. No compensation limit applies to §457
plans
.

CRS-19
Limits on Investments
Persons acting in a fiduciary capacity are required to follow the “prudent person”
rule when investing contributions from salary deferrals. That is, investments are to
be made according to the judgments that a prudent investor would make acting
individually in investing for retirement.
Unless a special exemption is granted, the law specifically prohibits certain
transactions between a plan and “disqualified persons.” The disqualified group
includes owners, officers, employee organizations, fiduciaries, persons providing
services to the plan, family members of disqualified persons, or major partners of any
of these persons. An excise tax of 5% is imposed on the amount of any prohibited
transaction. Federal law restricts defined benefit pension trusts from holding more
than 10% of plan assets in property or stock of the plan sponsor. This restriction was
extended to §401(k) plans (discussed below under Exceptions).
Salary deferral plans often allow participants to decide how to invest their
accounts, but U.S. Department of Labor (DoL) regulations provide guidance on the
investment options these plans can offer. A plan that allows participant-directed
investing has to offer at least three diversified options with different risk/return
characteristics.
Exceptions. Specific investment restrictions apply to IRAs, which cannot be
invested in collectibles such as art, antiques, and other tangible assets. Such
investments are treated as taxable distributions from the IRA. However, IRAs are
allowed to invest in certain precious metals.
P.L. 105-34 established a limit on the investment of §401(k) assets in securities
or property of the employer. Effective in 1999, salary deferrals in excess of 1% of
pay that are invested in the employer’s securities or property cannot exceed 10% of
total plan investments unless the participant elects a higher percentage.
Federal laws on investment policies do not apply to §457 plans, but most states
apply their own “prudent person” standards.
The DoL regulations that require a range of investment options apply only to
qualified plans, thereby excluding §457 plans and IRAs.
Withdrawal Options
Funds may be withdrawn in four ways — as a loan, a rollover, an annuity
contract, or a cash withdrawal. Loans and rollovers that comply with tax laws and
regulations are considered nontaxable distributions. Each withdrawal method is
discussed below.
Loans. Federal law permits, but does not require, qualified plans to allow loans.
Borrowing is subject to a maximum of the lesser of: (1) $50,000; or (2) the greater
of one-half of vested contributions or $10,000.

CRS-20
The term of a loan cannot exceed 5 years unless the loan is used to purchase a
principal residence. Interest charged on a plan loan is not tax-deductible for the
borrower, regardless of the loan’s purpose. In determining the amount available for
borrowing, the largest amount borrowed in the prior 12 months is deducted from the
$50,000 maximum, and the reduced maximum is applied in considering a loan request.
At the time that an employee ceases to be covered by a plan, any outstanding loan
balance is treated as a taxable distribution from the plan.
Exceptions. Borrowing is not permitted from IRAs, SEPs, SARSEPs, or
SIMPLE retirement accounts. State or local government §457 plans may allow loans
beginning in 1999, but §457 plans of nonprofit organizations cannot.
The Federal Employees’ Thrift Savings Plan allows borrowing in amounts up
to the employee’s own contributions plus investment earnings. Though loans
originally were limited to four purposes (medical expenses, education expenses,
purchase of a primary residence, financial hardship), this restriction was removed by
P.L. 104-208. A thrift plan loan for home purchase may be paid off over 15 years,
but other loans cannot exceed 4 years.
Rollovers. A rollover is a tax-free transfer of funds from one tax-deferred
retirement account to another. Such transfers must be completed within 60 days to
avoid taxation.
Upon leaving employment, a plan participant may roll over vested funds from a
qualified salary reduction plan to a qualified plan offered by the next employer (if that
plan accepts rollovers) or to a traditional IRA (but not to a Roth IRA). Effective in
1993, a plan distribution can be rolled over regardless of the proportion it constitutes
of an individual’s total assets in the plan.
Although a rollover is not subject to tax, mandatory income tax withholding at
a rate of 20% applies to all lump-sum distributions received directly by a participant
from an employer plan, even if the distribution eventually is rolled over and thus not
currently taxable. Only rollovers executed by trustee-to-trustee transfers escape tax
withholding.
Exceptions. The Federal Employees’ Thrift Savings Plan does not accept
rollovers. Rollovers are not permitted from or to §457 plans. Nontaxable transfers
may be made between two §457 plans, however. A rollover from a §403(b) plan can
be made only to another §403(b) plan or to a traditional IRA.
IRAs can be rolled over without regard to employment status, but only to other
IRAs owned by the same person. IRA-to-IRA rollovers are limited to 1 per year for
each IRA. A Roth IRA can be rolled over only to another Roth IRA. A SIMPLE
retirement account
can be rolled over to an IRA only after plan participation exceeds
2 years.
A traditional IRA can be converted to a Roth IRA by payment of the income tax
on any untaxed funds withdrawn from the traditional IRA for this purpose. Only tax
filers with AGI of $100,000 or less may convert a traditional IRA to a Roth IRA,

CRS-21
however. Conversions that occurred in 1998 were entitled to 4-year averaging in
computing income tax liability.
Annuities and Cash Withdrawals. An annuity is obtained through a contract
with an insurance company in which the retirement plan asset is used to purchase a
series of benefit payments for a guaranteed time period, the participant’s lifetime, or
the joint lifetimes of the participant and a surviving beneficiary. A cash withdrawal
is the direct removal of funds from an account by the participant, either in a lump sum
or in a series of payments. Federal law requires that a plan must begin benefit
payments to a participant no later than 60 days after the close of the plan year in
which the later of three events occurs: (1) attainment of age 65 or, if earlier, the plan’s
normal retirement age; (2) completion of 10 years of service; or (3) separation from
employment.
To be exempt from a 10% excise tax on early withdrawals, an annuity or a cash
withdrawal must be received under one of the following conditions: (1) after
attainment of age 59½; (2) upon the death of the accountholder; (3) because of a
permanent disability; (4) upon separation from employment under an early retirement
provision after attainment of age 55; (5) upon withdrawal at any age if in the form of
a life annuity; or (6) because of medical expenses that are large enough to be eligible
for itemized deduction treatment under the federal income tax.
At the plan’s option, a cash withdrawal can be obtained while employed if
needed to meet financial hardship,25 but only the individual’s elective deferrals can be
withdrawn for this purpose. Hardship withdrawals are subject to the 10% early
withdrawal excise tax unless one of the abovementioned six conditions for exemption
are met.
Cash withdrawals are subject to the 20% mandatory income tax withholding
described above under Rollovers if the withdrawal constitutes a lump-sum distribution
or a series of periodic payments received over fewer than 10 years. Otherwise,
income tax withholding is optional.
Exceptions. The abovementioned early retirement exception to the early
withdrawal penalty (item 4) does not apply for IRAs. Also, financial hardship
withdrawals are not applicable to IRAs since they are not employer plans.
However, two new exceptions included in P.L. 105-34 do apply to IRAs.
Withdrawals from IRAs, including Roth IRAs, are no longer subject to the 10% early
withdrawal tax if the funds are used to pay higher education expenses or to purchase
a primary residence. This latter purpose is restricted to accountholders who have not
owned a residence in the prior 2 years. The amount that may be withdrawn penalty-
free for a home purchase is subject to a lifetime limit of $10,000.
25 Hardship withdrawals are allowed in order for a participant to meet immediate and heavy
financial needs for which no other resources are available. The following needs meet the
definition of hardship: medical expenses; purchase of a principal residence; tuition for
postsecondary education; and prevention of eviction from, or foreclosure on, a principal
residence.

CRS-22
Withdrawals from a §457 plan are permitted upon separation from employment,
attainment of age 70½, “unforeseeable emergencies,” or death. The early-withdrawal
excise tax does not apply to §457 plans.
Early withdrawals from a SIMPLE retirement account are subject to a 25%
excise tax if made within the accountholder’s first 2 years of plan participation.
Required Minimum Distributions. Withdrawals must begin after the later of
(1) attainment of age 70½, or (2) retirement from covered employment26 to avoid tax
penalties for late withdrawal. The required beginning date, when age is the
controlling factor, is on or before the 1st of April following the calendar year in which
age 70½ is attained. The amount of the required annual distribution is determined
based on life expectancy using actuarial tables published by the IRS. The required
minimum distribution must be made from each affected account. An individual with
multiple IRAs must calculate the required distribution based on all IRAs held but may
make the actual withdrawal from only one of the IRAs.
Exceptions. Age 70½ is still the sole criterion for required minimum
distributions from IRAs. However, there is no required minimum distribution from
a Roth IRA. Required minimum distributions from §403(b) plans can be delayed until
age 75 for contributions and investment earnings that were credited to those plans
before 1987.
Tax Treatment of Withdrawals
Withdrawals of untaxed funds from tax-deferred accounts, unless in the form of
a loan or rollover, are taxable when received. However, a number of special
situations require further explanation.
General Rules. Amounts withdrawn from salary reduction plans that were
contributed or acquired on a tax-deferred basis are subject to the federal income tax
in the year the funds are received. Withdrawals are not subject to FICA or FUTA
taxes, however. If a plan holds funds that were taxed when contributed (i.e., after-tax
contributions), the percentage of the withdrawn amounts that is subject to tax is equal
to the percentage that the tax-deferred funds comprise of the account’s total assets.
For example, if 10% of an individual’s vested assets were from after-tax
contributions, only 90% of each withdrawal would be subject to the income tax.
When funds are withdrawn from an IRA, the tax status is determined according to the
tax status of all the individual’s IRAs, not just the status of the IRA from which the
funds were actually taken.
This pro rata approach to taxation applies regardless of the status of the
contributions actually being withdrawn. That is, withdrawals of funds that were
identified originally as after-tax contributions are still treated for tax purposes as if
they were withdrawn from the larger pool of after-tax and before-tax contributions.
26 The retirement date option was instituted by P.L. 100-647 for participants in governmental
§457 plans and church plans (§457 or §403(b) plans) and by P.L. 104-188 (effective in 1997)
for participants in other types of plans.

CRS-23
This procedure does not change the total amount of taxable income; it simply speeds
up the time of taxation by denying the individual control over when taxable amounts
are used as income.
Exceptions. Withdrawals from a Roth IRA are not subject to the general rule
for taxation of retirement distributions. A Roth IRA withdrawal is assumed to come
first from contributions until all contributions have been withdrawn. Since
contributions to a Roth IRA have already been taxed, these initial withdrawals are tax
free, even if the accountholder does not meet the criteria that determine when
withdrawals from a Roth IRA generally are tax free. Those criteria do determine
when withdrawals of investment earnings from a Roth IRA are tax free, however.
To withdraw investment earnings from a Roth IRA tax free, the initial investment
must have been made for a tax year at least 5 years earlier, and one of the following
conditions must exist: (1) the accountholder has attained age 59½; (2) the
accountholder is deceased or disabled; or (3) the funds will be used to purchase a
primary residence by an accountholder who has not had ownership interest in a home
for the prior 2 years.
Early Withdrawals. Taxable withdrawals before age 59½, unless covered by
the exceptions listed earlier in the section on Annuities and Cash Withdrawals, are
subject to an excise tax for early withdrawal. This tax, 10% of the amount of taxable
funds withdrawn, is in addition to the regular income tax liability.
Exceptions. The 10% penalty tax does not apply to withdrawals from §457
plans. The 10% penalty tax does apply to early withdrawals from SIMPLE retirement
accounts,
but the tax is higher (25%) on early withdrawals by SIMPLE
accountholders who have been plan participants for less than 2 years.
Late Withdrawals. An excise tax is applied under all plans for late withdrawals.
Late withdrawals are withdrawals that are deficient compared to the required
minimum distributions. (See the preceding section on Required Minimum
Distributions.
) The excise tax for a late withdrawal is 50% of the amount of the
deficiency.
Large Distributions. The excise tax for large distributions, which did not apply
to §457 plans, was waived for 3 years (1997-1999) by P.L. 104-188. It was repealed
permanently by P.L. 105-34. Prior to 1997, a 15% excise tax was levied for
“excessive” distributions. This tax was applied to the excess distributions of an
individual who received periodic payments from all plans that summed to more than
$155,000 yearly in 1996 (indexed for inflation in $5,000 intervals). (The history of
these limits since 1987 is shown in Table 8.) A lump-sum distribution was regarded
as excessive if it were greater than $775,000 in 1996.27
Income Averaging. The 1986 Tax Reform Act phases out the practice of 10-
year averaging of lump-sum distributions for tax purposes. Under 10-year averaging,
the distribution is treated as if it were received in each of 10 years rather than in the
27 This lump-sum threshold amount was set at five times the threshold used to determine
excessive annual distributions.

CRS-24
year of actual receipt. The 1986 act allows persons already over age 50 on January
1, 1986, to elect 10-year averaging, but they must use the higher income tax rates that
were in effect before the 1986 Tax Reform Act took effect. The 1986 act also ended
the option to treat a distribution as a receipt of capital gains under the pre-1974
capital gains tax rules. Such treatment was phased out over the period 1987-1992.
For taxpayers denied 10-year averaging by the 1986 Act, the law allowed 5-year
averaging post-1986 tax rates. However, 5-year averaging was ended effective in
2000 by P.L. 104-188.
Table 8. Limits on Plan Distributions, 1987-1997
Year
Annual distribution limit
1987
$112,500
1988
117,529
1989
122,580
1990
128,228
1991
136,204
1992
140,276
1993
144,551
1994
148,500
1995
150,000
1996
155,000
1997
160,000a
a The limit was waived for 1997-1999 by P.L. 104-188 and then
repealed by P.L. 105-34.

CRS-25
Appendix A: Comparison of Federal Rules
for Retirement Plans by Plan Type
This appendix provides a series of six tables comparing the federal rules for
different types of retirement plans. This comparison covers the plan types analyzed
in this report and three other types of employer plans: money purchase plans, in which
the employer purchases securities on the behalf of each covered employee on a
periodic basis; profit-sharing plans, in which the employer allocates a percentage of
annual profits to each employee; and defined benefit (DB) plans, which promise each
covered employee that a benefit based on salary and/or tenure will be paid at
retirement age from a pension fund.
The rules presented in these tables are federal limits on how plans can be
designed. There is no mandate that employers offer plans, and plans often have
flexibility within the federal rules to set specific limits with respect to such factors as
retirement age, benefit level, and contribution rate. Some complications necessarily
were omitted to produce this comparison in a compact format. For example, rules
variations associated with a plan sponsor’s being self-employed are not identified.

CRS-26
Table A-1. Eligibility Rules by Retirement Plan Type
Plan Type
Employer eligibility
Extent of workforce coverage required
Employee eligibility
Traditional
Not applicable
Not applicable
All employed individuals and their spouses
IRA
Roth IRA
Not applicable
Not applicable
All employed individuals and their spouses with
AGI less than $110,000 (single filers) or $160,000
(joint filers)
SEP IRA
Any employer
100% of nonexcludible employees
Plan may exclude: (1) those under age 21; (2)
those who worked for firm in less than 3 of last 5
years; (3) those earning less than $400 in last year;
(4) members of bargaining unit; (5) nonresident
aliens with no U.S. income
SARSEP
Those with 25 or fewer eligible
At least 50% of eligible employees must
Plan may exclude: (1) those under age 21; (2)
IRA
employees; a SARSEP cannot be
defer salary
those who worked for firm in less than 3 of last 5
started after 12/31/96
years; (3) those earning less than $400 in last year;
(4) members of bargaining unit; (5) nonresident
aliens with no U.S. income
SIMPLE
Those with 100 or fewer
100% of nonexcludible employees
Plan may exclude: (1) those earning less than
IRA
employees earning at least $5,000;
$5,000 in each of 2 prior years and current year;
cannot offer another plan
(2) members of bargaining unit; (3) nonresident
aliens with no U.S. income
§401(k)
Any nongovernmental employer;
Plan must benefit at least 70% of
Plan may exclude employees: (1) until later of
government plans limited to those
employees who are not highly
attaining age 21 or completing 1 year of service;
adopted before 5/6/86 and certain
compensated, or meet one of two other
(2) who are members of bargaining unit; (3) who
irrigation and drainage entities
tests
are nonresident aliens with no U.S. income
Educational organizations may exclude employees
until later of age 26 or 1 year of service if benefits
fully vested after 1 year
SIMPLE
Nongovernmental employers with
Plan must benefit at least 70% of
Plan may exclude employees: (1) until later of
§401(k)
100 or fewer employees earning at
employees who are not highly
attaining age 21 or completing 1 year of service;
least $5,000; cannot offer another
compensated, or meet one of two other
(2) who are members of bargaining unit; (3) who
plan
tests
are nonresident aliens with no U.S. income
Educational organizations may exclude employees
until later of age 26 or 1 year of service if benefits
fully vested after 1 year

CRS-27
Plan Type
Employer eligibility
Extent of workforce coverage required
Employee eligibility
Federal
U.S. government
All employees in groups specified in law;
All employees in groups specified in law;
Thrift
federal agencies must contribute to
employees under CSRSa ineligible for employer
Savings
accounts of all employees covered by
contributions
FERSa
§403(b)
Religious, charitable, educational,
Plan must benefit at least 70% of
Plan may exclude employees: (1) who participate
research, and cultural
employees who are not highly
in §457 plan, §401(k) plan, or another §403(b)
organizations in the state and
compensated, or meet one of two other
plan of employer; (2) who are in bargaining unit;
local government and nonprofit
tests
(3) who are nonresident aliens with no U.S.
sectors
income; (4) who are students in the sponsoring
institution and work less than 20 hours a week
Educational organizations may exclude employees
until later of age 26 or 1 year of service if benefits
fully vested after 1 year
Eligibility in church plans determined by sponsor
§457
State and local government
No minimum federal requirement, but
Eligibility determined by sponsor
agencies, nonprofit organizations
nonprofits can cover only selected groups
Money
Any employer
Plan must benefit at least 70% of
Plan may exclude employees: (1) until later of
purchase
employees who are not highly
attaining age 21 or completing 1 year of service (2
compensated, or meet one of two other
years if benefits fully vested at that time); (2) who
tests
are members of bargaining unit; (3) who are
nonresident aliens with no U.S. income
Educational organizations may exclude employees
until later of age 26 or 1 year of service if benefits
fully vested after 1 year
Profit-
Any private-sector employer
Plan must benefit at least 70% of
Plan may exclude employees: (1) until later of
sharing
employees who are not highly
attaining age 21 or completing 1 year of service (2
compensated, or meet one of two other
years if benefits fully vested at that time); (2) who
tests
are members of bargaining unit; (3) who are
nonresident aliens with no U.S. income
Educational organizations may exclude employees
until later of age 26 or 1 year of service if benefits
fully vested after 1 year

CRS-28
Plan Type
Employer eligibility
Extent of workforce coverage required
Employee eligibility
Private-
Any private-sector employerb
Plan must benefit at least 70% of
Plan may exclude employees: (1) until later of
sector
employees who are not highly
attaining age 21 or completing 1 year of service (2
defined
compensated, or meet one of two other
years if benefits fully vested at that time); (2) who
benefit
tests
are members of bargaining unit; (3) who are
nonresident aliens with no U.S. income
Educational organizations may exclude employees
until later of age 26 or 1 year of service if benefits
fully vested after 1 year
a CSRS, the Civil Service Retirement System, was replaced for employees hired after 1983 by FERS, the Federal Employees’ Retirement System. The Thrift
Savings Plan was designed to be an integral part of the retirement benefit for post-1983 hires, along with a FERS DB plan and Social Security.
b Governmental employers also sponsor defined benefit (DB) plans. However, most federal rules for DB plans do not apply to governmental plans.

CRS-29
Table A-2. Rules for Employee Contributions by Retirement Plan Type
Annual limit on employee
Annual limit on employee
Nondiscrimination test for employee
Plan Type
tax-deferred contributions
after-tax contributions
salary deferrals
Traditional
$2,000 if employee (and spouse)a are not
$2,000 minus allowable pre-tax
Not applicable
IRA
covered by an employer plan or if AGI does
contributions; same limit applies to
not exceed $32,000 (single filers) or
employee’s nonworking spouse
$52,000 (joint filers); limit declines to $0
over next $10,000 of AGI;b limit is $0 for
persons over age 70½
Roth IRA
Tax-deferred contributions not allowed
$2,000a if AGI does not exceed
Not applicable
$95,000 (single filers) or $150,000
(joint filers); limit declines to $0
over next $15,000 of AGI for single
filers (next $10,000 for joint filers)
SEP IRA
Employee contributions not allowed
Employee contributions not allowed
Not applicable
SARSEP
$10,500 (indexed in $500 incrementsc)
After-tax employee contributions not
Average deferral percentage (ADP) of highly
IRA
allowed
compensated employees cannot exceed ADP
for other employees by more than lesser of:
(1) 100% of the nonhighly compensated
group’s ADP; or (2) greater of (a) 2
percentage points, or (b) 25% of nonhighly
compensated group’s ADP; this test also
applies to employer matching contributions
SIMPLE
$6,000 (indexed in $500 incrementsc)
After-tax employee contributions not
Exempt from test
IRA
allowed
§401(k)
$10,500 (indexed in $500 incrementsc)
After-tax employee contributions not
Average deferral percentage (ADP) of highly
allowed
compensated employees cannot exceed ADP
for other employees by more than lesser of:
(1) 100% of the nonhighly compensated
group’s ADP; or (2) greater of (a) 2
percentage points, or (b) 25% of nonhighly
compensated group’s ADP; this test also
applies to employer matching contributionsd
SIMPLE
$6,000 (indexed in $500 incrementsc)
After-tax employee contributions not
Deemed to satisfy §401(k) test
§401(k)
allowed

CRS-30
Annual limit on employee
Annual limit on employee
Nondiscrimination test for employee
Plan Type
tax-deferred contributions
after-tax contributions
salary deferrals
Federal
Lesser of $10,500 (indexed in $500
After-tax employee contributions not
§401(k) test waived by P.L. 100-202
Thrift
incrementsc) or 10% of pay (5% of pay
allowed
Savings
under CSRS)
§403(b)
$10,500 (indexed in $500 incrementsc);
After-tax employee contributions not
No test for employee salary deferrals, but the
catchup deferrals allowed up to $3,000 a
allowed
§401(k) test does apply to employer matching
year, $15,000 lifetime, for those with over
contributionsd
15 years of service and whose past deferrals
do not exceed $5,000 times years of service;
contributions also limited by exclusion
allowance
that considers amount
contributed over whole career
§457
Lesser of $8,000 (indexed in $500
After-tax employee contributions not
Not applicable
incrementsc) or a of pay; catchup deferrals
allowed
allowed up to $15,000 in last 3 years before
retirement
Money
Tax-deferred employee contributions not
Not applicable
Not applicable
purchase
allowed
Profit-
Tax-deferred employee contributions not
Not applicablee
Not applicable
sharing
allowede
Private-
Tax-deferred employee contributions not
After-tax employee contributions
Not applicable
sector
allowed
allowed; no limit specified in federal
defined
law
benefit
a A nonworking spouse can also contribute $2,000, but the couple’s combined contributions cannot exceed their combined earnings. A spouse’s
participation in an employer plan does not disqualify an individual from making a deductible contribution, but the maximum deductible contribution
is phased out as the couple’s joint AGI rises from $150,000 to $160,000.
b The $10,000 phase-out range begins at $32,000 and $52,000 for 2000, at $33,000 and $53,000 for 2001, at $34,000 and $54,000 for 2002, at $40,000
and $60,000 for 2003, at $45,000 and $65,000 for 2004, at $50,000 and $70,000 for 2005, at $50,000 and $75,000 for 2006, and at $50,000 and
$80,000 for 2007 and thereafter. The phase-out interval remains at $10,000 until 2007, when it will increase to $20,000 for joint filers.
c When an amount is said to be “indexed in increments,” the indexed amount remains unchanged until inflation adjustments exceed the specified increment,
at which time the indexed figure rises by the amount of the increment. For example, the §401(k) salary deferral limit rose from $10,000 to $10,500
in 2000 because of 2 years of cumulative inflation adjustments to the $10,000 ceiling.
d A provision of P.L. 104-188, effective in 1999, deems the nondiscrimination test to be met for §401(k) plans and §403(b) plans that comply with a “safe
harbor” design in regard to the level of employer contributions.
e In a conventional profit-sharing plan, the employer makes all the contributions. If after-tax employee contributions are made, the plan would be termed
a profit-sharing thrift plan. Voluntary after-tax employee contributions are sometimes permitted by profit-sharing and thrift plans.

CRS-31
Table A-3. Employer Contribution Rules by Retirement Plan Type
Is year-to-year flexibility
Annual limit on employer
allowed in employer
Vesting requirements for
Employer plan funding
Plan Type
contributionsa
contributions?
employer contributions
requirements
Traditional
No employer contribution
Not applicable
Not applicable
Not applicable
IRA
Roth IRA
No employer contribution
Not applicable
Not applicable
Not applicable
SEP IRA
Lesser of 15% of pay or $30,000
Yes
Immediate
Contributions and investment
(indexed in $5,000 increments)
earnings held in IRAs
SARSEP
Lesser of 15% of pay or $30,000
Yes
Immediate
Contributions and investment
IRA
(indexed in $5,000 increments)
earnings held in IRAs
SIMPLE
Employer must contribute
Matching rate can apply to
Immediate
Contributions and investment
IRA
according to one of two formulas:
as little as 1% of pay, but
earnings held in IRAs
(1) 2% of pay; (2) 100% match
must apply to 3% of pay at
of employee deferrals up to 3% of
least 3 out of every 5 years
pay
§401(k)
Lesser of 25% of pay or $30,000
Yes, if §401(k) is part of a
ERISA rulesb
Contributions and investment
(indexed in $5,000 increments)
profit-sharing or stock
earnings held in individual trust
bonus plan
fund accounts
SIMPLE
Employer must contribute
Yes, if §401(k) is part of a
Immediate
Contributions and investment
§401(k)
according to one of two formulas:
profit-sharing or stock
earnings held in individual trust
(1) 2% of pay; (2) 100% match
bonus plan
fund accounts
of employee deferrals up to 3% of
pay
Federal
Employer must contribute 1% of
No
Immediate for federal
Contributions and investment
Thrift
pay to each FERS employee’s
matching; 3 years for
earnings held in individual trust
Savings
account and match employee
automatic 1% federal
fund accounts
salary deferrals at rate of 100%
contribution (2 years for
for first 3% of pay plus 50% for
some noncareer employees)
next 2% of pay, yielding a
maximum employer contribution
of 5% of pay; employer cannot
contribute to CSRS employees’
accounts

CRS-32
Is year-to-year flexibility
Annual limit on employer
allowed in employer
Vesting requirements for
Employer plan funding
Plan Type
contributionsa
contributions?
employer contributions
requirements
§403(b)
Lesser of 25% of pay or $30,000
No
Immediate except for failure
Contributions fund individual
(indexed in $5,000 increments);
to pay premiums
annuities or may be invested in
also limited by exclusion
custodial trust fund accounts
allowance that considers all
contributions over career
§457
No employer contributions
Not applicable
Not applicable
In nonprofit plans, funds held by
employer; in state/local plans,
contributions and investment
earnings held in individual trust
fund accounts
Money
Lesser of 25% of pay or $30,000
No
ERISA rulesb
Minimum funding requirements
purchase
(indexed in $5,000 increments)
apply; contributions are made
according to a fixed formula
Profit-
Aggregate amount cannot exceed
Yes
ERISA rulesb
Contributions set by plan
sharing
15% of compensation of all
sponsor, do not have to be from
employees; also limited to lesser
current profits; minimum
of 25% of individual’s pay or
funding requirements do not
$30,000 (indexed in $5,000
apply
increments)
Private-
Employer must contribute
Yes, within a
ERISA rulesb
Determined by ERISA and tax
sector
enough to avoid negative balance
minimum/maximum range
code;c must fund benefits earned
defined
in funding standard account;
each year and amortize any past
benefit
may not exceed full funding limit
unfunded liabilities over 30-40
years
a The annual employee pay upon which employer contributions can be based is limited to $170,000 (indexed in $10,000 increments). Limits on employer
contributions apply to employee salary deferrals as well, because these deferrals are considered in the tax code to be contributions made by employers
at the behest of employee elections to defer current receipt of a part of pay.
b ERISA and the tax code require that employer contributions be fully vested after completion of 5 years of service, or after 7 years if vested in steps of 20%
beginning after 3 years of service.
c ERISA and the tax code set rules for the funding of defined benefit (DB) pension liabilities. DB plans must establish a funding standard account to which
charges and credits are made. Plans must fund pension benefits earned each year (normal cost) and amortize past service liabilities over 30 to 40
years. Actuarial gains and losses must be amortized over 5 years and changes in actuarial assumptions over 10 years. An additional funding
requirement (deficit reduction contribution) applies to plans that are less than 90% funded. The funding standard account provides employers with
some funding flexibility.

CRS-33
Table A-4. Nondiscrimination and Integration Rules by Retirement Plan Type
Plan Type
Nondiscrimination rulesa
Social security integrationb
Rules for top-heavy plansc
Traditional
Not applicable
Not applicable
Not applicable
IRA
Roth IRA
Not applicable
Not applicable
Not applicable
SEP IRA
Not applicable
Difference in contribution rates
Applicable
above and below Social Security
taxable wage base cannot exceed
5.7 percentage points
SARSEP
Not applicable
Not allowed
Applicable
IRA
SIMPLE
Not applicable
Not allowed
Exempt
IRA
§401(k)
Cannot discriminate among employees in
Not allowed
Applicable
regard to benefit availability, rights, or
features
SIMPLE
Cannot discriminate among employees in
Not allowed
Exempt
§401(k)
regard to benefit availability, rights, or
features
Federal
Not applicable
Not allowed
Exempt
Thrift
Savings
§403(b)
Cannot discriminate among employees in
Difference in contribution rates
Applicable
regard to benefit availability, rights, or
above and below Social Security
features
taxable wage base cannot exceed
5.7 percentage points
§457
Not applicable
Not applicable
Not applicable
Money
Cannot discriminate among employees in
Difference in contribution rates
Applicable
purchase
regard to benefit availability, rights, or
above and below Social Security
features
taxable wage base cannot exceed
5.7 percentage points

CRS-34
Plan Type
Nondiscrimination rulesa
Social security integrationb
Rules for top-heavy plansc
Profit-
Cannot discriminate among employees in
Difference in contribution rates
Applicable
sharing
regard to benefit availability, rights, or
above and below Social Security
features; allocation of employer
taxable wage base cannot exceed
contributions cannot favor highly
5.7 percentage points
compensated employees
Private-
Cannot discriminate among employees in
Offset plan cannot reduce
Applicable
sector
regard to benefit availability, rights, or
pension below half of accrued
defined
features; plan must benefit at least the lesser
benefit; difference in accrual
benefit
of: (1) 50 employees, or (2) the greater of (a)
rates above and below Social
40% of all employees, or (b) 2 employees
Security wage base cannot
exceed 0.75 percentage point in
excess plan
a This column presents the nondiscrimination rules that apply to employer-provided benefits. Nondiscrimination testing of salary deferrals is displayed
in Table A-2.
b If an employer takes Social Security benefits explicitly into account in designing a retirement plan, the plan is said to be integrated. Since Social
Security benefits favor lower-paid workers, the tax code permits employer-sponsored benefits to favor higher-paid workers, so long as the benefits
in combination with Social Security are nondiscriminatory.
c A top-heavy defined contribution plan is one in which the accounts of key employees hold more than 60% of the plan’s total assets. A top-heavy defined
benefit plan is one in which the present value of accrued benefits for key employees exceeds 60% of the present value of all accrued benefits. Top-
heavy plans are required to vest employer contributions at least as fast as: (1) 100% after 3 years of service; or (2) 20% a year after 2 years. Top-
heavy plans also are required to provide employer contributions for non-key employees at least as great as the lesser of: (1) 3% of pay; or (2) the
rate provided for key employees. These rules apply only in years in which a plan meets the top-heavy criteria.

CRS-35
Table A-5. Plan Distribution Rules by Retirement Plan Typea
Excise tax on early
Excise tax on late
In-service
Plan Type
withdrawals
withdrawals
withdrawals
Rollover options
Loan availability
Traditional
10% of taxable
50% of amount by which
Allowed
Once a year to another
None
IRA
amount withdrawn
withdrawal falls short of
traditional IRA; can be
before age 59½ unless
minimum required
converted to Roth IRA
exceptionb applies
distributionc after age 70½
by payment of tax on
tax-deferred amounts
by accountholders with
AGI of less than
$100,000
Roth IRA
10% of investment
None
Allowed
Once a year to another
None
earnings withdrawn
Roth IRA
before age 59½ unless
exceptionb applies
SEP IRA
10% of taxable
50% of amount by which
Allowed
To another SEP IRA or
None
amount withdrawn
withdrawal falls short of
traditional IRA; can be
before age 59½ unless
minimum required
converted to Roth IRA
exceptionb applies
distributionc after age 70½
SARSEP
10% of taxable
50% of amount by which
Allowed
To another SARSEP
None
IRA
amount withdrawn
withdrawal falls short of
IRA or traditional IRA;
before age 59½ unless
minimum required
can be converted to
an exceptionb applies
distributionc after age 70½
Roth IRA
SIMPLE
10% of taxable
50% of amount by which
Allowed
To another SIMPLE
None
IRA
amount withdrawn
withdrawal falls short of
IRA or traditional IRA
before age 59½ unless
minimum required
(if in SIMPLE at least
an exceptionb applies;
distributionc after age 70½
2 years); can be
penalty is 25% if
converted to Roth IRA
withdrawal is within
first 2 years of
SIMPLE participation
§401(k)
10% of taxable
50% of amount by which
Allowed after age
To an employer plan
Limited to the lesser of
amount withdrawn
withdrawal falls short of
59½, earlier in case of
that accepts rollovers
(1) $50,000 or (2) the
before age 59½ unless
minimum required
financial hardship
or to traditional IRA
greater of (a) 50% of
exceptiond applies
distributionc after later of
vested amount or (b)
age 70½ or retirement
$10,000

CRS-36
Excise tax on early
Excise tax on late
In-service
Plan Type
withdrawals
withdrawals
withdrawals
Rollover options
Loan availability
SIMPLE
10% of taxable
50% of amount by which
Allowed after age
To an employer plan
Limited to the lesser of
§401(k)
amount withdrawn
withdrawal falls short of
59½, earlier in case of
that accepts rollovers
(1) $50,000 or (2) the
before age 59½ unless
minimum required
financial hardship
or to traditional IRA
greater of (a) 50% of
exceptiond applies
distributionc after later of
vested amount or (b)
age 70½ or retirement
$10,000
Federal
10% of taxable
50% of amount by which
Allowed in case of
To an employer plan
Limited to sum of
Thrift
amount withdrawn
withdrawal falls short of
financial hardship;
that accepts rollovers
employee’s contributions
Savings
before age 59½ unless
minimum required
one-time withdrawal
or to traditional IRA
plus related investment
exceptiond applies
distributionc after later of
allowed by employees
earnings; also limited to
age 70½ or retirement
after age 59½
lesser of (1) $50,000 or
(2) the greater of (a) 50%
of vested amount or (b)
$10,000
§403(b)
10% of taxable
50% of amount by which
Allowed after age
To another §403(b)
Limited to the lesser of
amount withdrawn
withdrawal falls short of
59½, earlier in case of
plan or to traditional
(1) $50,000 or (2) the
before age 59½ unless
minimum required
financial hardship
IRA
greater of (a) 50% of
exceptiond applies
distributionc after later of
vested amount or (b)
age 70½ or retirement;
$10,000
minimum required
distribution of §403(b)
assets acquired before
1987 can be delayed to age
75
§457
No excise tax;
50% of amount by which
Allowed after age
To another §457 plan
Not allowed in nonprofit
withdrawals allowed
withdrawal falls short of
70½, earlier for
plans; in state/local
only in event of job
minimum required
emergencies
plans, allowed up to
separation, attainment
distributionc after later of
lesser of (1) $50,000 or
of age 70½, financial
age 70½ or retirement
(2) greater of (a) 50% of
emergency, or death
vested amount or (b)
$10,000
Money
10% of taxable
None; plan must start
Allowed
To an employer plan
Limited to the lesser of
purchase
amount withdrawn
distributions after later of
that accepts rollovers
(1) $50,000 or (2) the
before age 59½ unless
age 70½ or retirement
or to traditional IRA
greater of (a) 50% of
exceptiond applies
vested amount or (b)
$10,000

CRS-37
Excise tax on early
Excise tax on late
In-service
Plan Type
withdrawals
withdrawals
withdrawals
Rollover options
Loan availability
Profit-
10% of taxable
None; plan must start
Allowed for assets
To an employer plan
Limited to the lesser of
sharing
amount withdrawn
distributions after later of
held in plan at least 2
that accepts rollovers
(1) $50,000 or (2) the
before age 59½ unless
age 70½ or retirement
years
or to traditional IRA
greater of (a) 50% of
exceptiond applies
vested amount or (b)
$10,000
Private-
10% of taxable
None; plan must start
Not allowed
To an employer plan
Limited to the lesser of
sector
amount withdrawn
distributions after later of
that accepts rollovers
(1) $50,000 or (2) the
defined
before age 59½ unless
age 70½ or retirement
or to traditional IRA
greater of (a) 50% of
benefit
exceptiond applies
vested amount or (b)
$10,000
a Generally, retirement income is subject to the federal income tax upon receipt, but only to the extent that the funds have not been taxed previously. If
income is received from an account or plan that includes both taxed and untaxed funds, the income tax applies to the same proportion of the income
as untaxed funds make up of the total retirement asset.
b The exceptions are: death, disability, withdrawal in the form of a life annuity, higher education expenses, up to $10,000 for a qualified home purchase,
payment of medical expenses in excess of 7.5% of AGI, or payment of health insurance premiums after receiving unemployment benefits for at least
12 weeks. Withdrawals from a Roth IRA are presumed to come first from contributions, which usually are not taxed when withdrawn and thus are
not subject to this 10% penalty.
c The minimum required annual distribution must be enough to use up the asset over the accountholder’s (and beneficiary’s) expected lifetime(s).
d The exceptions are: death, disability, retirement under an early retirement provision after attainment of age 55, withdrawal in the form of a life annuity,
or payment of medical expenses in excess of 7.5% of AGI.

CRS-38
Table A-6. Rulesa for Reporting, Disclosure, Fiduciary Responsibility and Allowable Investments
by Retirement Plan Type
Required reporting by plan to
Required disclosure by plan
Requirements on
Plan Type
federal agencies
to participants
plan fiduciaries
Prohibited investments
Traditional
Distributions reported to IRS on
Distributions reported to
Exempt from ERISA
Art, antiques, and other
IRA
Form 1099-R; contributions and
accountholder on Form 1099-R;
rulesb
collectibles (except certain
account balances reported to IRS on
contributions and account
precious metals); penalty for
Form 5498
balances reported to
prohibited transactionsc
accountholder on Form 5498
Roth IRA
Distributions reported to IRS on
Distributions reported to
Exempt from ERISA
Art, antiques, and other
Form 1099-R; contributions and
accountholder on Form 1099-R;
rulesb
collectibles (except certain
account balances reported to IRS on
contributions and account
precious metals); penalty for
Form 5498
balances reported to
prohibited transactionsc
accountholder on Form 5498
SEP IRA
Distributions reported to IRS on
Distributions reported to
ERISA rules applyb
Art, antiques, and other
Form 1099-R; contributions and
accountholder on Form 1099-R;
collectibles (except certain
account balances reported to IRS on
contributions and account
precious metals); penalty for
Form 5498
balances reported to
prohibited transactionsc
accountholder on Form 5498
Plan data reported to IRS on Form
5500 unless plan begun as model
Simplified version of ERISA
plan
disclosure rulesd also applies
SARSEP
Distributions reported to IRS on
Distributions reported to
ERISA rules applyb
Art, antiques, and other
IRA
Form 1099-R; contributions and
accountholder on Form 1099-R;
collectibles (except certain
account balances reported to IRS on
contributions and account
precious metals); penalty for
Form 5498
balances reported to
prohibited transactionsc
accountholder on Form 5498
Plan data reported to IRS on Form
5500 unless plan begun as model
Simplified version of ERISA
plan
disclosure rulesd also applies

CRS-39
Required reporting by plan to
Required disclosure by plan
Requirements on
Plan Type
federal agencies
to participants
plan fiduciaries
Prohibited investments
SIMPLE
Distributions reported to IRS on
Distributions reported to
Employer relieved of
Art, antiques, and other
IRA
Form 1099-R; contributions and
accountholder on Form 1099-R;
fiduciary liability for
collectibles (except certain
account balances reported to IRS on
contributions and account
losses related to
precious metals); penalty for
Form 5498
balances reported to account-
participant control of
prohibited transactionsc
holder on Form 5498
assets, which occurs
at earliest of: (1)
Amended ERISA rules also
choice among
apply: trustee must provide
investment options;
annual plan summary; employer
(2) rollover of funds
must give plan description to
to another account;
eligibles and notify them of
(3) completion of 1
chance to elect participation
year in plan
§401(k)
Distributions reported to IRS on
Distributions reported to
ERISA rules applyb
Investments in securities or
Form 1099-R; contributions and
participants on Form 1099-R
real property of the employer
account balances reported to IRS on
of deferrals in excess of 1% of
Form 5498
ERISA rules also applyd
pay cannot exceed 10% of total
unless individual chooses;
Plan data reported to IRS on Form
penalty for prohibited
5500; simplified reporting applies for
transactionsc
plans with less than 100 participants
SIMPLE
Distributions reported to IRS on
Distributions reported to
ERISA rules applyb
Investments in securities or
§401(k)
Form 1099-R; contributions and
participants on Form 1099-R
real property of the employer
account balances reported to IRS on
of deferrals in excess of 1% of
Form 5498
ERISA rules also applyd
pay cannot exceed 10% of total
unless individual chooses;
Plan data reported to IRS on Form
penalty for prohibited
5500; simplified reporting applies for
transactionsc
plans with less than 100 participants
Federal
Distributions reported to IRS on
Transactions and account
Rules set forth in USC
Investment limited to five
Thrift
Form 1099-R
balances reported to participants
Title 5, Section 8477
funds established by law, two
Savings
semi-annually; plan summary
of which are not yet in
provided by agencies to
operation
employees when plan changes

CRS-40
Required reporting by plan to
Required disclosure by plan
Requirements on
Plan Type
federal agencies
to participants
plan fiduciaries
Prohibited investments
§403(b)
Distributions reported to IRS on
Distributions reported to
ERISA rules applyb
Penalty for prohibited
Form 1099-R; contributions and
participants on Form 1099-R
transactionsc
account balances reported to IRS on
Form 5498
ERISA rules also applyd
Plan data reported to IRS on Form
5500; simplified reporting applies for
plans with less than 100 participants
§457
Distributions reported to IRS on
Nonee
Nonee
Nonee
Form 1099-R
Money
Distributions reported to IRS on
Distributions reported to
ERISA rules applyb
Penalty for prohibited
purchase
Form 1099-R
participants on Form 1099-R
transactionsc
Plan data reported to IRS on Form
ERISA rules also applyd
5500; simplified reporting applies for
plans with less than 100 participants
Profit-
Distributions reported to IRS on
Distributions reported to
ERISA rules applyb
Penalty for prohibited
sharing
Form 1099-R
participants on Form 1099-R
transactionsc
Plan data reported to IRS on Form
ERISA rules also applyd
5500; simplified reporting applies for
plans with less than 100 participants
Private-
Distributions reported to IRS on
Distributions reported to
ERISA rules applyb
Penalty for prohibited
sector
Form 1099-R
participants on Form 1099-R
transactions;c investment in
defined
employer’s securities or real
benefit
Plan data reported to IRS on Form
ERISA rules also applyd
property cannot exceed 10% of
5500; simplified reporting applies for
plan assets
plans with less than 100 participants
a In addition to the requirements shown in this table, the financial institutions that invest plan assets also must file reports to comply with federal and state
laws regulating banks, brokerage firms, and insurance companies.
b ERISA requires that plan fiduciaries act prudently and solely in the interests of plan participants and beneficiaries.
c Prohibited transactions involve the sale or transfer of assets between a participant, plan sponsor, or fiduciary and another interested party (e.g., family
members, plan service providers). The penalty is an excise tax, raised to 15% from 10% by P.L. 105-34.
d Each participant must be furnished with a summary plan description and a summary annual financial report.
e Though federal laws on disclosure, fiduciary standards, and investment policy do not apply to §457 plans, state laws may apply.

CRS-41
Appendix B: Abbreviations Used in This Report
ADP. Average deferral percentage, a measure used in the nondiscrimination test for §401(k) and
§403(b) plans.
AGI. Adjusted gross income.
CRS. Congressional Research Service.
CSRS. Civil Service Retirement System.
DB. A defined benefit pension plan, which promises participants a future benefit based on tenure and
salary and holds funds in reserve to cover the obligations of those promised benefits.
DC. A defined contribution plan, which accrues funds in individual accounts for each participant. The
assets in an individual’s account become the vested property of the participant for use in retirement.
DoL. U.S. Department of Labor.
ERISA. Employee Retirement Income Security Act of 1974 (P.L. 93-406).
FERS. Federal Employees’ Retirement System.
FICA. Federal Insurance Contributions Act, which authorizes collection of the federal payroll tax that
funds the Social Security system.
FUTA. Federal Unemployment Tax Act, which authorizes collection of the federal payroll tax that
funds certain activities under the federal-state Unemployment Compensation system.
GAO. U.S. General Accounting Office.
GPO. U.S. Government Printing Office.
IRA. Individual retirement account.
IRS. U.S. Internal Revenue Service.
PWBA. Pension and Welfare Benefits Administration, the division of the U.S. Department of Labor
that has enforcement responsibilities under ERISA.
SARSEP. A simplified employee pension plan that includes a salary reduction agreement as authorized
by §408(k) of the tax code.
§401(k) Plan. A qualified employer retirement plan that includes a salary reduction agreement
authorized by §401(k) of the tax code.
§403(b) Plan. A tax-deferred annuity plan authorized by §403(b) of the tax code for sponsorship by
certain educational, cultural, and research organizations.
§457 Plan. A nonqualified deferred compensation plan authorized by §457 of the tax code for
sponsorship by government and nonprofit employers.
§501(c)(18) Plan. A union-sponsored thrift plan granted tax-deferred status by §501(c)(18) of the tax
code.
SEP. A simplified employee pension plan as authorized by §408 of the tax code.

CRS-42
SIMPLE. A savings incentive match plan for employees of small employers as authorized by §408(p)
of the tax code.
USC. United States Code.

CRS-43
Appendix C: Location of Statutory Provisions
For Retirement Plans
Law/section number
Provisions of section
Internal Revenue Code
of 1986:

72(a)
Treatment of annuities as income
72(b)
Exclusion of contributions to retirement plans from income
72(c)
Definitions of certain terms used in other sections
72(h)
Lump-sum payment option
72(m)
Special rules for annuities and distributions
72(o)
Rules for deductible employee contributions
72(p)
Rules for plan loans
72(q)
Penalty for early withdrawal
72(s)
Distribution requirements upon death of accountholder
72(t)
10% early withdrawal excise tax
219
Adjustment to AGI for IRA contributions
401(a)
Rules for qualified employer retirement plans
401(b)
Retroactive plan amendments
401(c)
Rules for self-employed individuals
401(d)
Rules for owner-employee plans
401(f)
Rules for custodial accounts
401(g)
Definition of annuity
401(i)
Definition of union-negotiated qualified plan
401(k)
Rules for cash or deferred arrangements (§401(k) plans)
401(m)
Nondiscrimination test for employee salary deferral contributions and
matching employer contributions
401(n)
Coordination of qualified plan rules with qualified domestic relations
orders

CRS-44
Law/section number
Provisions of section
402(a)
Rules for rollovers
402(b)
Tax treatment of contributions to nonexempt trust
402(c)
Tax treatment of foreign pension trusts
402(e)
Tax treatment of lump-sum distributions
402(f)
Requirement for written explanation of rollovers
402(g)
Limits on §401(k) and §403(b) elective deferrals
402(h)
Limits on contributions to SEPs
402(i)
Treatment of self-employed as employees for certain purposes
403(a)
Taxation of qualified employee annuities
403(b)
Rules for tax-sheltered annuities for §501(c)(3) organizations and public
schools (§403(b) plans)
403(c)
Taxation of nonqualified annuities
404
Tax treatment of employer contributions
406
Treatment of employees of foreign affiliates
407
Treatment of employees of domestic firm with foreign operations
408
Rules for IRAs, SEPs, SIMPLEs
410
Minimum standards for plan participation
411
Minimum standards for vesting of benefits
412
Minimum funding standards
413
Rules for collectively bargained plans, multiemployer plans
414(a)
Service for predecessor employer
414(b)
Employees of controlled group of corporations
414(c)
Employees of commonly controlled partnerships and proprietorships
414(d)
Definition of governmental plan

CRS-45
Law/section number
Provisions of section
414(e)
Definition and treatment of church plans
414(f)
Definition of multiemployer plan
414(g)
Definition of plan administrator
414(h)
Tax treatment of contributions
414(i)
Definition of defined contribution (DC) plan
414(l)
Plan mergers and consolidations, transfers of plan assets
414(m)
Employees of affiliated service group
414(n)
Employee leasing
414(p)
Definition of qualified domestic relations order
414(q)
Definition of highly compensated employee
414(r)
Rules for separate lines of business (SLOB rules)
414(s)
Definition of compensation
415
Limits on benefits and contributions
416
Rules for top-heavy plans
417
Minimum standards for survivor annuity provisions
457
Rules for deferred compensation plans of state and local governments and
tax-exempt organizations (§457 plans)
501(c)(18)
Tax exemption for certain employee pension trusts
3121
Treatment of retirement contributions by FICA tax
3306
Treatment of retirement contributions by FUTA tax
4972
Excise tax on employer for nondeductible plan contributions
4973
Excise tax on excess contributions to IRAs and §403(b) plans
4974
Excise tax on failure to make minimum required distribution
4975
Excise tax on prohibited fund transactions
4979
Excise tax on employer for excess plan contributions
4980A (repealed) Excise tax on excess plan distributions

CRS-46
Law/section number
Provisions of section
Employee Retirement
Income Security
Act of 1974:

3
Definition of terms
4
Types of benefit plans covered
101-111
Reporting and disclosure rules
202
Rules for employee coverage
203
Vesting standards
204
Benefit accrual rules
205
Rules for joint and survivor annuity option
206
Rules for benefit commencement
401-405,
Rules for fiduciary conduct
409-413
406, 408
Prohibited transactions
501-513
Administration and enforcement
514
Preemption of state laws