Order Code RL31939
Report for Congress
Received through the CRS Web
Pensions and Retirement Saving Plans:
Comparison of H.R. 1776 with Current Law
May 16, 2003
Patrick Purcell
Specialist in Social Legislation
Domestic Social Policy Division
Congressional Research Service ˜ The Library of Congress

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Pensions and Retirement Saving Plans:
Comparison of H.R. 1776 with Current Law
Summary
H.R. 1776, (Portman/Cardin) the Pension Preservation and Savings Expansion
Act was introduced April 11, 2003. Among the major provisions of the bill, it would:
! make permanent the pension provisions of the Economic Growth
and Tax Relief Reconciliation Act of 2001 (EGTRRA), which
otherwise expire after 2010;
! accelerate the scheduled increases in contribution limits to
individual retirement accounts and employer-sponsored plans, as
included in the EGTRRA of 2001;
! expand and make permanent a non-refundable income tax credit for
low- and moderate-income individuals who contribute to a qualified
retirement plan;
! replace the interest rate on 30-year Treasury bonds as the rate used
by defined benefit plans to calculate funding ratios and lump-sum
distribution amounts with a rate based on an index of high-quality,
long-term corporate bonds;
! allow retirees to use distributions from a retirement plan to pay
premiums for employer-based health insurance on a pre-tax basis;
! allow up to $2,000 of retirement annuity income to be free of income
taxes;
! raise the age at which participants must begin to take distributions
from pension plans and individual retirement accounts from 70½ to
75, and reduce the excise tax for not taking distributions from 50%
to 20% of the amount not distributed;
! allow workers to diversify company stock acquired through
employer matching contributions after 3 years of service and
company stock acquired through other employer contributions after
5 years of service;
! impose an excise tax on excessive payments to executives prior to
bankruptcy;
! direct the IRS to adopt new mortality assumptions for “blue collar”
workers;
! increase the permissible deduction for employers that maintain both
a defined benefit and defined contribution plan;
! allow small employers to make additional contributions to SIMPLE
plans, establish employee-funded SIMPLE plans, and adopt a
§401(k) plan mid-year;
! repeal the IRA “marriage penalty”; enhance portability of state and
local pension benefits; and
! allow disabled persons to contribute to retirement plans and to
qualify for Supplemental Security Income (SSI) while holding up to
$75,000 of retirement assets.
This report will be updated as further legislative developments occur.

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Contents
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Title I. Making Today’s Savings Opportunities Permanent . . . . . . . . . . . . . 2
Title II. Preserving Retirement Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Title III. Enhancing Fairness and Pension Portability . . . . . . . . . . . . . . . . . . 5
Title IV. Increasing Retirement Plan Participation and Savings . . . . . . . . . . 9
Title V. Expanding Retirement Plan Coverage to Employees
of Small Businesses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Title VI. Strengthening Individual Retirement Arrangements . . . . . . . . . . 14
Title VII. Revitalizing Defined Benefit Plans . . . . . . . . . . . . . . . . . . . . . . . 16
Title VIII. Simplify and Streamline Retirement Plan Rules . . . . . . . . . . . 18
Title IX. Expanding Retirement Savings Opportunities for Employees
of Tax-Exempt Organizations and Governments . . . . . . . . . . . . . . . . 22
Title X. Restricting Excessive Remuneration . . . . . . . . . . . . . . . . . . . . . . . 23
Title XI. Defined Contribution Plan Protections . . . . . . . . . . . . . . . . . . . . 24
Title XII. Other Tax Provisions Relating to Pensions . . . . . . . . . . . . . . . . 25
Title XIII. Stock Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Title XIV. Other Elements of Retirement Security . . . . . . . . . . . . . . . . . . 27
Title XV. Reducing Regulatory Burdens . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Title XVI. Social Security and Medicare Held Harmless . . . . . . . . . . . . . 28
List of Tables
Side-by-Side Comparison of H.R. 1776 as Introduced in the
House of Representatives with Current Law . . . . . . . . . . . . . . . . . . . . . . . . . 2

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Pensions and Retirement Saving Plans:
Comparison of H.R. 1776 with Current Law
Introduction
H.R. 1776 (Portman/Cardin), the Pension Preservation and Savings Expansion
Act was introduced April 11, 2003. Provisions of the bill would make permanent the
pension provisions of the Economic Growth and Tax Relief Reconciliation Act of
2001 (EGTRRA), which otherwise expire after 2010, and accelerate the scheduled
increases in contribution limits to individual retirement accounts and employer-
sponsored plans that were included in the EGTRRA of 2001. The bill also would
expand and make permanent a non-refundable tax credit for low- and
moderate-income individuals who contribute to a qualified retirement plan. It would
replace the interest rate on 30-year Treasury bonds as the rate used by defined benefit
plans to calculate funding ratios and lump-sum distribution amounts. It would allow
retirees to use distributions from a retirement plan to pay premiums for
employer-based health insurance on a pre-tax basis, and allow up to $2,000 of
retirement annuity income to be free of income taxes. It would raise from 70½ to 75
the age at which participants must begin to take distributions from pension plans and
individual retirement accounts and reduce the excise tax for not taking required
distributions. It would allow workers to diversify company stock acquired through
employer matching contributions after 3 years of service and company stock acquired
through other employer contributions after 5 years of service. The bill would allow
disabled persons to contribute unearned income to retirement plans and to qualify for
Supplemental Security Income (SSI) while holding retirement assets of $75,000 or
more. The following pages provide a side-by-side comparison of all provisions of
H.R. 1776 with current law.

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CRS-2
Side-by-Side Comparison of H.R. 1776 as Introduced
in the House of Representatives with Current Law
Section title
Current law
H.R. 1776
Title I. Making Today’s Savings Opportunities Permanent
Section 101. Pensions and individual
Section 901 of the Economic Growth and Tax
Provides that Section 901of the Economic Growth
retirement arrangement provisions of
Relief Reconciliation Act of 2001 (“EGTRRA,”
and Tax Relief Reconciliation Act of 2001 shall
Economic Growth and Tax Relief
P.L. 107-16) provides that the Act shall not apply
not apply to the provisions of that law relating to
Reconciliation Act of 2001 made
after December 31, 2010.
pensions and individual retirement arrangements.
permanent
Section 102. Saver’s credit made
Section. 618 of P.L. 107-16 authorized a non-
Provides for permanent extension of the non-
permanent
refundable tax credit to certain low- and
refundable tax credit.
moderate-income individuals for elective salary
deferrals to an employer-sponsored plan or
contributions to an individual retirement account.
The credit does not apply to years that begin after
December 31, 2006.

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CRS-3
Section title
Current law
H.R. 1776
Title II. Preserving Retirement Assets
Section 201. Simplification and
Section 401(a)(9) of the Internal Revenue Code
The required beginning date for distributions
u p d a t i n g o f t h e mi n i mu m
(I.R.C.) requires plan participants and owners of
would be increased from age 70½ to 75 on the
distribution rules
traditional IRAs to begin taking distributions no
following schedule:
later than April of the year after reaching age
70½. There is an exception that allows
Year
Required Beginning Date:
participants in employer-sponsored plans who are
still working at age 70½ to delay distributions
2004-2005
Dec. 31 of year attain age 72
until April of the year after they have retired,
2006-2007
Dec. 31 of year attain age 73
unless they own 5% or more of the firm.
2008-2009
Dec. 31 of year attain age 74
Distributions must be made over the life
2010 and later
Dec. 31 of year attain age 75
expectancy of the plan participant, or over the
joint life expectancies of the plan participant and
As under current law, distributions could be
his or her designated beneficiary. If a participant
delayed until retirement (if later) except for
in a defined benefit plan retires after age 70½, the
traditional IRAs and 5% owners of a firm.
benefit must be increased in an actuarially fair
Actuarial adjustment would continue to be
manner. Failure to take a required distribution
required for defined benefit plan participants who
results in a tax penalty equal to 50% of the
retire after age 70½. To prevent the occurrence of
amount that should have been distributed.
two required distributions in 1 year, the required
beginning date would be December 31 of the later
of (1) the year the participant reaches the
designated age that required distributions must
begin or (2) the year of retirement. An employee
retiring in December would be treated as retiring
in December of the following year. The excise
tax for failure to take a required minimum
distribution would be reduced from 50% to 20%
of the amount that should have been distributed.
Provisions would be effective after December 31,
2003.

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CRS-4
Section title
Current law
H.R. 1776
Section 202. Treatment of unclaimed
I.R.C. Section 411(a)(11) provides that if the
Plans would be permitted to transfer distributions
benefits
present value of a participant’s vested benefit
subject to Section 657 of EGTRRA (distributions
exceeds $5,000, a plan may not distribute the
of more than $1,000 but less than $5,000) to the
accrued benefit to a departing employee without
PBGC rather than to an IRA. Distributions of less
his or her consent. Section 657 of EGTRRA
than $1,000 also could be transferred to the
amended I.R.C. Section 401(a)(31) to require the
PBGC. Distributions of more than $5,000 could
direct transfer to an IRA of distributions of less
be transferred to the PBGC after one year unless
than $5,000 (but more than $1,000) unless the
the participant directs otherwise. Account
participant directs the distribution to another
balances of missing participants in defined
eligible plan or elects to receive the distribution
contribution plans that terminate could be
in cash.
transferred to the PBGC, effective January 1,
2005. All state escheat laws that might otherwise
If a participant in a terminated plan cannot be
apply to these transfers would be superseded by
located, the plan is authorized to purchase an
the I.R.C., effective on the date of enactment.
annuity or transfer the benefits of the participant
to the Pension Benefit Guaranty Corporation
(PBGC). Neither defined benefit plans that have
not terminated nor defined contribution plans can
transfer benefits of missing participants to the
PBGC.
Section 203. Facilitation under
ERISA Section 404(c) provides that if an
The relief from fiduciary liability under ERISA
fiduciary rules of certain rollovers
employee exercises control over the investment
Section 404(c) would be extended to the transfer
and annuity distributions
of the funds in a qualified retirement plan, the
to an IRA or annuity contract of amounts
employer will not be held liable for investment
distributed from the plan under I.R.C. Section
losses that the employee experiences as a result
401(a)(31) if the participant elected the transfer or
of exercising that control.
distribution and the participant was given an
opportunity to elect another individual retirement
plan or another annuity contract.

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CRS-5
Section title
Current law
H.R. 1776
Section 204. Equalizing treatment of
Section 401(a)(9) of the I.R.C. requires plan
The Secretary of the Treasury would be directed
defined benefit plans and defined
participants to begin taking distributions no later
to permit defined benefit plans to meet the
contribution plans
than April 1 of the year after reaching age 70½.
required distribution rules of the Internal Revenue
Participants in employer-sponsored plans who
Code by satisfying the rules applicable to annuity
are still working at age 70½ can delay
contracts distributed under defined contribution
distributions until April 1 of the year after they
plans, as specified under Temporary Treasury
have retired. This exception does not apply
Regulation 1.401(a)(9)-6T Q&A 4(b), or by
either to traditional IRAs or to plan participants
satisfying any final regulations to the extent that
who own 5% or more of the firm that sponsors
the final regulations permit additional means of
the plan. Distributions must be made over the life
satisfying the relevant sections of the Code.
expectancy of the plan participant, or over the
joint life expectancies of the plan participant and
his or her designated beneficiary. The Treasury
Department has issued proposed regulations
under which the distribution requirements for
annuity payments under a defined benefit plan
differ from the requirements for payments from
an annuity purchased through a defined
contribution plan.
Section. 205. Study concerning
No provision.
The Secretary of the Treasury would conduct for
defined contribution plan losses due
the Committee on Ways and Means and the
to market volatility
Committee on Finance a study to evaluate
possible ways to lessen defined contribution plan
losses resulting from market volatility.
Title III. Enhancing Fairness and Pension Portability
Section 301. Allow transfers to
Under I.R.C. Section 408, transfer of IRA assets
Transfer of IRA assets between spouses’ IRAs
spouse’s retirement plans
from the IRA owner to his or her spouse’s IRA is
would in most cases not be treated as a taxable
taxable except in cases of divorce or death of the
distribution.
account owner.
Section. 302. Faster vesting of
Under I.R.C. Section 411(a), employees must be
Vesting in nonelective employer contributions
employer nonelective contributions
fully vested in nonelective employer
would be the same as the vesting schedule for
contributions (i.e., contributions other than
employer matching contributions. Employees
matching contributions) after no more than 5
would be fully vested in nonelective employer
years of service, or in increments of 20%
contributions after no more than 3 years of
beginning in the 3rd year with full vesting after 7
service, or in increments of 20% beginning in the
years. Employees must be fully vested in
2nd year with full vesting after 6 years.
employer matching contributions after no more
than 3 years of service, or in increments of 20%
beginning in the 2nd year with full vesting after 6
years.

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CRS-6
Section title
Current law
H.R. 1776
Section 303. Rollovers by nonspouse
If a participant in an employer-sponsored plan
A non-spouse beneficiary of a deceased plan
beneficiaries
dies and the named beneficiary of the deceased
participant could transfer the assets of the plan to
participant is not the participant’s spouse,
an IRA in the deceased participant’s name and
distributions from the plan to the named
receive distributions from the IRA over his or her
beneficiary cannot be rolled over into another
remaining life expectancy.
tax-qualified plan and are taxable distributions.
If the owner of an IRA dies, and the named
beneficiary of the deceased account owner is not
the account owner’s spouse, the beneficiary may
maintain the IRA in the name of the decedent.
The beneficiary is required to take distributions
from the plan based on his or her remaining life
expectancy. If an employer-sponsored plan
requires more rapid distributions (e.g., a lump
sum), the plan’s rules control the distribution.
Section. 304. Allow direct rollovers
Individuals with modified adjusted gross income
Individuals with modified adjusted gross income
from retirement plans to Roth IRAs
under $100,000 can convert a traditional IRA to
under $100,000 could roll over a distribution from
a Roth IRA. The converted amount, minus the
an employer-sponsored plan to a Roth IRA. The
amount originally contributed to the IRA by the
converted amount, minus the amount originally
participant (the account “basis”) is treated as
contributed to the plan by the participant (the
taxable income in the year of the conversion.
account “basis”) would be treated as taxable
Assets held in an employer-sponsored plan
income in the year of the conversion.
cannot be rolled over into a Roth IRA; however,
they can be rolled over into a traditional IRA
which can then be converted to a Roth IRA.
Section 305. Exclusion of percentage
Most distributions from retirement plans are
As an incentive for plan participants to choose
of lifetime annuity payments
taxed as ordinary income, regardless of whether
annuity payments rather than lump-sum
they are received as a lump-sum distribution or in
distributions, a percentage of annuity payments
the form of an annuity. (That part of any
from an employer-sponsored plan or an IRA could
distribution that represents repayment to the
be excluded from taxable income. For tax years
participant of amounts that he or she contributed
2004 to 2007, 5% of annuity payments up to
to the plan with after-tax dollars is excluded from
$20,000 could be excluded from income (i.e., a
taxable income.)
maximum exclusion of $1,000 per year.) In 2008
and later, 10% of annuity payments could be
excluded. The $20,000 limit on countable annuity
payments would be indexed to inflation. The
exclusion would be phased out for single tax filers
with adjusted gross income between $75,000 and
$90,000 and for joint filers with AGI from
$150,000 to $180,000.

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CRS-7
Section title
Current law
H.R. 1776
Section 306. Rollover of after-tax
Section 643 of EGTRRA provided that
Clarifies that amounts that were contributed on an
amounts in annuity contracts
distributions from a tax-qualified employer-
after-tax basis to a §403(b) annuity may be rolled
sponsored plan or an IRA that include amounts
over into a §401(k) plan, and vice versa.
that were contributed on an after-tax basis by the
plan participant can be rolled over into an IRA or
another employer-sponsored plan.
Section 307. Fair treatment under
Under I.R.C. Section 72(t), distributions from an
Would amend I.R.C. Section 72(t) such that a
substantially equal periodic payments
employer-sponsored plan or IRA that occur
change from one permissible method of
rule
before age 59½ are subject a 10% penalty. There
calculating substantially equal periodic payments
are several exceptions to the 10% penalty,
to another permissible method would not result in
including distributions made as a series of
the 10% tax penalty being imposed if the change
substantially equal periodic payments that are
results initially in a reduction in the amount of the
based on the life expectancy of the plan
payments. It would further provide that if
participant or the joint life expectancies of the
amounts are being received as a series of
participant and his or her designated beneficiary.
substantially equal periodic payments, and a
If the series of payments is terminated or
transfer or rollover “of all or a portion of the
modified (except because of death or disability)
taxpayer’s benefit” is made into another tax-
before the later of age 59½ or the end of a 5-year
qualified retirement plan, the 10% tax penalty will
period beginning on the date of the first
not be applied. Provides that any “reasonable”
distribution, the entire series of distributions is
interest rate may be used in determining whether
then subject to the 10% penalty.
distributions are substantially equal periodic
payments.
Under Revenue Ruling 2002-62, an individual
can elect a one-time change in the series of equal
[Note: I.R.S. Revenue Ruling 2002-62 refers
periodic payments without incurring the tax
specifically to changes in the account balance that
penalty. The ruling further specifies that either a
will be treated as a modification to the series of
nontaxable transfer of a portion of the account
payments and thus trigger the 10% tax penalty.
balance to another retirement plan or a rollover
H.R. 1776 §308 refers to a transfer or a rollover
of the amount received by the taxpayer to another
from the qualified retirement plan ... of all or a
account will be treated as a modification of the
portion of the taxpayer’s benefit under the
series of payments, resulting in all distributions
transferor plan ....” [Emphasis added] It is not
being subject to the 10% tax penalty. The
clear whether the phrase taxpayer’s benefit is
ruling also specifies that the interest rate used in
intended to refer to the account balance, the series
calculating these payments may not exceed 120%
of payments from the account, or both.]
of the federal mid-term rate.
Section 308. Treatment of
Under ERISA Section 206(d), pension benefits
Would clarify that a qualified domestic relations
subsequent qualified domestic
can be assigned to an alternate payee under a
order that is issued subsequent to an earlier QDRO
relations orders
qualified domestic relations order (QDRO), as
must be obeyed by a plan, but only for amounts
for payment of alimony or child support.
paid after the subsequent QDRO has been
determined to be qualified.

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CRS-8
Section title
Current law
H.R. 1776
Section 309. Treatment of delayed
Under ERISA Section 206(d), pension benefits
Would clarify that a qualified domestic relations
qualified domestic relations orders
can be assigned to an alternate payee under a
order that meets the requirements of ERISA must
qualified domestic relations order (QDRO), as
be recognized by a plan regardless of the date it
for payment of alimony or child support.
was issued.
Section 310. Treatment of annuity
I.R.C. Section 402(e)(4) provides that if a plan
Amends I.R.C. Section 402(e)(4)(D) to provide
contracts
participant receives a lump-sum distribution that
that a distribution of an annuity contract from a
includes employer securities, any net unrealized
trust or annuity plan may be treated as a part of a
appreciation attributable to that part of the
lump sum distribution. Effective, December 31,
distribution which consists of employer securities
1999 (i.e., as if included in §1401(b) of P.L. 104-
shall be excluded from gross income.
188).
Section 311. Preservation of pension
The Supplemental Security Income (SSI)
Up to $75,000 in a qualified retirement account
plans
program is a means-tested, federally
would be excluded from assets in determining
administered income assistance program
eligibility for SSI. Beginning at age 60½, the
authorized by Title XVI of the Social Security
Social Security Administration would count as
Act. SSI provides monthly cash payments to
monthly income the annuity value of any
needy aged, blind, and disabled persons.
retirement account balance and offset SSI benefits
The maximum SSI payment in 2003 is $552 per
by that amount, regardless of whether or not the
month for a single person and $829 per month
individual had converted the account to an
for a couple. The asset limit for SSI eligibility is
annuity.
$2,000 for a single person and $3,000 for a
couple.
Section 312. Certain plan transfers
An employer that wishes to change from one
The Secretary of the Treasury would publish
and mergers
kind of individual account plan to another (e.g.,
regulations under which assets held in one kind of
from a plan authorized under I.R.C. Section 401
individual account plan maintained by an
to one authorized under I.R.C. Section 403, or
employer could be transferred to another
vice versa) must sometimes maintain the old
individual account plan maintained by that
plan, even though it receives no more employee
employer. The regulation must provide for the
salary deferrals or employer contributions.
protection of participants’ and spouses’ rights.

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CRS-9
Section title
Current law
H.R. 1776
Title IV. Increasing Retirement Plan Participation and Savings
Section 401. Expansion of the
Section 618 of EGTRRA authorizes a non-
The non-refundable credit would be made
Saver’s credit
refundable tax credit equal to a percentage of the
permanent and would be expanded for tax years
first $2,000 contributed annually to a qualified
after 2003 according to the following schedule:
retirement plan by low- and moderate-income
individuals and families. The credit does not
Single return
Joint return
Credit
apply to years after 2006. The credit is applied
according to the following schedule:
AGI < $15,000
AGI < $30,000
55%
15,001-20,000
30,001-40,000
25%
Single return
Joint return
Credit
20,001-25,000
40,001-50,000
20%
25,001-30,000
50,001-60,000
10%
AGI < $15,000
AGI < $30,000
50%
15,001-16,250
30,001-32,500
20%
16,251-25,000
32,501-50,000
10%

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CRS-10
Section title
Current law
H.R. 1776
Section 402. Acceleration of
Section 611 of EGTRRA amended the I.R.C. to
The maximum annual employee contribution to
scheduled increases in pension plan
increase the maximum annual employee
qualified retirement plans authorized under
contribution limits
contribution to qualified retirement plans
Sections 401(k), 403(b), and 457(b) would be
authorized under Sections 401(k), 403(b), and
increased to $15,000 in 2004 and indexed to
457(b), according to the following schedule:
inflation in $500 increments in later years.
Year
Maximum employee contribution
2003
$12,000
2004
$13,000
2005
$14,000
2006
$15,000*
*Indexed to inflation in $500 increments.
Section 611 of EGTRRA increased the maximum
The maximum annual employee contribution to a
annual employee contribution to a SIMPLE
SIMPLE retirement plan would be increased to
retirement plan under Section 408(p) according
$10,000 in 2004 and indexed to inflation in $500
to the following schedule:
increments in later years.
Year
Maximum employee contribution
2003
$ 8,000
2004
$ 9,000
2005
$10,000*
*Indexed to inflation in $500 increments.
Section 631 of EGTRRA amended I.R.C. Section
The maximum additional contribution to plans
414(v) to permit persons age 50 and older to
under Sections 401(k), 403(b), and 457(b) by
make additional contributions to retirement
individuals age 50 and older would be increased
plans, according to the following schedule:
to $5,000 in 2004 and indexed to inflation in later
years. The maximum additional contribution to a
Year
401(k), 403(b), 457(b) SIMPLE
SIMPLE plan by individuals age 50 and older
would be increased to $2,500 in 2004 and indexed
2003
$2,000
$1,000
to inflation in $500 increments in later years.
2004
$3,000
$1,500
2005
$4,000
$2,000
2006
$5,000*
$2,500*
*Indexed to inflation in $500 increments.

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CRS-11
Section title
Current law
H.R. 1776
Section 403. Removing barriers to
The IRS has authorized firms to enroll employees
Would amend ERISA Section 404(c) to authorize
automatic contribution trust
automatically in salary reduction retirement
“automatic contribution trust arrangements” under
arrangements
savings plans, provided certain conditions are
which the employer could contribute a uniform
met. (See Revenue Rulings 98-30 and 2000-8.)
percentage of employee pay to a retirement
Employees must receive notice of the
account that is invested in accordance with
arrangement and have the opportunity to choose
regulations to be prescribed by the Secretary of
not to participate.
Labor. Employees must be notified of their right
not to participate in the plan and also of assets in
ERISA Section 404(c) provides that, in general,
which the contributions to the plan will be
if an employee can exercise control over the
invested in the absence of specific directions by
investment of the funds in a qualified retirement
the employee. Would amend I.R.C. Section
plan, the employer will not be held liable for
514(b) to supersede any state laws that otherwise
investment losses that the employee may
would prohibit automatic enrollment in a qualified
experience as a result of exercising control over
retirement savings plan.
the investment of plan assets. There is some

ambiguity concerning the application of ERISA
Section 404(c) when the participant has not
affirmatively elected to participate in the plan
and selected the investments to which plan assets
are to be allocated. Also, there are some
instances in which state laws might be interpreted
as prohibiting automatic enrollment.
Section 404. Disposition of unused
Under a “Flexible Spending Arrangement”
Would allow up to $500 per year of unused health
health benefits in cafeteria plans and
(FSA), an employee can choose between
care benefits in a flexible spending account to be
flexible spending arrangements
receiving cash or certain nontaxable benefits,
contributed to a qualified retirement plan,
usually reimbursements for health care or
including plans under Sections 401, 403, 457, and
dependent care. If the FSA meets the
IRAs. These amounts would be treated as elective
requirements of I.R.C. Section 125, the employee
contributions and would be subject to the annual
is not taxed on the amount of compensation that
contribution limits under Section 402(g),
was available. If the full amount is not used by
nondiscrimination testing under Section 401, and
the end of the year, it cannot be carried forward
any other applicable limits.
to the next year.
Section 405. Updating deduction
I.R.C. Section 407(a)(7) limits the deduction that
Would limit the application of the I.R.C. Section
rules for combination of plans
can be taken by an employer who sponsors both
407(a)(7) deduction limits to cases in which
a defined benefit plan and a defined contribution
employer contributions to one or more defined
plan.
contribution plans exceed 6% of the compensation
paid to plan participants.

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CRS-12
Section title
Current law
H.R. 1776
Title V. Expanding Retirement Plan Coverage to Employees of Small Businesses
Section 501. Additional nonelective
P.L. 104-188 allows employers with 100 or
An employer could choose to make an additional
employer contributions to SIMPLE
fewer employees to establish a Savings Incentive
nonelective contribution of a uniform percentage
plans
Match Plan for Employees (SIMPLE). Under a
of pay up to 10% of total compensation for each
SIMPLE plan, an employer must either (1) match
eligible employee, regardless of whether or not
100% of employee salary deferrals up to 3% of
the employer also makes a matching contribution.
pay to a maximum match of $6,000 in 2003 for
all participating employees or (2) make a
nonelective employer contribution of 2% of pay
up to $4,000 in 2003 for all eligible employees.
No other employer contributions are permitted.
Section 502. Matching contribution
Under the SIMPLE IRA, an employer can reduce
An employer that sponsors a SIMPLE 401(k)
rules for SIMPLE IRAs and SIMPLE
its contribution to 1% of pay in 2 years out of
could make matching contributions of less than
401(k)s conformed
any 5. Reduced contributions are not permissible
3% of pay, provided that the contribution is at
in a SIMPLE 401(k).
least 1% of pay and the reduced contribution is
not in effect for more than 2 years in a 5-year
period ending in the current year.
Section 503. Salary-reduction only
Under a SIMPLE plan, an employer must either
A small employer that has not sponsored a
SIMPLE plans
(1) match 100% of salary deferrals up to 3% of
retirement plan in the previous 2 years, and that is
pay to a maximum match of $6,000 in 2003 for
otherwise eligible to sponsor a SIMPLE plan,
any participating employee, or (2) make a
could adopt a SIMPLE plan funded entirely
nonelective employer contribution of 2% of pay
through employees’ elective deferrals with no
to a maximum contribution of $4,000 in 2003 for
employer contributions. Employees could defer
any eligible employee.
up to $5,000 per year, indexed to inflation. Other
rules applicable to SIMPLE plans would continue
to be in effect.
Section 504. Permit a mid-year
Once an employer has adopted a SIMPLE plan,
The Secretary of the Treasury would be required
change from a SIMPLE plan to
the employer cannot adopt an alternative tax-
to propose regulations by December 31, 2004 that
another plan
qualified plan to replace the SIMPLE plan,
would permit an employer to replace a SIMPLE
except at the end of the year.
plan with another tax-qualified plan in mid-year.
The regulation must assure that rules applicable to
funding and participation are not violated by an
employer having two plans in a single year.
Section 505. Elimination of higher
I.R.C. Section 72(t) imposes a 10% tax penalty
Would lower the tax penalty on distributions from
penalty on certain SIMPLE
on IRA distributions before age 59½, except in
a SIMPLE IRA during the first 2 years of
distributions
certain circumstances. During the first 2 years an
participation to 10% of the amount distributed.
employee participates in a SIMPLE IRA, a tax
penalty of 25% is imposed on distributions.

---

CRS-13
Section title
Current law
H.R. 1776
Section 506. SIMPLE plan
In general, amounts held in a plan authorized
Would allow individuals to roll over balances
portability
under I.R.C. Sections 401(k), 403(b), or 547(b)
from any other type of qualified retirement
can be rolled over into any of these kinds of
savings plan into a SIMPLE IRA. Amounts held
plans or into an IRA. Amounts in these plans
in a SIMPLE IRA could be rolled over into other
cannot, however, be rolled over into a SIMPLE,
qualified retirement plans to the same extent as
and during the first 2 years an employee
other IRAs.
participates in a SIMPLE IRA, a distribution
from it can be rolled over only into another
SIMPLE IRA.
Section 507. Correction of Simplified
Under a Simplified Employee Pension (SEP), the
For purposes of applying the 25% limit on
Employee Pension compensation
maximum deduction an employer can take for
contributions, compensation would be defined to
inconsistency
employer contributions to the plan is 25% of the
be gross compensation (including salary
total compensation of the firm’s employees. For
deferrals), as in I.R.C. Section 415(c)(3).
purposes of the deduction, employee
compensation is gross compensation, including
salary deferrals. Employer contributions to a
SEP are limited to the lesser of (1) an employee’s
taxable compensation (i.e., net of salary deferrals
and (2) $40,000 (indexed to inflation).
Section 508. Equalization of tax
Employer contributions to a retirement plan on
Would exclude a self-employed person’s
treatment of retirement plan
behalf of employees are a deductible business
contributions to a retirement plan on his or her
contributions of the self-employed
expense for the firm and are excluded for
own behalf for purposes of determining
purposes of determining payroll taxes. A self-
employment taxes.
employed person’s contributions to a retirement
plan on his or her own behalf are not excluded
for determining employment taxes, (e.g., Social
Security payroll taxes).

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CRS-14
Section title
Current law
H.R. 1776
Title VI. Strengthening Individual Retirement Arrangements
Section 601(a). Acceleration of
Section 601 of EGTRRA increases the maximum
The maximum annual contribution to an IRA
increases in IRA contribution limits
annual contribution to an IRA according to the
would be increased to $5,000 in 2004 and indexed
following schedule:
to inflation in $500 increments in later years.
Year
Maximum contribution
2002 to 2004
$3,000
2005 to 2007
$4,000
2008
$5,000
After 2008, the maximum contribution is indexed
to inflation in $500 increments.
Section 601(b). Acceleration of
Section 601 of EGTRRA allows individuals age
The maximum additional contribution to an IRA
i n c r e a s e s i n I R A ca tc h - u p
50 and older to make additional contributions to
for persons age 50 and older would be increased
contributions
IRAs, according to the following schedule:
to $1,000 in 2004 and later years.
Year
Additional contribution
2002 to 2005
$ 500
2006 and later
$1,000

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CRS-15
Section title
Current law
H.R. 1776
Section 602. Acceleration and
Contributions to a traditional IRA are fully
The increase in the income limit for deductible
expansion of certain scheduled
deductible if neither the worker nor his spouse is
IRA contributions by married couples filing
increases in eligibility for IRAs and
covered by an employer-sponsored retirement
jointly would be accelerated according to the
elimination of IRA marriage penalty
plan. For unmarried workers covered by an
following schedule:
employer-sponsored retirement plan and married
workers covered by an employer-sponsored plan,
the maximum deductible contribution phases out
between the following amounts of modified AGI:
Year
Joint filers
Year
Single filers
Joint filers
2003
$60,000- 70,000
2004
$70,000- 80,000
2003
$40,000-50,000 $60,000-70,000
2005
$75,000- 85,000
2004
$45,000-55,000 $65,000-75,000
2006
$80,000- 90,000
2005
$50,000-60,000 $70,000-80,000
2007
$85,000-105,000
2006
$50,000-60,000 $75,000-85,000
2008
$90,000-110,000
2007, later $50,000-60,000 $80,000-100,000
2009
$95,000-115,000
2010, later
$100,000-120,000
For a married worker who files a joint return and
does not have an employer-sponsored retirement
Effective after 2006, a married worker filing a
plan, but whose spouse is covered by an
joint return whose spouse is covered by an
employer’s plan, the maximum deductible
employer’s plan could make a deductible
contribution phases out between $150,000 and
contribution to a traditional IRA regardless of the
$160,000 of modified adjusted gross income.
couple’s joint income.
For single tax filers, the maximum permissible
contribution to a Roth IRA phases out from
$3,000 to $0 for those with modified adjusted
For married couples filing jointly, the maximum
gross income between $95,000 and $110,000.
permissible contribution to a Roth IRA would be
For married couples filing jointly, the maximum
phased out between $190,000 and $220,000 of
permissible contribution to a Roth IRA phases
modified adjusted gross income.
out between $150,000 and $160,000 of annual
income. For married persons filing separately,
the contribution limit phases out between $0 and
$10,000 of income.

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CRS-16
Section title
Current law
H.R. 1776
Section 603. IRA eligibility for the
Individual Retirement Accounts (IRAs) were
Disabled persons, as defined in I.R.C. §72(m)(7),
disabled
authorized by Congress in the Employee
could contribute to an IRA, regardless of whether
Retirement Income Security Act of 1974
they had earned income for the year of the
(ERISA, P.L. 93-406) to give employees without
contribution, provided that they had not yet
access to an employer-sponsored retirement plan
reached age 70½.
the opportunity to save for retirement on a tax-
deferred basis. IRA contributions are limited to
the lesser of a specific dollar amount (currently
$3,000) or the individual’s earned income for the
year.
Section 604. Protecting IRA assets
Although the IRS has systems in place to correct
The Secretary of the Treasury would be directed
erroneous distributions from qualified employer-
to establish a procedure allowing an individual to
sponsored plans, no method exists for
rescind one or more distributions from an IRA to
participants in IRAs to redeposit erroneous
correct errors that result from the individual’s
distributions.
misunderstanding of applicable rules or an error
of the custodian of the individual retirement plan
in processing a transaction as a distribution rather
than as a transfer or rollover. The procedure must
also include conditions that will prevent abuse.
Title VII. Revitalizing Defined Benefit Plans
Section 701. Multiple employer plans
In multiple employer plans created in 1989 or
Plan administrators of multiple-employer plans
permitted to elect separate or
later, funding requirements and limitations on
could choose whether the plan is to be treated as
aggregate treatment for purposes of
deductions are usually applied separately to each
a single plan or as separate plans for purposes of
applying the funding rules and
participating employer. In plans created before
applying funding requirements and deduction
deduction limitations
1989, funding requirements and deduction limits
limits. The choice would become effective in the
are usually applied to the plan as a whole, and
year it is made. It could not be changed without
required contributions are allocated among the
IRS approval.
participating employers.
Section 702. Treatment of employee
In the private sector, most defined benefit plans
Employers in the private sector could treat
contributions to contributory defined
are funded entirely by the employer. If
employee contributions to defined benefit plans as
benefit plans
employees are required to contribute, the
contributions of pre-tax dollars.
employee contributions must be made on an
after-tax basis. In the public sector, most
governmental defined benefit plans require
employees to contribute to the plan; however,
governmental employers can choose to take
employee contributions on a pre-tax basis.
(Note: Federal employee contributions to CSRS
and FERS are made with after-tax income.)

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CRS-17
Section title
Current law
H.R. 1776
Section 703. Reform of the minimum
I.R.C. Section 401(a)(26) requires a defined
I.R.C. Section 401(a)(26) would apply only to the
participation rule
benefit plan to cover no fewer than the lesser of
extent defined in regulations to be issued by the
(1) 50 employees or (2) 40% of the employer’s
Secretary of the Treasury. The regulations would
employees.
target plans that by design are inconsistent with
the prohibition on plans that discriminate in favor
of highly compensated employees.
Section 704. Plan valuation data
In calculating the funded status of a defined
Would allow defined benefit plans to value plan
collection
benefit plan, assets and liabilities must be valued
liabilities based on a date up to 1 year before the
as of the same date. As codified by Section 661
date of the plan valuation. The liabilities would
of EGTRRA, this calculation must reference a
then be projected forward to the date of the plan
date within the plan year to which the plan
valuation by adjusting for acquisitions,
valuation refers or the month preceding the
divestitures, or other significant events. Plan
beginning of that year. In an exception,
assets could be valued as of a date after the
EGTRRA allows defined benefit plans with
valuation of plan liabilities, but (in general) not
assets equal to at least 125% of the plan’s current
later than the end of the plan year.
liability to calculate the plan’s assets with respect
to a date in the year before the year to which the
valuation refers.
Section 705. Replacement of interest
The I.R.C. requires the interest rate on 30-year
For determining the funded status of defined
rate on 30-year Treasury securities
U.S. Treasury Bonds to be used (1) to determine
benefit plans, the interest rate on 30-year Treasury
w i t h i n t e r e s t r a t e o n
the funded status of a defined benefit plan, (2) to
Bonds would be replaced with an interest rate
conservatively-invested long-term
calculate the amount of lump-sum distributions
based on an index of high-quality, long-term
corporate bonds
to plan participants, and (3) to determine
corporate bonds. For calculating lump-sum
maximum benefit amounts. The Treasury
distributions, the corporate bond rate would be
Department no longer issues 30-year bonds.
phased in over 4 years beginning in 2006. For
determining maximum benefit amounts under
I.R.C. §415(b), the Treasury interest rate would
be replaced by a rate of 5.5% in 2004.
Section 706. Interest rate range for
Section 405 of P.L. 107-147 allows plans to
Would allow plans to apply the higher interest rate
additional funding requirements
determine current liability for 2002 and 2003
authorized by P.L. 107-147 to plan year 2001 as
using an interest rate of up to 120% of the 4-year
well as 2002 and 2003.
weighted average rate on 30-year Treasury
bonds, rather than 105% of this rate, as was
provided for under prior law.

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CRS-18
Section title
Current law
H.R. 1776
Section 707. Asset valuation
Defined benefit plans are required by law to pay
In determining whether contributions were equal
premiums to the Pension Benefit Guaranty
to the full funding limit, plans could use the
Corporation. The current premium is $19 per
actuarial value of assets in their calculations of
participant per year. Underfunded plans are
excess liabilities, even if the fair market value of
required to pay a supplemental variable rate
assets were less than the actuarial value of assets.
premium because of their higher risk of failure.
The additional premium is not levied if the
employer’s contribution in the previous year was
at least equal to the amount by which liabilities
exceeded the lesser of (1) the fair market value of
plan assets or (2) the actuarial value of plan
assets, (i.e., the “full funding limitation” under
I.R.C. §412(c)(7)).
Section 708. Multiemployer plan
Under I.R.C. Section 412(b)(2)(B)(iv), multi-
Multi-employer plans could amortize certain
emergency investment loss rule
employer plans must amortize experience losses
experience losses over 30 years. These losses
(e.g., investment losses) over not more than 15
would be the difference between the fair market
years.
value of plan assets as of the end of a plan year
beginning after June 30, 1999 and ending before
January 1, 2004 and what the market value of
those assets would have been if it had realized its
projected rate of return.
Section 709. Mortality table
The mortality tables to be used in determining a
For purposes of determining the current liability
adjustment
defined benefit plan’s current liability and
of defined benefit plans, the Secretary of the
funding obligations are set forth in I.R.C. Section
Treasury would be directed to develop mortality
412(l)(7).
tables applicable specifically to “blue-collar”
workers, as defined in rules to be published by the
Secretary.
Title VIII. Simplify and Streamline Retirement Plan Rules
Section 801. Excise tax on excess
Certain contributions to a retirement plan in
The 2½ month time limit on corrective
contributions
excess of the annual maximum are subject to an
distributions would be extended to 6 months.
excise tax of 10% of the excess contribution.
Corrective distributions of excess contributions up
The excise tax is not levied if the excess
to $1,000 would be included in income in the year
contribution is distributed or forfeited within 2½
of the distribution, regardless of date.
months of the end of the plan year. Amounts
Distributions of $1,000 or more that occur within
distributed within the 2½ month limit usually are
6 months of the end of the plan year would be
included in employee income in the year they
included in income in the year the excess
were contributed to the plan. If the distribution
contribution was made.
is less than $100 or occurs more than 2½ months
after the end of the plan year, it is included in
income in the year distributed.

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CRS-19
Section title
Current law
H.R. 1776
Section 802. Excess benefit plans
Tax-qualified plans subject to ERISA cannot
A plan would not be subject to ERISA if it
discriminate in favor of highly-compensated
provides benefits that would have been provided
employees (HCEs), generally defined as owners
under the employer’s qualified plan except for the
of 5% or more of a business and employees
application of the nondiscrimination rules under
earning $90,000 or more per year (indexed to
(1) the actual deferral percentage (ADP) test under
inflation). A firm can choose to count only the
I.R.C. Section 401(k), (2) the actual contribution
top fifth of wage earners as HCEs, but it must
percentage (ACP) test under I.R.C. Section
include all 5% owners. Certain highly-
401(m), or (3) the annual compensation limit
compensated employees, called “top-hat”
under I.R.C. Section 401(a)(17). An employer
employees, may be covered by nonqualified
that must limit contributions by highly
plans that are not subject to ERISA. Some
compensated employees to its qualified plan in
highly-compensated employees may not be “top-
order to comply with the ADP test or the ACP test
hat” employees; thus, while their benefits under
could provide additional benefits to these
the qualified plan may be limited by law, they
employees through a nonqualified plan.
cannot participate in the firm’s nonqualified
plan.
Section 803. Paperless technologies
Under guidance issued by the Departments of
The Departments of Labor and the Treasury
in retirement plans
Labor and Treasury, qualified plans may use
would be directed to allow electronic media to be
electronic means (e.g., email, web sites,
used for (1) notices, elections, and spousal
telephones, etc.) to perform some notification
consents under I.R.C. §401(a)(11) and §417 and
and transaction functions. Some plan
ERISA §205, (2) satisfying requirements for a
transactions may not be conducted through
hardship distribution under I.R.C. §401
electronic media.
(k)(2)(B)(i)(IV), and (3) other transactions. The
regulations may not permit electronic media to be
used if it would compromise the rights of plan
participants or interfere with the enforcement of
ERISA or the I.R.C.
Section 804. Elimination of
For purposes of testing plans for prohibited
The Secretary of the Treasury would be directed
unintended consequences attributable
discrimination in favor of highly compensated
to issue regulations under which base pay could
to use of base pay or rate of pay
employees, plans must measure employee
be used for testing defined benefit plans for
compensation in accordance with I.R.C. §414(s).
prohibited discrimination in favor of highly
Total compensation generally includes overtime,
compensated employees, provided that it is a
bonuses, and other special pay, which might not
reasonable measure and that it does not
be included in an employee’s “base pay.”
systematically favor highly compensated
Benefits under qualified plans are usually based
employees.
on base pay rather than total compensation. In
order for base pay to qualify as compensation
under Section 414(s), it must be a “reasonable”
measure that does not systematically favor highly
compensated employees and it must meet a
mathematical test.

---

CRS-20
Section title
Current law
H.R. 1776
Section 805. Repeal of the gateway
A single firm may have separate plans for
Would repeal the “gateway test.”
test
separate “lines of business.” Before the rules
applicable to plans in separate lines of business
can be used, the employer is subject to a
“gateway test” that applies to the entire firm.
Section 806. Intermediate sanctions
A plan that fails to meet a requirement or
A plan that inadvertently violates a provision of
for inadvertent failures
requirements of the I.R.C. may be disqualified.
the I.R.C. would not be disqualified if it has made
In general, the I.R.C. does not provide for lesser
a good faith effort at compliance and corrects the
sanctions. In practice, the I.R.S. allows most
violation. Plans subject to audit may be charged
plans to correct violations, and it has established
a fee by the IRS. In the event of disqualification,
the Employee Plans Compliance Resolution
non-highly compensated employees would not
System to facilitate the process.
have to include employer contributions and
earnings on plan contributions in their taxable
income.
Section 807. Qualified preretirement
An election prior to age 35 to waive a pre-
An election prior to age 35 to waive a pre-
survivor annuity
retirement annuity from a qualified plan is no
retirement annuity from a qualified plan would
longer valid after reaching age 35.
continue to be valid after age 35.
Section 808. Cost-of-living
Vested accrued benefits of less than $5,000 can
The $5,000 amount that can be paid as a lump-
adjustment of $5,000 cash-out
be paid as a lump-sum distribution to a
sum distribution to a separating employee without
amount
separating employee without his or her consent.
his or her consent would be indexed to inflation in
This amount is not indexed.
increments of $500.
Section 809. Catch-up contributions
Section 631 of EGTRRA amended I.R.C. Section The rule that if catch-up contributions are offered
414(v) to permit individuals age 50 and older to
they must be available to all eligible employees
make additional contributions to retirement
would be incorporated into the nondiscrimination
plans. An employer that chooses to allow
rules under I.R.C. Section 401(a)(4). Would
employees to make “catch-up” contributions
clarify that employees in collectively bargained
must do so for all eligible employees.
plans and qualifying separate lines of business
would not be included in determining compliance.
Section 810. Reverse match salary
P.L. 104-188 prohibited establishment of any
New SARSEPs could be established. Employee
reduction arrangement simplified
new salary reduction Small Employer Pensions
salary deferrals could be no more than twice the
employee annuity
(SARSEPs). Existing SARSEPs were not
percentage of pay contributed by the employer.
affected.
Salary deferrals would be prohibited if more than
25 employees of the firm were eligible to
participate in the preceding year, or would have
been eligible if the employer had offered a plan in
that year.

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CRS-21
Section title
Current law
H.R. 1776
S e c t i o n 8 1 1 . L e v e l d o l l a r
Employer contributions to a Simplified
Would allow employer contributions to be made
contributions to SEPs
Employee Pension (SEP) are required to be the
in the same dollar amount for all participating
same percentage of pay for all participating
employees.
employees.
Section 812. Tax on nondeductible
Nondeductible employer contributions to a
The 10% excise tax on nondeductible employer
contributions not to apply to certain
qualified retirement plan are usually subject to a
contributions would be waived in the case of
n o n t r a d e o r b u s i n e s s S E P
10% excise tax. Section 637 of EGTRRA
nondeductible contributions to a Simplified
contributions
provided that the 10% excise tax will not apply to
Employee Pension (SEP), as well as in the case of
contributions to a SIMPLE retirement account
contributions to a SIMPLE IRA or a SIMPLE
under I.R.C. Section 408(p) or a SIMPLE plan
plan.
under I.R.C. Section 401(k)(11) that are non-
deductible “solely because such contributions are
not made in connection with a trade or business
of the employer.”
Section 813. Clarification of
I.R.C. Section 411(a)(11) provides that if the
ERISA Section 404(c) would be amended to
fiduciary duty
present value of a participant’s vested benefit
provide that in the case of a mandatory
exceeds $5,000, a plan may not distribute the
distribution that is rolled over by the disbursing
accrued benefit to a departing employee without
plan into an IRA, the plan would be subject to
his or her consent. Section 657 of EGTRRA
ERISA’s fiduciary standards with respect to
amended I.R.C. Section 401(a)(31) to require the
selecting the IRA into which the distribution is
direct transfer to an IRA of distributions of less
deposited. There would be a safe harbor for any
than $5,000 (but more than $1,000) unless the
liability for a plan that follows the Department of
participant directs the distribution to another
Labor’s guidance on rollovers.
eligible plan or elects to receive the distribution
in cash.
Section 814. Multiemployer plan
I.R.C. Section 414(f) defines a ‘’multiemployer
The Secretary of the Treasury would be directed
clarification
plan’‘ as a plan (1) to which more than one
to issue regulations setting forth conditions under
employer is required to contribute, (2) that is
which, for purposes of any applicable
maintained pursuant to one or more collective
nondiscrimination rules, a multiemployer plan
bargaining agreements between one or more
would not be treated as a plan maintained by the
employee organizations and more than one
employers of the plan’s participating employees.
employer, and (3) that satisfies such other
requirements as the Secretary of Labor may
prescribe by regulation.
Section 815. Clarification of status of
Churches and some church-related organizations
Would provide that the Young Men’s Christian
Young Men’s Christian Association
can sponsor retirement plans under I.R.C. Section
Association (YMCA) Retirement Fund is a church
Retirement Fund
403(b)(9).
plan under I.R.C. Section 403(b)(9).

---

CRS-22
Section title
Current law
H.R. 1776
Title IX. Expanding Retirement Savings Opportunities for Employees of Tax-Exempt Organizations and Governments
Section 901. Deferred compensation
State and local governments and tax-exempt
The deferred compensation plans of tax-exempt
plans of tax-exempt organizations
organizations can offer deferred compensation
organizations would no longer be covered under
arrangements under I.R.C. Section 457. The
I.R.C. Section 457. A new Section 459 would be
maximum amount that can be deferred in 2003 is
added to the Internal Revenue Code, under which
$12,000. This amount will increase by $1,000
the annual deferral limit for tax-exempt
per year until it reaches $15,000 in 2006, after
organizations would be the greater of the Section
which it will be indexed.
457 limit or one-third of an employee’s annual
compensation. Deferrals of more than this amount
would be taxed when the employee becomes
vested.
Section 902. Inapplicability of 10%
Under I.R.C. Section 72(t), a 10% penalty is
Public safety employees such as police and
additional tax on early distributions
imposed on most distributions from an employer-
firefighters often are eligible to retire earlier than
of pension plans of public safety
sponsored plan that occur before age 59½.
other workers. H.R. 1776 would waive the 10%
employees
Exceptions are provided for participants who
penalty on distributions before age 59½ for public
retire at age 55 or older, die, become disabled,
safety employees who participate in a “deferred
purchase a home, pay qualified educational or
retirement option plan” (DROP) in which a
health insurance expenses, or receive the
retirement eligible employee continues to work
distributions in a series of substantially equal
and pension distributions are paid into a personal
periodic payments based on life expectancy or
account.
the joint life expectancies of the participant and
his or her designated beneficiary.
Section 903. Clarifications regarding
Employees of state and local governments who
I.R.C. Sections 403 and 457 would be amended
purchase of permissive service credit
move from one state or locality to another often
to facilitate the use of distributions from 403 and
can purchase service credit in the new
457 plans to purchase service credit under state
employer’s defined benefit pension plan. Section
and local defined benefit plans. Would clarify
647 of EGTRRA provided that distributions from
that the defined benefit plan’s distribution rules
a defined contribution plan under I.R.C. Section
would apply to the transferred amounts.
403 or Section 457 will not be taxable income if
used to purchase service credit.
Section 904. Certain rollovers of
Transfers from one Section 457 deferred
A transfer from one Section 457 plan to another of
benefits permitted
compensation plan to another are not treated as
the entire benefit of one or more participants
income to the participant.
would be permitted even if not all assets of the
transferor plan are transferred to the other plan.

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CRS-23
Section title
Current law
H.R. 1776
Section 905. Minimum distribution
Distributions from an employer-sponsored
The Secretary of the Treasury would issue
rules
retirement plan must begin at age 70½, or at
regulations under which a governmental plan may
retirement, if later.
be treated as having complied with the minimum
distribution rules if the plan complies with a
“reasonable good faith interpretation” of those
rules.
Section 906. Church plan rule
Under I.R.C. Section 415(b), the maximum
Except for some highly-compensated employees,
annual benefit under a single-employer defined
the maximum annual benefit provided by defined
benefit retirement plan is the lesser of (1) the
benefit plans of churches and religious institutions
average of the participant’s 3 highest years of
would be $160,000, even if this is greater than the
pay or (2) $160,000 (indexed to inflation). The
average of the participant’s 3 highest years of pay.
maximum benefit under a governmental plan or
a multi-employer plan is $160,000.
Section 907. Plans maintained by
Under I.R.C. Section 415(b), the maximum
Would amend I.R.C. Section 415(b) such that, in
governments and tax-exempt
annual benefit under a single-employer defined
the case of governments, tax-exempt
organizations
benefit retirement plan is the lesser of (1) the
organizations, and certain merchant marine plans,
average of the participant’s 3 highest years of
the actuarial reduction would not reduce the
pay or (2) $160,000 (indexed to inflation). The
maximum benefit below $130,000 for retirement
benefit limit under Section 415(b) is reduced
at age 55 or later. For retirement before 55, the
actuarially for retirement before age 62.
reduction could not be below an amount that is
actuarially equivalent to $130,000 beginning at
age 55.
Title X. Restricting Excessive Remuneration
Section 1001. Golden parachute
An excise tax of 20% is imposed on certain
Would impose an excise tax of 50% on “excessive
excise tax to apply to excessive
payments to owners and officers of a corporation
employee remuneration” (including nonqualified
employee remuneration paid by
that are contingent on a change in company
pension benefits) that is paid during bankruptcy
corporation after declaration of
ownership or control of assets.
and the 2 years preceding a bankruptcy filing. In
bankruptcy
the case of company payments made to cover an
employee’s income taxes on “excessive employee
remuneration,” the excise tax would be 100%.

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CRS-24
Section title
Current law
H.R. 1776
Title XI. Defined Contribution Plan Protections
Section 1101. Provision of
Under ERISA Section 105, a participant is
Would require all defined contribution plans to
investment education notices to
entitled to receive once each year a statement
provide quarterly “investment education notices”
participants
indicating, on the basis of the latest available
to participants that would include an explanation
information, (1) the total benefits he or she has
of generally accepted investment principles,
accrued under the plan, and (2) the
including principles of risk management and
nonforfeitable pension benefits, if any, that he or
diversification, and a discussion of the risk of
she has accrued, or the earliest date on which
holding substantial portions of a portfolio in the
benefits will become nonforfeitable.
security of any one entity, such as employer
securities. An excise tax of $100 per participant
would be levied on plans that fail to provide the
required notices.
Section 1102. Notice of blackout
P.L. 107-204 requires plans to notify participants
An excise tax of $100 per participant would be
periods to participant or beneficiary
30 days in advance of any period of 3 or more
levied on any non-ERISA plan that fails to
under defined contribution plan
days during which 50% or more of a plan’s
provide notice 30 days in advance of any period
participants would be unable to trade the
of 3 or more days during which 50% or more of
employer’s securities. The Secretary of Labor
a plan’s participants would be unable to trade the
may assess a civil penalty of up to $100 per
employer’s securities.
participant per day from the date of the plan
administrator’s failure or refusal to provide
notice to participants and beneficiaries.
Section 1103. Diversification
Employer contributions to defined contribution
Employers could not require employees to
r e q u i r e m e n t s f o r d e f i n e d
plans are sometimes made with shares of the
purchase company stock with their own salary
contribution plans that hold
employer’s stock. Employers sometimes require
deferrals. Participants would be allowed to sell
employer securities
employees to hold this stock until separation or
company stock acquired through employer
until age 50 or 55.
matching contributions after 3 years of service
and company stock acquired through other
employer contributions after 5 years of service.
The diversification requirement would be phased
in from 2004 to 2008. Diversification
requirements would not apply to (1) employee
stock ownership plans (ESOPs) that hold neither
employer salary deferrals nor employer matching
contributions or (2) plans that do not hold
company stock that is readily traded on a public
stock exchange.
Section 1104. Treatment of qualified
Individuals who pay for retirement planning
Employees could pay for retirement planning
retirement planning services
services generally must do so with after-tax
services on a pre-tax basis through payroll
income.
deduction.

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CRS-25
Section title
Current law
H.R. 1776
Section 1105. Special rules
No provision.
In the case of collectively bargained plans,
amendments made by sections 1101-1104 of H.R.
1776 would not apply to plan years beginning
before the earlier of –
(1) the later of
(A) January 1, 2005, or
(B) the date on which the collective bargaining
terminates, or
(2) January 1, 2006.
Title XII. Other Tax Provisions Relating to Pensions
Section 1201. Amendments to
Section 769 of the Retirement Protection Act of
Would set the funded current liability percentage
Retirement Protection Act of 1994
1994 (P.L. 103-465) established special funding
at 90% for purposes of I.R.C. Section 412(l) and
rules for certain plans.
at 100% for purposes of I.R.C. Section 412(m).
Would provide that for purposes of determining
unfunded vested benefits under ERISA Section
4006(a)(3)(E)(iii), the mortality table shall be the
mortality table used by the plan.
S e c t i o n 1 2 0 2 . R e p o r t i n g
A “one-participant plan” covers only a business
One-participant plans with assets under $250,000
simplification
owner and his or her spouse. These plans are
would be exempt from some reporting
exempt from some reporting requirements if
requirements. The Secretary of the Treasury and
assets are under $100,000, and must file
the Secretary of Labor would develop simplified
simplified reports in other instances.
reporting for plans with fewer than 25
participants.
Section 1203. Improvement of
A plan that fails to meet a requirement or
The Secretary of the Treasury would be directed
employee plans compliance resolution
requirements of the I.R.C. may be disqualified.
to continue to improve the Employee Plans
system
In general, the I.R.C. does not provide for lesser
Compliance Resolution System, with special
sanctions. In practice, the I.R.S. allows most
emphasis on the needs of small employers.
plans to correct violations, and it has established
the Employee Plans Compliance Resolution
System to facilitate the process.
Section 1204. Extension to all
The Taxpayer Relief Act of 1997, P.L. 105-34
Would exempt all governmental plans, as defined
governmental plans of moratorium
exempted state and local government plans from
in I.R.C. Section 414(d), from the rules on
o n a p p l i c a t i o n o f c e r t a i n
certain rules that prohibit discrimination in favor
minimum participation and nondiscrimination in
nondiscrimination rules applicable to
of highly compensated employees.
favor of highly compensated employees.
state and local plans

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CRS-26
Section title
Current law
H.R. 1776
Section 1205. Notice and consent
A plan must provide information on forms of
The required notices could be provided up to 180
period regarding distributions
distribution and taxation of eligible rollover
days before the date of the distribution. The
distributions no more than 90 days before the
Secretary of the Treasury would issue regulations
date of the distribution.
to provide that the description of a participant’s
right, if any, to defer receipt of a distribution shall
also describe the consequences of failing to defer
such receipt.
Section 1206. Reduced PBGC
Defined benefit plans are required by law to pay
Employers with fewer than 100 employees that
premium for new plans of small
a premium of $19 per participant per year to the
adopt a defined benefit plan would pay a reduced
employers
Pension Benefit Guaranty Corporation.
premium of $5 per participant for each of the first
5 years of the plan.
Section 1207. Reduction of
Underfunded plans are required to pay a
If a new plan is subject to a supplemental
additional PBGC premium for new
supplemental premium (the variable rate
premium, it would be phased in over 6 years.
and small plans
premium) because of their higher risk of failure.
Supplemental premiums for firms with fewer than
25 employees would be capped at $5 per
participant per year.
Section 1208. Authorization for
The Pension Benefit Guaranty Corporation is not
The Pension Benefit Guaranty Corporation would
PBGC to pay interest on premium
authorized to pay interest on refunds of premium
be authorized to pay interest on refunds of
overpayment refunds
overpayments.
premium overpayments.
Section 1209. Substantial owner
In the case of a plan termination, the benefits
The same 5-year phase-in of benefit guarantees
benefits in terminated plans
paid by the PBGC to a “substantial owner” of a
that applies to non-owners would apply to a
business (owner of 10% or more of a company)
substantial owner with less than a 50% interest.
are subject to special rules.
For an owner with more than a 50% interest, the
phase-in would be based on the number of years
the plan has been in effect.
Section 1210. Qualified group legal
Prior to June 30, 1992, I.R.C. §120 allowed
The exclusion from income for legal services
services plans
employer contributions for, and services
would be reinstated for the years 2004 though
provided under, qualified group legal services
2008 with an annual maximum of $150.
plans to be excluded from employee income up
to an annual value of $70.
Section 1211. Studies
No provision.
The Department of Labor, in consultation with the
Treasury Department would conduct a study of
possible designs for a model plan for small
employers. The Department of Labor would
conduct a study of the effects of EGTRRA and
H.R. 1776 on retirement plan sponsorship and
participation.

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CRS-27
Section title
Current law
H.R. 1776
Title XIII. Stock Options
Section 1301. Exclusion of incentive
In November 2001, the Treasury issued proposed
Would provide that stock options exercised under
stock options and employee stock
regulations that would have made stock options
an incentive stock option plan or an employee
purchase plan stock options from
subject to Social Security payroll taxes when the
stock purchase plan are not subject to payroll
wages
options were exercised. A subsequent notice
taxes.
(2002-47) suspended the proposed regulations
indefinitely.
Title XIV. Other Elements of Retirement Security
Section 1401. Employee pre-tax
Retired employees who purchase health
Would provide that retirees can pay for health
payments for retiree health
insurance through a former employer pay these
insurance purchased though a former employer
premiums with after-tax income.
with pre-tax income, provided that the premium is
paid, in whole or in part with distributions from
an employer-sponsored plan under I.R.C. Sections
401, 403, and 457. Would not apply to
distributions from an IRA. Prior to 2010, the limit
on plan distributions used for pre-tax payment of
health insurance premiums would be $500 in 2004
and 2005, $1,000 in 2006 and 2007, and $2,000 in
2008 and 2009.
Section 1402. Encouraging
Financial Accounting Standard 106 requires
Would amend the I.R.C. Section 401(h) such that
employers to maintain retiree health
public corporations to report on their financial
accounts to prefund retiree health benefits also
plans
statements the amount of any unfunded
could be maintained under profit-sharing or stock
obligation for retiree health insurance benefits.
bonus plans. Employer contributions to the
Employers are not required to pre-fund these
401(h) account would be limited to 25% of the
obligations, and most retiree health insurance
employer’s total contributions to the plan, as
benefits are either unfunded or underfunded.
under current law, except that for profit-sharing
Under I.R.C. Section 401(h), an account can be
and stock bonus plans the limit would be 5% in
maintained as part of a defined benefit plan or
2004 and 2005, 10% in 2006 and 2007, and 20%
money purchase plan to be used to pre-fund some
in 2008 and 2009.
retiree health benefits.

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CRS-28
Section title
Current law
H.R. 1776
Title XV. Reducing Regulatory Burdens
Section 1501. Provisions relating to
No provision.
Plan amendments required by the passage of H.R.
plan amendments
1776 would not have to be made before the last
day of the plan year beginning on or after January
1, 2006. Except as provided for in Treasury
regulations, plan amendments will not be
construed to violate the “anti-cutback” rules of
I.R.C. Section 411(d). For governmental plans,
the required date for plan amendments would be
the end of the first plan year beginning on or after
January 1, 2008.
Title XVI. Social Security and Medicare Held Harmless
Section 1601. Protection of Social
No provision.
Amounts transferred to any trust fund under the
Security and Medicare
Social Security Act would be determined as if
H.R. 1776 had not been enacted.

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