Retirement Plans with Individual Accounts: Federal Rules and Limits

Retirement Plans with Individual Accounts: Federal Rules and Limits

Order Code 98-171 EPW
Report for Congress
Received through the CRS Web
Retirement Plans With Individual Accounts:
Federal Rules and Limits
Updated February 27, 2003
James R. Storey
Specialist in Social Legislation
Paul J. 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 were
intended to be used in retirement. Most such plans now penalize cash withdrawals
before a certain age, with exceptions for circumstances such as death, disability, or
financial hardship. Thus, they often are called salary reduction retirement plans.
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). In 2001, the Economic
Growth and Tax Relief Reconciliation Act of 2001 (P.L. 107-16) raised contribution
limits substantially, liberalized the rules permitting tax-free transfers of assets among
different types of plans, shortened the maximum service required for employees to
become vested in employer contributions, established a nonrefundable income tax
credit for retirement plan contributors with income below specified levels, and made
numerous other changes.
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 these 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 for specific plan types.
Appendix A to this report compares the rules for each plan type in chart form.
Appendix B explains the abbreviated terms used in this report. Appendix C lists the
major provisions of law by statute and section number. This report is updated
annually.

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 . . . . . . . . . . . . . . . . . . . . . . . . 7
Section 403(b) Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Section 457 Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Salary Reduction Arrangements in Simplified Employee
Pension Plans (SARSEPs) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Savings Incentive Match Plans for Employees
of Small Employers (SIMPLE) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Plan Rules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Eligibility Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Vesting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Tax Treatment of Contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Limits on Contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Limits on Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Withdrawal Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Rollovers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Annuities and Cash Withdrawals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Required Minimum Distributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Tax Treatment of Withdrawals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
General Rules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Early Withdrawals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Late Withdrawals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Large Distributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Income Averaging . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Appendix A: Comparison of Federal Rules for Retirement Plans by Plan Type 26
Appendix B: Abbreviations Used in This Report . . . . . . . . . . . . . . . . . . . . . . . . 43
Appendix C: Location of Statutory Provisions
For Retirement Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44

List of Tables
Table 1. Determinants of Eligibility to Deduct Contribution
to Traditional IRA in 2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Table 2. Limits Defining Highly Compensated Group,
1987-2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Table 3. Minimum Requirements for Vesting of Employer Contributions to
Qualified Retirement Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Table 4. Limits on Salary Deferrals by Highly Compensated
Employees Under the Nondiscrimination Test . . . . . . . . . . . . . . . . . . . . . . 15
Table 5. Limits on Annual Compensation That Can Be Used to
Determine Plan Contributions, 1989-2003 . . . . . . . . . . . . . . . . . . . . . . . . . 16
Table 6. Limits on Annual Contributions to Salary Deferral Plans by Plan Type,
2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Table 7. Annual Dollar Limits on Elective Salary Deferrals,
1975-2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Table 8. Thresholds Above Which Plan Distributions Were Subject to Excise Tax
on Large Distributions, 1987-1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Table A-1. Eligibility Rules by Retirement Plan Type . . . . . . . . . . . . . . . . . . . . 27
Table A-2. Rules for Employee Contributions by Retirement Plan Type . . . . . . 30
Table A-3. Employer Contribution Rules by Retirement Plan Type . . . . . . . . . 33
Table A-4. Nondiscrimination and Integration Rules by Retirement Plan Type
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Table A-5. Plan Distribution Rules by Retirement Plan Type . . . . . . . . . . . . . . 37
Table A-6. Rules for Reporting, Disclosure, Fiduciary Responsibility and Allowable
Investments by Retirement Plan Type . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40

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. Further changes were made in the Taxpayer Relief Act of 1997 (P.L. 105-
34). Most recently, the Economic Growth and Tax Relief Reconciliation Act of 2001
(P.L. 107-16) raised contribution limits, liberalized the rules governing tax-free
transfers of assets among plan types, shortened the maximum service required for
employees to become vested in employer contributions, and made other important
changes in law.
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; and
! savings 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.

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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 section, which first sets 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 presents a series of charts that compare the rules 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. Some are covered also by
an employer-sponsored defined benefit pension plan and/or another defined
contribution plan,1 but, for 52% of workers covered by a §401(k) plan, that plan is
the only tax-deferred retirement arrangement made available by employers to
employees.2
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.3 However, when tax-deferred
1 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.
2 The proportion with only a §401(k) plan rose from 41% in 1994 to 52% in 1998. Source:
U.S. Dept. of Labor. Pension and Welfare Benefits Administration. Abstract of 1998 Form
5500 Annual Reports. Private Pension Plan Bulletin, no. 11, winter 2001-2002. (Hereafter
cited as Pension and Welfare Benefits Administration, Private Pension Plan Bulletin.)
3 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
(continued...)

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funds eventually are withdrawn from the plan, they are then subject to the federal
income tax.4 If withdrawals are premature or tardy, as defined in tax law, special
excise taxes may also apply.
Tax deferral offers two possible advantages to an employee. First, compound
interest accrues on the portion of savings that would have been used to pay taxes,
thus 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. 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
investments and withdrawals.
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
Economic Growth and Tax Relief Reconciliation Act of 2001 (P.L. 107-16)
significantly increased the IRA contribution limit and indexed it for inflation.
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
earned income), they serve as the investment vehicle for two types of employer plans
(SEPs and SIMPLE IRAs), and they are widely used as “successor plans” to which
individuals transfer assets from employer plans after retirement or job separation
occurs.
In 1985, 16.2 million tax filing units (19% of all units with wage or salary
income) reported IRA deductions, but the number actively contributing fell after the
3 (...continued)
deferral is achieved may be called a “deduction” or an “exclusion,” the amount on which
tax is deferred eventually will be subject to taxation when it is withdrawn from the
retirement plan.
4 An exception is the Roth IRA, which accepts only after-tax contributions but permits tax-
free withdrawals of both principal and investment earnings. P.L. 107-16 authorizes “Roth
401k” and “Roth 403b” plans as well, effective in 2006.

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1986 law took effect.5 Only 3.5 million tax filers (3.2% of all units with wage or
salary income) reported deductible IRA contributions for 2000. Participation rates
have fallen at all income levels, the decline being greater, the higher the income.
However, this trend undoubtedly has been altered since 1998 by contributions to
Roth IRAs.
Traditional IRAs. Anyone with wage income can contribute the lesser of
$3,000 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)
$3,000, or (2) 100% of the couple’s combined earnings less the working spouse’s
IRA contribution.6
P.L. 107-16 raised the old limit ($2,000) to $3,000 in 2002. Further increases
are scheduled, to $4,000 in 2005 and $5,000 in 2008. The contribution limit will rise
automatically with inflation in $500 increments in subsequent years. This law also
authorized “catch-up” contributions for individuals age 50 and older of up to $500
a year for 2002 through 2005 and up to $1,000 annually thereafter.
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;7
or (2) the contributor has adjusted gross income (AGI) below $40,000 ($60,000 for
a joint filer). A deduction for contributions of less than $3,000 is allowed if AGI
falls between this level and $50,000 ($70,000 for a joint filer).8 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 $3,000
annually.9 Qualified withdrawals are tax free. Contributions up to $3,000 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
5 U.S. Internal Revenue Service. Statistics of Income. Washington, various years.
6 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.
7 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 $3,000 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.
8 The limits on 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.
9 The annual limit on Roth IRA contributions began to rise in 2002 in tandem with the limit
for traditional IRAs as explained above.

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tax on the IRA assets that have not been taxed. Eligibility for conversion is limited
to tax filing units (single or joint) with AGI not in excess of $100,000.
Table 1. Determinants of Eligibility to Deduct Contribution
to Traditional IRA in 2003
Tax filing unit/
Eligibility of account-
work status of
holder (and spouse) for
2003 adjusted gross
Eligibility to deduct
accountholder
employer pension plan
income (AGI)
IRA contribution
Single/employed
Not eligible
Any amount
Full
Single/employed
Eligible
$0-$40,000
Full
Single/employed
Eligible
$40,001-$49,999
Limiteda
Single/employed
Eligible
$50,000 or more
None
Joint/employed
Not eligible
Any amount
Full
Joint/employed
Eligible
$0-$60,000
Full
Joint/employed
Eligible
$60,001-$69,999
Limiteda
Joint/employed
Eligible
$70,000 or more
None
Joint/nonworking
spouse
Not eligible (nor is spouse)
Any amount
Full
Joint/nonworking
Not eligible (spouse
spouse
eligible)
$0-$150,000
Full
Joint/nonworking
Not eligible (spouse
spouse
eligible)
$150,001-$159,999
Limiteda
Joint/nonworking
Not eligible (spouse
spouse
eligible)
$160,000 or more
None
a The ceiling on deductible contributions declines proportionately from $3,000 at the lower end of the
AGI range to $0 at the upper end.
Section 401(k) Plans10
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.
10 Treatment similar to that for §401(k) plans is granted to employee contributions to certain
trusts by §501(c)(18) of the tax code. That 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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Effective in 1997 (P.L. 104-188), authority to establish §401(k) plans was regained
by all 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.
In 1998, 42.7 million workers were covered by §401(k) plans. Most of the
covered group (37.1 million) were active participants.11 Participation rates rise as
earnings levels increase. While 90% of §401(k) plans are the primary retirement
plans offered by employers, many of these are small firms. Only 52% of §401(k)
active participants are in §401(k) plans that are their firms’ primary retirement
plans.12
These plans permit employees to elect to contribute a part of wages on a tax-
deferred basis. If participants have control over investment of their contributions, the
plans must offer several options for investment with a range of risk/return
characteristics. Many employers make contributions as well, 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. (Beginning in
2006, participants in §401(k) plans can elect to have their contributions taxed and
receive their distributions, including investment income, tax free. These “Roth
401k” arrangements were authorized by P.L. 107-16.)
An individual’s elective contributions are limited to $12,000 in 2003. (The limit
was set at $7,000, effective in 1987, and has since been adjusted annually for price
inflation.)13 Further restrictions apply to “highly compensated” participants under
“nondiscrimination” rules, which are intended to assure that plans benefit rank-and-
file workers.14 P.L. 107-16 raised the 2001 limit of $10,500 to $11,000 in 2002,
$12,000 in 2003, $13,000 in 2004, $14,000 in 2005, and $15,000 in 2006, after
which inflation indexing in $500 increments will again apply. This law also
authorized “catch-up contributions” for participants age 50 and older of up to $1,000
in 2002, $2,000 in 2003, $3,000 in 2004, $4,000 in 2005, and $5,000 in 2006. This
catchup contribution limit also will be indexed for inflation in subsequent years in
$500 increments. Total contributions from both employee and employer are also
11 Pension and Welfare Benefits Administration, Private Pension Plan Bulletin, p. 47.
Active participants are those who are current employees of the plan sponsor and eligible to
contribute to the plan.
12 Ibid., p. 49.
13 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 one year earlier. The adjusted figure
is rounded down to the nearest multiple of $500. The statutory increases specified for 2002
through 2006 by P.L. 107-16 will override this indexation feature, but yearly adjustments
in $500 increments will resume after 2006.
14 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.

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subject to an overall limit on all retirement contributions on behalf of an employee.
(In 2003, this limit is $40,000.)
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 civilian
employees covered by Social Security, created a salary reduction retirement plan
modeled on the §401(k) plan. This plan (the Thrift Savings Plan, or TSP) 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 31,
2002, there were 2.8 million federal employees contributing to the TSP through
salary reductions.15 Contributing employees represented 87% of FERS enrollees and
66% of CSRS enrollees.16 The plan’s assets totaled $104 billion.
Before July 2001, federal employees under FERS could contribute up to 10%
of salary, but no more than $10,500 in 2001. Employees under CSRS could
contribute up to 5% of salary. The percentage limits on employee contributions rose
in July 2001 based on a provision included in P.L. 106-554. The FERS and CSRS
limits increased to 11% and 6%, respectively, at that time. Further one-percentage-
point increases are scheduled to occur in 2002 and each succeeding year until the
limits reach 15% and 10%, respectively. In 2006, the percentage limits on employee
contributions will be abolished, but dollar limits will still apply. The dollar limit in
2003 is $12,000. Effective in 2002, military personnel became eligible to contribute
to the TSP on the same basis as civilian employees covered by CSRS.
Each federal agency contributes an automatic 1% of pay to the thrift savings
accounts of employees covered by FERS. The agencies also make matching
contributions on a dollar for dollar basis for the first 3% of salary their FERS-covered
employees contribute and on a 50 cents per dollar basis for the next 2%. No federal
agency contributions are made to the accounts of CSRS-covered workers; only
selected military personnel are eligible for federal contributions to their accounts.
The thrift plan offers participants a choice among five funds that track broad
portfolios of: government securities, common stocks of large firms, fixed-income
securities, small capitalization stocks, and international stocks.
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
15 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.
16 CRS Report RL30387, Federal Employees’ Retirement System: The Role of the Thrift
Savings Plan, by Patrick J. Purcell, September 19, 2002.

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generally consists of nonprofit research, scientific, educational, and charitable
organizations.
Employee tax-deferred contributions are generally subject to an annual ceiling
of $12,000 in 2003. 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.
It will rise yearly through 2006 on the same schedule as set forth above for §401(k)
plans as a result of P.L. 107-16.) Beginning in 2006, participants can have their
deferrals taxed and receive tax-free distributions from “Roth 403b” plans, as
authorized by P.L. 107-16.
Total contributions from both employee and employer are subject to the overall
$40,000 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 2001, TIAA-CREF managed assets worth $267 billion for 2.4 million
participants from more than 12,000 institutions.17
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 2000, §457 plans held more than $90 billion in assets.18
Unlike §401(k) plans, which are considered retirement plans “qualified” for
preferred treatment under federal tax law, §457 plans are not “qualified” plans.19
Thus, the conditions for tax deferral of contributions to §457 plans are specified only
in §457, and some of these rules differ from those of qualified plans.
Contributions are limited in 2003 to $12,000. 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. P.L. 107-
16 raised the annual deferral limit to $11,000 in 2002, $12,000 in 2003, $13,000 in
2004, $14,000 in 2005, and $15,000 in 2006, and indexes it for inflation thereafter
17 College Retirement Equities Fund Prospectus. CREF, New York. May 1, 2002.
18 Pensions and Investments, June 11, 2001, p. 21.
19 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, §403(b) plans, the TSP,
SIMPLE retirement accounts, SARSEPs, §457 plans, and IRAs are not qualified plans. The
tax treatment of these plans is specified separately in the law.

CRS-9
in $500 increments. These limits are doubled for participants in their last 3 years
prior to retirement. P.L. 107-16 also eliminated the one-third of compensation limit
on deferrals that applied prior to 2002.
Salary Reduction Arrangements in Simplified Employee
Pension Plans (SARSEPs)
A simplified employee pension (SEP) consists of IRAs that are funded
completely by the employer on behalf of all eligible employees.20 Contributions are
allowed up to the lesser of 25% of earnings or $40,000 annually and must apply to
each employee account uniformly as a percent of salary. SEPs were authorized to
provide small businesses with a simple means for offering pension coverage to
employees.
This 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). However, the authority to establish new SARSEPs expired
on December 31, 1996, because of provisions in P.L. 104-188 authorizing SIMPLE
(discussed below). Plans already in existence were allowed to continue in operation.
SARSEPs are 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 $40,000. Elective contributions are subject to the
same $12,000 limit in 2003 as a §401(k) plan. This limit will rise yearly through
2006 according to the same schedule detailed above for §401(k) plans.
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 $8,000 a year in 2003 from salary as contributions to the plan, which
the employer must either match according to a specified formula or augment with a
contribution of 2% of each participant’s wages. SIMPLEs are exempt from certain
nondiscrimination rules and reporting requirements.21
The $8,000 annual deferral limit will increase under the provisions of P.L. 107-
16 to $9,000 in 2004 and $10,000 in 2005. Inflation indexing in $500 increments
will apply for subsequent years.
20 An employee may make annual contributions up to the limit for a traditional IRA to the
same account as the SEP-IRA.
21 For more information, see: CRS Report 96-758, Pension Reform: SIMPLE Plans for Small
Employers, by James R. Storey (updated by Celinda Franco).

CRS-10
Plan Rules
The Tax Reform Act of 1986 and the Economic Growth and Tax Relief
Reconciliation Act of 2001 made great strides toward bringing the different types of
salary reduction plans under uniform rules. However, 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 $90,000 in 2003 (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.22 (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 have earned income or have a spouse with earned income. (Whether
or not IRA contributions are eligible for tax-deferral is discussed below under Tax
Treatment of Contributions.)
22 This definition of highly compensated was included in P.L. 104-188 to simplify provisions
of prior law.

CRS-11
Table 2. Limits Defining Highly Compensated Group,
1987-2003
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
2000-01
85,000
85,000
2002-03
90,000
90,000
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 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. However, the state
and local governments and the nonprofit organizations that sponsor §457 plans apply
their own eligibility rules.
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: (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-12
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 of job tenure 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 3 years (3-year cliff vesting); or 20% a year beginning with 2 years of
service and reaching full vesting after 6 years (graded vesting). Before 2002, the
maximum terms for vesting were 5 years (cliff) and 7 years (graded). (The effective
date for the shorter vesting periods may be delayed for collectively bargained plans
until the earlier of the bargaining agreement’s termination date or January 1, 2006.)
Both current and past vesting standards are displayed in Table 3.
Exceptions. Employer contributions to SIMPLEs must vest at once. Federal
vesting standards do not apply to §457 plans. Vesting rules are not needed for IRAs
since all contributions are from the participant.
Table 3. Minimum Requirements for Vesting of Employer
Contributions to Qualified Retirement Plans
Minimum percentage of employer contribution that must be
vested
Cliff vesting
Graded vesting
Completed years of
in 2002 and
in prior
in 2002 and
in prior
participation
later yearsa
yearsb
later yearsa
yearsb
1
0
0
0
0
2
0
0
20
0
3
100
0
40
20
4
100
0
60
40
5
100
100
80
60
6
100
100
100
80
7 or more
100
100
100
100
a The new vesting rules may be delayed for collectively bargained plans until the earlier of the
bargaining agreement termination date or January 1, 2006.
b The old rules were in force from 1989 through 2001. Multiemployer plans were able to use 10-year
cliff vesting until it was eliminated by P.L. 104-188.

CRS-13
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 Medicare) and FUTA (Unemployment Insurance) 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. Beginning in 2006, there also will be no tax deferral allowed for salary
deferrals to “Roth 401k” and “Roth 403b” plans, which were authorized by P.L. 107-
16 to begin in that year.
Contributions to traditional IRAs are not tax-deferred if the contributor is an
active participant23 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 2003, if AGI is above
$50,000 ($70,000 for a joint filer), no deduction is allowed. If AGI is between
$40,000 and $50,000 ($60,000 and $70,000 for a joint filer), a deduction is allowed
up to a ceiling. The deductible ceiling equals $3,000 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.
These AGI thresholds for deductibility of IRA contributions formerly applied
to a noncovered spouse of a person who had employer plan coverage. However, a
higher threshold was adopted for noncovered 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 $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
23 An “active participant” in a particular year is anyone eligible to participate in a defined
benefit plan in that year or anyone whose defined contribution account has funds contributed
or allocated to it in that year. Neither the amount of money contributed nor the length of the
eligibility period are considered in the determination of active participant status.

CRS-14
thresholds for full deductibility will increase to the following levels: $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 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 annual limit ($3,000 in 2003) 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.
Beginning in 2002, P.L. 107-16 authorized a temporary nonrefundable tax credit
equal to a portion of retirement plan contributions for tax filers with AGI below
specified levels. The credit can be applied to both IRA and employer plan
contributions and may be taken in addition to the adjustment to AGI for the
contributions. The credit amounts, which can be applied to up to $2,000 of
contributions, are as follows: 50% of the contribution if the filer’s AGI is no more
than $15,000 (single), $22,500 (head of household), or $30,000 (joint); 20% of the
contribution if AGI is between $15,000 and $16,250 (single), $22,500 and $24,375
(head of household), or $30,000 and $32,500 (joint); 10% of the contribution if AGI
is between $16,250 and $25,000 (single), $24,375 and $37,500 (head of household),
or $32,500 and $50,000 (joint). There is no credit available if AGI is above these
stated ranges, and the credit is scheduled to expire December 31, 2006.
Limits on Contributions
Individual plans may set their own limits on the amounts that can be
contributed. However, plan limits cannot exceed the limits established in the Internal
Revenue Code. Employee contributions from salary deferrals are limited to $12,000
in 2003. P.L. 107-16 raises this ceiling yearly through 2006. (See Table 7 for the
scheduled increases.) Beginning in 2007, this limit will be indexed for inflation in
$500 intervals.
There is also an overall annual limit on combined contributions that can be
made by employee and employer to an employee’s account. That limit is $40,000 in
2003. The contribution limit is indexed for inflation in $1,000 intervals. (A 25% of
salary limit was repealed effective in 2002 by P.L. 107-16. That law also raised the
2001 limit of $35,000 to $40,000 for 2002 and lowered the threshold amount for an
inflation adjustment from $5,000 to $1,000.)

CRS-15
A further limit may apply to elective salary deferrals by highly compensated
employees and to employer matching.24 The actual deferral percentage of the highly
compensated is limited by a formula tied to the actual 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.
Table 4. Limits on Salary Deferrals by Highly Compensated
Employees Under the Nondiscrimination Test
If avg. deferral ratea of nonhighly
Limit on avg. deferral ratea of highly
compensated is:
compensatedb is:
between 0% and 8%
2 percentage points higher than rate for
nonhighly compensated
between 9% and 80%
1.25 times rate for nonhighly compensated
between 81% and 100%
100%
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.
The level of annual compensation on which contributions can be based is
limited to $200,000 in 2003. (See Table 5 for the complete history of this limit.)
The limit is indexed for inflation annually but can rise only in $5,000 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. (P.L. 107-16 increased the 2001 limit of
$170,000 to $200,000 effective in 2002 and lowered the threshold for inflation
adjustments from $10,000 to $5,000 increments.)
Beginning in 2002, P.L. 107-16 authorized individuals who have attained age
50 to make “catch-up” contributions to IRAs, §401(k) plans, §403(b) plans, §457
plans, and SIMPLEs. The additional catch-up amount started at $1,000 in 2002 and
rises in $1,000 steps annually until it reaches $5,000 in 2006. This amount will be
indexed for inflation in subsequent years in $500 intervals. (For SIMPLEs, the catch-
up amount started at $500 and rises in $500 steps until it reaches $2,500 in 2006.
Inflation indexing will then apply in $500 intervals. For IRAs, the catch-up amount
is $500 for 2002 through 2005 and $1,000 in 2006. The IRA catch-up amount is not
indexed for inflation.)
24 The definition of a highly compensated employee is given in the section entitled
Eligibility Requirements.

CRS-16
Table 5. Limits on Annual Compensation That Can Be Used to
Determine Plan Contributions, 1989-2003
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
2000-01
170,000
2002-03
200,000c
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. 103-66. It remained unchanged in some
years after 1994 because it was allowed to rise with inflation only in $10,000 intervals after
enactment of P.L. 103-66.
c P.L. 107-16 established a $200,000 limit for 2002 and changed the indexing increment to $5,000.
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, in 2003, $3,000 (or a total of $6,000 for a worker and a nonworking spouse). The
overall limit of $40,000 does not apply to IRAs. However, the $3,000 IRA limit
governs contributions to all of the IRAs an individual owns. (The schedule of limits
set by P.L. 107-16 beginning in 2002 is shown in Table 7.)
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.
In §457 plans, unused deferrals from prior years may be contributed in one or
more of an employee’s last 3 years before attaining normal retirement age, not to
exceed twice the otherwise applicable annual limit
The Federal Employees’ Thrift Savings Plan originally limited salary deferrals
to 10% of salary for employees covered by FERS and 5% of salary for those under
CSRS, but these limits began to rise in July 2001 and are now 13% and 8%,
respectively. They will rise annually by one percentage point until they reach 15%
and 10% in 2005. In 2006, these percentage limits will be abolished. 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 ($12,000 in 2003) does apply,
however.

CRS-17
Table 6. Limits on Annual Contributions to Salary Deferral
Plans by Plan Type, 2003
Limit is lesser of:
Is dollar
Does nondis-
Annual
Percent
limit
crimination test
dollar
of earn-
inflation
apply to elective
Plan type
limit
ings
indexed?a
salary deferrals?
IRA-employee
$3,000
100%
Yes
No
IRA-nonworking
spouse
3,000b
b
Yes
No
401(k)
12,000
100%
Yes
Yesc
403(b)
12,000
100%
Yes
Nod
457
12,000
100%
Yes
No
501(c)(18)
12,000
100%
Yes
Yes
SARSEP
12,000
25%
Yes
Yes
Federal thrift plan —
FERS
12,000
13%
Yes
No
Federal thrift plan —
CSRS
12,000
8%
Yes
No
SIMPLE retirement
account
8,000
100%
Yes
No
SIMPLE 401(k)
8,000
100%
Yes
No
a Scheduled increases included in P.L. 107-16 will override inflation indexing for several years. See
Table 7.
b Contributions of a worker and a nonworking spouse in combination cannot exceed 100% of the
worker’s earnings.
c 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. (See preceding page for details.)
d The nondiscrimination test does apply to employer contributions to §403(b) plans, however.
Annual salary deferrals in a SIMPLE are limited in 2003 to $8,000. (The
scheduled increases in this limit under P.L. 107-16 beginning in 2002 are shown in
Table 7.) The nondiscrimination test is waived for deferrals to these plans. The
$200,000 limit on the annual compensation that can be used as the basis for plan
contributions does not apply in the case of employer matching contributions to a
SIMPLE retirement account.
The nondiscrimination test can be waived for §401(k) plans that meet one of
two employer contribution goals set forth in P.L. 104-188. 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

CRS-18
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.
Table 7. Annual Dollar Limits on Elective Salary Deferrals,
1975-2008
[Note: Higher “catch-up” limits apply for participants age 50 and older
beginning in 2002–see text for details]
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
2001
10,500
10,500
8,500
2,000
6,500
2002
11,000f
11,000f
11,000f
3,000f
7,000f
2003
12,000f
12,000f
12,000f
3,000f
8,000f
2004
13,000f
13,000f
13,000f
3,000f
9,000f
2005
14,000f
14,000f
14,000f
4,000f
10,000f
g
2006
15,000f
15,000f
15,000f
4,000f
g
g
g
g
2007
4,000f
g
g
g
g
2008
5,000f
a These limits also apply to §501(c)(18) plans, SARSEPs, and the Federal Employees’ Thrift Savings
Plan.

CRS-19
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.
f Limit set in P.L. 107-16.
g Limit to be adjusted annually for inflation in $500 increments.
Plans exempt from nondiscrimination testing have a $250,000 limit. The
$200,000 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. Because of inflation indexing, that limit is $300,000 in 2003.
No compensation limit applies to §457 plans.
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 in 1999 (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 to their plans.

CRS-20
The DoL regulations that require a range of investment options apply only to
plans qualified under §401 of the tax code.
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.
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, 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 salary reduction plan to a plan offered by the next employer (if that plan accepts
rollovers) or to a traditional IRA (but not to a Roth IRA). A plan distribution can be
rolled over regardless of the proportion it constitutes of an individual’s total assets
in the plan, so long as the distribution is not “one in a series of periodic payments.”
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.

CRS-21
Exceptions. Beginning in 2002, P.L. 107-16 removed most of the past
barriers to rollovers. Rollovers are now generally permitted among §401(k) plans,
§403(b) plans, §457 plans, the TSP, and traditional IRAs.
IRA-to-IRA rollovers are limited to one 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 if 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,
however. This $100,000 limit applies to both single and joint filers.
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 multiple 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 latest 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 at least 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 treated
as an itemized deduction from income subject to 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 is 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 multiple payments received over fewer than 10 years. Otherwise,
income tax withholding is optional.
25 Hardship withdrawals are allowed if needed by 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 rent or mortgage payments to prevent eviction from, or
foreclosure on the mortgage on, a principal residence.

CRS-22
Exceptions. The abovementioned early retirement exception to the early
withdrawal penalty (item 4) does not apply for IRAs. Also, in-service withdrawals
for financial hardship are not applicable to IRAs since IRAs are not employer plans.
However, three exceptions do apply to IRAs. Withdrawals from IRAs, including
Roth IRAs, are not subject to the 10% early withdrawal tax if the funds are used to:
(1) pay higher education expenses, (2) purchase a primary residence; or (3) pay for
health insurance premiums after receiving unemployment benefits for at least 12
weeks. The home purchase exception 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.
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. To avoid tax penalties for late
withdrawal, withdrawals must begin after the later of (1) attainment of age 70½, or
(2) retirement from covered employment.26 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 applies to 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.
On April17, 2002, the IRS issued final and temporary rules that simplify the
process of determining the required minimum distribution from qualified plans and
IRAs beginning as early as 2001. Similar rules for §457 plans were proposed May
8, 2002. These rules provide that all taxpayers can use the same table to receive
distributions based on their life expectancy and that of a beneficiary. The table is
based on an age differential between accountholder and beneficiary of 10 years. An
exception is made where the beneficiary is a spouse who is more than 10 years
younger. In this case, the accountholder may use the longer distribution period of
their joint or last-survivor life expectancy.
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 pre-1987 contributions and investment earnings.
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 for participants
in other types of employer-sponsored plans.

CRS-23
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 a traditional IRA, the tax status is determined
according to the tax status of all the individual’s traditional IRAs, not just the status
of the IRA from which the funds were actually taken.
The 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.
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 at least 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 unless the amount withdrawn had been rolled over from another type of
retirement plan. 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.

CRS-24
Late Withdrawals. An excise tax is applied for late withdrawals. A late
withdrawal is one that is deficient compared to the required minimum distribution.
(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 is no longer in
force. It was waived for 3 years (1997-1999) by P.L. 104-188 and was repealed
permanently by P.L. 105-34. Prior to 1997, a 15% excise tax had been levied for
“excessive” distributions. This tax was applied to the excess distributions of an
individual who received periodic payments from all plans (excluding §457 plans) that
summed to more than $155,000 yearly in 1996 (indexed for inflation in $5,000
intervals). (The history of these limits is shown in Table 8.) A lump-sum
distribution had been regarded as excessive if it were greater than $775,000 in 1996
(or five times the threshold for an excessive annual distribution).
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 spread out over each of 10 years, beginning with the
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 Tax Reform Act of 1986 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 had allowed
5-year averaging using post-1986 tax rates. However, 5-year averaging was ended
in 2000 by P.L. 104-188.

CRS-25
Table 8. Thresholds Above Which Plan Distributions Were
Subject to Excise Tax on Large
Distributions, 1987-1997
Year
Annual threshold
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
aThe excise tax on large distributions was waived for 1997-1999 by P.L. 104-188 and repealed by
P.L. 105-34 for all subsequent years.

CRS-26
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 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 in plan rules were omitted in order to keep this comparison
in a compact format. For example, rules variations associated with a plan sponsor’s
being self-employed are not identified.

CRS-27
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 $450 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 December 31, 1996
years; (3) those earning less than $450 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; (2)
cannot offer another plan
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 May 6, 1986 and
compensated, or meet one of two other
(2) who are members of bargaining unit; (3) who
certain irrigation and drainage
tests
are nonresident aliens with no U.S. income
entities
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
SIMPLE
Nongovernmental employers with
100% of nonexcludible employees
Plan may exclude: (1) those earning less than
§401(k)
100 or fewer employees earning at
$5,000 in each of 2 prior years and current year; (2)
least $5,000; cannot offer another
members of bargaining unit; (3) nonresident aliens
plan to employees covered by
with no U.S. income
SIMPLE §401(k)
Educational organizations may exclude employees
until later of age 26 or 1 year of service if benefits
fully vested after 1 year
Federal
U.S. government
All employees in groups specified in law;
All civilian and military employees in groups
Thrift
federal agencies must contribute to
specified in law; employees under CSRSa ineligible
Savings
accounts of all employees covered by
for employer contributions; only select military
FERSa
groups eligible for employer contributions
§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 local
compensated, or meet one of two other
plan of employer; (2) who are in bargaining unit;
government and nonprofit sectors
tests
(3) who are nonresident aliens with no U.S.
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

CRS-29
Plan type
Employer eligibility
Extent of workforce coverage required
Employee eligibility
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
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 (TSP) was designed to be an integral part of the retirement benefit for post-1983 hires, along with the FERS DB plan and Social Security.
Military personnel became eligible to participate in TSP in 2002.
b Governmental employers also sponsor defined benefit (DB) plans. However, most federal rules for DB plans do not apply to governmental plans.

CRS-30
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 a
after-tax contributions
salary deferrals
Traditional
$3,000 if employee (and spouse)b are not
$3,000 ($3,500 if “catch-up”
Not applicable
IRA
covered by an employer plan or if AGI does
contribution applies) minus
not exceed $40,000 (single filers) or $60,000
allowable pre-tax contributions;
(joint filers); limit declines to $0 over next
same limit applies to employee’s
$10,000 of AGI;c limit is $0 for persons over
nonworking spouse
age 70½; $500 “catch-up” contribution
allowed if age 50 or older
Roth IRA
Tax-deferred contributions not allowed
$3,000b 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);
$500 “catch-up” contribution
allowed if age 50 or older
SEP IRA
Employee contributions not allowed
Employee contributions not allowed
Not applicable
SARSEP
$12,000 (indexed in $500 incrementsd);
After-tax employee contributions not
Actual deferral percentage (ADP) of highly
IRA
$2,000 “catch-up” contribution allowed if
allowed
compensated employees cannot exceed ADP
age 50 or older
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
$8,000 (indexed in $500 incrementsd);
After-tax employee contributions not
Exempt from test
IRA
$1,000 “catch-up” contribution allowed if
allowed
age 50 or older

CRS-31
Annual limit on employee
Annual limit on employee
Nondiscrimination test for employee
Plan Type
tax-deferred contributions a
after-tax contributions
salary deferrals
§401(k)
$12,000 (indexed in $500 incrementsd);
After-tax employee contributions not
Actual deferral percentage (ADP) of highly
$2,000 “catch-up” contribution allowed if
allowed
compensated employees cannot exceed ADP
age 50 or older
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 contributionse
SIMPLE
$8,000 (indexed in $500 incrementsd);
After-tax employee contributions not
Deemed to satisfy §401(k) test
§401(k)
$1,000 “catch-up” contribution allowed if
allowed
age 50 or older
Federal
Lesser of $12,000 (indexed in $500
After-tax employee contributions not
None; §401(k) test waived by P.L. 100-202
Thrift
incrementsd) or 13% of pay (8% of pay
allowed
Savings
under CSRS)f
§403(b)
$12,000 (indexed in $500 incrementsd);
After-tax employee contributions not
No test for employee salary deferrals, but the
catch-up deferrals allowed up to $3,000 a
allowed
§401(k) test does apply to employer matching
year, $15,000 lifetime, for those with over
contributionse
15 years of service and whose past deferrals
do not exceed $5,000 times years of service;
$2,000 “catch-up” contribution allowed if
age 50 or older
§457
$12,000 (indexed in $500 incrementsd);
After-tax employee contributions not
Not applicable
catch-up deferrals allowed up to twice the
allowed
amount otherwise allowed in last 3 years
before retirement; $2,000 “catch-up”
contribution allowed if age 50 or older
Money
Tax-deferred employee contributions not
Not applicable
Not applicable
purchase
allowed
Profit-
Tax-deferred employee contributions not
Not applicableg
Not applicable
sharing
allowedg
Private-
Tax-deferred employee contributions not
After-tax employee contributions
Not applicable
sector
allowed
allowed; no limit specified in federal
defined
law
benefit

CRS-32
aEffective in 2002, P.L. 107-16 authorizes nonrefundable tax credits, in addition to tax deferrals, for contributions to IRAs and employer plans made by tax filers with AGI
less than $25,000 (single), $37,500 (head of household), or $50,000 (joint).
b A nonworking spouse can also contribute $3,000, 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.
c The $10,000 phase-out range begins 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.
d 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. P.L. 107-16 overrides inflation indexing for 2002 and several years thereafter because of statutory increases
set forth in that law.
e 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.
f The FERS and CSRS contribution limits rose to 11% and 6%, respectively, in July 2001 (from the original 10% and 5%), to 12% and 7% in January 2002, and rise by one
percentage point annually thereafter until they reach 15% and 10%. In 2006, these percentage limits will be abolished.
g In a conventional profit-sharing plan, the employer makes all the contributions. Voluntary after-tax employee contributions are sometimes permitted by profit-sharing plans.
In this case, the plan would be termed a profit-sharing thrift plan.

CRS-33
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 25% of pay or $40,000
Yes
Immediate
Contributions and investment
(indexed in $1,000 increments)
earnings held in IRAs
SARSEP
Lesser of 25% of pay or $40,000
Yes
Immediate
Contributions and investment
IRA
(indexed in $1,000 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 of
must apply to 3% of pay at
employee deferrals up to 3% of
least 3 out of every 5 years
pay
§401(k)
$40,000 (indexed in $1,000
Yes, if §401(k) is part of a
ERISA rulesb
Contributions and investment
increments), minus employee’s
profit-sharing or stock
earnings held in individual trust
deferral amount
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 of
bonus plan
fund accounts
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; selected military
personnel are eligible for
employer contributions

CRS-34
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)
$40,000 (indexed in $1,000
No
Immediate except for failure
Contributions fund individual
increments), minus employee’s
to pay premiums
annuities or may be invested in
deferral amount
custodial trust fund accounts
§457
$12,000 less employee’s deferral
Yes
Immediate
In nonprofit plans, funds held by
amount
employer; in state/local plans,
contributions and investment
earnings held in individual trust
fund accounts
Money
$40,000 (indexed in $1,000
No
ERISA rulesb
Minimum funding requirements
purchase
increments)
apply; contributions are made
according to a fixed formula
Profit-
Aggregate amount cannot exceed
Yes
ERISA rulesb
Contributions set by plan
sharing
25%c of compensation of all
sponsor, do not have to be from
employees; also limited to
current profits; minimum funding
$40,000 (indexed in $1,000
requirements do not 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;e must fund benefits earned
defined
in funding standard account; may
each year and amortize any past
benefit
not exceed full funding limitd
unfunded liabilities over 30-40
years
a The annual employee pay upon which employer contributions can be based is limited to $200,000 in 2003 (indexed in $5,000 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. This column identifies the employer limit net of the
employee’s deferral amount.
b ERISA and the tax code require that employer contributions be fully vested after completion of 3 years of service, or after 6 years if vested in steps of 20%
beginning after 2 years of service.
c This limit was changed to 25% from 15% effective in 2002 by P.L. 107-16.
d P.L. 107-16 repeals the full funding limit effective in 2004.
e 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-35
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
Applies to employer matching contributions
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-36
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 pension
Applicable
sector
regard to benefit availability, rights, or
below half of accrued benefit;
defined
features; plan must benefit at least the lesser
difference in accrual rates above
benefit
of: (1) 50 employees, or (2) the greater of (a)
and below Social Security wage
40% of all employees, or (b) 2 employees
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 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-37
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; to employer
plan that accepts
rollovers
Roth IRA
10% of amounts taxed
None
Allowed
Once a year to another
None
upon conversion or
Roth IRA
investment earnings
withdrawn 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
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 2
exceptionb applies;
distributionc after age 70½
years); can be
penalty is 25% if
converted to Roth IRA
withdrawal is within
first 2 years of
SIMPLE participation

CRS-38
Excise tax on early
Excise tax on late
In-service
Plan Type
withdrawals
withdrawals
withdrawals
Rollover options
Loan availability
§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 or
(1) $50,000 or (2) the
before age 59½ unless
minimum required
financial hardship
to traditional IRA
greater of (a) 50% of
exceptiond applies
distributionc after later of
vested amount or (b)
age 70½ or retirement
$10,000
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 or
(1) $50,000 or (2) the
before age 59½ unless
minimum required
financial hardship
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 or
employee’s contributions
Savings
before age 59½ unless
minimum required
one-time withdrawal
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 employer plan that
Limited to the lesser of
amount withdrawn
withdrawal falls short of
59½, earlier in case of
accepts rollovers or to
(1) $50,000 or (2) the
before age 59½ unless
minimum required
financial hardship
traditional 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 employer plan that
Not allowed in nonprofit
withdrawals allowed
withdrawal falls short of
70½, earlier for
accepts rollovers or to
plans; in state/local plans,
only in event of job
minimum required
emergencies
traditional IRA
allowed up to lesser of (1)
separation, attainment
distributionc after later of
$50,000 or (2) greater of
of age 70½, financial
age 70½ or retirement
(a) 50% of vested amount
emergency, or death
or (b) $10,000

CRS-39
Excise tax on early
Excise tax on late
In-service
Plan Type
withdrawals
withdrawals
withdrawals
Rollover options
Loan availability
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 or
(1) $50,000 or (2) the
before age 59½ unless
age 70½ or retirement
to traditional IRA
greater of (a) 50% of
exceptiond applies
vested amount or (b)
$10,000
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 or
(1) $50,000 or (2) the
before age 59½ unless
age 70½ or retirement
years
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 or
(1) $50,000 or (2) the
defined
before age 59½ unless
age 70½ or retirement
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 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 lifetime (and that of a beneficiary deemed to be
10 years younger).
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-40
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 Form
Distributions reported to
Exempt from ERISA
Art, antiques, and other
IRA
1099-R; contributions and account
accountholder on Form 1099-R;
rulesb
collectibles (except certain
balances reported to IRS on Form
contributions and account
precious metals); penalty for
5498
balances reported to
prohibited transactionsc
accountholder on Form 5498
Roth IRA
Distributions reported to IRS on Form
Distributions reported to
Exempt from ERISA
Art, antiques, and other
1099-R; contributions and account
accountholder on Form 1099-R;
rulesb
collectibles (except certain
balances reported to IRS on Form
contributions and account
precious metals); penalty for
5498
balances reported to
prohibited transactionsc
accountholder on Form 5498
SEP IRA
Distributions reported to IRS on Form
Distributions reported to
ERISA rules applyb
Art, antiques, and other
1099-R; contributions and account
accountholder on Form 1099-R;
collectibles (except certain
balances reported to IRS on Form
contributions and account
precious metals); penalty for
5498
balances reported to
prohibited transactionsc
accountholder on Form 5498
Plan data reported to IRS on Form
5500 unless plan begun as model plan
Simplified version of ERISA
disclosure rulesd also applies
SARSEP
Distributions reported to IRS on Form
Distributions reported to
ERISA rules applyb
Art, antiques, and other
IRA
1099-R; contributions and account
accountholder on Form 1099-R;
collectibles (except certain
balances reported to IRS on Form
contributions and account
precious metals); penalty for
5498
balances reported to
prohibited transactionsc
accountholder on Form 5498
Plan data reported to IRS on Form
5500 unless plan begun as model plan
Simplified version of ERISA
disclosure rulesd also applies

CRS-41
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 Form
Distributions reported to
Employer relieved of
Art, antiques, and other
IRA
1099-R; contributions and account
accountholder on Form 1099-R;
fiduciary liability for
collectibles (except certain
balances reported to IRS on Form
contributions and account
losses related to
precious metals); penalty for
5498
balances reported to account-
participant control of
prohibited transactionsc
holder on Form 5498
assets, which occurs at
earliest of: (1) choice
Amended ERISA rules also
among investment
apply: trustee must provide
options; (2) rollover
annual plan summary; employer
of funds to another
must give plan description to
account; (3)
eligibles and notify them of
completion of 1 year
chance to elect participation
in plan
§401(k)
Distributions reported to IRS on Form
Distributions reported to
ERISA rules applyb
Investments in securities or real
1099-R; contributions and account
participants on Form 1099-R
property of the employer of
balances reported to IRS on Form
deferrals in excess of 1% of
5498
ERISA rules also applyd
pay cannot exceed 10% of total
deferral unless individual
Plan data reported to IRS on Form
chooses; penalty for prohibited
5500; simplified reporting applies for
transactionsc
plans with less than 100 participants
SIMPLE
Distributions reported to IRS on Form
Distributions reported to
ERISA rules applyb
Investments in securities or real
§401(k)
1099-R; contributions and account
participants on Form 1099-R
property of the employer of
balances reported to IRS on Form
deferrals in excess of 1% of
5498
ERISA rules also applyd
pay cannot exceed 10% of total
deferral unless individual
Plan data reported to IRS on Form
chooses; penalty for prohibited
5500; simplified reporting applies for
transactionsc
plans with less than 100 participants
Federal
Distributions reported to IRS on Form
Transactions and account
Rules set forth in USC
Investment limited to five
Thrift
1099-R
balances reported to participants
Title 5, Section 8477
funds established by law
Savings
semi-annually; plan summary
provided by agencies to
employees when plan changes

CRS-42
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 Form
Distributions reported to
ERISA rules applyb
Penalty for prohibited
1099-R; contributions and account
participants on Form 1099-R
transactionsc
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 Form
Distributions reported to
Nonee
Nonee
1099-R
participants on Form 1099-R or
W-2
Money
Distributions reported to IRS on Form
Distributions reported to
ERISA rules applyb
Penalty for prohibited
purchase
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 Form
Distributions reported to
ERISA rules applyb
Penalty for prohibited
sharing
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 Form
Distributions reported to
ERISA rules applyb
Penalty for prohibited
sector
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-43
Appendix B: Abbreviations Used in This Report
ADP. Actual 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 future benefits based on tenure and
salary and holds invested assets in a central fund to cover the promised benefits.
DC. A defined contribution plan, which accrues contributed funds and investment earnings 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 Social Security and Medicare.
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, former name of 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(k) of the tax code.
SIMPLE. A savings incentive match plan for employees of small employers as authorized by §408(p)
of the tax code.
TSP. The Thrift Savings Plan, a §401(k)-type plan for federal employees.
USC. United States Code.

CRS-44
Appendix C: Location of Statutory Provisions
For Retirement Plans
Law/section number
Provisions of section
Internal Revenue Code
of 1986:
25B
Nonrefundable credit equal to portion of retirement plan contributions
for taxpayers with AGI below specified levels
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-45
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(a)-408(i)
Rules for IRAs
and 408(m)-408(o)
408(j)-408(l)
Rules for SEPs
408(p)
Rules for SIMPLEs
408A
Rules for Roth IRAs
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

CRS-46
Law/section number
Provisions of section
414(d)
Definition of governmental plan
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

CRS-47
Law/section number
Provisions of section
4980A (repealed) Excise tax on excess plan distributions
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
Title 5, United States
Code:
Ch. 83, Subch.
Provisions establishing the Civil Service Retirement System
III
Ch. 84, Subch.
Provisions establishing the Federal Employees’ Retirement System
I, II, IV, V,
and VI
Ch. 84, Subch.
Provisions establishing the Federal Employees’ Thrift Savings Plan
III and VII