Order Code RL31939
CRS Report for Congress
Received through the CRS Web
Pensions and Retirement Saving Plans:
Comparison of H.R. 1776 with Current Law
Updated October 3, 2003
Patrick Purcell
Specialist in Social Legislation
Domestic Social Policy Division
Congressional Research Service ˜
The Library of Congress
Pensions and Retirement Saving Plans:
Comparison of H.R. 1776 with Current Law
Summary
H.R. 1776, (Portman/Cardin) the
Pension Preservation and Savings Expansion
Act was ordered to be reported (as amended) by the Committee on Ways and Means
on July 18, 2003. Among the major provisions of the bill, it would:
! accelerate the scheduled increases in contribution limits to
individual retirement accounts and employer-sponsored plans, as
included in the EGTRRA of 2001;
! expand and extend a non-refundable income tax credit for low- and
moderate-income individuals who contribute to a qualified
retirement plan;
! replace for three years the interest rate on 30-year Treasury bonds as
the rate used by defined benefit plans to calculate funding ratios with
a rate based on an index of high-quality, long-term corporate bonds;
! allow up to $2,000 of certain retirement annuity income to be free of
income taxes during each of the first 5 years such income is
received;
! raise the age at which participants must begin to take distributions
from pension plans and individual retirement accounts from 70½ to
75, and reduce the excise tax for not taking distributions from 50%
to 20% of the amount not distributed;
! accelerate the schedule on which employees must be fully vested in
an employer’s contributions to a defined contribution plan;
! allow nontaxable transfers of IRA of assets to the IRA of a spouse
or former spouse;
! increase the permissible deduction for employers that maintain both
a defined benefit and defined contribution plan;
! allow public-safety employees to take distributions from a Deferred
Retirement Option Plan before age 59½ without being subject to the
10% penalty for distributions made before age 59½;
! allow small employers to make additional contributions to SIMPLE
retirement plans;
! allow disabled persons to contribute to individual retirement
accounts (IRAs).
The sections of
H.R. 1776 that amend provisions of law enacted by the
Economic Growth and Tax Relief Reconciliation Act of 2001 (“EGTRRA,” P.L.
107-16) are subject to the “sunset” provision of section 901 of EGTRRA, which
provides that the Act shall not apply after December 31, 2010.
The provision of
H.R. 1776 that would replace the interest rate on 30-year
Treasury bonds as the rate used by defined benefit plans to calculate funding ratios
with a rate based on an index of high-quality, long-term corporate bonds was
introduced as a separate bill,
H.R. 3108 (Boehner), on September 17, 2003.
This report will be updated as further legislative developments occur.
Contents
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Title I. Building and preserving retirement assets
and enhancing portability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Title II. Revitalizing defined benefit pension plans . . . . . . . . . . . . . . . . . . . 6
Title III. Expanding small business retirement plan coverage . . . . . . . . . . . 7
Title IV. Expanding retirement savings for tax-exempt
organizations and government employees . . . . . . . . . . . . . . . . . . . . . . . 8
Title V. Simplification and equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Title VI. Other tax provisions relating to pensions . . . . . . . . . . . . . . . . . . . 13
Title VII. Stock options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Title VIII. Miscellaneous provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
List of Tables
Side-by-Side Comparison of H.R. 1776 as Ordered Reported in the House of
Representatives with Current Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Pensions and Retirement Saving Plans:
Comparison of H.R. 1776 with Current Law
Introduction
H.R. 1776, (Portman/Cardin) the
Pension Preservation and Savings Expansion
Act was ordered to be reported (as amended) by the Committee on Ways and Means
on July 18, 2003. Provisions of the bill would accelerate the scheduled increases in
contribution limits to individual retirement accounts and employer-sponsored plans,
as included in the EGTRRA of 2001, and would expand and extend a non-refundable
income tax credit for low- and moderate-income individuals who contribute to a
qualified retirement plan. The bill would replace for three years the interest rate on
30-year Treasury bonds as the rate used by defined benefit plans to calculate funding
ratios with a rate based on an index of conservatively invested, long-term corporate
bonds.
The bill would allow up to $2,000 of certain retirement annuity income to be
free of income taxes during each of the first 5 years such income is received. It
would raise the age at which participants must begin to take distributions from
pension plans and individual retirement accounts from 70½ to 75, and reduce the
excise tax for not taking distributions from 50% to 20% of the amount not
distributed. It would accelerate the schedule on which employees must be fully vested
in an employer’s contributions to a defined contribution plan, and it would allow
nontaxable transfers of IRA assets to the IRA of a spouse or former spouse.
The bill would increase the permissible deduction for employers that maintain
both a defined benefit and defined contribution plan and allow public-safety
employees to take distributions from a Deferred Retirement Option Plan before age
59½ without being subject to the 10% penalty for distributions made before age 59½.
It would allow small employers to make additional contributions to a SIMPLE
retirement plan, and allow disabled persons to contribute to individual retirement
accounts (IRAs). The sections of H.R. 1776 that amend provisions of law enacted
by the
Economic Growth and Tax Relief Reconciliation Act of 2001 (“EGTRRA,”
P.L. 107-16) are subject to the “sunset” provision of section 901 of EGTRRA, which
provides that the Act shall not apply after December 31, 2010. The following pages
provide a side-by-side comparison of all provisions of H.R. 1776 with current law.
CRS-2
Side-by-Side Comparison of H.R. 1776 as Ordered Reported
in the House of Representatives with Current Law
Section title
Current law
H.R. 1776
Title I. Building and preserving retirement assets and enhancing portability
Section 101. Acceleration of
Section 611 of EGTRRA amended the I.R.C. to
The maximum annual employee contribution to
scheduled increases in pension plan
increase the maximum annual employee
qualified retirement plans authorized under
contribution limits
contribution to qualified retirement plans
Sections 401(k), 403(b), and 457(b) would be
authorized under Sections 401(k), 403(b), and
increased to $15,000 in 2004 and indexed to
457(b), according to the following schedule:
inflation in $500 increments in later years.
Year
Maximum employee contribution
2003
$12,000
2004
$13,000
2005
$14,000
2006
$15,000*
EGTRRA §611 increased the maximum
The maximum annual employee contribution to a
employee contribution to a SIMPLE retirement
SIMPLE retirement plan would be increased to
plan under Section 408(p):
$10,000 in 2004 and indexed to inflation in $500
increments in later years.
Year
Maximum employee contribution
2003
$ 8,000
2004
$ 9,000
2005
$10,000*
EGTRRA §631amended I.R.C. §414(v) to permit
The maximum additional contribution to plans
additional contributions by people 50 and older:
under Sections 401(k), 403(b), and 457(b) by
individuals age 50 and older would be increased
Year
401(k), 403(b), 457(b) SIMPLE
to $5,000 in 2004 and indexed to inflation in later
years. The maximum additional contribution to a
2003
$2,000
$1,000
SIMPLE plan by individuals age 50 and older
2004
$3,000
$1,500
would be increased to $2,500 in 2004 and indexed
2005
$4,000
$2,000
to inflation in $500 increments in later years.
2006
$5,000*
$2,500*
*Indexed to inflation in $500 increments.
CRS-3
Section title
Current law
H.R. 1776
Section 102. Acceleration of
Section 601 of EGTRRA increases the maximum
The maximum annual contribution to an IRA
scheduled increases in IRA
annual contribution to an IRA according to the
would be increased to $5,000 in 2004 and indexed
contribution limits
following schedule:
to inflation in $500 increments in later years.
Year
Maximum contribution
2002 to 2004
$3,000
2005 to 2007
$4,000
2008
$5,000
After 2008, the maximum contribution is indexed
to inflation in $500 increments.
EGTRRA allows individuals age 50 and older to
The maximum additional contribution to an IRA
make additional contributions to IRAs, according
for persons age 50 and older would be increased
to the following schedule:
to $1,000 in 2004 and later years.
Year
Additional contribution
2002 to 2005
$ 500
2006 and later
$1,000
Section 103. Extension and
Section 618 of EGTRRA authorizes a non-
The non-refundable credit would be extended
expansion of saver’s credit
refundable tax credit equal to a percentage of the
through 2010, indexed for inflation, and expanded
first $2,000 contributed annually to a qualified
for tax years after 2003 according to the following
retirement plan by low- and moderate-income
schedule:
individuals and families. The credit does not
apply to years after 2006. The credit is applied
according to the following schedule:
Single return
Joint return
Credit
Single return
Joint return
Credit
AGI < $15,000
AGI < $30,000
50%
AGI < $15,000
AGI < $30,000
50%
15,001-16,250
30,001-32,500
20%
15,001-20,000
30,001-40,000
20%
16,251-25,000
32,501-50,000
10%
20,001-25,000
40,001-50,000
10%
CRS-4
Section title
Current law
H.R. 1776
Section 104. Faster vesting of
Under I.R.C. Section 411(a), employees must be
Vesting in nonelective employer contributions
employer nonelective contributions
fully vested in
nonelective employer
would be the same as the vesting schedule for
contributions (i.e., contributions other than
employer matching contributions. Employees
matching contributions) after no more than 5
would be fully vested in nonelective employer
years of service, or in increments of 20%
contributions to a defined contribution plan after
beginning in the 3rd year with full vesting after 7
no more than 3 years of service, or in increments
years. Employees must be fully vested in
of 20% beginning in the 2nd year with full vesting
employer
matching contributions after no more
after 6 years.
than 3 years of service, or in increments of 20%
beginning in the 2nd year with full vesting after 6
years.
Section 105. Allow transfers to
Under I.R.C. Section 408, transfer of IRA assets
Transfer of IRA assets between spouses’ IRAs
spouse’s retirement plan
from the IRA owner to his or her spouse’s IRA is
would in most cases not be treated as a taxable
taxable except in cases of divorce or death of the
distribution.
account owner.
Section 106. Allow rollovers by
If a participant in an employer-sponsored plan
A non-spouse beneficiary of a deceased plan
nonspouse beneficiaries of certain
dies and the named beneficiary of the deceased
participant could transfer the assets of the plan to
retirement plan distributions
participant is not the participant’s spouse,
an IRA in the deceased participant’s name and
distributions from the plan to the named
receive distributions from the IRA over his or her
beneficiary cannot be rolled over into another
remaining life expectancy.
tax-qualified plan and are taxable distributions.
If the owner of an IRA dies, and the named
beneficiary of the deceased account owner is not
the account owner’s spouse, the beneficiary may
maintain the IRA in the name of the decedent.
The beneficiary is required to take distributions
from the plan based on his or her remaining life
expectancy. If an employer-sponsored plan
requires more rapid distributions (e.g., a lump
sum), the plan’s rules control the distribution.
Section 107. Allow rollover of after-
Section 643 of EGTRRA provided that
Clarifies that amounts that were contributed on an
tax amounts in annuity contracts
distributions from a tax-qualified employer-
after-tax basis to a §403(b) annuity may be rolled
sponsored plan or an IRA that include amounts
over into a §401(k) plan, and vice versa.
that were contributed on an after-tax basis by the
plan participant can be rolled over into an IRA or
another employer-sponsored plan.
CRS-5
Section title
Current law
H.R. 1776
Section 108. IRA eligibility for the
Individual Retirement Accounts (IRAs) were
Disabled persons, as defined in I.R.C. §72(m)(7),
disabled
authorized by Congress in the Employee
could contribute to an IRA, regardless of whether
Retirement Income Security Act of 1974
they had earned income for the year of the
(ERISA, P.L. 93-406) to give employees without
contribution, provided that they had not yet
access to an employer-sponsored retirement plan
reached the age at which required minimum
the opportunity to save for retirement on a tax-
distributions must begin. (Under current law,
deferred basis. IRA contributions are limited to
required minimum distributions must begin no
the lesser of a specific dollar amount (currently
later than April of the year after reaching age
$3,000) or the individual’s
earned income for the
70½. H.R. 1776 would delay the RMD date to
year.
age 72 through 2007 and age 75 thereafter.)
Section 109. Exclusion of certain
Most distributions from retirement plans are
As an incentive for plan participants to choose
annuity payments from taxable
taxed as ordinary income, regardless of whether
annuity payments rather than lump-sum
income
they are received as a lump-sum distribution or in
distributions, a percentage of annuity payments
the form of an annuity. (That part of any
from an employer-sponsored defined contribution
distribution that represents repayment to the
plan or an IRA could be excluded from taxable
participant of amounts that he or she contributed
income during the first 5 years that the annuity
to the plan with after-tax dollars is excluded from
payments are received. The exclusion would
taxable income.)
apply to 10% of otherwise taxable annuity
income, up to 50% of the limit under I.R.C.
§415(c)(1)(A), which is currently $40,000. Thus,
the maximum amount that could be excluded from
income in 2004 would be 10% of 50% of $40,000,
or $2,000. The exclusion would be phased out
for single tax filers with adjusted gross income
between $60,000 and $75,000 and for joint filers
with AGI from $120,000 to $150,000.
CRS-6
Section title
Current law
H.R. 1776
Title II. Revitalizing defined benefit pension plans
Section 201. Tax treatment of
In the private sector, most defined benefit plans
Employers in the private sector could treat
e m p l o y e e c o n t r i b u t i o n s t o
are funded entirely by the employer. If
employee contributions to defined benefit plans of
contributory defined benefit plans
employees are required to contribute, the
up to 2.0% of pay as contributions of
pre-tax
employee contributions must be made on an
dollars.
after-tax basis. In the public sector, most
governmental defined benefit plans require
employees to contribute to the plan; however,
governmental employers can choose to take
employee contributions on a
pre-tax basis.
(
Note: Federal employee contributions to CSRS
and FERS are made with
after-tax income.)
Section 202. Reform of the minimum
I.R.C. Section 401(a)(26) requires a defined
The Secretary of the Treasury would be required
participation rule
benefit plan to cover no fewer than the lesser of
to issue regulations on the application of I.R.C.
(1) 50 employees or (2) 40% of the employer’s
Section 401(a)(26), relating to minimum
employees.
participation requirements in defined benefit
plans, during a transition period after a firm
acquires or sells another firm.
Section 203. Temporary replacement
The I.R.C. requires the interest rate on 30-year
For determining the funded status of defined
of 30-year Treasury rate
U.S. Treasury Bonds to be used (1) to determine
benefit plans, the interest rate on 30-year Treasury
the funded status of a defined benefit plan, (2) to
Bonds would be replaced for a three-year period
calculate the amount of lump-sum distributions
(2004, 2005, 2006) with an interest rate based on
to plan participants, and (3) to determine
“amounts conservatively invested long-term
maximum benefit amounts. The Treasury
corporate bonds.” For calculating lump-sum
Department no longer issues 30-year bonds.
distributions, the corporate bond rate apply only
in 2006. For determining maximum benefit
amounts under I.R.C. §415(b)(2)(E)(ii), the
Treasury interest rate would be replaced by a rate
of 5.5% in 2004, 2005, and 2006.
CRS-7
Section title
Current law
H.R. 1776
Section 204. Updating deduction
I.R.C. Section 407(a)(7) limits the deduction that
Would limit the application of the I.R.C. Section
rules for combination of plans
can be taken by an employer who sponsors both
407(a)(7) deduction limits to cases in which
a defined benefit plan and a defined contribution
employer contributions to one or more defined
plan.
contribution plans exceed 6% of the compensation
paid to plan participants.
Title III. Expanding small business retirement plan coverage
Section 301. Allow additional
P.L. 104-188 allows employers with 100 or
An employer could choose to make an additional
nonelective contributions to SIMPLE
fewer employees to establish a Savings Incentive
nonelective contribution of a uniform percentage
plans
Match Plan for Employees (SIMPLE). Under a
of pay up to 10% of total compensation for each
SIMPLE plan, an employer must either (1) match
eligible employee, regardless of whether or not
100% of employee salary deferrals up to 3% of
the employer also makes a matching contribution.
pay to a maximum match of $6,000 in 2003 for
all
participating employees or (2) make a
nonelective employer contribution of 2% of pay
up to $4,000 in 2003 for all
eligible employees.
No other employer contributions are permitted.
Section 302. Conform matching
Under the SIMPLE IRA, an employer can reduce
An employer that sponsors a SIMPLE 401(k)
contribution rules for SIMPLE IRAs
its contribution to 1% of pay in 2 years out of
could make matching contributions of less than
and SIMPLE 401(k)s
any 5. Reduced contributions are not permissible
3% of pay, provided that the contribution is at
in a SIMPLE 401(k).
least 1% of pay and the reduced contribution is
not in effect for more than 2 years in a 5-year
period ending in the current year.
Section 303. Correction of Simplified
Under a Simplified Employee Pension (SEP), the
For purposes of applying the 25% limit on
Employee Pension compensation
maximum deduction an employer can take for
contributions, compensation would be defined to
inconsistency
employer contributions to the plan is 25% of the
be gross compensation (including salary
total compensation of the firm’s employees. For
deferrals), as in I.R.C. Section 415(c)(3).
purposes of the deduction, employee
compensation is
gross compensation, including
salary deferrals. Employer contributions to a
SEP are limited to the
lesser of (1) an employee’s
taxable compensation (i.e., net of salary deferrals
and (2) $40,000 (indexed to inflation).
CRS-8
Section title
Current law
H.R. 1776
Section 304. Allow level dollar
Employer contributions to a Simplified
Would allow employer contributions to be made
contributions to SEPs
Employee Pension (SEP) are required to be the
in the same dollar amount for all participating
same percentage of pay for all participating
employees.
employees.
Section 305. Tax treatment of certain
Nondeductible employer contributions to a
The 10% excise tax on nondeductible employer
n o n t r a d e o r b u s i n e s s S E P
qualified retirement plan are usually subject to a
contributions would be waived in the case of
contributions
10% excise tax. Section 637 of EGTRRA
nondeductible contributions to a Simplified
provided that the 10% excise tax will not apply to
Employee Pension (SEP), as well as in the case of
contributions to a SIMPLE retirement account
contributions to a SIMPLE IRA or a SIMPLE
under I.R.C. Section 408(p) or a SIMPLE plan
plan.
under I.R.C. Section 401(k)(11) that are non-
deductible “solely because such contributions are
not made in connection with a trade or business
of the employer.”
Title IV. Expanding retirement savings for tax-exempt organizations and government employees
Section 401. Waiver of 10 percent
Under I.R.C. Section 72(t), a 10% penalty is
Public safety employees such as police and
early withdrawal penalty tax on
imposed on most distributions from an employer-
firefighters often are eligible to retire earlier than
certain distributions of pension plans
sponsored plan that occur before age 59½.
other workers. H.R. 1776 would waive the 10%
for public safety employees
Exceptions are provided for participants who
penalty on distributions before age 59½ for public
retire at age 55 or older, die, become disabled,
safety employees who participate in a “deferred
purchase a home, pay qualified educational or
retirement option plan” (DROP) in which a
health insurance expenses, or receive the
retirement eligible employee continues to work
distributions in a series of substantially equal
and pension distributions are paid into a personal
periodic payments based on life expectancy or
account.
the joint life expectancies of the participant and
his or her designated beneficiary.
Section 402. Clarifications regarding
Employees of state and local governments who
I.R.C. Sections 403 and 457 would be amended
purchase of permissive service credit
move from one state or locality to another often
to facilitate the use of distributions from 403 and
can purchase service credit in the new
457 plans to purchase service credit under state
employer’s defined benefit pension plan. Section
and local defined benefit plans. Would clarify
647 of EGTRRA provided that distributions from
that the defined benefit plan’s distribution rules
a defined contribution plan under I.R.C. Section
would apply to the transferred amounts.
403 or Section 457 will not be taxable income if
used to purchase service credit.
Section 403. Eligibility for
No provision.
Provides that an individual is not precluded from
participation in retirement plans
participating in an eligible deferred compensation
plan by reason of having received a distribution
from a §457 plan as in effect before the
Small
Business Job Protection Act of 1996.
CRS-9
Section title
Current law
H.R. 1776
Section 404. Clarification of
Distributions from an employer-sponsored
The Secretary of the Treasury would issue
minimum distribution rules
retirement plan must begin at age 70½, or at
regulations under which a governmental plan may
retirement, if later.
be treated as having complied with the minimum
distribution rules if the plan complies with a
“reasonable good faith interpretation” of those
rules.
Section 405. Church plan rule
Under I.R.C. Section 415(b), the maximum
Except for some highly-compensated employees,
annual benefit under a single-employer defined
the maximum annual benefit provided by defined
benefit retirement plan is the lesser of (1) the
benefit plans of churches and religious institutions
average of the participant’s 3 highest years of
would be $160,000, even if this is greater than the
pay or (2) $160,000 (indexed to inflation). The
average of the participant’s 3 highest years of pay.
maximum benefit under a governmental plan or
a multi-employer plan is $160,000.
Title V. Simplification and equity
Section 501. Updating of the
Section 401(a)(9) of the Internal Revenue Code
The required beginning date for distributions
minimum distribution rules
(I.R.C.) requires plan participants and owners of
would be increased from age 70½ to 75 on the
traditional IRAs to begin taking distributions no
following schedule:
later than April of the year after reaching age
70½. There is an exception that allows
Year
Required Beginning Date:
participants in employer-sponsored plans who are
still working at age 70½ to delay distributions
2004-2007
Age 72
until April of the year after they have retired,
2008 and later
Age 75
unless they own 5% or more of the firm.
Distributions must be made over the life
As under current law, distributions could be
expectancy of the plan participant, or over the
delayed until retirement (if later) except for
joint life expectancies of the plan participant and
traditional IRAs and 5% owners of a firm.
his or her designated beneficiary. If a participant
Actuarial adjustment would continue to be
in a defined benefit plan retires after age 70½, the
required for defined benefit plan participants who
benefit must be increased in an actuarially fair
retire after age 70½. The excise tax for failure to
manner. Failure to take a required distribution
take a required minimum distribution would be
results in a tax penalty equal to 50% of the
reduced from 50% to 20% of the amount that
amount that should have been distributed.
should have been distributed. Provisions would
be effective after December 31, 2003.
CRS-10
Section title
Current law
H.R. 1776
Section 502. Clarification of catch-
Section 631 of EGTRRA amended I.R.C. Section
The nondiscrimination rules under I.R.C.
up contributions
414(v) to permit individuals age 50 and older to
414(v)(4) for catch-up contributions would be
make additional contributions to retirement
amended to provide an exception for qualified
plans. An employer that chooses to allow
plans in Puerto Rico that do not provide catch-up
employees to make “catch-up” contributions
contributions. The aggregation rule would be
must do so for all eligible employees.
amended to except employees in collectively
bargained plans and nonresident aliens who have
no earned income from the employer in the U.S.
Would provide that the universal applicability
requirement could be satisfied separately with
respect to separate lines of business in some cases.
Section 503. Transfers to the PBGC
I.R.C. Section 411(a)(11) provides that if the
Would amend I.R.C. §401(a)(31)(B) such that
present value of a participant’s vested benefit
mandatory distributions from qualified plans
exceeds $5,000, a plan may not distribute the
could be transferred to the PBGC rather than an
accrued benefit to a departing employee without
IRA. A transfer to the PBGC would be treated as
his or her consent. Section 657 of EGTRRA
a transfer to an IRA under the I.R.C., and a
amended I.R.C. Section 401(a)(31) to require the
subsequent distribution to the plan participant
direct transfer to an IRA of distributions of less
would be treated as a distribution from an IRA.
than $5,000 (but more than $1,000) unless the
participant directs the distribution to another
Would extend the PBGC’s missing participants
eligible plan or elects to receive the distribution
program to cover terminating multi-employer
in cash.
plans. Would extend the missing participants
program on a voluntary basis to certain defined
If a participant in a terminated plan cannot be
contribution plans and uncovered defined benefit
located, the plan is authorized to purchase an
plans.
annuity or transfer the benefits of the participant
to the Pension Benefit Guaranty Corporation
(PBGC). Neither defined benefit plans that have
not terminated nor defined contribution plans can
transfer benefits of missing participants to the
PBGC.
Section 504. Allow direct rollovers
Individuals with modified adjusted gross income
Individuals with modified adjusted gross income
from retirement plans to Roth IRAs
under $100,000 can convert a traditional IRA to
under $100,000 could roll over a distribution from
a Roth IRA. The converted amount, minus the
an employer-sponsored plan to a Roth IRA. The
amount originally contributed to the IRA by the
converted amount, minus the amount originally
participant (the account “basis”) is treated as
contributed to the plan by the participant (the
taxable income in the year of the conversion.
account “basis”) would be treated as taxable
Assets held in an employer-sponsored plan
income in the year of the conversion.
cannot be rolled over into a Roth IRA; however,
they can be rolled over into a traditional IRA
which can then be converted to a Roth IRA.
CRS-11
Section title
Current law
H.R. 1776
Section 505. Reform excise tax on
Certain contributions to a retirement plan in
The 2½ month time limit on corrective
excess contributions
excess of the annual maximum are subject to an
distributions would be extended to 6 months.
excise tax of 10% of the excess contribution.
Amounts distributed would be treated as earned
The excise tax is not levied if the excess
and received in the year the distribution was
contribution is distributed or forfeited within 2½
made.
months of the end of the plan year. Amounts
distributed within the 2½ month limit usually are
included in employee income in the year they
were contributed to the plan. If the distribution
is less than $100 or occurs more than 2½ months
after the end of the plan year, it is included in
income in the year distributed.
Section 506. Intermediate sanctions
A plan that fails to meet a requirement or
A plan that inadvertently violates a provision of
for inadvertent failures
requirements of the I.R.C. may be disqualified.
the I.R.C. would not be disqualified if it has made
In general, the I.R.C. does not provide for lesser
a good faith effort at compliance and corrects the
sanctions. In practice, the I.R.S. allows most
violation. Plans subject to audit may be charged
plans to correct violations, and it has established
a fee by the IRS. In the event of disqualification,
the Employee Plans Compliance Resolution
non-highly compensated employees would not
System to facilitate the process.
have to include employer contributions and
earnings on plan contributions in their taxable
income.
CRS-12
Section title
Current law
H.R. 1776
Section 507. Clarification of
Under I.R.C. Section 72(t), distributions from an
Would provide that if amounts are being received
substantially equal periodic payment
employer-sponsored plan or IRA that occur
as a series of substantially equal periodic
rule
before age 59½ are subject a 10% penalty. There
payments, and a transfer or rollover “of all or a
are several exceptions to the 10% penalty,
portion of the taxpayer’s benefit” is made into
including distributions made as a series of
another tax-qualified retirement plan, the 10% tax
substantially equal periodic payments that are
penalty will not be applied if the payments from
based on the life expectancy of the plan
both plans would in combination continue to
participant or the joint life expectancies of the
satisfy I.R.C. §72(t) if they were made only from
participant and his or her designated beneficiary.
the transferor plan. Provides that any
If the series of payments is terminated or
“reasonable” interest rate may be used in
modified (except because of death or disability)
determining whether distributions are
before
the later of age 59½ or the end of a 5-year
substantially equal periodic payments.
period beginning on the date of the first
distribution, the entire series of distributions is
then subject to the 10% penalty.
Under Revenue Ruling 2002-62, an individual
can elect a one-time change in the series of equal
periodic payments without incurring the tax
penalty. The ruling further specifies that either a
nontaxable transfer of a portion of the account
balance to another retirement plan or a rollover
of the amount received by the taxpayer to another
account will be treated as a modification of the
series of payments, resulting in all distributions
being subject to the 10% tax penalty. The
ruling also specifies that the interest rate used in
calculating these payments may not exceed 120%
of the federal mid-term rate.
Section 508. Clarification of
I.R.C. Section 402(e)(4) provides that if a plan
Amends I.R.C. Section 402(e)(4)(D) to provide
treatment of distributions of annuity
participant receives a lump-sum distribution that
that a distribution of an annuity contract from a
contracts
includes employer securities, any net unrealized
trust or annuity plan may be treated as a part of a
appreciation attributable to that part of the
lump sum distribution. Effective, December 31,
distribution which consists of employer securities
1999 (i.e., as if included in §1401(b) of P.L. 104-
shall be excluded from gross income.
188).
CRS-13
Section title
Current law
H.R. 1776
Section 509. Allow certain plan
An employer that wishes to change from one
The Secretary of the Treasury would publish
transfers and mergers
kind of individual account plan to another (e.g.,
regulations under which assets held in one kind of
from a plan authorized under I.R.C. Section 401
individual account plan maintained by an
to one authorized under I.R.C. Section 403, or
employer could be transferred to another
vice versa) must sometimes maintain the old
individual account plan maintained by that
plan, even though it receives no more employee
employer. The regulation must provide for the
salary deferrals or employer contributions.
protection of participants’ and spouses’ rights.
Section 510. Treatment of YMCA
Churches and some church-related organizations
Would provide that the Young Men’s Christian
retirement fund
can sponsor retirement plans under I.R.C. Section
Association (YMCA) Retirement Fund is a church
403(b)(9).
plan under I.R.C. Section 403(b)(9).
Title VI. Other tax provisions relating to pensions
Section 601. Reporting simplification
A “one-participant plan” covers only a business
One-participant plans with assets under $250,000
owner and his or her spouse. These plans are
would be exempt from some reporting
exempt from some reporting requirements if
requirements. The Secretary of the Treasury and
assets are under $100,000, and must file
the Secretary of Labor would develop simplified
simplified reports in other instances.
reporting for plans with fewer than 25
participants.
Section 602. Improvement of
A plan that fails to meet a requirement or
The Secretary of the Treasury would be directed
employee plans compliance resolution
requirements of the I.R.C. may be disqualified.
to continue to improve the Employee Plans
system
In general, the I.R.C. does not provide for lesser
Compliance Resolution System, with special
sanctions. In practice, the I.R.S. allows most
emphasis on the needs of small employers.
plans to correct violations, and it has established
the Employee Plans Compliance Resolution
System to facilitate the process.
Section 603. Extension of
The Taxpayer Relief Act of 1997, P.L. 105-34
Would exempt all governmental plans, as defined
moratorium on application of certain
exempted state and local government plans from
in I.R.C. Section 414(d), from the rules on
nondiscrimination rules to all
certain rules that prohibit discrimination in favor
minimum participation and nondiscrimination in
governmental plans
of highly compensated employees.
favor of highly compensated employees.
Section 604. Notice and consent
A plan must provide information on forms of
The required notices could be provided up to 180
period regarding distributions
distribution and taxation of eligible rollover
days before the date of the distribution. The
distributions no more than 90 days before the
Secretary of the Treasury would issue regulations
date of the distribution.
to provide that the description of a participant’s
right, if any, to defer receipt of a distribution shall
also describe the consequences of failing to defer
such receipt.
CRS-14
Section title
Current law
H.R. 1776
Section 605. Reduced PBGC
Defined benefit plans are required by law to pay
Employers with fewer than 100 employees that
premium for new plans of small
a premium of $19 per participant per year to the
adopt a defined benefit plan would pay a reduced
employers
Pension Benefit Guaranty Corporation.
premium of $5 per participant for each of the first
5 years of the plan.
Section 606. Reduction of additional
Underfunded plans are required to pay a
If a new plan is subject to a supplemental
PBGC premiums for new and small
supplemental premium (the variable rate
premium, it would be phased in over 6 years.
plans
premium) because of their higher risk of failure.
Supplemental premiums for firms with fewer than
25 employees would be capped at $5 per
participant per year.
Section 607. Authorization for
The Pension Benefit Guaranty Corporation is not
The Pension Benefit Guaranty Corporation would
PBGC to pay interest on premium
authorized to pay interest on refunds of premium
be authorized to pay interest on refunds of
overpayment refunds
overpayments.
premium overpayments.
Section 608. Substantial owner
In the case of a plan termination, the benefits
The same 5-year phase-in of benefit guarantees
benefits in terminated plans
paid by the PBGC to a “substantial owner” of a
that applies to non-owners would apply to a
business (owner of 10% or more of a company)
substantial owner with less than a 50% interest.
are subject to special rules.
For an owner with more than a 50% interest, the
phase-in would be based on the number of years
the plan has been in effect.
Title VII. Stock options
Section 701. Exclusion of incentive
In November 2001, the Treasury issued proposed
Would provide that stock options exercised under
stock options and employee stock
regulations that would have made stock options
an incentive stock option plan or an employee
purchase plan options from wages
subject to Social Security payroll taxes when the
stock purchase plan are not subject to payroll
options were exercised. A subsequent notice
taxes.
(2002-47) suspended the proposed regulations
indefinitely.
Title VIII. Miscellaneous provisions
Section 801. Provisions relating to
No provision.
Plan amendments required by the passage of H.R.
plan amendments
1776 would not have to be made before the last
day of the plan year beginning on or after January
1, 2006. Except as provided for in Treasury
regulations, plan amendments will not be
construed to violate the “anti-cutback” rules of
I.R.C. Section 411(d). For governmental plans,
the required date for plan amendments would be
the end of the first plan year beginning on or after
January 1, 2008.
CRS-15
Section title
Current law
H.R. 1776
Section 802. Application of
Section 901of the Economic Growth and Tax
Any amendment made by H.R. 1776 that amends
EGTRRA sunset
Relief Reconciliation Act of 2001
a provision of law enacted by EGTRRA (P.L.
(“EGTRRA,” P.L. 107-16) provides that the
107-16) is subject to the “sunset” provision of title
Act shall not apply after December 31, 2010.
IX of EGTRRA.