Enhancing American Retirement Now Act
Summary
Senate Report 117–142, 2d Session, Calendar No. 480, on the Enhancing American Retirement Now Act, ordered to be printed September 8, 2022. The Committee on Finance reports favorably on S. 4808, an original bill to amend the Internal Revenue Code of 1986 to encourage retirement savings, and recommends that the bill do pass without amendment. The report states that the bill is based on a proposal recommended by Chairman Wyden and Ranking Member Crapo, and cites a survey in which about 36 percent of non-retired adults reported that their retirement savings were on track. Its contents list titles on individual retirement, retirees, disaster relief, employer plans and revenue provisions.
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Cite this document
“Enhancing American Retirement Now Act.”
Original at www.govinfo.gov. Archived at Pandemic Darlings, https://pandemicdarlings.com/source-documents/crpt-crpt-117srpt142-crpt-117srpt142/
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Calendar No. 480
117TH CONGRESS REPORT
" SENATE !
2d Session 117–142
ENHANCING AMERICAN RETIREMENT NOW ACT
SEPTEMBER 8, 2022.—Ordered to be printed
Mr. WYDEN, from the Committee on Finance,
submitted the following
R E P O R T
[To accompany S. 4808]
The Committee on Finance, having considered an original bill, S.
4808, to amend the Internal Revenue Code of 1986 to encourage re-
tirement savings, and for other purposes, having considered the
same, reports favorably thereon without amendment and rec-
ommends that the bill do pass.
CONTENTS
Page
I. LEGISLATIVE BACKGROUND ..................................................................... 1
II. EXPLANATION OF THE BILL ...................................................................... 9
TITLE I—INDIVIDUAL RETIREMENT ............................................................... 9
1. Secure deferral arrangements (sec. 101 of the bill and new secs.
401(k)(16) and 401(m)(13) of the Code) ............................................ 9
2. Matching payments for elective deferral and IRA contributions
by certain individuals (sec. 102 of the bill and new sec. 6433
of the Code) ......................................................................................... 13
3. Modification of participation requirements for long-term, part-time
workers (sec. 103 of the bill and sec. 401(k) of the Code) ............... 17
4. Treatment of student loan payments as elective deferrals for pur-
poses of matching contributions (sec. 104 of the bill and secs.
401(m), 403(b), 408(p), and 457(b) of the Code) ............................... 20
5. Withdrawals for certain emergency expenses (sec. 105 of the bill
and sec. 72(t) of the Code) ................................................................. 26
6. Allow additional nonelective contributions to SIMPLE plans (sec.
106 of the bill and sec. 408(p) of the Code) ...................................... 29
7. Small immediate financial incentives for contributing to a plan
(sec. 107 of the bill and secs. 401(k), 403(b), and 4975 of the
Code) ................................................................................................... 31
8. Indexing IRA catch-up limit (sec. 108 of the bill and sec. 219
of the Code) ......................................................................................... 34
9. Higher catch-up limit to apply at age 60, 61, 62, and 63 (sec.
109 of the bill and sec. 414(v) of the Code) ...................................... 35
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10. Eliminate the ‘‘first day of the month’’ requirement for govern-
mental section 457(b) plans (sec. 110 of the bill and sec. 457(b)
of the Code) ......................................................................................... 37
11. Tax treatment of certain non-trade or business SEP contributions
(sec. 111 of the bill and sec. 4972 of the Code) ................................ 38
12. Elimination of additional tax on corrective distributions of excess
contributions (sec. 112 of the bill and sec. 72 of the Code) ............. 39
13. Employer may rely on employee certifying that deemed hardship
distribution conditions are met (sec. 113 of the bill and secs.
401(k), 403(b), and 457(b) of the Code) ............................................ 41
14. Penalty-free withdrawals from retirement plans for individuals
in case of domestic abuse (sec. 114 of the bill and sec. 72(t)
of the Code) ......................................................................................... 44
15. Amendments to increase benefit accruals under plan for previous
plan year allowed until employer tax return due date (sec. 115
of the bill and sec. 401(b) of the Code) ............................................. 47
16. Retroactive first year elective deferrals for sole proprietors (sec.
116 of the bill and sec. 401(b) of the Code) ...................................... 48
17. Treasury guidance on rollovers (sec. 117 of the bill and secs.
402(c) and 408(d) of the Code) .......................................................... 49
18. Exemption for automatic portability transactions (sec. 118 of
the bill and sec. 4975 of the Code) .................................................... 51
19. Application of section 415 limit for certain employees of rural
electric cooperatives (sec. 119 of the bill and sec. 415(b) of the
Code) ................................................................................................... 57
20. Insurance-dedicated exchange-traded funds (sec. 120 of the bill
and Treas. Reg. secs. 1.817–5(f)(2) and (3)) ..................................... 59
21. Modification of age requirement for qualified ABLE programs
(sec. 121 of the bill and sec. 529A of the Code) ............................... 62
22. Assist savers in recovering unclaimed savings bonds (sec. 122
of the bill) ............................................................................................ 65
TITLE II—RETIREES ............................................................................................ 66
1. Increase in age for required beginning date for mandatory distribu-
tions (sec. 201 of the bill and sec. 401(a)(9) of the Code) ................ 66
2. Qualifying longevity annuity contracts (sec. 202 of the bill and
Treas. Reg. sec. 1.401(a)(9)–6) ........................................................... 70
3. Remove required minimum distribution barriers for life annuities
(sec. 203 of the bill and sec. 401(a)(9) of the Code) ......................... 73
4. Eliminating a penalty on partial annuitization (sec. 204 of the
bill and Treas. Reg. secs. 1.401(a)(9)–5 and –6) .............................. 76
5. Reduction in excise tax on certain accumulations in qualified re-
tirement plans (sec. 205 of the bill and sec. 4974 of the Code) ...... 78
6. Clarification of substantially equal periodic payment rule (sec.
206 of the bill and secs. 72(t) and (q) of the Code) .......................... 79
7. Recovery of retirement plan overpayments (sec. 207 of the bill
and secs. 402 and 414 of the Code) ................................................... 81
8. Retirement Savings Lost and Found (sec. 208 of the bill and
secs. 402, 408, 411, 6011, 6057, 6652 and new section 7901
of the Code) ......................................................................................... 86
9. Roth plan distribution rules (sec. 209 of the bill and sec. 402A(d)
of the Code) ......................................................................................... 95
10. One-time election for qualified charitable distribution to split-
interest entity; increase in qualified charitable distribution limi-
tation (sec. 210 of the bill and sec. 408(d)(8) of the Code) .............. 96
11. Exception to penalty on early distributions from qualified plans
for individuals with a terminal illness (sec. 211 of the bill and
sec. 72(t) of the Code) ........................................................................ 103
12. Surviving spouse election to be treated as employee (sec. 212
of the bill and sec. 401(a)(9) of the Code) ......................................... 103
13. Long-term care contracts purchased with retirement plan dis-
tributions (sec. 213 of the bill and new secs. 72(t)(2)(L),
401(a)(39), 403(a)(6), and 6050Z, and sec. 6724(d) of the Code) ..... 104
TITLE III—PUBLIC SAFETY OFFICERS AND MILITARY .............................. 108
1. Military spouse retirement plan eligibility credit for small employ-
ers (sec. 301 of the bill and new sec. 45U of the Code) ................... 108
2. Distributions to firefighters (sec. 302 of the bill and sec. 72(t)
of the Code) ......................................................................................... 109
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3. Exclusion of certain disability-related first responder retirement
payments (sec. 303 of the bill and new sec. 139C of the Code) ...... 110
4. Repeal of direct payment requirement on exclusion from gross
income of distributions from governmental plans for health and
long-term care insurance (sec. 304 of the bill and sec. 402(l)(5)(A)
of the Code) ......................................................................................... 112
5. Modification of eligible age for exemption from early withdrawal
penalty (sec. 305 of the bill and sec. 72(t) of the Code) .................. 113
6. Exemption from early withdrawal penalty for certain State and
local government corrections employees (sec. 306 of the bill and
sec. 72(t) of the Code) ........................................................................ 114
TITLE IV—NONPROFITS AND EDUCATORS ................................................... 115
1. Enhancement of 403(b) plans (sec. 401 of the bill and sec. 403(b)
of the Code) ......................................................................................... 115
2. Hardship withdrawal rules for 403(b) plans (sec. 402 of the bill
and sec. 403(b) of the Code) .............................................................. 118
3. Multiple employer 403(b) plans (sec. 403 of the bill and secs.
403(b), 6057 and 6058 of the Code) .................................................. 119
TITLE V—DISASTER RELIEF .............................................................................. 129
1. Special rules for use of retirement funds in connection with quali-
fied federally declared disasters (sec. 501 of the bill and sec.
72 of the Code) .................................................................................... 129
TITLE VI—EMPLOYER PLANS ........................................................................... 134
1. Credit for employers with respect to modified safe harbor require-
ments (sec. 601 of the bill and new sec. 45V of the Code) .............. 134
2. Application of top-heavy rules to defined contribution plans cov-
ering excludible employees (sec. 602 of the bill and sec. 416
of the Code) ......................................................................................... 136
3. Increase in credit limitation for small employer pension plan start-
up costs of certain employers (sec. 603 of the bill and sec. 45E
of the Code) ......................................................................................... 138
4. Expansion of Employee Plans Compliance Resolution System (sec.
604 of the bill) .................................................................................... 139
5. Application of credit for small employer pension plan start-up
costs to employers which join an existing plan (sec. 605 of bill
and sec. 45E of the Code) .................................................................. 142
6. Safe harbor for corrections of employee elective deferral failures
(sec. 606 of the bill) ............................................................................ 143
7. Reform of family attribution rule (sec. 607 of the bill and sec.
414 of the Code) .................................................................................. 145
8. Contribution limit for SIMPLE IRAs (sec. 608 of the bill and
secs. 401(k), 408(p) and 414(v) of the Code) .................................... 148
9. Employers allowed to replace SIMPLE retirement accounts with
safe harbor 401(k) plans during a year (sec. 609 of the bill
and secs. 72(t), 401(k) and 408(p) of the Code) ................................ 150
10. Starter 401(k) plans for employers with no retirement plan (sec.
610 of the bill and new secs. 401(k)(17) and 403(b)(17) of the
Code) ................................................................................................... 151
11. Credit for small employers that adopt an automatic portability
arrangement (sec. 611 of the bill and sec. 45U of the Code) .......... 153
12. Re-enrollment credit (sec. 612 of the bill and sec. 45X of the
Code) ................................................................................................... 154
13. Corrections of mortality tables (sec. 613 of the bill and sec.
430(h) of the Code) ............................................................................. 158
14. Enhancing retiree health benefits in pension plans (sec. 614
of the bill and sec. 420 of the Code) ................................................. 159
15. Deferral of tax for certain sales of employer stock to employee
stock ownership plan sponsored by S corporation (sec. 615 of
the bill and sec. 1042 of the Code) .................................................... 161
TITLE VII—NOTICES ............................................................................................ 167
1. Review and report to Congress relating to reporting and disclosure
requirements (sec. 701 of the bill) .................................................... 167
2. Report to Congress on section 402(f) notices (sec. 702 of the bill
and sec. 402(f) of the Code) ............................................................... 169
3. Eliminating unnecessary plan requirements related to unenrolled
participants (sec. 703 of the bill and sec. 414 of the Code) ............ 170
TITLE VIII—TECHNICAL MODIFICATIONS .................................................... 171
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1. Repayment of qualified birth or adoption distributions limited
to three years (sec. 801 of the bill and sec. 72 of the Code) ........... 171
2. Amendments relating to the Setting Every Community Up for
Retirement Enhancement Act of 2019 (sec. 802 of the bill and
secs. 401(k) and 4973 of the Code) ................................................... 173
3. Modification of required minimum distribution rules for special
needs trusts (sec. 803 of the bill and sec. 401(a)(9) of the Code) ... 175
TITLE IX—PLAN AMENDMENTS ....................................................................... 177
1. Provisions relating to plan amendments (sec. 901 of the bill) .......... 177
TITLE X—TAX COURT RETIREMENT PROVISIONS ...................................... 178
1. Provisions relating to judges of the Tax Court (sec. 1001 of the
bill) ...................................................................................................... 178
2. Provisions relating to special trial judges of the Tax Court (sec.
1002 of the bill) .................................................................................. 180
TITLE XI—REVENUE PROVISIONS ................................................................... 182
1. SIMPLE and SEP Roth IRAs (sec. 1101 of the bill and secs.
408(k) and 408(p) of the Code) .......................................................... 182
2. Elective deferrals generally limited to regular contribution limit
(sec. 1102 of the bill and secs. 402, 411 and 457 of the Code) ....... 184
3. Optional treatment of employer matching and nonelective con-
tributions as Roth contributions (sec. 1103 of the bill and sec.
402A of the Code) ............................................................................... 187
4. Charitable conservation easements (sec.1104 of the bill and
secs.170(h), 6662, and 6664 of the Code) ......................................... 188
III. BUDGET EFFECTS OF THE BILL ............................................................... 194
IV. VOTES OF THE COMMITTEE ...................................................................... 201
V. REGULATORY IMPACT AND OTHER MATTERS ..................................... 201
VI. CHANGES IN EXISTING LAW MADE BY THE BILL, AS REPORTED 202
I. LEGISLATIVE BACKGROUND
The Committee on Finance, having considered S. 4808, the En-
hancing American Retirement Now Act, a bill to amend the Inter-
nal Revenue Code of 1986 to encourage retirement savings, and for
other purposes, reports favorably thereon and recommends that the
bill do pass.
Background and need for legislative action
Background—Based on a proposal recommended by Chairman
Wyden and Ranking Member Crapo, the Committee on Finance
marked up original legislation, the ‘‘Enhancing American Retire-
ment Now Act’’ (the ‘‘EARN’’ Act) on June, 22, 2022, and, with a
majority present, unanimously ordered the bill favorably reported.
Need for legislative action—Tax-preferred retirement saving op-
tions, such as 401(k) plans and individual retirement accounts
(‘‘IRAs’’), have helped many Americans plan for a financially secure
retirement. Though some Americans have accumulated significant
retirement savings, many Americans do not have any retirement
savings or have inadequate savings. For example, only about 36
percent of non-retired adults reported that their retirement savings
were on track, and about one-quarter said they did not have any,
according to the Federal Reserve Board’s 2020 Survey of Household
Economics and Decision making (‘‘SHED’’).1
1 Board of Governors of The Federal Reserve System, Economic Well-Being of U.S. Households
in 2020 (May 2021), https://www.federalreserve.gov/publications/files/2020-report-economic-well-
being-us-households-202105.pdf. Similarly, 49 percent of Americans aged 55 to 66 said they had
no personal retirement savings in 2017 according to the U.S. Census Bureau’s Survey of Income
and Program Participation (‘‘SIPP’’). Brittany King, Census Bureau, Those Who Married Once
More Likely Than Others to Have Retirement Savings, AMERICA COUNTS: STORIES BEHIND THE
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NUMBERS (Jan. 13, 2022), https://www.census.gov/library/stories/2022/01/women-more-likely-
than-men-to-have-no-retirement-savings.html.
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Certain retirement savings options, such as a 401(k) plan, are
sponsored by employers and often offer employees the convenience
of payroll deduction savings opportunities. However, not all em-
ployees work for employers who offer such plans, and of those that
do, not all workers are eligible to participate or elect not to partici-
pate. For example, in March of 2021 only 68 percent of private sec-
tor workers had access to retirement benefits through their em-
ployer, and only 51 percent of private sector workers elected to par-
ticipate (a take-up rate of 75 percent).2
For those employees who can save, the risk that they will outlive
their savings has increased as life expectancy has increased and
health and long-term care costs have increased. This risk is com-
pounded by the shift in employer-sponsored plans from defined
benefit plan designs which provide a fixed monthly benefit to a re-
tiree for life to defined contribution plan designs, such as 401(k)
plans, which provide an account balance which a retiree must man-
age both in terms of investment and a withdrawal strategy to sup-
port retirement expenses.
Retirement security can be improved by legislation that encour-
ages employers to adopt retirement plans, increases employee par-
ticipation in workplace plans and contribution rates, encourages
IRA contributions, and helps retirees manage longevity costs.
Hearings and bills
In preparation for its June markup, the Committee held two
hearings in 2020 and 2021 at which it received testimony regarding
retirement savings. The context of the two hearings was the recent
passage in late 2019 of the Setting Every Community Up for Re-
tirement Enhancement Act (the ‘‘SECURE Act’’), P.L. 116–94. The
SECURE Act was comprised of several dozen provisions that pro-
vided for various improvements to laws regulating retirement sav-
ing. The hearings in 2020 and 2021 focused on additional legisla-
tive changes that could improve retirement savings and security
beyond what was enacted as part of the SECURE Act.
On December 9, 2020, the Subcommittee on Social Security, Pen-
sions, and Family Policy held a hearing on ‘‘Investigating Chal-
lenges to American Retirement Security.’’ Invited witnesses who at-
tended the hearing included:
• Scott Barr, Financial Advisor, Edward Jones, who testified
on his experiences with retirement saving success stories as
well as his experience with savings obstacles.
• Eric Stevenson, President, Retirement Plans, Nationwide,
who testified on opportunities to improve workers’ financial
wellness at every phase of life with a focus on employer-spon-
sored retirement plans.
• Michael P. Kreps, Principal, Groom Law Group, who testi-
fied on expanding coverage, strengthening the saver’s credit,
reducing plan leakage, and underfunded multiemployer pen-
sion plans.
• Joshua Luskin, President, National Association of Govern-
ment Defined Contribution Administrators, who testified on
2 Bureau of Labor Statistics, U.S. Department of Labor, The Economics Daily, https://
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www.bls.gov/opub/ted/2021/68-percent-of-private-industry-workers-had-access-to-retirement-
plans-in-2021.htm (visited July 13, 2022).
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simplifying and providing additional flexibility for govern-
mental retirement savings plans.
Following the subcommittee hearing, on July 28, 2021, the Com-
mittee held a hearing on ‘‘Building on Bipartisan Retirement Legis-
lation: How Can Congress Help?’’ Invited witnesses who attended
the hearing included:
• Aliya Robinson, Senior Vice President, Retirement and
Compensation Policy, ERISA Industry Committee, who testi-
fied on promoting employee retirement security and reducing
administrative burdens for employers who sponsor retirement
plans, with a focus on medium and larger-sized employers.
• Brian H. Graff, Chief Executive Officer, American Retire-
ment Association, who testified on expanding retirement cov-
erage and closing racial disparities in retirement savings, with
a focus on smaller employers and reforms to the saver’s credit.
• David Certner, Legislative Counsel and Policy Director,
AARP, who testified on COVID–19’s impact on retirement se-
curity and the importance of expanding retirement coverage
and workplace saving options.
• Tobias Read, Oregon State Treasurer, who testified on Or-
egon’s experience in expanding retirement coverage and in-
creasing savings rates through a state-based auto-IRA pro-
gram, OregonSaves.
Committee members have sponsored or co-sponsored a number of
bills in the 117th Congress which address retirement saving, in-
cluding:
• S. 243, the Legacy IRA Act, introduced by Senators
Cramer and Stabenow and cosponsored by Senators Daines,
Rosen, Cornyn, Peters, and Murkowski. This bill would expand
the tax exclusion for distributions from IRAs for charitable
purposes, including to split-interest entities exclusively funded
by charitable distributions.
• S. 331, the ABLE Age Adjustment Act, introduced by Sen-
ator Casey and cosponsored by Senators Moran, Wyden, Van
Hollen, Boozman, Blumenthal, Murkowski, Marshall, Leahy,
Klobuchar, Toomey, Reed, Cardin, Durbin, Whitehouse, Kaine,
Duckworth, Brown, Burr, and Feinstein. This bill would in-
crease the age by which a disability must occur for ABLE ac-
count eligibility from 26 to 46.
• S. 1272, the SIMPLE Plan Modernization Act, introduced
by Senators Collins and Warner. This bill would increase the
contribution limits for SIMPLE IRA plans and SIMPLE 401(k)
plans and modify the requirements for replacing SIMPLE IRAs
with SIMPLE 401(k) plans.
• S. 1273, the Military Spouses Retirement Security Act, in-
troduced by Senator Collins and cosponsored by Senators Has-
san, Lankford, Bennet, King, Daines, Blunt, and Murkowski.
This bill would allow a tax credit for certain small businesses
that include military spouses in their retirement plans.
• S. 1300, the Promotion and Expansion of Private Employee
Ownership Act of 2021, introduced by Senators Cardin and
Portman and cosponsored by Senators Stabenow, Crapo, Cant-
well, Daines, Brown, Collins, Casey, Risch, Whitehouse, Blunt,
Hassan, Boozman, Leahy, Fischer, Murray, Ernst, Sanders,
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Klobuchar, Tester, Shaheen, King, Booker, Peters, Van Hollen,
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Duckworth, Reed, Kennedy, Moran, Grassley, Hoeven, Toomey,
Baldwin, Thune, Smith, and Barrasso. This bill expands tax in-
centives and federal assistance for employee stock ownership
plans (‘‘ESOPs’’) that are sponsored by S corporations.
• S. 1443, the Retirement Parity for Student Loans Act, in-
troduced by Senator Wyden and cosponsored by Senators
Brown, Cantwell, Cardin, Whitehouse, and Murkowski. This
bill would allow certain employer-sponsored retirement plans
to make matching contributions for an employee’s student loan
payments as if the loan payments were contributions to the re-
tirement plan.
• S. 1618, the Putting First Responders First Act, introduced
by Senators Daines and Tester and cosponsored by Senators
Brown and Grassley. This bill would allow first responders to
exclude from gross income certain service-connected disability
payments received as part of a pension or annuity after reach-
ing the age of retirement.
• S. 1703, the Improving Access to Retirement Savings Act,
introduced by Senator Grassley and cosponsored by Senators
Hassan and Lankford. This bill would make a number of
changes to present law, including the expansion of multiple
employer plans to include 403(b) plans and allowing small em-
ployers that join a multiple employer plan to obtain a tax cred-
it for their plan start-up expenses.
• S. 1730, the Retirement Savings Lost and Found Act of
2021, introduced by Senators Warren and Daines. This bill
would establish an online Retirement Savings Lost and Found
managed by the Pension Benefit Guaranty Corporation to as-
sist individuals in locating certain employer-sponsored retire-
ment accounts.
• S. 1770, the Retirement Security and Savings Act of 2021,
introduced by Senators Cardin and Portman and cosponsored
by Senators Hassan, Collins, Brown, Daines, Tester, Capito,
Sinema, Blunt, Hickenlooper, and Murkowski. This bill in-
cludes several dozen provisions that would make a number of
changes to policies, credits, and requirements that apply to em-
ployer-sponsored retirement plans and IRAs.
• S. 1870, the Enhancing Emergency and Retirement Sav-
ings Act of 2021, introduced by Senators Lankford and Bennet.
This bill would permit penalty-free distributions, up to $1,000,
from retirement plans for emergency personal expenses, and
would allow participants to repay such distributions over a
three-year period.
• S. 1889, the Compassionate Retirement Act of 2021, intro-
duced by Senators Burr and Bennet and cosponsored by Sen-
ator Van Hollen. This bill would allow early penalty-free dis-
tributions from retirement plans that are made to an indi-
vidual who is certified by a physician as terminally ill.
• S. 2415, the Long-Term Care Affordability Act, introduced
by Senator Toomey. This bill would allow retirement plan dis-
tributions to be used to pay for long-term care insurance.
• S. 2446, the Women’s Retirement Protection Act, intro-
duced by Senator Murray and cosponsored by Senators
Blumenthal, Hirono, Klobuchar, Feinstein, Smith, Warren,
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Cantwell, Wyden, Sanders, Baldwin, Bennet, Menendez, Cortez
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Masto, Kaine, Padilla, Rosen, Brown, Gillibrand, Stabenow,
Durbin, Merkley, Duckworth, Shaheen, Booker, and Casey.
This bill would extend spousal protections to defined contribu-
tion plans, allow part-time workers to access retirement sav-
ings plans one year earlier, and fund community-based organi-
zations that support women and survivors of domestic abuse.
• S. 2452, the Encouraging Americans to Save Act, intro-
duced by Senator Wyden and cosponsored by Senators Bennet,
Casey, Durbin, Klobuchar, Menendez, and Murray. This bill
would modify and expand the saver’s credit into matching pay-
ments for retirement savings and IRA contributions.
• S. 2583, introduced by Senators Cassidy and Menendez.
The bill would provide for rules for the use of retirement funds
in connection with federally declared disasters.
• S. 3955, the Starter-K Act of 2022, introduced by Senators
Barrasso and Carper. This bill would allow employers who do
not provide a retirement plan to establish a starter 401(k) de-
ferral-only arrangement.
• S. 3993, the Savings Access for Escaping and Rebuilding
(‘‘SAFER’’) Act of 2022, introduced by Senators Cortez Masto
and Cornyn. This bill would allow penalty-free distributions
from tax-exempt retirement plans for domestic abuse victims.
• S. 4024, the State and Local Corrections Officer Retire-
ment Fairness Act of 2022, introduced by Senators Toomey and
Bennet. This bill would extend the exemption from the penalty
for early withdrawals from retirement plans currently allowed
to federal public safety officers to certain state and local gov-
ernment corrections officers.
• S. 4312, the Healthcare Enhancement for Local Public
Safety Act, introduced by Senators Brown and Thune, and co-
sponsored by Senators Warner and Grassley. This bill would
eliminate the requirement that payments be made directly to
providers of accident or health plans or qualified long-term
care insurance contracts as a condition of eligibility for the tax
exclusion of distributions from retirement plans for such health
and long-term care insurance.
• S. 4314, the Protecting Public Safety Employees’ Timely
Retirement Act of 2022, introduced by Senators Toomey and
Bennet. This bill would exempt public safety officers from the
retirement plan early withdrawal penalty after 25 years of
service.
• S. 4406, the Advancing Auto-Portability Act of 2022, intro-
duced by Senators Scott and Brown. This bill would allow a de-
fault IRA account to be automatically rolled over into a work-
er’s new employer’s retirement plan.
These hearings and legislative proposals informed the content of
the EARN Act.
Committee mark-up
On June 22, 2022, the Committee met to mark up the EARN Act.
The Committee adopted an amendment to accelerate the effective
date of the exclusion of changes to certain disability related first
responder payments by a vote of 23–5. The Committee favorably
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reported the legislation by a vote of 28–0.
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II. EXPLANATION OF THE BILL
TITLE I—INDIVIDUAL RETIREMENT
1. Secure deferral arrangements (sec. 101 of the bill and new secs.
401(k)(16) and 401(m)(13) of the Code)
PRESENT LAW
Section 401(k) plans
A qualified defined contribution plan may include a qualified
cash or deferred arrangement, under which employees may elect to
have contributions made to the plan (referred to as ‘‘elective defer-
rals’’) rather than receive the same amount as current compensa-
tion (referred to as a ‘‘section 401(k) plan’’).3 The maximum annual
amount of elective deferrals that can be made by an employee for
a year is $20,500 (for 2022) or, if less, the employee’s compensa-
tion.4 For an employee who attains age 50 by the end of the year,
the dollar limit on elective deferrals is increased by $6,500 (for
2022) (called ‘‘catch-up contributions’’).5 The dollar limits for elec-
tive deferrals, including catch-up contributions, are indexed for in-
flation. An employee’s elective deferrals must be fully vested (non-
forfeitable to the employee).6 A section 401(k) plan may also pro-
vide for employer matching and nonelective contributions, which
may be subject to vesting conditions. A matching contribution is
conditioned on the employee making elective deferrals,7 while a
nonelective contribution is not conditioned on whether an employee
has elected to make contributions to the plan.
Automatic enrollment
A section 401(k) plan must provide each eligible employee with
an effective opportunity to make or change an election to make
elective deferrals at least once each plan year.8 Whether an em-
ployee has an effective opportunity is determined based on all the
relevant facts and circumstances, including the adequacy of notice
of the availability of the election, the period of time during which
an election may be made, and any other conditions on elections.
Section 401(k) plans are generally designed so that an employee
will receive cash compensation unless the employee affirmatively
elects to make elective deferrals to the section 401(k) plan. Alter-
natively, a plan may provide that elective deferrals are made at a
specified rate when an employee becomes eligible to participate un-
less the employee elects otherwise (that is, affirmatively elects not
to make contributions or to make contributions at a different rate).
This plan design is referred to as automatic enrollment.
3 Except where otherwise provided, all section references are to the Internal Revenue Code
of 1986, as amended (the ‘‘Code’’). Elective deferrals are generally made on a pretax basis and
distributions attributable to elective deferrals are includible in income. However, a section
401(k) plan is permitted to include a ‘‘qualified Roth contribution program’’ that permits a par-
ticipant to elect to have all or a portion of the participant’s elective deferrals under the plan
treated as after-tax Roth contributions. Certain distributions from a designated Roth account
are excluded from income, even though they include earnings not previously taxed.
4 Sec. 402(g).
5 Sec. 414(v).
6 Sec. 411(a).
7 Matching contributions may also be conditioned on the employee making Roth contributions
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or after-tax contributions.
8 Treas. Reg. sec. 1.401(k)–1(e)(2)(ii).
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Nondiscrimination testing
Actual deferral percentage test
An annual nondiscrimination test, called the actual deferral per-
centage test (the ‘‘ADP’’ test) applies to elective deferrals under a
section 401(k) plan.9 The ADP test generally compares the average
rate of deferral for highly compensated employees to the average
rate of deferral for non-highly compensated employees and requires
that the average deferral rate for highly compensated employees
not exceed the average rate for non-highly compensated employees
by more than certain specified amounts.
The ADP test is deemed to be satisfied if a section 401(k) plan
includes certain minimum matching or nonelective contributions
under either of two plan designs (‘‘401(k) safe harbor plan’’), de-
scribed below, as well as certain required rights and features and
if the plan satisfies a notice requirement, if applicable.10
Matching contribution nondiscrimination test
Employer matching contributions are also subject to a non-
discrimination test that compares the average actual contribution
percentages of matching contributions for the highly compensated
employee group and the non-highly compensated employee group
(the ‘‘ACP’’ test). Under the ACP test, the actual contribution per-
centage of the highly compensated employee group for the current
plan year must not exceed the greater of (1) 125 percent of the ac-
tual contribution percentage of the non-highly compensated em-
ployee group for the prior plan year, or (2) 200 percent of the ac-
tual contribution percentage of the non-highly compensated em-
ployee group for the prior plan year and not more than two per-
centage points greater than the actual contribution percentage of
the non-highly compensated employee group for the prior plan
year.
The ACP test is deemed to be satisfied if a 401(k) safe harbor
plan meets the contribution and notice requirements under section
401(k), and if the following limits on matching contributions are
met: (1) matching contributions are not provided with respect to
elective deferrals in excess of six percent of compensation, (2) the
rate of matching contribution does not increase as the rate of an
employee’s elective deferrals increases, and (3) the rate of matching
contribution with respect to any rate of elective deferral of a highly
compensated employee is no greater than the rate of matching con-
tribution with respect to the same rate of deferral of a non-highly
compensated employee.11
Safe harbor 401(k) plan designs
Under one type of 401(k) safe harbor plan (‘‘basic 401(k) safe har-
bor plan’’), the plan either (1) satisfies a matching contribution re-
quirement, or (2) provides for a nonelective contribution to a de-
fined contribution plan of at least three percent of an employee’s
compensation on behalf of each non-highly compensated employee
who is eligible to participate in the plan.12 The matching contribu-
9 Sec. 401(k)(3).
10 Secs. 401(k)(12) and (13).
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11 Sec. 401(m)(11); 401(m)(12).
12 Sec. 401(k)(12).
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tion requirement under the matching contribution basic 401(k) safe
harbor requires a matching contribution equal to at least 100 per-
cent of elective contributions of the employee for contributions not
in excess of three percent of compensation, and 50 percent of elec-
tive contributions for contributions that exceed three percent of
compensation but do not exceed five percent, for a total matching
contribution of up to four percent of compensation. The required
matching contributions and the three percent nonelective contribu-
tion under the basic 401(k) safe harbor must be immediately non-
forfeitable (that is, 100 percent vested) when made.
Another safe harbor applies for a section 401(k) plan that in-
cludes automatic enrollment (‘‘automatic enrollment 401(k) safe
harbor plan’’).13 An automatic enrollment section 401(k) safe har-
bor plan must provide that, unless an employee elects otherwise,
the employee is treated as electing to make elective deferrals at a
default rate equal to a percentage of compensation as stated in the
plan that is at least (1) three percent of compensation through the
end of the first plan year that begins after the first deemed election
applies to the participant, (2) four percent during the second plan
year, (3) five percent during the third plan year, and (4) six percent
during the fourth plan year and thereafter.14 An automatic enroll-
ment section 401(k) safe harbor plan generally may provide for de-
fault rates higher than these minimum rates, but the default rate
cannot exceed 15 percent for any year (10 percent during the first
year).
The automatic enrollment section 401(k) safe harbor plan also
must satisfy either (1) a matching contribution requirement, or (2)
provide for a nonelective contribution. The matching contribution
requirement under the matching contribution automatic enrollment
401(k) safe harbor plan is 100 percent of elective contributions of
the employee for contributions not in excess of one percent of com-
pensation, and 50 percent of elective contributions for contributions
that exceed one percent of compensation but do not exceed six per-
cent, for a total matching contribution of up to 3.5 percent of com-
pensation. Alternatively, the plan can provide that the employer
will make a nonelective contribution of three percent. For an auto-
matic enrollment 401(k) safe harbor plan, the matching and non-
elective contributions are required to become 100 percent vested
only after two years of service (rather than being required to be im-
mediately vested when made).
Safe harbor notice
Both the matching contribution basic section 401(k) safe harbor
plan and the matching contribution automatic enrollment section
401(k) safe harbor plan are subject to a notice requirement.15 A
written notice must be provided to each employee eligible to par-
ticipate, within a reasonable period before each plan year and must
describe the employee’s rights and obligations under the arrange-
ment. Such notice must be (1) sufficiently accurate and comprehen-
sive to apprise the employee of such rights and obligations, and (2)
13 Sec. 401(k)(13).
14 Sec. 401(k)(13)(C)(iii). These automatic increases in default contribution rates are required
for plans using the safe harbor. Rev. Rul. 2009–30, 2009–39 I.R.B. 391, provides guidance for
including automatic increases in other plans using automatic enrollment, including under a plan
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that includes an eligible automatic contribution arrangement.
15 Secs. 401(k)(12)(A); 401(k)(13)(B).
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written in a manner calculated to be understood by the average
employee to whom the arrangement applies.
In the case of a matching contribution automatic enrollment sec-
tion 401(k) safe harbor plan, the notice must also (1) explain the
employee’s right under the arrangement to elect not to have elec-
tive contributions made on the employee’s behalf (or to elect to
have such contributions made at a different percentage), (2) in the
case of an arrangement under which the employee may elect
among 2 or more investment options, explain how contributions
made under the arrangement will be invested in the absence of any
investment election by the employee. Additionally, the employee
must have a reasonable period of time after receipt of the notice
and before the first elective contribution is made to make either
such election.
REASONS FOR CHANGE
The Committee recognizes that one of the primary reasons many
Americans reach retirement age with little or no savings is that too
few workers are offered an opportunity to save for retirement
through their employers. Even for those employees who are offered
a retirement plan at work, many do not participate. However, auto-
matic enrollment in section 401(k) plans significantly increases
participation. Since first defined and approved by Treasury in
1998, automatic enrollment has boosted participation by eligible
employees generally, and particularly for lower-wage employees.
For these reasons, the Committee believes it is appropriate to cre-
ate a new automatic enrollment safe harbor to promote additional
retirement savings through higher rate default and matching con-
tributions.
EXPLANATION OF PROVISION
The provision establishes a new automatic enrollment safe har-
bor (‘‘secure deferral arrangement’’) in addition to the existing
automatic enrollment 401(k) safe harbor plan. The secure deferral
arrangement is required to satisfy certain requirements, including
providing for certain minimum qualified percentages of elective de-
ferrals and certain minimum matching contributions. There is also
an employee notice requirement. However, secure deferral arrange-
ments (like other safe harbor 401(k) plans) generally are not sub-
ject to nondiscrimination testing.
Under the new secure deferral arrangement, the minimum quali-
fied percentages of employee elective deferrals are at least six per-
cent but not greater than 10 percent during the period ending on
the last day of the first plan year (instead of the current three per-
cent in the existing automatic enrollment 401(k) safe harbor) which
begins after the date on which the first elective contribution is
made with respect to such employee, at least seven percent in the
second year, at least eight percent in the third year, at least nine
percent in the fourth year, and at least 10 percent in all subse-
quent years. The 10 percent cap on the default level of employee
elective deferrals applies in the first year, but no cap applies to any
of the following years.
The employer is required to make matching contributions on be-
half of all eligible non-highly compensated employees equal to at
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least (a) 100 percent of the employee’s elective deferrals up to two
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percent of the employee’s compensation, (b) 50 percent of such em-
ployee’s elective deferrals that exceed two percent but do not ex-
ceed six percent of the employee’s compensation, and (c) 20 percent
of such employee’s elective deferrals that exceed six percent but do
not exceed 10 percent of the employee’s compensation (for a total
minimum matching contribution of up to 4.8 percent of compensa-
tion based on this schedule). The matching contribution as specified
for each increment of deferrals is a minimum requirement for that
increment meaning that an employer can make matching contribu-
tions at a higher rate for each increment so long as the matching
contribution rate does not increase as an employee’s rate of elective
contributions increases. Matching contributions with respect to em-
ployee contributions or deferrals in excess of 10 percent of com-
pensation are not permitted.
EFFECTIVE DATE
The provision is effective for plan years beginning after Decem-
ber 31, 2023.
2. Matching payments for elective deferral and IRA contributions
by certain individuals (sec. 102 of the bill and new sec. 6433 of
the Code)
PRESENT LAW
Eligible taxpayers may claim a nonrefundable income tax credit
for qualified retirement savings contributions to certain retirement
accounts.16 Subject to adjusted gross income (‘‘AGI’’) limits, the
credit is available to individuals who are age 18 or older, other
than individuals who are full-time students or claimed as a de-
pendent on another taxpayer’s return. The maximum amount of
the contribution that may be taken into account is $2,000 with a
maximum credit of $1,000 per eligible individual.17
The amount of the credit is based on the taxpayer’s AGI and fil-
ing status. The credit is a percentage of the taxpayer’s qualified re-
tirement savings contributions with a percentage of 10 percent, 20
percent, or 50 percent, as shown in the table below. The credit is
in addition to any deduction or exclusion that would otherwise
apply with respect to the contribution. The credit offsets alter-
native minimum tax liability as well as regular tax liability.
TABLE 1.—CREDIT RATES FOR SAVER’S CREDIT (FOR 2022)
Heads of All Other
Joint Filers (AGI) Credit Rate
Households (AGI) Filers 1 (AGI)
$0–$41,000 ................................................. $0–$30,750 $0–$20,500 50 percent
$41,001–$44,000 ........................................ $30,751–$33,000 $20,501–$22,000 20 percent
$44,001–$68,000 ........................................ $33,001–$51,000 $22,001–$34,000 10 percent
more than $68,000 ..................................... more than $51,000 more than $34,000 0 percent
Note: AGI amounts are indexed for inflation.
1 Includes single, married filing separately, and qualifying widow or widower.
Eligible contributions for purposes of the credit include (1) con-
tributions to traditional and Roth IRAs; (2) elective deferrals to a
section 401(k) plan, a section 403(b) plan, a governmental section
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16 Sec. 25B; Pub. L. No. 109–290.
17 See IRS Form 8880, Credit for Qualified Retirement Savings Contributions.
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457(b) plan, a SIMPLE IRA, or a SEP; (3) voluntary after-tax em-
ployee contributions to a qualified retirement plan or annuity or a
section 403(b) plan; and (4) contributions to a section 501(c)(18)(D)
plan. Under changes enacted by Public Law 115–97, eligible con-
tributions for purposes of the credit also include contributions to
Achieving a Better Life Experience (‘‘ABLE’’) accounts for which
the taxpayer is a designated beneficiary.18 ABLE accounts are sav-
ings accounts utilized by individuals with disabilities. A credit for
such contributions is available for contributions made in calendar
years 2018 through 2025.
The amount of any contribution eligible for the credit is reduced
by distributions received by the taxpayer (or by the taxpayer’s
spouse if the taxpayer files a joint return with the spouse) from
any retirement plan or IRA to which eligible contributions can be
made during the taxable year for which the credit is claimed, dur-
ing the two taxable years prior to the year the credit is claimed,
and during the period after the end of the taxable year for which
the credit is claimed and prior to the due date for filing the tax-
payer’s return for the year. Distributions that are rolled over to an-
other retirement plan do not affect the credit.
REASONS FOR CHANGE
The Committee believes that the credit for qualified retirement
savings contributions is an important tool for helping middle-class
Americans prepare for retirement, but that it could be more effec-
tive if certain improvements are made. For example, the various
credit rates under present law change substantially as a result of
very minor income differences. More significantly, the Committee
wishes to expand eligibility for the credit such that many more tax-
payers would qualify as compared to present law. A key limitation
on eligibility under present law is that a taxpayer with no income
tax liability is ineligible for the credit. Lastly, the Committee be-
lieves that the credit is more effective if it is structured as an ac-
tual contribution to a worker’s IRA or section 401(k) account, with
the result that the credit along with years of compounded earnings
will directly boost retirement savings.
EXPLANATION OF PROVISION
Under the provision, an eligible individual is allowed a refund-
able income tax credit, up to $1,000, equal to a percentage of quali-
fied retirement savings contributions made by the individual to a
retirement account.19 The refund must be paid by the Secretary of
Treasury (‘‘Secretary’’) as a contribution to the eligible individual’s
applicable retirement savings vehicle and must be made as soon as
practicable after the eligible individual files a tax return making a
claim for the credit. This credit generally replaces the present-law
credit for qualified retirement savings contributions to retirement
accounts.20
18 Pub. L. No. 115–97, sec. 11024, December 22, 2017.
19 Sec. 6433, as added by this provision.
20 Sec. 25B. The credit under the provision does not apply with respect to contributions made
to an ABLE account (within the meaning of section 529A) of which such individual is the des-
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ignated beneficiary. Such contributions would continue to be eligible for the credit as it exists
under present law. See sec. 25B(d)(1)(D).
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Qualified retirement savings contributions
The maximum percentage of qualified retirement savings con-
tributions eligible for the credit remains 50 percent, and the max-
imum amount of qualified retirement savings contributions that
may be taken into account remains $2,000. This amount is not in-
dexed for inflation. The credit percentage is reduced from 50 per-
cent to 0 percent beginning at the applicable dollar amount of
modified AGI and extending over a phaseout range.21 For eligible
married individuals who file a joint tax return and for surviving
spouses,22 the applicable dollar amount is $41,000 of modified AGI,
indexed for inflation, and the phaseout range is $30,000 of modified
AGI. For eligible individuals who file as head of household, the ap-
plicable dollar amount and phaseout range are 75 percent of those
in effect for joint return filers. For all other taxpayers, the applica-
ble dollar amount and phaseout range are 50 percent of the
amounts in effect for joint return filers. Taxpayers who are eligible
for a credit less than $100 but more than $0 receive the amount
as a cash refund (rather than as a contribution to a retirement ac-
count) unless the taxpayer elects otherwise.
The provision retains the criteria that only individuals who have
attained age 18 as of the close of the taxable year are eligible for
the credit. An eligible individual does not include any individual
who would be claimed as a dependent on another individual’s re-
turn,23 or any individual who is a student.24
The qualified retirement savings contribution is the sum of the
amounts of: (1) the qualified retirement contributions made by the
eligible individual,25 (2) any elective deferrals plus elective deferral
of compensation by such individuals under a governmental section
457(b) plan,26 and (3) voluntary employee contributions by such in-
dividual to a qualified retirement plan.27
The amount of qualified retirement savings contributions is re-
duced (but not below zero) by the aggregate distributions received
by the individual during the testing period from any entity of a
type to which the foregoing contributions may be made. For pur-
poses of determining distributions received by an individual, any
distribution received by a spouse of such individual is treated as
received by such individual if they file a joint return for such tax-
able year and for the taxable year during which the spouse receives
the distribution.
The testing period is the period that includes the taxable year
plus the two preceding taxable years and the period after such tax-
able year and before the due date (including extensions) for filing
the tax return for such taxable year. Certain distributions made
during the testing period are not taken into account for purposes
21 The percentage is reduced by the number of percentage points which bears the same ratio
to 50 percentage points as the excess of the taxpayer’s modified AGI for the taxable year, over
the applicable dollar amount, bears to the phaseout range. Modified AGI is determined as AGI
without regard to sections 911, 931, and 933, and without regard to any exclusion or deduction
allowed for any qualified retirement savings contribution made during the taxable year.
22 See sec. 2(a) (definition of surviving spouse).
23 As provided in section 151.
24 As defined in sec. 152(f)(2).
25 Sec. 219(e).
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26 Secs. 402(g)(3), 457(b), 457(e)(1)(A).
27 Sec. 4974(c).
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of the reduction.28 Finally, any portion of a distribution transferred
or paid in a rollover contribution 29 to an account or plan to which
qualified retirement contributions can be made will not be applied
to any reduction in qualified retirement savings contributions for
purposes of this provision.
Payment of credits As previously noted, the credit will be paid
in the form of a contribution to the individual’s applicable retire-
ment savings vehicle that is an account or plan elected by the indi-
vidual. The contribution is treated as a pre-tax contribution to the
plan. Thus, the amount will be taxable to the distributee when it
is distributed from the retirement plan.
In order to receive the credit, an eligible individual must elect to
have the contribution made to an account or plan which (1) is an
eligible retirement plan; 30 (2) is for the benefit of the eligible indi-
vidual; (3) accepts contributions made under this provision, and (4)
is designated by such individual, in such form and manner as the
Secretary may provide, on the tax return for the taxable year.
A payment of a credit that is a contribution is treated as an elec-
tive deferral made by the individual or as an IRA contribution (as
applicable), except as provided by the Secretary under regulations.
The contribution is not taken into account with respect to any
qualified plan limitations.31
Any contribution that was erroneously paid, including a payment
that is not made to an applicable retirement saving vehicle, is
treated as an underpayment of tax 32 for the taxable year in which
the Secretary determines that the payment was erroneous. In the
case of an erroneous credit, the distribution of such contribution is
excluded from income,33 and the 10 percent additional tax does not
apply to the distribution of such contribution or income attrib-
utable to such contribution, if the distribution of such amounts is
received no later than the due date (including extensions) for filing
the individual’s tax return. Any plan or arrangement to which a
contribution is made under this provision, or from which a distribu-
tion is made, is not treated as violating the requirements applica-
ble to such plan solely by reason of such contribution or distribu-
tion.34
Information related to payment of credits
If an eligible individual elects to have the credit contributed to
an account or plan, the Secretary must provide guidance to the cus-
todian of the account or the plan sponsor, as the case may be, de-
tailing the treatment of such contribution and reporting require-
ments with respect to such contribution.
28 Distributions made during the testing period are not taken into account for purposes of the
reduction if made under sections 72(p), 401(k)(8), 401(m)(6), 402(g)(2), 404(k), or 408(d)(4). In
addition, distributions to which sections 408(d)(3) or 408A(d)(3) applies are not taken into ac-
count for purposes of the reduction.
29 As defined in sections 402(c), 403(a)(4), 403(b)(8), 408A(e), or 457(e)(16).
30 Sec. 402(c)(8)(B).
31 As imposed by sections 402(g)(1), 403(b), 408(a)(1), 408(b)(2)(B), 414(v)(2), 415(c), or
457(b)(2). Also, such contributions are disregarded for purposes of sections 401(a)(4), 401(k)(3),
401(k)(11)(B)(i), and 416.
32 Such a payment shall not be treated as an underpayment of tax for purposes of Part II of
subchapter A of Chapter 68.
33 Sections 402(a), 403(a)(1), 403(b)(1), 408(d)(1), and 457(a)(1) do not apply to the distribution
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of the contribution.
34 The plan is not treated as violating secs. 401, 403, or 457.
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The Secretary is required to amend the reporting requirements
for retirement plans and IRAs to require separate reporting of the
aggregate amount of contributions received by the plan during the
year from the Secretary pursuant to the provision.
ABLE Accounts
The credit under the provision does not apply with respect to
contributions made to an ABLE account 35 of which such individual
is the designated beneficiary. Such contributions would continue to
be eligible for the credit as it exists under present law.36
Treatment of the U.S. territories
The Secretary must pay to each territory of the United States
that has a mirror Code tax system—the U.S. Virgin Islands, Com-
monwealth of the Northern Mariana Islands, and Guam—amounts
equal to the loss (if any) to that territory by reason of amendments
made by this provision. Such amounts will be determined by the
Secretary based on information provided by the government of the
territory. With respect to any United States territory, a mirror
Code tax system means the income tax system of such territory if
the income tax liability of the residents of such territory is deter-
mined by reference to the income tax laws of the United States as
if that territory were the United States.
For territories that do not have a mirror Code—Puerto Rico and
American Samoa—the Secretary will pay amounts estimated by the
Secretary as being equal to the aggregate benefits (if any) that
would have been provided to residents of that territory by reason
of the amendments made by this provision if the territory had a
mirror Code. The respective territory must have a plan, which has
been approved by the Secretary, under which such territory will
promptly distribute such payments to its residents in order for the
territory to receive amounts estimated to equal aggregate benefits.
A credit under the provision will not be allowed against Federal
income taxes to any person to whom a credit is allowed against
taxes imposed by the territory due to this provision, or who is eligi-
ble for a payment resulting from a determination of aggregate ben-
efits in a non-mirror Code territory.
EFFECTIVE DATE
The amendments made by this provision apply to taxable years
beginning after December 31, 2026.
3. Modification of participation requirements for long-term, part-
time workers (sec. 103 of the bill and sec. 401(k) of the Code)
PRESENT LAW
Background on section 401(k) plans may be found in Title I, sec-
tion 1 of this document.
General participation requirements
A qualified retirement plan generally can delay participation in
the plan based on attainment of age or completion of years of serv-
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35 Sec. 529A.
36 Sec. 25B(d)(1)(D).
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ice but not beyond the later of completion of one year of service
(that is, a 12-month period with at least 1,000 hours of service) or
attainment of age 21.37 A plan also cannot exclude an employee
from participation (on the basis of age) when that employee has at-
tained a specified age.38 Employees can be excluded from plan par-
ticipation on other bases, such as job classification, as long as the
other basis is not an indirect age or service requirement. A plan
can provide that an employee is not entitled to an allocation of em-
ployer nonelective or matching contributions for a plan year unless
the employee completes either 1,000 hours of service during the
plan year or is employed on the last day of the year even if the em-
ployee previously completed 1,000 hours of service in a prior year.
Long-term part-time workers
Effective generally for plan years beginning in 2021, section
401(k) plans generally must permit an employee to make elective
deferrals if the employee has worked at least 500 hours per year
with the employer for at least three consecutive years and has met
the minimum age requirement (age 21) by the end of the three-con-
secutive-year period (a ‘‘long-term part-time employee’’).39 Thus, a
long-term part-time employee may not be excluded from the plan
merely because the employee has not completed a year of service.
Once a long-term part-time employee meets the age and service re-
quirements, such employee must be able to commence participation
no later than the earlier of (1) the first day of the first plan year
beginning after the date on which the employee satisfied the age
and service requirements or (2) six months after the date on which
the individual satisfied those requirements.
The plan is not required to provide that a long-term part-time
employee is otherwise eligible to participate in the plan. Thus, the
plan can continue to treat a long-term part-time employee as ineli-
gible under the plan for employer nonelective and matching con-
tributions based on not having completed a year of service. How-
ever, for a plan that does provide employer contributions for long-
term part-time employees, the plan must credit, for each year in
which such an employee worked at least 500 hours, a year of serv-
ice for purposes of vesting in any employer contributions. If a long-
term part-time employee under such a plan becomes a full-time
employee, the plan must continue to credit the employee with any
years of service earned under the special rule for long-term part-
time employees.
Employers are permitted to exclude long-term part-time employ-
ees from nondiscrimination testing,40 including top-heavy vesting
and top-heavy benefit requirements. However, the relief from the
nondiscrimination rules ceases to apply to any employee who be-
comes a full-time employee (as of the first plan year beginning
37 Secs. 401(a)(3) and 410(a)(1). Parallel requirements generally apply to plans of private em-
ployers under section 202 of ERISA. Governmental plans under section 414(d) and church plans
under section 414(e) are generally exempt from these Code requirements and from ERISA.
38 Sec. 410(a)(2).
39 Sec. 401(k)(2)(D). This rule was enacted as part of the Setting Every Community Up for
Retirement Enhancement Act of 2019, Pub. L. No. 116–94, Division O, December 20, 2019 (‘‘SE-
CURE Act’’), sec. 112. The rule does not apply to collectively bargained plans.
dlhill on DSK120RN23PROD with HEARING
40 Nondiscrimination testing relief applies to sections 401(a)(4), 401(k)(3), 401(k)(12),
401(k)(13), 401(m)(2), and 410(b).
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19
after the plan year in which the employee completes a 12-month
period with at least 1,000 hours of service).
The long-term part-time employee rules are effective for plan
years beginning after December 31, 2020, except that in deter-
mining whether the three-consecutive-year period has been met,
12-month periods beginning before January 1, 2021 are not taken
into account.
REASONS FOR CHANGE
The SECURE Act requires employers to allow long-term, part-
time workers to participate in their section 401(k) plans after the
worker has completed three consecutive years of part-time serv-
ice.41 As women are more likely to work part-time than men, this
provision is particularly important for women in the workforce. The
Committee wishes to make it easier for part-time workers to save
for retirement by requiring section 401(k) plans to allow part-time
workers to participate after two consecutive years of part-time
service.
EXPLANATION OF PROVISION
The provision modifies the rules that apply to long-time part-
time employees under a section 401(k) plan to reduce the service
requirement for such employees from three years to two years.
Thus, under the provision, a section 401(k) plan generally must
permit an employee to make elective deferrals if the employee has
worked at least 500 hours per year with the employer for at least
two consecutive years and has met the minimum age requirement
(age 21) by the end of the two-consecutive-year period.
In addition, the provision clarifies the effective date of the long-
term part-time employee rules. Under the provision, 12-month peri-
ods beginning before January 1, 2021 are not taken into account
in determining a year of service for purposes of the rules applicable
to the vesting of employer contributions. Thus, in addition to being
disregarded for purposes of determining whether the employee has
completed three consecutive years of service (as under present law),
12-month periods beginning before January 1, 2021 are disregarded
for vesting purposes.
Finally, the provision clarifies that a section 401(k) safe harbor
plan that is eligible for an exemption from the top heavy rules 42
does not fail to qualify for such exemption merely because the plan
does not provide safe harbor matching contributions 43 to long-term
part-time employees.
EFFECTIVE DATE
The reduction in service requirement from three years to two
years is effective for plan years beginning after December 31, 2022.
The clarification of the vesting rule and the top-heavy rule is effec-
tive as if included in the enactment of section 112 of the SECURE
Act.
41 Sec. 112 of the SECURE Act.
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42 Under section 416(g)(4)(H).
43 Secs. 401(m)(11) and (12).
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20
4. Treatment of student loan payments as elective deferrals for
purposes of matching contributions (sec. 104 of the bill and secs.
401(m), 403(b), 408(p), and 457(b) of the Code)
PRESENT LAW
Section 401(k) plans
A section 401(k) plan is a type of profit-sharing or stock bonus
plan that contains a qualified cash or deferred arrangement. Such
arrangements are subject to the rules generally applicable to quali-
fied defined contribution plans. In addition, special rules apply to
such arrangements. Employees who participate in a section 401(k)
plan may elect to have contributions made to the plan (referred to
as ‘‘elective deferrals’’) rather than receive the same amount as cur-
rent compensation.44 The maximum annual amount of elective de-
ferrals that can be made by an employee for a year is the lesser
of $20,500 (for 2022) or the employee’s compensation.45 For an em-
ployee who attains age 50 by the end of the year, the dollar limit
on elective deferrals is increased by $6,500 (for 2022) (called ‘‘catch-
up contributions’’).46 An employee’s elective deferrals must be fully
vested. A section 401(k) plan may also provide for employer match-
ing and nonelective contributions.
In order to constitute a qualified cash or deferred arrangement,
no benefit under the arrangement may be conditioned, directly or
indirectly, on the employee electing to have the employer make or
not make contributions in lieu of receiving cash.47 However, match-
ing contributions are exempt from this rule.
Nondiscrimination test
Actual deferral percentage test
An annual nondiscrimination test, called the actual deferral per-
centage test (the ‘‘ADP’’ test) applies to elective deferrals under a
section 401(k) plan.48 The ADP test generally compares the aver-
age rate of deferral for highly compensated employees to the aver-
age rate of deferral for non-highly compensated employees. The av-
erage deferral rate for highly compensated employees must not ex-
ceed the average rate for non-highly compensated employees by
more than certain specified amounts. If a plan fails to satisfy the
ADP test for a plan year based on the deferral elections of highly
compensated employees, the plan is permitted to distribute defer-
rals to highly compensated employees (‘‘excess deferrals’’) in a suffi-
cient amount to correct the failure. The distribution of the excess
deferrals must be made by the close of the following plan year.49
The ADP test is deemed to be satisfied if a section 401(k) plan
includes certain minimum matching or nonelective contributions
44 Elective deferrals generally are made on a pre-tax basis and distributions attributable to
elective deferrals are includible in income. However, a section 401(k) plan is permitted to in-
clude a ‘‘qualified Roth contribution program’’ that permits a participant to elect to have all or
a portion of the participant’s elective deferrals under the plan treated as after-tax Roth contribu-
tions. Certain distributions from a designated Roth account are excluded from income, even
though they include earnings not previously taxed.
45 Sec. 402(g).
46 Sec. 414(v).
47 Sec. 401(k)(4)(A).
48 Sec. 401(k)(3). Long-term part-time workers may be excluded from this and other non-
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discrimination tests. Sec. 401(k)(2)(D).
49 Sec. 401(k)(8).
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21
under either of two plan designs (‘‘401(k) safe harbor plans’’), de-
scribed below, as well as certain required rights and features and
the plan satisfies a notice requirement.50
Section 401(k) safe harbor contributions
Under one type of section 401(k) safe harbor plan (‘‘basic 401(k)
safe harbor plan’’), the plan either (1) satisfies a matching contribu-
tion requirement (‘‘matching contribution basic 401(k) safe harbor
plan’’) or (2) provides for the employer to make a nonelective con-
tribution to a defined contribution plan of at least three percent of
an employee’s compensation on behalf of each non-highly com-
pensated employee who is eligible to participate in the plan (‘‘non-
elective basic 401(k) safe harbor plan’’). The matching contribution
basic 401(k) safe harbor requires a matching contribution equal to
at least 100 percent of elective contributions of the employee for
contributions not in excess of three percent of compensation, and
50 percent of elective contributions for contributions that exceed
three percent of compensation but do not exceed five percent, for
a total matching contribution of up to four percent of compensation.
The required matching contributions and the three percent non-
elective contribution under the basic 401(k) safe harbor must be
immediately nonforfeitable (that is, 100 percent vested) when
made.
Another safe harbor applies for a section 401(k) plan that in-
cludes automatic enrollment (‘‘automatic enrollment 401(k) safe
harbor’’). Under an automatic enrollment 401(k) safe harbor, unless
an employee elects otherwise, the employee is treated as electing
to make elective deferrals equal to a percentage of compensation as
stated in the plan, not in excess of 15 percent and at least (1) three
percent of compensation for the first year the deemed election ap-
plies to the participant, (2) four percent during the second year, (3)
five percent during the third year, and (4) six percent during the
fourth year and thereafter.51 The matching contribution require-
ment under this safe harbor is 100 percent of elective contributions
of the employee for contributions not in excess of one percent of
compensation, and 50 percent of elective contributions for contribu-
tions that exceed one percent of compensation but do not exceed six
percent, for a total matching contribution of up to 3.5 percent of
compensation (‘‘matching contribution automatic enrollment 401(k)
safe harbor’’). Alternatively, the plan can provide that the employer
will make a nonelective contribution of three percent, as under the
basic 401(k) safe harbor (‘‘nonelective contribution automatic en-
rollment 401(k) safe harbor’’). However, under the automatic enroll-
ment 401(k) safe harbors, the matching and nonelective contribu-
tions are allowed to become 100 percent vested after two years of
service (rather than being required to be immediately vested when
made).
50 Sec. 401(k)(12) and (13). If certain additional requirements are met, matching contributions
under 401(k) safe harbor plan may also satisfy a nondiscrimination test applicable under section
401(m).
51 These automatic increases in default contribution rates are required for plans using the safe
harbor. Rev. Rul. 2009–30, 2009–39 I.R.B. 391, provides guidance for including automatic in-
dlhill on DSK120RN23PROD with HEARING
creases in other plans using automatic enrollment, including under a plan that includes an eligi-
ble automatic contribution arrangement.
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22
Matching contribution nondiscrimination test
Employer matching contributions are also subject to a special
nondiscrimination test, the ‘‘ACP test,’’ which compares the aver-
age actual contribution percentages (‘‘ACPs’’) of matching contribu-
tions for the highly compensated employee group and the non-high-
ly compensated employee group. The plan generally satisfies the
ACP test if the ACP of the highly compensated employee group for
the current plan year is either (1) not more than 125 percent of the
ACP of the non-highly compensated employee group for the prior
plan year, or (2) not more than 200 percent of the ACP of the non-
highly compensated employee group for the prior plan year and not
more than two percentage points greater than the ACP of the non-
highly compensated employee group for the prior plan year.
A safe harbor section 401(k) plan that provides for matching con-
tributions is deemed to satisfy the ACP test (‘‘401(m) safe harbor’’)
if, in addition to meeting the safe harbor contribution and notice
requirements under section 401(k), (1) matching contributions are
not provided with respect to elective deferrals in excess of six per-
cent of compensation, (2) the rate of matching contribution does not
increase as the rate of an employee’s elective deferrals increases,
and (3) the rate of matching contribution with respect to any rate
of elective deferral of a highly compensated employee is no greater
than the rate of matching contribution with respect to the same
rate of deferral of a non-highly compensated employee.52
SIMPLE IRA plan
A small employer that employs no more than 100 employees who
earned $5,000 or more during the prior calendar year can establish
a simplified tax-favored retirement plan, which is called the SIM-
PLE IRA plan. A SIMPLE IRA plan is generally a plan under
which contributions are made to an IRA for each employee (a ‘‘SIM-
PLE IRA’’).53 A SIMPLE IRA plan allows employees to make elec-
tive deferrals to a SIMPLE IRA, subject to a limit of $14,000 (for
2022). An individual who has attained age 50 before the end of the
taxable year may also make catch-up contributions under a SIM-
PLE IRA plan up to a limit of $3,000 (for 2022).
In the case of a SIMPLE IRA plan, the group of eligible employ-
ees generally must include any employee who has received at least
$5,000 in compensation from the employer in any two preceding
years and is reasonably expected to receive $5,000 in the current
year. A SIMPLE IRA plan is not subject to the nondiscrimination
rules generally applicable to qualified retirement plans.
Employer contributions to a SIMPLE IRA must satisfy one of two
contribution formulas. Under the matching contribution formula,
the employer is generally required to match 100 percent of em-
ployee elective contributions up to three percent of the employee’s
compensation. The employer can elect a lower percentage matching
contribution for all employees (but not less than one percent of
each employee’s compensation); however, a lower percentage cannot
be elected for more than two years out of any five-year period. Al-
ternatively, for any year, an employer is permitted to elect, in lieu
of making matching contributions, to make a nonelective contribu-
dlhill on DSK120RN23PROD with HEARING
52 Sec. 401(m)(11); 401(m)(12).
53 Sec. 408(p). Employer may also establish SIMPLE section 401(k) plans. Sec. 401(k)(11).
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23
tion of two percent of compensation on behalf of each eligible em-
ployee with at least $5,000 in compensation for such year, whether
or not the employee makes an elective contribution.
The employer must provide each employee who is eligible to
make elective deferrals under a SIMPLE IRA plan (1) a 60-day
election period before the beginning of the calendar year and (2) a
notice at the beginning of the 60-day period explaining the employ-
ee’s choices under the plan.54
No contributions other than employee elective contributions, re-
quired employer matching contributions, or employer nonelective
contributions can be made to a SIMPLE IRA plan, and the em-
ployer may not maintain any other qualified retirement plan.
Section 403(b) and governmental 457(b) plans
Tax-deferred annuity plans (‘‘section 403(b) plans’’) are generally
similar to qualified defined contribution plans, but may be main-
tained only by (1) tax-exempt charitable organizations 55 and (2)
educational institutions of State or local governments (that is, pub-
lic schools, including colleges and universities).56 Section 403(b)
plans may provide for employees to make elective deferrals (in pre-
tax or designated Roth form), including catch-up contributions, or
other after-tax employee contributions, and employers may make
nonelective or matching contributions on behalf of employees. Con-
tributions to a section 403(b) plan are generally subject to the same
contribution limits applicable to qualified defined contribution
plans, including the limits on elective deferrals.
Contributions to a section 403(b) plan must be fully vested. The
minimum coverage and general nondiscrimination requirements
applicable to a qualified retirement plan generally apply to a sec-
tion 403(b) plan, as well as employer matching and nonelective con-
tributions and after-tax employee contributions to the plan.57 If a
section 403(b) plan provides for elective deferrals, the plan is sub-
ject to a ‘‘universal availability’’ requirement under which all em-
ployees must be given the opportunity to make deferrals of more
than $200.58 In applying this requirement, nonresident aliens, stu-
dents, and employees who normally work less than 20 hours per
week may be excluded.59
An eligible deferred compensation plan of a governmental em-
ployer (‘‘governmental section 457(b) plan’’) is generally similar to
a qualified cash or deferred arrangement under a section 401(k)
plan in that it consists of elective deferrals, that is, contributions
(in pre-tax or designated Roth form) made at the election of an em-
ployee, including catch-up contributions. Deferrals under a govern-
mental section 457(b) plan are generally subject to the same limits
as elective deferrals under a section 401(k) plan or a section 403(b)
plan.
54 Notice 98–4, 1998–1 C.B. 269.
55 These are organizations exempt from tax under section 501(c)(3). Section 403(b) plans of pri-
vate, tax-exempt employers may be subject to ERISA as well as the requirements of section
403(b).
56 Sec. 403(b).
57 These requirements do not apply to a governmental section 403(b) plan or a section 403(b)
plan maintained by a church or a qualified church-controlled organization as defined in section
3121(w).
58 Sec. 403(b)(12)(A)(ii).
59 For this purpose, nonresident alien has the meaning in section 410(b)(3)(C), and student
dlhill on DSK120RN23PROD with HEARING
has the meaning in section 3121(b)(10). The universal availability requirement does not apply
to a section 403(b) plan maintained by a church or a qualified church-controlled organization.
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24
REASONS FOR CHANGE
The Committee wishes to assist employees who may not be able
to save for retirement because they are overwhelmed with student
debt, and thus are missing out on available matching contributions
under retirement plans. Thus, this provision allows a plan to pro-
vide such employees with matching contributions based on student
loan repayments.
EXPLANATION OF PROVISION
The provision modifies the definition of matching contribution 60
for purposes of defined contribution plans, including section 401(k)
plans, to include employer contributions made to the plan on behalf
of an employee on account of a qualified student loan payment. For
this purpose, a qualified student loan payment is a payment made
by an employee in repayment of a qualified education loan 61 in-
curred by the employee to pay qualified higher education expenses.
However, this definition applies only to the extent such payments
in the aggregate for the year do not exceed the amount of elective
deferrals that the employee would be permitted to contribute under
the Code 62 (reduced by elective deferrals made by the employee for
the year). Qualified higher education expenses are defined as the
cost of attendance at an eligible educational institution.63 In addi-
tion, in order for a student loan payment to qualify, the employee
must certify annually to the employer making the matching con-
tribution the amount of the loan payments that have been made
during the year. The employer is permitted to rely on this certifi-
cation.
In order for an employer contribution made on account of a quali-
fied student loan payment to be treated as a matching contribution
under the provision, the plan must satisfy certain requirements.
The plan must provide matching contributions on account of elec-
tive deferrals at the same rate as contributions on account of quali-
fied student loan payments. The plan must provide matching con-
tributions on account of qualified student loan payments only on
behalf of employees otherwise eligible to receive matching contribu-
tions on account of elective deferrals (and, similarly, must provide
matching contributions on account of elective deferrals only on be-
half of employees eligible to receive matching contributions on ac-
count of qualified student loan payments). The plan must also pro-
vide that matching contributions on account of qualified student
loan payments vest in the same manner as matching contributions
on account of elective deferrals.
60 Under section 401(m)(4)(A)(iii), as added by this provision.
61 As defined in section 221(d)(1), a qualified education loan is generally any indebtedness in-
curred by the taxpayer solely to pay qualified higher education expenses (1) which are incurred
on behalf of the taxpayer, the taxpayer’s spouse, or any dependent of the taxpayer as of the
time the indebtedness was incurred; (2) which are paid or incurred within a reasonable period
of time before or after the indebtedness is incurred; and (3) which are attributable to education
furnished during a period during which the recipient was an eligible student.
62 The limitation applicable under section 402(g) for the year ($20,500 for 2022), or, if less,
the employee’s compensation as defined in section 415(c)(3) for the year.
63 ‘‘Cost of attendance’’ for this purpose is defined in section 472 of the Higher Education Act
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of 1965, as in effect on the day before the enactment of the Taxpayer Relief Act of 1997. ‘‘Eligi-
ble educational institution’’ is defined in section 221(d)(2) of the Code.
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25
Under the provision, for purposes of certain nondiscrimination
rules and minimum coverage requirements,64 matching contribu-
tions on account of qualified student loan payments do not fail to
be treated as available to an employee solely because such em-
ployee does not have debt incurred under a qualified education
loan. In addition, the provision provides that a qualified student
loan payment is generally not treated as a plan contribution. How-
ever, a plan may treat a qualified student loan payment as an elec-
tive deferral or an elective contribution (as applicable) for purposes
of the matching contribution requirement under a basic safe harbor
401(k) plan, the automatic enrollment safe harbor 401(k) plan, and
the secure deferral arrangement described in Title I, section 1 of
this document, as well as for purposes of the section 401(m) safe
harbors.65 A plan is also permitted to apply the ADP test sepa-
rately to employees who receive matching contributions on account
of qualified student loan payments.
The provision also contains similar rules allowing matching con-
tributions to be made on account of qualified student loan pay-
ments in the case of SIMPLE IRAs, section 403(b) plans, and sec-
tion 457(b) plans. In the case of SIMPLE IRAs, the provision pro-
vides that a SIMPLE IRA does not fail to meet the matching con-
tribution requirement applicable to such arrangements solely be-
cause the arrangement treats qualified student loan payments as
elective employer contributions to the extent such payments do not
exceed the amount of elective employer contributions the employee
is permitted to contribute under the Code 66 (reduced by elective
employer contributions contributed by the employee for the year).
As under a section 401(k) plan, in order for the student loan pay-
ment to qualify, the employee must certify annually to the em-
ployer making the matching contribution the amount of loan pay-
ments that have been made during the year. In addition, matching
contributions on account of qualified student loan payments must
be provided only on behalf of employees otherwise eligible to make
elective employer contributions, and all employees otherwise eligi-
ble to participate in the arrangement must be eligible to receive
matching contributions on account of qualified student loan pay-
ments.
In the case of a section 403(b) plan, under the provision, the fact
that the employer offers matching contributions on account of
qualified student loan payments 67 is not taken into account in
determining whether the plan satisfies the universal availability
requirement.68 Similarly, in the case of a governmental 457(b)
plan, the provision provides that a plan is not treated as failing to
meet the requirements applicable to such plans 69 solely because
64 This rule applies for purposes of section 401(a)(4), section 410(b), and the rule under the
provision that all employees eligible to receive matching contributions on account of elective de-
ferrals be eligible to receive matching contributions on account of qualified student loan pay-
ments.
65 This rule applies for purposes of sections 401(k)(12)(B) and (13)(B), and sections
401(m)(11)(B) and (12). It also applies to SIMPLE section 401(k) plans under section
401(11)(B)(i)(II).
66 The limitation applicable under section 408(p)(2)(E) for the year, including permitted catch-
up contributions under section 414(v), or, if less, the employee’s compensation as defined in sec-
tion 415(c)(3) for the year.
67 As described in section 401(m)(13), as added by this provision.
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68 Sec. 403(b)(12)(A)(ii).
69 Under section 457(b).
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26
the plan, or another qualified plan 70 or section 403(b) plan main-
tained by the employer provides for matching contributions on ac-
count of qualified student loan payments.71
The provision directs the Secretary to prescribe regulations for
purposes of implementing the provision, including regulations:
• Permitting a plan to make matching contributions for
qualified student loan payments 72 at a different frequency
than matching contributions are otherwise made under the
plan, provided that the frequency is not less than annually;
• Permitting employers to establish reasonable procedures
to claim matching contributions for such qualified student loan
payments under the plan, including an annual deadline (not
earlier than three months after the close of each plan year) by
which a claim must be made; and
• Promulgating model amendments which plans may adopt
to implement matching contributions on qualified student loan
payments.73
EFFECTIVE DATE
The provision is effective for contributions made for plan years
beginning after December 31, 2023.
5. Withdrawals for certain emergency expenses (sec. 105 of the bill
and sec. 72(t) of the Code)
PRESENT LAW
Distributions from tax-favored retirement plans
A distribution from a tax-qualified plan described in section
401(a) (a ‘‘qualified retirement plan’’), a tax-sheltered annuity plan
(a ‘‘section 403(b) plan’’), an eligible deferred compensation plan of
a State or local government employer (a ‘‘governmental section
457(b) plan’’), or an individual retirement arrangement (an ‘‘IRA’’)
generally is included in income for the year distributed.74 These
plans are referred to collectively as ‘‘eligible retirement plans.’’ 75 In
addition, unless an exception applies, a distribution from a quali-
fied retirement plan, a section 403(b) plan, or an IRA received be-
fore age 591⁄2 is subject to a 10-percent additional tax (referred to
as the ‘‘early withdrawal tax’’) on the amount includible in in-
come.76
In general, a distribution from an eligible retirement plan may
be rolled over to another eligible retirement plan within 60 days,
in which case the amount rolled over generally is not includible in
income. The Internal Revenue Service (‘‘IRS’’) has the authority to
waive the 60-day requirement if failure to waive the requirement
70 Under section 401(a).
71 As described in section 401(m)(13), as added by this provision.
72 As defined in sections 401(m)(4)(D) and 408(p)(2)(F), as added by this provision.
73 For purposes of sections 401(m), 408(p), 403(b), and 457(b).
74 Secs. 401(a), 403(a), 403(b), 457(b), and 408. Under section 3405, distributions from these
plans are generally subject to income tax withholding unless the recipient elects otherwise. In
addition, certain distributions from a qualified retirement plan, a section 403(b) plan, or a gov-
ernmental section 457(b) plan are subject to mandatory income tax withholding at a 20-percent
rate unless the distribution is rolled over.
75 Sec. 402(c)(8)(B). Eligible retirement plans also include annuity plans described in section
403(a).
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76 Sec. 72(t). The 10-percent early withdrawal tax does not apply to distributions from a gov-
ernmental section 457(b) plan.
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27
would be against equity or good conscience, including cases of cas-
ualty, disaster, or other events beyond the reasonable control of the
individual.77
The terms of a qualified retirement plan, section 403(b) plan, or
governmental section 457(b) plan generally determine when dis-
tributions are permitted. However, for many types of plans, restric-
tions apply to distributions before an employee’s termination of em-
ployment, referred to as ‘‘in-service’’ distributions or withdrawals.
Despite such restrictions, an in-service distribution from a qualified
retirement plan that includes a qualified cash-or-deferred arrange-
ment (a ‘‘section 401(k) plan’’), or a section 403(b) plan may be per-
mitted in the case of financial hardship. Similarly, a governmental
section 457(b) plan may permit distributions in the case of an un-
foreseeable emergency. Under a qualified retirement plan that is a
pension plan (i.e., defined benefit pension plan or money purchase
pension plan), distributions generally may be made only in the
event of retirement, death, disability, or other separation from
service, although in-service distributions may be permitted after
age 591⁄2.78
REASONS FOR CHANGE
The Committee recognizes that individuals may need funds to
address unforeseeable and immediate financial needs related to
personal or family emergencies. The Committee believes that indi-
viduals should be able to access funds from retirement plans when
needed for such emergencies, with minimal administrative hurdles
and without being subject to the 10-percent early withdrawal tax
that otherwise generally applies to early distributions from a re-
tirement plan. Allowing such access will encourage workers to save
more in retirement plans since the funds will not be locked away
in the case of a financial emergency. In addition, the Committee
wishes to permit individuals to recontribute such withdrawals to a
retirement plan, so that individuals who can later repay the funds
do not miss out on valuable compounding of earnings on retirement
savings.
EXPLANATION OF PROVISION
Under the provision, an exception to the 10-percent early with-
drawal tax applies in the case of withdrawals from applicable eligi-
ble retirement plans for emergency personal expenses. In addition,
such eligible distributions may be recontributed subject to certain
requirements.
Eligible distributions for emergency personal expenses
An emergency personal expense distribution is a permissible dis-
tribution from an applicable eligible retirement plan which, for this
purpose, includes qualified retirement plans (other than defined
benefit plans), section 403(b) plans, governmental section 457(b)
77 Rev. Proc. 2020–46, 2020–45 I.R.B. 995, provides for a self-certification procedure (subject
to verification on audit) that may be used by a taxpayer claiming eligibility for a waiver of the
60-day requirement with respect to a rollover into a plan or IRA in certain specified cir-
cumstances.
78 Sec. 401(a)(36); Treas. Reg. secs. 1.401–1(b)(1)(i) and 1.401(a)–1(b)(1)(i). Section 401(k)
dlhill on DSK120RN23PROD with HEARING
plans, section 403(b) plans, and governmental section 457(b) plans also may permit in-service
distributions after age 591⁄2.
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plans, and IRAs.79 Emergency personal expense distribution means
any distribution from an applicable retirement plan to an indi-
vidual for purposes of meeting unforeseeable or immediate finan-
cial needs relating to necessary personal or family emergency ex-
penses. In making such a distribution, a plan administrator may
rely on the employee’s certification that the distribution is an eligi-
ble emergency personal expense distribution.80
The maximum aggregate amount which may be treated as an
emergency personal expense distribution by any individual in any
calendar year cannot exceed the lesser of $1,000, or an amount
equal to the excess of (1) the individual’s total nonforfeitable ac-
crued benefit under the plan (the individual’s total interest in the
plan in the case of an individual retirement plan), determined as
of the date of each such distribution, over (2) $1,000. Not more
than one emergency personal expense distribution may be made
per year per individual.
An employer plan is not treated as violating any Code require-
ment merely because it treats a distribution to an individual as an
emergency personal expense distribution (provided that such dis-
tribution would otherwise be an emergency personal expense dis-
tribution), so long as the aggregate amount or number of such dis-
tributions to that individual from plans maintained by the em-
ployer and members of the employer’s controlled group 81 does not
exceed the limits described above. Thus, under such circumstances
an employer plan is not treated as violating any Code requirement
merely because an individual might receive total emergency per-
sonal expense distributions in excess of the limits (pertaining to the
aggregate amount or number of such distributions) as a result of
emergency personal expense distributions from plans of other em-
ployers or IRAs.
Recontributions to applicable eligible retirement plans
Generally, an individual may recontribute any portion of an
emergency personal expense distribution at any time during the 3-
year period beginning on the day after the date on which such dis-
tribution was received, to an applicable eligible retirement plan to
which a rollover can be made and of which the individual is a bene-
ficiary. If an individual makes a recontribution of an emergency
personal expense distribution, then the individual is treated as
having received the distribution as an eligible rollover distribution
(to the extent of the amount of the contribution) and as having
transferred the recontribution amount in a direct trustee to trustee
transfer within 60 days of the distribution meaning the recontribu-
tion amount is not includible in income.
In the case of an eligible retirement plan that is not an IRA, an
individual may not recontribute more than the aggregate amount
of emergency personal expense distributions that are made from
such plan to the individual. In addition, such recontributions are
79 An emergency personal expense distribution is subject to income tax withholding unless the
recipient elects otherwise. Mandatory 20-percent withholding does not apply.
80 The Secretary may provide by regulations for exceptions to this rule in cases where the plan
administrator has actual knowledge to the contrary and for addressing cases of employee mis-
representation.
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81 The term ‘‘controlled group’’ means any group treated as a single employer under subsection
(b), (c), (m), or (o) of section 414.
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29
permitted only if the individual is eligible to make contributions to
the plan.
Limitation on subsequent distributions
If a distribution is treated as an emergency personal expense dis-
tribution, then no amount may be treated as such a distribution
during the immediately following three calendar years unless the
previous emergency personal expense distribution is recontributed,
or the aggregate of the elective deferrals and employee contribu-
tions to the plan (the total amounts contributed in the case of an
IRA) subsequent to such previous emergency personal expense dis-
tribution is at least equal to the amount of such previous distribu-
tion which has not been recontributed.
EFFECTIVE DATE
The provision is effective for distributions made after December
31, 2023.
6. Allow additional nonelective contributions to SIMPLE plans
(sec. 106 of the bill and sec. 408(p) of the Code)
PRESENT LAW
Under present law, certain small businesses can establish a sim-
plified retirement plan called the savings incentive match plan for
employees (‘‘SIMPLE’’) retirement plan. SIMPLE plans can be
adopted by employers who employ 100 or fewer employees who re-
ceived at least $5,000 in compensation during the preceding year
and who do not maintain another employer-sponsored retirement
plan. A SIMPLE plan can be either an individual retirement ar-
rangement (an ‘‘IRA’’) for each employee or part of a qualified cash
or deferred arrangement (a section ‘‘401(k) plan’’).82 If established
in IRA form, a SIMPLE plan is not subject to the nondiscrimina-
tion rules generally applicable to qualified retirement plans (includ-
ing the top-heavy rules) and simplified reporting requirements
apply. If established as part of a 401(k) plan, the SIMPLE does not
have to satisfy the special nondiscrimination tests applicable to
401(k) plans and is not subject to the top-heavy rules. The other
qualified retirement plan rules continue to apply. Within limits,
contributions to a SIMPLE plan are not taxable until withdrawn.
Contributions to a SIMPLE plan (whether a SIMPLE IRA or
SIMPLE 401(k)) may include employee salary reduction contribu-
tions (‘‘elective deferrals’’’). Employers are also required to make ei-
ther a matching contribution or a nonelective contribution each
year. The matching contribution must generally be to up to three
percent of an employee’s compensation, and the nonelective con-
tribution must be of two percent of compensation (regardless of the
employee’s elective deferral).83 In the case of the nonelective con-
tribution, it is required to be provided only to employees who are
eligible to participate in the plan and who have at least $5,000 of
compensation from the employer for the year. No other contribu-
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82 Sec. 408(p); 401(k)(11).
83 Sec. 408(p)(2)(A)(iii); (B)(i).
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30
tions are permitted. Contributions to a SIMPLE account must be
fully vested.84
There is an annual threshold on the amount of an elective defer-
ral that an employee may make to a SIMPLE plan (subject to cost-
of-living adjustments). The elective deferrals under a SIMPLE plan
count toward the overall annual limit on elective deferrals an em-
ployee may make to this and other plans permitting elective defer-
rals.85 For 2022, the annual contribution limit for SIMPLE plans
is $14,000.86 If permitted by the SIMPLE plan, participants who
are age 50 or above at the end of the calendar year may also make
catch up contributions ($3,000 for 2022). In the case of a SIMPLE
IRA, the contribution limit that otherwise applies to IRAs is in-
creased to account for the limit on elective deferrals to a SIMPLE
IRA and the required employer matching or nonelective contribu-
tion.87
In the case of a SIMPLE IRA plan, if a participant receives a
payment or distribution from the plan during the first two years
the individual participates in the plan, such payment or distribu-
tion is not treated as a rollover contribution if it is paid to an IRA
or retirement plan, unless it is paid to another SIMPLE IRA
plan.88 In addition, the 10-percent tax on early distributions from
retirement plans is increased to 25 percent in the case of any such
distributions that are subject to the early distribution tax.89
REASONS FOR CHANGE
The Committee wishes to boost the ability of sponsors of SIMPLE
IRA plans and SIMPLE 401(k) plans to assist their workers in sav-
ing for retirement. Thus, the Committee believes it is appropriate
to increase the amount of nonelective contributions that are per-
mitted to be made under the plans.
EXPLANATION OF PROVISION
The provision expands the types of contributions that may be
made to a SIMPLE IRA plan or a SIMPLE 401(k) plan by also per-
mitting the employer to make nonelective contributions of a uni-
form percentage of up to 10 percent of compensation, not to exceed
$5,000. The $5,000 amount is indexed for inflation.90 As in the case
of the two-percent nonelective contribution under present law, the
nonelective contribution under the provision is provided only to em-
ployees who are eligible to participate in the arrangement and who
have at least $5,000 of compensation from the employer for the
year. The provision also increases the IRA contribution limit as it
applies to SIMPLE IRAs to account for the additional nonelective
contribution permitted under the provision.
EFFECTIVE DATE
The provision applies to taxable years beginning after December
31, 2023.
84 Secs. 401(k)(11)(A)(iii); 408(p)(3).
85 Secs. 401(a)(30); 402(g).
86 Secs. 401(k)(11)(B)(i)(I); 408(p)(2)(A)(ii).
87 Sec. 408(p)(8).
88 Sec. 408(d)(3)(G).
89
Sec. 72(t)(6).
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90 Note that the $5,000 amount of compensation that applies to determine employee eligibility
remains unindexed under the provision.
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31
7. Small immediate financial incentives for contributing to a plan
(sec. 107 of the bill and secs. 401(k), 403(b), and 4975 of the Code)
PRESENT LAW
Section 401(k) plans
A section 401(k) plan is a type of profit-sharing or stock bonus
plan that contains a qualified cash or deferred arrangement. Such
arrangements are subject to the rules generally applicable to quali-
fied defined contribution plans. In addition, special rules apply to
such arrangements. Employees who participate in a section 401(k)
plan may elect to have contributions made to the plan (elective de-
ferrals) rather than receive the same amount as current compensa-
tion.91 The maximum annual amount of elective deferrals that can
be made by an employee for a year is $20,500 (for 2022) or, if less,
the employee’s compensation.92 For an employee who attains age
50 by the end of the year, the dollar limit on elective deferrals is
increased by $6,500 (for 2022) (called ‘‘catch-up contributions’’).93
An employee’s elective deferrals must be fully vested. A section
401(k) plan may also provide for employer matching and nonelec-
tive contributions.
In order to constitute a qualified cash or deferred arrangement,
no benefit under the arrangement may be conditioned, directly or
indirectly, on the employee electing to have the employer make or
not make contributions under the arrangement in lieu of receiving
cash.94 However, matching contributions are exempt from this rule.
Tax-sheltered annuities (section 403(b) plans)
Section 403(b) plans are a form of tax-favored employer-spon-
sored plan that provide tax benefits similar to qualified retirement
plans. Section 403(b) plans may be maintained only by (1) chari-
table tax-exempt organizations, and (2) educational institutions of
State or local governments (that is, public schools, including col-
leges and universities). Many of the rules that apply to section
403(b) plans are similar to the rules applicable to qualified retire-
ment plans, including section 401(k) plans. Employers may make
nonelective or matching contributions to such plans on behalf of
their employees, and the plan may provide for employees to make
pre-tax elective deferrals, designated Roth contributions (held in
designated Roth accounts) 95 or other after-tax contributions. Gen-
erally, section 403(b) plans provide for contributions toward the
purchase of annuity contracts or provide for contributions to be
held in custodial accounts for each employee. In the case of con-
tributions to custodial accounts under a section 403(b) plan, the
amounts must be invested only in regulated investment company
stock.96
91 Elective deferrals generally are made on a pre-tax basis and distributions attributable to
elective deferrals are includible in income. However, a section 401(k) plan is permitted to in-
clude a ‘‘qualified Roth contribution program’’ that permits a participant to elect to have all or
a portion of the participant’s elective deferrals under the plan treated as after-tax Roth contribu-
tions. Certain distributions from a designated Roth account are excluded from income, even
though they include earnings not previously taxed.
92 Sec. 402(g).
93 Sec. 414(v).
94 Sec. 401(k)(4)(A).
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95 Sec. 402A.
96 Sec. 403(b)(7).
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32
Contributions to a section 403(b) plan must be fully vested. The
minimum coverage and general nondiscrimination requirements
applicable to a qualified retirement plan generally apply to a sec-
tion 403(b) plan and to employer matching and nonelective con-
tributions and after-tax employee contributions to the plan.97 If a
section 403(b) plan provides for elective deferrals, the plan is sub-
ject to a ‘‘universal availability’’ requirement under which all em-
ployees must be given the opportunity to make deferrals of more
than $200. In applying this requirement, nonresident aliens, stu-
dents, and employees who normally work less than 20 hours per
week may be excluded.98
Prohibited transactions
In general
The Code and the Employee Retirement Income Security Act of
1974 (‘‘ERISA’’) 99 prohibit certain transactions (‘‘prohibited trans-
action’’) between a qualified retirement plan and a disqualified per-
son (referred to as a ‘‘party in interest’’ under ERISA).100 The pro-
hibited transaction rules under the Code apply also to IRAs, Archer
MSAs, HSAs, and Coverdell ESAs.101
Disqualified persons include a fiduciary of the plan; a person pro-
viding services to the plan; an employer with employees covered by
the plan; an employee organization any of whose members are cov-
ered by the plan; certain owners, officers, directors, highly com-
pensated employees, family members, and related entities.102 A fi-
duciary includes any person who (1) exercises any discretionary au-
thority or discretionary control respecting management of the plan
or exercises any authority or control respecting management or dis-
position of the plan’s assets, (2) renders investment advice for a fee
or other compensation, direct or indirect, with respect to any mon-
eys or other property of the plan, or has any authority or responsi-
bility to do so, or (3) has any discretionary authority or discre-
tionary responsibility in the administration of the plan.103
Prohibited transactions include the following transactions,
whether direct or indirect, between a plan and a disqualified per-
son:
1. The sale or exchange or leasing of property,
97 These requirements do not apply to a governmental section 403(b) plan or a section 403(b)
plan maintained by a church or a qualified church-controlled organization as defined in section
3121(w).
98 For this purpose, nonresident has the meaning in section 410(b)(3)(C), and student has the
meaning in section 3121(b)(10). The universal availability requirement does not apply to a sec-
tion 403(b) plan maintained by a church or a qualified church-controlled organization.
99 Pub. L. No. 93–406, September 2, 1974.
100 Sec. 4975; ERISA sec. 406. The prohibited transaction rules of the Code and ERISA are
very similar; however, some differences exist between the two sets of rules. As mentioned above,
ERISA generally does not apply to governmental plans or church plans. The prohibited trans-
action rules under the Code also generally do not apply to governmental plans or church plans.
However, under section 503, the trust holding assets of a governmental or church plan may lose
its tax-exempt status in the case of a prohibited transaction listed in section 503(b). Before the
enactment of ERISA in 1974, section 503 applied to qualified retirement plans generally. In con-
nection with the enactment of section 4975 by ERISA, section 503 was amended to apply only
to governmental and church plans.
101 These are included in the definition of ‘‘plan’’ under section 4975(e)(1).
102 Sec. 4975(e)(2). Party in interest is defined similarly under ERISA section 3(14) with re-
spect to an employee benefit plan. Under ERISA, employee benefit plans, defined in ERISA sec-
tion 3(3), consist of two types: pension plans (that is, retirement plans), defined in ERISA sec-
tion 3(2), and welfare plans, defined in ERISA section 3(1).
103 Sec. 4975(d)(3); ERISA sec. 3(21)(A). Under ERISA, fiduciary also includes any person des-
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ignated under ERISA section 405(c)(1)(B) by a named fiduciary (that is, a fiduciary named in
the plan document) to carry out fiduciary responsibilities.
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33
2. The lending of money or other extension of credit,
3. The furnishing of goods, services, or facilities,
4. The transfer to, or use by or for the benefit of, the income or
assets of the plan,
5. In the case of a fiduciary, an act dealing with the plan’s in-
come or assets in the fiduciary’s own interest or for the fiduciary’s
own account, and
6. The receipt by a fiduciary of any consideration for the fidu-
ciary’s own personal account from any party dealing with the plan
in connection with a transaction involving the income or assets of
the plan.104
Exemptions from prohibited transaction treatment
Certain transactions are statutorily exempt from prohibited
transaction treatment, for example, certain loans to plan partici-
pants and arrangements with a disqualified person for legal, ac-
counting or other services necessary for the establishment or oper-
ation of a plan if no more than reasonable compensation is paid for
the services.105
Sanctions for violations
Under the Code, if a prohibited transaction occurs, the disquali-
fied person who participated in the transaction is generally subject
to a two-tiered excise tax. The first-tier tax is 15 percent of the
amount involved in the transaction. The second-tier tax, imposed
if the prohibited transaction is not corrected within a certain pe-
riod, is 100 percent of the amount involved. In the case of an IRA,
HSA, Archer MSA or Coverdell ESA, the sanction for some prohib-
ited transactions is the loss of tax favored status, rather than an
excise tax. A private right of action is not available for a Code vio-
lation.
Under ERISA, the Department of Labor (‘‘DOL’’) may assess a
civil penalty against a person who engages in a prohibited trans-
action, other than a transaction with a plan covered by the prohib-
ited transaction rules of the Code.106 The penalty may not exceed
five percent of the amount involved in the transaction for each year
or part of a year that the prohibited transaction continues. If the
prohibited transaction is not corrected within 90 days after notice
from DOL, the penalty can be up to 100 percent of the amount in-
volved in the transaction. A prohibited transaction by a fiduciary
may also be the basis for an action for a breach of fiduciary respon-
sibility by DOL, a plan participant or beneficiary, or another plan
fiduciary (as discussed above).
104 Sec. 4975(c)(1)(A)–(F) and ERISA sec. 406(a)(1)(A)–(D) and (b)(1) and (3). Under ERISA
section 406(a)(1), a plan fiduciary is prohibited from causing the plan to engage in a transaction
described in paragraphs (A)–(D). ERISA section 406(b)(2) also prohibits a plan fiduciary, in the
fiduciary’s individual capacity or any other capacity, from acting in any transaction involving
the plan on behalf of a party (or represent a party) whose interests are adverse to the interests
of the plan or the interests of plan participants or beneficiaries. ERISA section 406(a)(1)(E) and
(a)(2) relate to limitations under ERISA section 407 on a plan’s acquisition or holding of em-
ployer securities and real property.
105 Sec. 4975(d) and ERISA sec. 408. The Code and ERISA also provide for the grant of admin-
istrative exemptions, on either an individual or class basis, subject to a finding that the exemp-
tion is administratively feasible, in the interests of the plan and of its participants and bene-
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ficiaries, and protective of the rights of participants and beneficiaries of the plan.
106 ERISA sec. 502(i).
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34
REASONS FOR CHANGE
The Committee recognizes that individuals can be especially mo-
tivated by small immediate financial incentives. Thus, in addition
to providing matching contributions as a long-term incentive for
employees to contribute to a section 401(k) plan or section 403(b)
plan, the Committee wishes to provide employers the flexibility to
be able to offer small immediate financial incentives, such as gift
cards in small amounts, to employees who participate in the em-
ployer’s retirement plan.
EXPLANATION OF PROVISION
The provision modifies the rule applicable to section 401(k) plans
that prohibits the conditioning of benefits (other than matching
contributions) on an employee’s election to defer. As modified, the
rule exempts, in addition to matching contributions, a de minimis
financial incentive provided to employees who elect to make elec-
tive deferrals under the plan. Thus, a section 401(k) plan will not
fail to include a qualified cash or deferred arrangement merely be-
cause it conditions a de minimis financial incentive on an employ-
ee’s election to make an elective deferral. This exemption does not
apply in the case of a de minimis financial incentive provided to
employees who elect not to make elective deferrals under the plan.
Similarly, in the case of a section 403(b) plan, the provision pro-
vides that a plan does not fail to satisfy the universal availability
requirement 107 solely by reason of offering a de minimis financial
incentive to employees who elect to have the employer make con-
tributions pursuant to a salary reduction agreement.
In addition, under the provision, the provision of such de minimis
financial incentives under a section 401(k) plan or a section 403(b)
plan is not treated as a prohibited transaction under the Code.108
EFFECTIVE DATE
The provision applies to plan years beginning after the date of
enactment.
8. Indexing IRA catch-up limit (sec. 108 of the bill and sec. 219 of
the Code)
PRESENT LAW
There are two general types of individual retirement arrange-
ments (‘‘IRAs’’): traditional IRAs and Roth IRAs.109 The total
amount that an individual may contribute to one or more IRAs for
a year is generally limited to the lesser of: (1) a dollar amount
($6,000 for 2022); and (2) the amount of the individual’s compensa-
tion that is includible in gross income for the year.110 In the case
of an individual who has attained age 50 by the end of the taxable
year, the dollar amount is increased by $1,000 (referred to as a
‘‘catch-up contribution’’). In the case of a married couple, contribu-
107 Sec. 403(b)(12)(A)(ii).
108 Under section 4975. Modifications to Labor provisions are necessary to effectuate this pro-
vision.
109 Secs. 408 and 408A.
110 Sec. 219(b)(2) and (5), as referenced in secs. 408(a)(1) and (b)(2)(B) and 408A(c)(2). Under
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section 4973, IRA contributions in excess of the applicable limit are generally subject to an ex-
cise tax of six percent per year until withdrawn.
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35
tions can be made up to the dollar limit for each spouse if the com-
bined compensation of the spouses that is includible in gross in-
come is at least equal to the contributed amount. An individual
may make contributions to a traditional IRA (up to the contribu-
tion limit) without regard to his or her adjusted gross income.
An individual may deduct his or her contributions to a tradi-
tional IRA if neither the individual nor the individual’s spouse is
an active participant in an employer-sponsored retirement plan. If
an individual or the individual’s spouse is an active participant in
an employer-sponsored retirement plan, the deduction is phased
out for taxpayers with adjusted gross income over certain levels.111
Individuals with adjusted gross income below certain levels may
make contributions to a Roth IRA (up to the contribution limit).112
Contributions to a Roth IRA are not deductible.
REASONS FOR CHANGE
The Committee wishes to enhance an individual’s ability to save
for retirement, and therefore believes it is appropriate to increase
the amount of catch-up contributions that an individual may con-
tribute to an IRA based on increases in cost of living.
EXPLANATION OF PROVISION
Under the provision, the $1,000 amount that may be contributed
as a catch-up contribution by individuals who attain age 50 by the
end of the taxable year is increased for cost-of-living adjustments
for taxable years beginning after date of enactment.
EFFECTIVE DATE
The provision applies to taxable years beginning after the date
of enactment.
9. Higher catch-up limit to apply at age 60, 61, 62, and 63 (sec. 109
of the bill and sec. 414(v) of the Code)
PRESENT LAW
Under certain types of employer-sponsored retirement plans, in-
cluding section 401(k) plans, section 403(b) plans, SIMPLE
IRAs,113 and governmental section 457(b) plans, an employee may
elect to have contributions (elective deferrals) made to the plan,
rather than receive the same amount in cash. The maximum an-
nual amount of elective deferrals that can be made by an employee
for a year is $20,500 for 2022 ($14,000 in the case of a SIMPLE
IRA or SIMPLE section 401(k) plan 114) or, if less, the employee’s
compensation.115 For individuals who will attain age 50 by the end
of the taxable year, this limit is increased to allow additional
‘‘catch-up contributions.’’ 116
A section 401(k) plan, section 403(b) plan, and governmental sec-
tion 457(b) plan may generally permit catch-up contributions up to
111 Sec. 219(g).
112 Sec. 408A(c)(3).
113 Sec. 408(p).
114 Sec. 401(k)(11).
115 Secs. 402(g); 457(c). This limit applies to total elective deferrals under all of a participant’s
section 401(k) plans and section 403(b) plans but applies separately to any governmental section
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457(b) plan. Sec. 414(v).
116 Sec. 414(v).
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$6,500 in 2022 (indexed for inflation). A SIMPLE IRA or SIMPLE
section 401(k) plan may permit catch-up contributions up to $3,000
in 2022. If elective deferral and catch-up contributions are made to
both a section 401(k) plan and a section 403(b) plan for the same
employee, a single limit applies to the elective deferrals under both
plans. Special contribution limits apply to certain employees under
a section 403(b) plan maintained by a church. In addition, under
a special catch-up rule, an increased elective deferral limit applies
under a plan maintained by an educational organization, hospital,
home health service agency, health and welfare service agency,
church, or convention or association of churches in the case of em-
ployees who have completed 15 years of service. In this case, the
limit is increased by the least of (1) $3,000, (2) $15,000, reduced
by the employee’s total elective deferrals in prior years, and (3)
$5,000 times the employee’s years of service, reduced by the em-
ployee’s total elective deferrals in prior years.
The section 457(b) plan limits apply separately from the com-
bined limit applicable to section 401(k) and section 403(b) plan con-
tributions, so that an employee covered by a governmental section
457(b) plan and a section 401(k) or section 403(b) plan can con-
tribute the full amount to each plan. In addition, under a special
catch-up rule, for one or more of the participant’s last three years
before normal retirement age, the otherwise applicable limit is in-
creased to the lesser of (1) two times the normal annual limit
($41,000 for 2022) or (2) the sum of the otherwise applicable limit
for the year plus the amount by which the limit applicable in pre-
ceding years of participation exceeded the deferrals for that year.
Catch-up contributions are not subject to any other contribution
limits and are not taken into account in applying other contribu-
tion limits. In addition, such contributions are not subject to appli-
cable nondiscrimination rules. However, a plan fails to meet the
applicable nondiscrimination requirements under section 401(a)(4)
with respect to benefits, rights, and features unless the plan allows
all eligible individuals participating in the plan to make the same
election with respect to catch-up contributions. For purposes of this
rule, all plans of related employers are treated as a single plan. In
addition, the special nondiscrimination rule for mergers and acqui-
sitions applies for this purpose.117
An employer is permitted to make matching contributions with
respect to catch-up contributions. Any such matching contributions
are subject to the normally applicable rules.
REASONS FOR CHANGE
Under present law, the Code permits catch-up contributions at a
time when individuals are typically more advanced in their careers
and in a better financial position to contribute additional funds to
their retirement plans. In order to increase such individuals’ ability
to grow their retirement savings, the Committee believes it is ap-
propriate to increase the limit on catch-up contributions for a lim-
ited number of years before the individual reaches retirement age
under the plan.
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117 Secs. 410(b)(6)(C); 414(v)(4)(B).
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37
EXPLANATION OF PROVISION
Under the provision, the limit on catch-up contributions is in-
creased for individuals who would attain age 60, 61, 62, or 63 (but
who are not older than age 63), by the end of the taxable year. A
section 401(k) plan (other than a SIMPLE section 401(k) plan), sec-
tion 403(b) plan, or governmental section 457(b) plan may increase
the limit on catch-up contributions for such individuals to the less-
er of (1) $10,000 or (2) the participant’s compensation for the year
reduced by any other elective deferrals of the participant for the
year.118 A SIMPLE section 401(k) plan or a SIMPLE IRA may in-
crease the limit on catch-up contributions for such individuals to
the lesser of (1) $5,000 or (2) the participant’s compensation for the
year reduced by any other elective deferrals of the participant for
the year. Both the $10,000 amount and the $5,000 amount are in-
dexed for inflation beginning in 2025.
EFFECTIVE DATE
The provision applies to taxable years beginning after December
31, 2024.
10. Eliminate the ‘‘first day of the month’’ requirement for govern-
mental section 457(b) plans (sec. 110 of the bill and sec. 457(b)
of the Code)
PRESENT LAW
Section 457(b) plans
Among the various types of tax-favored retirement plans under
present law are eligible deferred compensation plans under section
457(b). A section 457(b) plan is a plan maintained by a State or
local government or a tax-exempt organization that meets certain
requirements. Generally, the maximum amount that can be de-
ferred under a section 457(b) plan by an individual during any tax-
able year is limited to the lesser of 100 percent of the participant’s
includible compensation or the applicable dollar amount for the
taxable year. The applicable dollar amount for 2022 is $20,500 and
is indexed for future taxable years. For an employee who attains
age 50 by the end of the year, the dollar limit on deferrals is in-
creased by $6,500 (for 2022) 119 (called catch-up contributions).120 A
participant’s includible compensation means the compensation of
the participant from the eligible employer for the taxable year.
One of the requirements to be an eligible deferred compensation
plan under section 457(b) is that a participant’s compensation is
deferred for any calendar month only if an agreement providing for
such deferral has been entered into before the beginning of such
month.121
REASONS FOR CHANGE
The Committee believes that the rules for deferral of compensa-
tion should be consistent between section 401(k), section 403(b) and
118 This increase also applies to catch-up contributions under a simplified employee pension
under section 408(k) that includes a salary reduction arrangement.
119 For 2020 and 2021, this amount is $6,500.
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120 Sec. 414(v).
121 Sec. 457(b)(4).
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38
governmental section 457(b) plans, and that a participant in a gov-
ernmental section 457(b) plan should have more flexibility on the
timing of deferral elections under such a plan.
EXPLANATION OF PROVISION
The provision provides that compensation is deferred under a
governmental section 457(b) plan only if an agreement providing
for such deferral has been entered into before the compensation is
currently available to the individual, consistent with the rule for
section 401(k) and 403(b) plans. In the case of a section 457(b) plan
maintained by a tax-exempt organization, the provision provides
that compensation is deferred under the plan for a calendar month
only if an agreement providing for such deferral has been entered
into before the beginning of such month.
EFFECTIVE DATE
The provision applies to taxable years beginning after the date
of enactment.
11. Tax treatment of certain non-trade or business SEP
contributions (sec. 111 of the bill and sec. 4972 of the Code)
PRESENT LAW
Tax on nondeductible contributions to qualified employer plans
A 10-percent excise tax applies to nondeductible contributions
made to a qualified employer plan.122 The tax is imposed on the
employer. For this purpose, nondeductible contributions generally
are the sum of (1) the excess of the amount contributed for the tax-
able year by the employer over the amount allowable as a deduc-
tion 123 for contributions to the plan, and (2) the amount deter-
mined as nondeductible 124 for the preceding year, reduced by any
portion returned to the employer and by the deductible portion for
that year.125
An exception to the application of the 10-percent excise tax ap-
plies in certain situations, including in the case of contributions to
a SIMPLE IRA 126 or to a Simple 401(k) plan 127 which are not de-
ductible solely because the contributions are not made in connec-
tion with a trade or business (for example, the contributions are
made with respect to a household employee).
The exception does not apply to contributions to a SEP IRA plan.
SEP IRA plans
A Simplified Employee Pension (‘‘SEP’’) plan is a type of em-
ployer-sponsored retirement plan whereby generally only the em-
ployer makes contributions to the plan.128 The amount of the con-
tribution to the SEP IRA plan is up to the lesser of 25 percent of
the employee’s compensation or the dollar limit applicable to con-
122 Sec. 4972.
123 As determined under section 404 without regard to section 404(e).
124 Under section 4972(c).
125 As determined under section 404 without regard to section 404(e).
126 Within the meaning of section 408(p).
127 Within the meaning of section 401(k)(11).
dlhill on DSK120RN23PROD with HEARING
128 Sec. 408(k). Certain grandfathered SEP plans may permit salary-reduction arrangements
(if the SEP was in existence on December 31, 1996). Sec. 408(k)(6)(H).
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39
tributions to a qualified defined contribution plan ($61,000 for
2022). A traditional IRA is set up for each eligible employee, and
all contributions must be fully vested. Any employee must be eligi-
ble to participate in the SEP if the employee has (1) attained age
21, (2) performed services for the employer during at least three of
the immediately preceding five years, and (3) received at least $650
(for 2022) in compensation from the employer for the year.129 Con-
tributions to a SEP generally must bear a uniform relationship to
compensation.
REASONS FOR CHANGE
The Committee believes this provision is needed to encourage
household employers to provide a retirement plan for their employ-
ees by permitting such employers to make contributions to a SEP
IRA retirement plan without incurring a 10-percent excise tax on
the contribution. This will make it more probable that employers
will make contributions on behalf of household employees who
might not otherwise have tax-favored retirement savings because
their work is not in connection with a trade or business of their
employer.
EXPLANATION OF PROVISION
The provision extends the exception from the 10-percent excise
tax to contributions to a SEP IRA which are not deductible solely
because the contributions are not made in connection with a trade
or business.
EFFECTIVE DATE
The provision is effective for taxable years beginning after the
date of enactment.
12. Elimination of additional tax on corrective distributions of
excess contributions (sec. 112 of the bill and sec. 72 of the Code)
PRESENT LAW
Early withdrawal tax
A distribution from a tax-qualified plan described in section
401(a), a tax-sheltered annuity plan (‘‘section 403(b) plan’’), an eli-
gible deferred compensation plan of a State or local government
employer, or an individual retirement arrangement (an ‘‘IRA’’) gen-
erally is included in income for the year distributed.130 In addition,
unless an exception applies, a distribution from a qualified retire-
ment plan, a section 403(b) plan, or an IRA received before age
591⁄2 is subject to a 10-percent additional tax (referred to as the
‘‘early withdrawal tax’’) on the amount includible in income.131
129 The annual compensation limit for SEPs is $290,000.
130 Secs. 401(a), 403(a), 403(b), 457(b), and 408. Under section 3405, distributions from these
plans are generally subject to income tax withholding unless the recipient elects otherwise. In
addition, certain distributions are subject to mandatory income tax withholding at a 20-percent
rate unless the distribution is rolled over.
dlhill on DSK120RN23PROD with HEARING
131 Sec. 72(t). The 10-percent early withdrawal tax does not apply to distributions from a gov-
ernmental section 457(b) plan.
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IRA rules
There are two basic types of IRAs: traditional IRAs,132 to which
both deductible and nondeductible contributions may be made,133
and Roth IRAs, to which only nondeductible contributions may be
made by certain individuals.134 For a traditional IRA, an eligible
contributor may deduct the contributions made for the year, but
distributions are includible in gross income to the extent attrib-
utable to earnings on the account and the deductible contributions.
For a Roth IRA, all contributions are after-tax (that is, no deduc-
tion is allowed), but distributions are not includible in gross income
if certain requirements are satisfied.135 Distributions from a Roth
IRA that do not meet those requirements, however, are not quali-
fied distributions and are includible in gross income to the extent
attributable to earnings. Amounts that are includible in income
that are withdrawn from a traditional IRA or a Roth IRA before
attainment of age 591⁄2 are subject to the 10-percent early with-
drawal tax unless an exception applies.
An annual limit applies to contributions to IRAs. The contribu-
tion limit is coordinated so that the aggregate maximum amount
that can be contributed to all of an individual’s IRAs (both tradi-
tional and Roth) for a taxable year is the lesser of a certain dollar
amount ($6,000 for 2022) or the individual’s compensation. An eli-
gible individual who has attained age 50 before the end of the tax-
able year may also make catch-up contributions to an IRA. For this
purpose, the aggregate dollar limit is increased by $1,000.
To the extent that contributions to an IRA exceed the contribu-
tion limits, an excise tax equal to six percent of the excess amount
applies.136 However, any amount contributed for a taxable year
that is distributed with allocable income by the due date for the
taxpayer’s return for the year (including extensions) will be treated
as though not contributed for the year.137 To receive this treat-
ment, the taxpayer must not have claimed a deduction for the
amount of the distributed contribution.
Currently, excess contributions are not expressly exempt from
the 10-percent early withdrawal tax and any income attributable to
returned excess contributions may be subject to the additional tax.
REASONS FOR CHANGE
Under present law, excess contributions that are returned with
allocable income within specified timeframes are treated as though
not contributed to the IRA provided that the taxpayer did not claim
a deduction for those contribution amounts. The Committee be-
132 Sec. 408.
133 Secs. 219 and 408. An individual may make deductible contributions to a traditional IRA
up to the IRA contribution limit if neither the individual nor the individual’s spouse is an active
participant in an employer-sponsored retirement plan. If an individual (or the individual’s
spouse) is an active participant in an employer-sponsored retirement plan, the deduction is
phased out for taxpayers with modified adjusted gross income (AGI) for the taxable year over
certain indexed levels. To the extent an individual cannot or does not make deductible contribu-
tions to a traditional IRA or contributions to a Roth IRA for the taxable year, the individual
may make nondeductible contributions to a traditional IRA, subject to the same contribution
limits as deductible contributions, including catch-up contributions.
134 Sec. 408A. Individuals with modified AGI below certain levels may make nondeductible
contributions to a Roth IRA. The maximum annual contribution that can be made to a Roth
IRA is phased out for taxpayers with AGI for the taxable year over certain indexed levels.
135 Sec. 408A(d).
dlhill on DSK120RN23PROD with HEARING
136 Secs. 4973(b) and (f).
137 Sec. 408(d)(4).
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41
lieves that it is therefore appropriate that any interest or earnings
attributable to those returned excess contributions be clearly ex-
empt from the 10-percent early withdrawal tax.
EXPLANATION OF PROVISION
The provision expressly exempts from the 10-percent early with-
drawal tax distribution amounts attributable to income on excess
contributions to an IRA if those contribution amounts are returned
with the amount of attributable income by the due date for the tax-
payer’s return for the year (including extensions), provided the tax-
payer did not claim a deduction for the amount of the distributed
contribution.
EFFECTIVE DATE
The provision is effective for any determination of, or affecting,
liability for taxes, interest or penalties that is made on or after the
date of enactment (without regard to whether the act or failure to
act upon which the determination is based occurred before the date
of enactment).
13. Employer may rely on employee certifying that deemed hard-
ship distribution conditions are met (sec. 113 of the bill and secs.
401(k), 403(b), and 457(b) of the Code)
PRESENT LAW
Section 401(k) plan and section 403(b) plan hardship distributions
A qualified defined contribution plan may include a qualified
cash or deferred arrangement, under which employees may elect to
have contributions made to the plan (referred to as ‘‘elective defer-
rals’’) rather than receive the same amount as current compensa-
tion (referred to as a ‘‘section 401(k) plan’’). A section 403(b) plan
may also include an elective deferral arrangement. Amounts attrib-
utable to elective deferrals under a section 401(k) plan or a section
403(b) plan generally cannot be distributed before the occurrence of
one or more specified events, including financial hardship of the
employee.138
A hardship distribution from a section 401(k) plan may include,
in addition to the employee’s elective deferrals, qualified matching
contributions, qualified nonelective contributions, and earnings on
any of these amounts.139 A hardship distribution from a section
403(b) plan may include elective deferrals, but not earnings on
those deferrals.140 Qualified matching contributions and qualified
nonelective contributions to a section 403(b) plan that are in a cus-
todial account are not eligible to be distributed on account of hard-
ship.141 A distribution under a section 401(k) plan is not treated
as failing to be on account of hardship solely because the employee
does not take any available plan loan. Distributions on account of
138 Secs. 401(k)(2)(B)(i)(IV) and 403(b)(7)(A)(i)(V) and (11)(B). Other types of contributions may
also be subject to this restriction.
139 Sec. 401(k)(14). Qualified matching contributions (as defined in section 401(k)(3)(D)(ii)(I))
and qualified nonelective contributions (as defined in section 401(m)(4)(C)) may be used to en-
able the plan to satisfy certain nondiscrimination tests, to prevent discrimination in favor of
highly compensated employees.
dlhill on DSK120RN23PROD with HEARING
140 Sec. 403(b)(11).
141 Treas. Reg. sec. 1.403(b)–6(c).
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42
hardship may be subject to an additional 10-percent early with-
drawal tax.142
Applicable Treasury regulations provide that a distribution is
made on account of hardship only if the distribution is made on ac-
count of an immediate and heavy financial need of the employee
and is necessary to satisfy the financial need.143 Generally, the de-
termination of whether an employee has an immediate and heavy
financial need is based on the relevant facts and circumstances.
However, a distribution is deemed to be made on account of an im-
mediate and heavy financial need if it is for: (1) generally, deduct-
ible expenses for medical care; 144 (2) costs directly related to the
purchase of a principal residence for the employee (excluding mort-
gage payments); (3) payment of tuition, related educational fees,
and room and board expenses, for up to the next 12 months of post-
secondary education for the employee, the employee’s spouse, child,
or dependent,145 or for a primary beneficiary under the plan; (4)
payments necessary to prevent the eviction of the employee from
the employee’s principal residence or foreclosure on the mortgage
on that residence; (5) payments for burial or funeral expenses for
the employee’s deceased parent, spouse, child, or dependent, or for
a deceased primary beneficiary under the plan; (6) expenses for the
repair of damage to the employee’s principal residence that would
qualify for the casualty deduction; 146 or (7) expenses and losses (in-
cluding loss of income) incurred by the employee on account of a
federally-declared disaster.147
A distribution is treated as necessary to satisfy the financial
need under the Treasury regulations only to the extent that the
amount of the distribution does not exceed the amount required. In
addition, in order to be treated as necessary to satisfy the financial
need, the following requirements must be met: (1) the employee
has obtained all other currently available distributions under all
plans of the employer; (2) the employee has provided to the plan
administrator a written representation that he or she has insuffi-
cient cash or other liquid assets reasonably available to satisfy the
need; and (3) the plan administrator does not have actual knowl-
edge contrary to the representation.148
Governmental section 457(b) plan distributions upon unforeseeable
emergency
An eligible deferred compensation plan of a governmental em-
ployer (referred to as a ‘‘governmental section 457(b) plan’’) is gen-
erally similar to a qualified cash or deferred arrangement under a
section 401(k) plan in that it consists of elective deferrals made at
142 Sec. 72(t).
143 Treas. Reg. secs. 1.401(k)–1(d)(3); 1.403(b)–6(d)(2).
144 Expenses for (or necessary to obtain) medical care that would be deductible under section
213(d), determined without regard to the limitations in section 213(a) (relating to the applicable
percentage of adjusted gross income and the recipients of the medical care) provided that, if the
recipient of the medical care is not listed in section 213(a), the recipient is a primary beneficiary
under the plan.
145 As defined in section 152 without regard to section 152(b)(1), (b)(2), and (d)(1)(B).
146 Under section 165 (determined without regard to section 165(h)(5) and whether the loss
exceeds 10 percent of adjusted gross income).
147 A disaster declared by the Federal Emergency Management Agency (‘‘FEMA’’) under the
Robert T. Stafford Disaster Relief and Emergency Assistance Act, Pub. L. No. 100–707, provided
that the employee’s principal residence or principal place of employment at the time of the dis-
aster was located in an area designated by FEMA for individual assistance with respect to the
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disaster.
148 Treas. Reg. sec. 1.401(k)–1(d)(3)(iii).
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43
the election of an employee. Such deferrals generally may not be
distributed from the plan before the occurrence of one or more spec-
ified events, including when the participant is faced with an un-
foreseeable emergency.149 Distributions from a governmental sec-
tion 457(b) plan are not subject to the 10-percent early withdrawal
tax.150
Under Treasury regulations, the unforeseeable emergency must
be defined in the plan as a severe financial hardship of the partici-
pant or beneficiary resulting from an illness or accident of the par-
ticipant or beneficiary, or the participant’s or beneficiary’s spouse
or dependent; 151 loss of the participant’s or beneficiary’s property
due to casualty; 152 or other similar extraordinary and unforesee-
able circumstances arising as a result of events beyond the control
of the participant or the beneficiary.153 The Treasury regulations
provide the following as examples of unforeseeable emergencies: (1)
the imminent foreclosure of or eviction from the participant’s or
beneficiary’s primary residence; (2) the need to pay for medical ex-
penses, including non-refundable deductibles, as well as for the cost
of prescription drug medication; and (3) the need to pay for the fu-
neral expenses of a spouse or a dependent of a participant or bene-
ficiary. The purchase of a home and the payment of college tuition
are not unforeseeable emergencies, unless such expenses otherwise
qualify.
In general, under the regulations, whether a participant or bene-
ficiary is faced with an unforeseeable emergency permitting a dis-
tribution is to be determined based on the relevant facts and cir-
cumstances of each case, but, in any case, a distribution on account
of an unforeseeable emergency may not be made to the extent that
such emergency is or may be relieved through reimbursement or
compensation from insurance or otherwise, by liquidation of the
participant’s assets, to the extent the liquidation of such assets
would not itself cause severe financial hardship, or by cessation of
deferrals under the plan. Distributions on account of an unforesee-
able emergency must be limited to the amount reasonably nec-
essary to satisfy the emergency need.
REASONS FOR CHANGE
The Committee believes that the existing administrative barriers
to taking hardship withdrawals from retirement plans should be
reduced, making it easier for participants who wish to access re-
tirement funds in times of financial need. Allowing such access will
encourage workers to save more in retirement plans since the
funds will not be locked away in the case of a financial emergency.
The Committee believes that generally allowing self-certification is
a logical step in light of the success of the coronavirus-related dis-
tribution self-certification rules and the current hardship regula-
tions under which employees self-certify as to the unavailability of
funds to address the hardship.
149 Sec. 457(d)(1)(A)(iii).
150 Secs. 72(t)(1); 4974(c).
151 As defined in section 152, and, for taxable years beginning on or after January 1, 2005,
without regard to section 152(b)(1), (b)(2), and (d)(1)(B).
152 This includes the need to rebuild a home following damage to a home not otherwise cov-
dlhill on DSK120RN23PROD with HEARING
ered by homeowner’s insurance, such as damage that is the result of a natural disaster.
153 Treas. Reg. sec. 1.457–6(c)(2).
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44
EXPLANATION OF PROVISION
Under the provision, in determining whether a distribution is
due to an employee hardship, the plan administrator of a section
401(k) plan or a section 403(b) plan may rely on the employee’s
written certification that the distribution is on account of a finan-
cial need of a type that is deemed in Treasury regulations to be an
immediate and heavy financial need. Thus, if the employee certifies
that the financial need for the hardship distribution is one of the
types of deemed immediate and heavy financial needs that are de-
scribed in the Treasury regulations,154 such as funeral expenses for
the employee’s deceased parent, the distribution is treated as being
made on account of an immediate and heavy financial need. In ad-
dition, under the provision, the plan administrator may rely on the
employee’s written certification that the distribution is not in ex-
cess of the amount required to satisfy the financial need, and that
the employee has no alternative means reasonably available to sat-
isfy such financial need.
Similarly, with respect to a governmental section 457(b) plan, in
determining whether a participant’s distribution is made when the
participant is faced with an unforeseeable emergency, a plan ad-
ministrator may rely on the participant’s written certification that
the distribution is on account of an unforeseeable emergency of a
type that is specifically described in Treasury regulations as an un-
foreseeable emergency,155 that the distribution does not exceed the
amount reasonably necessary to satisfy the emergency need, and
that the participant has no alternative means reasonably available
to satisfy such financial need.
In the case of each of these types of plans, the provision provides
that the Secretary may by regulation provide for exceptions to the
plan administrator’s ability to rely on participant certification
where the plan administrator has actual knowledge to the contrary.
The Secretary may also by regulation adopt procedures to address
misrepresentation.
EFFECTIVE DATE
The provision is effective for plan years beginning after the date
of enactment.
14. Penalty-free withdrawals from retirement plans for individuals
in case of domestic abuse (sec. 114 of the bill and sec. 72(t) of
the Code)
PRESENT LAW
Distributions from tax-favored retirement plans
A distribution from a tax-qualified plan described in section
401(a) (a ‘‘qualified retirement plan’’), a tax-sheltered annuity plan
(a ‘‘section 403(b) plan’’), an eligible deferred compensation plan of
a State or local government employer (a ‘‘governmental section
457(b) plan’’), or an individual retirement arrangement (an ‘‘IRA’’)
generally is included in income for the year distributed.156 These
154 Treas. Reg. sec. 1.401(k)–1(d)(3)(ii)(B), or any successor regulation.
155 Treas. Reg. sec. 1.457–6(c)(2)(i), or any successor regulation.
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156 Secs. 401(a), 403(a), 403(b), 457(b), and 408. Under section 3405, distributions from these
plans are generally subject to income tax withholding unless the recipient elects otherwise. In
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45
plans are referred to collectively as ‘‘eligible retirement plans.’’ 157
In addition, unless an exception applies, a distribution from a
qualified retirement plan, a section 403(b) plan, or an IRA received
before age 591⁄2 is subject to a 10-percent additional tax (referred
to as the ‘‘early withdrawal tax’’) on the amount includible in in-
come.158
In general, a distribution from an eligible retirement plan may
be rolled over to another eligible retirement plan within 60 days,
in which case the amount rolled over generally is not includible in
income. The IRS has the authority to waive the 60-day requirement
if failure to waive the requirement would be against equity or good
conscience, including cases of casualty, disaster, or other events be-
yond the reasonable control of the individual.159
The terms of a qualified retirement plan, section 403(b) plan, or
governmental section 457(b) plan generally determine when dis-
tributions are permitted. However, for many types of plans, restric-
tions apply to distributions before an employee’s termination of em-
ployment, referred to as ‘‘in-service’’ distributions or withdrawals.
Despite such restrictions, an in-service distribution from a qualified
retirement plan that includes a qualified cash-or-deferred arrange-
ment (a ‘‘section 401(k) plan’’) or a section 403(b) plan may be per-
mitted in the case of financial hardship. Similarly, a governmental
section 457(b) plan may permit distributions in the case of an un-
foreseeable emergency. Under a qualified retirement plan that is a
pension plan (i.e., defined benefit pension plan or money purchase
pension plan), distributions generally may be made only in the
event of retirement, death, disability, or other separation from
service, although in-service distributions may be permitted after
age 591⁄2.160
REASONS FOR CHANGE
The Committee recognizes that a domestic abuse victim may
need funds to escape an unsafe situation. The Committee believes
that such individuals should be able to access funds from retire-
ment plans when needed, with minimal administrative hurdles and
without being subject to the 10-percent early withdrawal tax that
otherwise generally applies to early distributions from a retirement
plan. In addition, the Committee wishes to permit such individuals
to recontribute such withdrawals to a retirement plan, so that indi-
viduals who are able to later repay the funds do not miss out on
valuable compounding of earnings on retirement savings.
addition, certain distributions from a qualified retirement plan, a section 403(b) plan, or a gov-
ernmental section 457(b) plan are subject to mandatory income tax withholding at a 20-percent
rate unless the distribution is rolled over.
157 Sec. 402(c)(8)(B). Eligible retirement plans also include annuity plans described in section
403(a).
158 Sec. 72(t). The 10-percent early withdrawal tax does not apply to distributions from a gov-
ernmental section 457(b) plan.
159 Rev. Proc. 2020–46, 2020–45 I.R.B. 995, provides for a self-certification procedure (subject
to verification on audit) that may be used by a taxpayer claiming eligibility for a waiver of the
60-day requirement with respect to a rollover into a plan or IRA in certain specified cir-
cumstances.
160 Sec. 401(a)(36); Treas. Reg. secs. 1.401–1(b)(1)(i) and 1.401(a)–1(b)(1)(i). Section 401(k)
dlhill on DSK120RN23PROD with HEARING
plans, section 403(b) plans, and governmental section 457(b) plans also may permit in-service
distributions after age 591⁄2.
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46
EXPLANATION OF PROVISION
Under the provision, an exception to the 10-percent early with-
drawal tax applies in the case of an eligible distribution to a do-
mestic abuse victim. In addition, such eligible distributions may be
recontributed to applicable eligible retirement plans, subject to cer-
tain requirements.
Eligible distributions to a domestic abuse victim
The provision provides that an eligible distribution to a domestic
abuse victim is a distribution from an applicable eligible retirement
plan to an individual if made during the one-year period beginning
on a date on which the individual is a victim of domestic abuse by
a spouse or domestic partner. Domestic abuse is defined under the
provision as physical, psychological, sexual, emotional, or economic
abuse, including efforts to control, isolate, humiliate, or intimidate
the victim, or to undermine the victim’s ability to reason independ-
ently, including by means of abuse of the victim’s child or another
family member living in the household. In making such a distribu-
tion, a plan administrator may rely on the participant’s certifi-
cation that the distribution is an eligible distribution to a domestic
abuse victim.
An applicable eligible retirement plan, for this purpose, generally
includes eligible retirement plans other than defined benefit plans,
including qualified retirement plans, section 403(b) plans, govern-
mental section 457(b) plans, and IRAs. It does not include a plan
that is subject to requirements relating to providing joint and sur-
vivor annuities and preretirement survivor annuities.161 The max-
imum aggregate amount which may be treated as an eligible dis-
tribution to a domestic abuse victim by an individual is the lesser
of $10,000 or 50 percent of the present value of the employee’s ac-
count under the plan.162 An eligible distribution to a domestic
abuse victim is treated as meeting requirements relating to the
timing of distributions under a section 401(k) plan, section 403(b)
plan, or governmental section 457(b) plan.163
Under the provision, an employer plan is not treated as violating
any Code requirement merely because it treats a distribution to an
individual (that would otherwise be an eligible distribution to a do-
mestic abuse victim) as an eligible distribution to a domestic abuse
victim, provided that the aggregate amount of such distributions to
that individual from plans maintained by the employer and mem-
bers of the employer’s controlled group 164 does not exceed the less-
er of $10,000 or 50 percent of the present value of the employee’s
accounts under the plans of the employer’s controlled group. Thus,
under such circumstances an employer plan is not treated as vio-
lating any Code requirement merely because an individual might
receive, for example, total distributions in excess of $10,000 as a
result of distributions from plans of other employers or IRAs.
161 Secs. 401(a)(11) and 417.
162 50 percent of the present value of the nonforfeitable accrued benefit of the employee under
the plan.
163 An eligible distribution to a domestic abuse victim is subject to income tax withholding un-
less the recipient elects otherwise. Mandatory 20-percent withholding does not apply.
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164 The term ‘‘controlled group’’ means any group treated as a single employer under sub-
section (b), (c), (m), or (o) of section 414.
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47
Recontributions to applicable eligible retirement plans
The provision provides that any portion of an eligible distribution
to a domestic abuse victim may, during the three-year period be-
ginning on the day after the date the distribution was received, be
recontributed to an applicable eligible retirement plan to which a
rollover can be made. Such a recontribution is treated as a rollover
and thus is not includible in income. In the case of a recontribution
to an applicable eligible retirement plan that is not an IRA, the in-
dividual may not recontribute an amount greater than the amount
of eligible distributions made from such plan to the individual. In
addition, the individual in that case must be eligible to contribute
to the plan (other than with respect to the recontribution of the eli-
gible distribution).
EFFECTIVE DATE
The provision is effective for distributions made after the date of
enactment.
15. Amendments to increase benefit accruals under plan for pre-
vious plan year allowed until employer tax return due date (sec.
115 of the bill and sec. 401(b) of the Code)
PRESENT LAW
Present law provides a remedial amendment period during
which, under certain circumstances, a retirement plan may be
amended retroactively in order to comply with the tax qualification
requirements.165 In general, plan amendments to reflect changes in
the law generally must be made by the time prescribed by law for
filing the income tax return of the employer for the employer’s tax-
able year in which the change in law occurs (including extensions).
Discretionary amendments must be adopted by the end of the plan
year.166 The Secretary may extend the date by which plan amend-
ments need to be made.
Section 201 of the SECURE Act 167 provides that if an employer
adopts a qualified retirement plan after the close of a taxable year
but before the time prescribed by law for filing the return of tax
of the employer for the taxable year (including extensions thereof),
the employer may elect to treat the plan as having been adopted
as of the last day of the taxable year.
REASONS FOR CHANGE
Present law requires that discretionary plan amendments to an
existing retirement plan must generally be adopted by the last day
of the plan year in which the amendment is effective, but an em-
ployer may adopt a new retirement plan by the due date of the em-
ployer’s tax return for the fiscal year in which the plan is effective.
This rule precludes an employer from adding plan provisions to an
existing plan that may be beneficial to participants after the end
of the plan year but before the due date for the employer’s tax re-
turn.
165 Sec. 401(b).
166 Rev. Proc. 2016–37, 2016–29 I.R.B. 136, June 29, 2016.
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167 Sec. 201 of Div. O. of the Further Consolidated Appropriations Act, 2020, Pub. L. No. 116–
94, December 20, 2019.
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48
The Committee believes that discretionary amendments to an ex-
isting plan that increase participants’ benefits to a plan for the
prior plan year should be permitted to be adopted up until the date
that the employer’s tax return is due to be filed.
EXPLANATION OF PROVISION
Under the provision, if an employer amends a stock bonus, pen-
sion, profit-sharing, or annuity plan to increase benefits accrued
under the plan effective as of any date during the immediately pre-
ceding plan year (other than increasing the amount of matching
contributions),168 the amendment would not otherwise cause the
plan to fail to meet any of the qualification requirements, and the
amendment is adopted before the time prescribed by law for filing
the return of the employer for the taxable year (including exten-
sions) which includes the effective date described above which is a
date during the immediately preceding plan year, the employer
may elect to treat such amendment as having been adopted as of
the last day of the plan year in which the amendment is effective.
EFFECTIVE DATE
The provision applies to amendments made in plan years begin-
ning after the date of enactment.
16. Retroactive first year elective deferrals for sole proprietors
(sec. 116 of the bill and sec. 401(b) of the Code)
PRESENT LAW
Present law provides a remedial amendment period during
which, under certain circumstances, a retirement plan may be
amended retroactively in order to comply with the tax qualification
requirements.169 In general, plan amendments to reflect changes in
the law generally must be made by the time prescribed by law for
filing the income tax return of the employer for the employer’s tax-
able year in which the change in law occurs (including extensions).
The Secretary may extend the time by which plan amendments
need to be made.
Section 201 of the SECURE Act provides that if an employer
adopts a qualified retirement plan after the close of a taxable year
but before the time prescribed by law for filing the return of tax
of the employer for the taxable year (including extensions thereof),
the employer may elect to treat the plan as having been adopted
as of the last day of the taxable year. That provision permits em-
ployers to establish and fund a qualified plan by the due date for
filing the employer’s return for the preceding plan year. However,
that provision does not override rules requiring certain plan provi-
sions to be in effect during a plan year, such as the provision for
elective deferrals under a qualified cash or deferral arrangement
(generally referred to as a ‘‘401(k) plan’’).170
Under section 401 of the SECURE Act, a section 401(k) plan of
a sole proprietor can be funded with employer contributions as of
the due date for the business’s return, but the elective deferrals
168 As defined in subsection 401(m)(4)(A).
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169 Sec. 401(b).
170 Treas. Reg. sec. 1.401(k)–1(e)(2)(ii).
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49
must be made as of December 31 of the prior year. However, an
individual is deemed to have made a contribution to an individual
retirement plan for a taxable year if it is contributed after the tax-
able year has ended but is made ‘‘on account of’’ that year and be-
fore the due date for filing the IRA owner’s tax return for that year
without extensions (generally, April 15).171
REASONS FOR CHANGE
An employer may establish a new 401(k) plan after the end of
the taxable year, but before the due date for the employer’s tax re-
turn and treat the plan as having been established on the last day
of the taxable year. Such plans may be funded by employer con-
tributions for which the employer may take a deduction, up to the
employer’s tax filing date.
The Committee believes that such plans when sponsored by sole
proprietors or single-member LLCs, should be able to receive em-
ployee contributions up to the date of the employer’s tax return fil-
ing date, but only for the initial year in which the plan is estab-
lished. Changing this timing rule may make it more likely that a
business owner adopts a new 401(k) plan.
EXPLANATION OF PROVISION
The provision provides that in the case of an individual who
owns the entire interest in an unincorporated trade or business,
and who is the only employee of such trade or business, any elec-
tive deferral 172 under a qualified cash or deferred plan which is
made by such individual before the time for filing the individual’s
return for the taxable year (determined without regard to any ex-
tensions) ending after or with the end of the plan’s first plan year,
shall be treated as having been made before the end of the plan’s
first plan year. This extension of time would only apply to the first
plan year in which the 401(k) plan is established.
EFFECTIVE DATE
The provision is effective for plan years beginning after the date
of enactment.
17. Treasury guidance on rollovers (sec. 117 of the bill and
secs. 402(c) and 408(d) of the Code)
PRESENT LAW
In general
A distribution from an employer-sponsored retirement plan or in-
dividual retirement arrangement (‘‘IRA’’) is generally includible in
income except for any portion attributable to after-tax contribu-
tions, which result in basis.173 Unless an exception applies, in the
case of a distribution before age 591⁄2, any amount included in in-
171 Sec. 219(f)(3). For taxpayers affected by a federally declared disaster, the IRS has the au-
thority to postpone various tax deadlines for a period of up to one year. Sec. 7508A and ERISA
sec. 518.
172 As defined in section 402(g)(3).
173 Secs. 402(a), 403(b)(1), 408(d)(1), and 457(a)(1). Under sections 402A(d) and 408A(d), a
dlhill on DSK120RN23PROD with HEARING
qualified distribution from a designated Roth account under an employer-sponsored plan and
from a Roth IRA is not includible in income.
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50
come is generally subject to an additional 10-percent tax, referred
to as the ‘‘early withdrawal’’ tax.174
Rollovers from employer-sponsored retirement plans
A distribution from a qualified retirement plan, section 403(b)
plan, or a governmental section 457(b) plan that is an eligible roll-
over distribution may be rolled over to another such plan or an
IRA. The rollover generally can be achieved by direct rollover (di-
rect payment from the distributing plan to the recipient plan) or
by contributing the distribution to the eligible retirement plan
within 60 days of receiving the distribution (‘‘60-day rollover’’).175
If the distribution from an employer-sponsored retirement plan
consists of property, the rollover is accomplished by a transfer or
contribution of the property to the recipient plan or IRA. Amounts
that are rolled over are usually not included in gross income.176
Generally, any distribution of the balance to the credit of a partici-
pant is an eligible rollover distribution with exceptions, for exam-
ple, for certain periodic payments, required minimum distributions,
and hardship distributions.177
Direct transfer of eligible rollover distributions
Qualified retirement plans, section 403(b) plans, and govern-
mental section 457(b) plans are required to offer a direct rollover
with respect to any eligible rollover distribution before paying the
amount to the participant or beneficiary.178 If an eligible rollover
distribution is not directly rolled over into an eligible retirement
plan, the taxable portion of the distribution generally is subject to
mandatory 20-percent income tax withholding.179 Participants who
do not elect a direct rollover but who roll over eligible distributions
within 60 days of receipt also defer tax on the rollover amounts;
however, the 20 percent withheld will remain taxable unless the
participant substitutes funds within the 60-day period.
Rollovers from IRAs
Distributions from IRAs are permitted to be rolled over tax-free
to another IRA or any other eligible retirement plan. The general
60-day rollover rule (discussed above) applies to IRA rollovers as
well as rollovers from qualified retirement plans, section 403(b) an-
nuities, and governmental section 457(b) plans. There is no provi-
sion for direct rollovers from an IRA, but direct payment to another
eligible retirement plan (via a trustee-to-trustee transfer) generally
satisfies the requirements. Distributions from an inherited IRA (ex-
cept in the case of an IRA acquired by the surviving spouse by rea-
174 Sec. 72(t). The early withdrawal tax does not apply to a section 457(b) plan.
175 Secs. 402(c), 402A(c)(3), 403(b)(8) and 457(e)(16). An exception to the 60-day rules applies
to rollovers of qualified plan loan offset amounts. Sec. 402(c)(3)(C).
176 Distributions from qualified retirement plans, section 403(b) plans, and governmental sec-
tion 457(b) plans may be rolled into a Roth IRA. Distributions from these plans that are rolled
over into a Roth IRA and that are not distributions from a designated Roth account must be
included in gross income.
177 Sec. 402(c)(4). Treas. Reg. sec. 1.402(c)–1 identifies certain other payments that are not eli-
gible for rollover, including, for example, certain corrective distributions, loans that are treated
as deemed distributions under section 72(p), and dividends on employer securities as described
in section 404(k). In addition, pursuant to section 402(c)(11), any distribution to a beneficiary
of a deceased employee other than the participant’s surviving spouse is only permitted to be
rolled over to an IRA using a direct rollover; 60-day rollovers are not available to nonspouse
beneficiaries.
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178 Sec. 401(a)(31).
179 Treas. Reg. sec. 1.402(c)–2, Q&A–1(b)(3).
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51
son of the IRA owner’s death) and required minimum distributions
are not permitted to be rolled over.180 The portion of any distribu-
tion from an IRA that is not includible in gross income is only per-
mitted to be rolled over to another IRA. Generally, distributions
from a traditional IRA may only be rolled over tax-free to another
IRA and distributions from a Roth IRA may only be rolled over tax-
free to another Roth IRA. However, a distribution from a tradi-
tional IRA may be rolled over to a Roth IRA as a Roth conversion
with the required income inclusion.181
REASONS FOR CHANGE
For middle- and moderate-income savers, the key to financial se-
curity in retirement is gradual saving throughout an entire career.
This gradual saving is significantly enhanced if it is done in a tax-
preferred retirement account by tax-free compounded earnings on
that saving. The Committee recognizes the importance of rollovers
in keeping funds in tax-preferred retirement accounts and pre-
venting early distributions from those accounts. The Committee
wishes to encourage the use of rollovers by making rollovers easier
for administrators, trustees, and plan participants. Thus, the Com-
mittee believes it is appropriate to develop sample forms to facili-
tate rollovers.
EXPLANATION OF PROVISION
The provision requires the Secretary, no later than January 1,
2025, to develop and release sample forms for (1) direct rollovers
of eligible rollover distributions from employer-sponsored retire-
ment plans to another such plan or IRA, and (2) trustee-to-trustee
transfers of amounts from an IRA to another IRA or retirement
plan. The purpose of such forms is to simplify, standardize, and fa-
cilitate the completion of direct rollovers and trustee-to-trustee
transfers. The sample forms must be written in a manner cal-
culated to be understood by the average person, and must apply to
both the distributing retirement plans or transferring IRAs and the
receiving retirement plans or IRAs.
EFFECTIVE DATE
The provision is effective on the date of enactment.
18. Exemption for automatic portability transactions (sec. 118 of
the bill and sec. 4975 of the Code)
PRESENT LAW
Distributions and rollovers
A distribution from an employer-sponsored retirement plan is
generally includible in income except for any portion attributable
to after-tax contributions, which result in basis.182 Unless an ex-
ception applies, in the case of a distribution before age 591⁄2 from
180 A trustee-to-trustee transfer between IRAs is not treated as a distribution and rollover.
Thus, nonspouse beneficiaries of IRAs can move funds to another inherited IRA established as
a beneficiary of the decedent IRA owner. In contrast, a surviving spouse is permitted to roll over
a distribution to his or her own IRA.
181 Sec. 408A(d)(3).
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182 Secs. 402(a), 403(b)(1) and 457(a)(1). Under section 402A(d), a qualified distribution from
a designated Roth account under an employer-sponsored plan is not includible in income.
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52
a qualified retirement plan or a section 403(b) plan, any amount
included in income is subject to an additional 10-percent tax, re-
ferred to as the ‘‘early withdrawal’’ tax.183
Rollovers
A distribution from a qualified retirement plan, section 403(b)
plan, or a governmental section 457(b) plan that is an eligible roll-
over distribution may be rolled over to another such plan or an
IRA. The rollover generally can be achieved by direct rollover (di-
rect payment from the distributing plan to the recipient plan) or
by contributing the distribution to the eligible retirement plan
within 60 days of receiving the distribution (‘‘60-day rollover’’).184
If the distribution from an employer-sponsored retirement plan
consists of property, the rollover is accomplished by a transfer or
contribution of the property to the recipient plan or IRA. Amounts
that are rolled over are usually not included in gross income.185
Generally, any distribution of the balance to the credit of a partici-
pant is an eligible rollover distribution with exceptions, for exam-
ple, for certain periodic payments, required minimum distributions,
and hardship distributions.186
Direct transfer of eligible rollover distributions
Qualified retirement plans, section 403(b) plans, and govern-
mental section 457(b) plans are required to offer a direct rollover
with respect to any eligible rollover distribution before paying the
amount to the participant or beneficiary.187 If an eligible rollover
distribution is not directly rolled over into an eligible retirement
plan, the taxable portion of the distribution generally is subject to
mandatory 20-percent income tax withholding.188 Participants who
do not elect a direct rollover but who roll over eligible distributions
within 60 days of receipt also defer tax on the rollover amounts;
however, the 20 percent withheld will remain taxable unless the
participant substitutes funds within the 60-day period.
However, a mandatory distribution,189 where the present value
of the nonforfeitable accrued benefit of the participant (as deter-
mined under section 411(a)(11)) is in excess of $1,000 but does not
exceed $5,000, must be directly rolled over to an IRA chosen by the
plan administrator or the payor, unless a participant elects other-
wise.
183 Sec. 72(t).
184 Secs. 402(c), 402A(c)(3), 403(b)(8) and 457(e)(16). An exception to the 60-day rules applies
to rollovers of qualified plan loan offset amounts. Sec. 402(c)(3)(C).
185 Distributions from qualified retirement plans, section 403(b) plans, and governmental sec-
tion 457(b) plans may be rolled into a Roth IRA. Distributions from these plans that are rolled
over into a Roth IRA and that are not distributions from a designated Roth account must be
included in gross income.
186 Sec. 402(c)(4). Treas. Reg. sec. 1.402(c)–1 identifies certain other payments that are not eli-
gible for rollover, including, for example, certain corrective distributions, loans that are treated
as deemed distributions under section 72(p), and dividends on employer securities as described
in section 404(k). In addition, pursuant to section 402(c)(11), any distribution to a beneficiary
of a deceased employee other than the participant’s surviving spouse is only permitted to be
rolled over to an IRA using a direct rollover; 60-day rollovers are not available to nonspouse
beneficiaries.
187 Sec. 401(a)(31).
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188 Treas. Reg. sec. 1.402(c)–2, Q&A–1(b)(3).
189 Under section 401(a)(3)(B)(i).
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53
Prohibited transactions
In general
The Code and ERISA prohibit certain transactions (‘‘prohibited
transaction’’) between a qualified retirement plan and a disquali-
fied person (referred to as a ‘‘party in interest’’ under ERISA).190
The prohibited transaction rules under the Code apply also to
IRAs, Archer MSAs, HSAs, and Coverdell ESAs.191
Disqualified persons include a fiduciary of the plan; a person pro-
viding services to the plan; an employer with employees covered by
the plan; an employee organization any of whose members are cov-
ered by the plan; certain owners, officers, directors, highly com-
pensated employees, family members, and related entities.192 A fi-
duciary includes any person who (1) exercises any discretionary au-
thority or discretionary control respecting management of the plan
or exercises any authority or control respecting management or dis-
position of the plan’s assets, (2) renders investment advice for a fee
or other compensation, direct or indirect, with respect to any mon-
eys or other property of the plan, or has any authority or responsi-
bility to do so, or (3) has any discretionary authority or discre-
tionary responsibility in the administration of the plan.193
Prohibited transactions include the following transactions,
whether direct or indirect, between a plan and a disqualified per-
son:
1. The sale or exchange or leasing of property,
2. The lending of money or other extension of credit,
3. The furnishing of goods, services, or facilities,
4. The transfer to, or use by or for the benefit of, the income or
assets of the plan,
5. In the case of a fiduciary, an act dealing with the plan’s in-
come or assets in the fiduciary’s own interest or for the fiduciary’s
own account, and
6. The receipt by a fiduciary of any consideration for the fidu-
ciary’s own personal account from any party dealing with the plan
in connection with a transaction involving the income or assets of
the plan.194
190 Sec. 4975; ERISA sec. 406. The prohibited transaction rules of the Code and ERISA are
very similar; however, some differences exist between the two sets of rules. As mentioned above,
ERISA generally does not apply to governmental plans or church plans. The prohibited trans-
action rules under the Code also generally do not apply to governmental plans or church plans.
However, under section 503, the trust holding assets of a governmental or church plan may lose
its tax-exempt status in the case of a prohibited transaction listed in section 503(b). Before the
enactment of ERISA in 1974, section 503 applied to qualified retirement plans generally. In con-
nection with the enactment of section 4975 by ERISA, section503 was amended to apply only
to governmental and church plans.
191 These are included in the definition of ‘‘plan’’ under section 4975(e)(1).
192 Sec. 4975(e)(2). Party in interest is defined similarly under ERISA section 3(14) with re-
spect to an employee benefit plan. Under ERISA, employee benefit plans, defined in ERISA
section3(3), consist of two types: pension plans (that is, retirement plans), defined in ERISA sec-
tion 3(2), and welfare plans, defined in ERISA section 3(1).
193 Sec. 4975(d)(3); ERISA sec. 3(21)(A). Under ERISA, fiduciary also includes any person des-
ignated under ERISA section 405(c)(1)(B) by a named fiduciary (that is, a fiduciary named in
the plan document) to carry out fiduciary responsibilities.
194 Sec. 4975(c)(1)(A)–(F) and ERISA sec.406(a)(1)(A)–(D) and (b)(1) and (3). Under ERISA sec-
tion 406(a)(1), a plan fiduciary is prohibited from causing the plan to engage in a transaction
described in paragraphs(A)–(D). ERISA section 406(b)(2) also prohibits a plan fiduciary, in the
fiduciary’s individual capacity or any other capacity, from acting in any transaction involving
the plan on behalf of a party (or representing a party) whose interests are adverse to the inter-
ests of the plan or the interests of plan participants or beneficiaries. ERISA section 406(a)(1)(E)
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and (a)(2) relate to limitations under ERISA section 407 on a plan’s acquisition or holding of
employer securities and real property.
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Exemptions from prohibited transaction treatment
Certain transactions are statutorily exempt from prohibited
transaction treatment, for example, certain loans to plan partici-
pants and arrangements with a disqualified person for legal, ac-
counting or other services necessary for the establishment or oper-
ation of a plan if no more than reasonable compensation is paid for
the services.195
Sanctions for violations
Under the Code, if a prohibited transaction occurs, the disquali-
fied person who participated in the transaction is generally subject
to a two-tiered excise tax. The first tier tax is 15 percent of the
amount involved in the transaction. The second tier tax, imposed
if the prohibited transaction is not corrected within a certain pe-
riod, is 100 percent of the amount involved. In the case of an IRA,
HSA, Archer MSA or Coverdell ESA, the sanction for some prohib-
ited transactions is the loss of tax favored status, rather than an
excise tax. A private right of action is not available for a Code vio-
lation.
Under ERISA, DOL may assess a civil penalty against a person
who engages in a prohibited transaction, other than a transaction
with a plan covered by the prohibited transaction rules of the
Code.196 The penalty may not exceed five percent of the amount in-
volved in the transaction for each year or part of a year that the
prohibited transaction continues. If the prohibited transaction is
not corrected within 90 days after notice from DOL, the penalty
can be up to 100 percent of the amount involved in the transaction.
A prohibited transaction by a fiduciary may also be the basis for
an action for a breach of fiduciary responsibility by DOL, a plan
participant or beneficiary, or another plan fiduciary.
REASONS FOR CHANGE
When an employee terminates employment from an employer
which sponsors a retirement plan, unless that employee rolls over
any benefits earned under that employer’s plan to a subsequent
employer’s plan, the employee is at risk of losing or forgetting
about that hard earned benefit and may lose track of that benefit
that should be available to that participant at the time of retire-
ment. Automatic portability providers can facilitate transfers of a
participant’s benefits from one employer’s plan to another employ-
er’s plan thereby reducing or eliminating that risk; however, to en-
sure that the prohibited transaction rules under the Code do not
unnecessarily discourage sponsors of retirement plans from using
such providers, the Committee believes that an exemption from
those prohibited transaction rules should be provided as long as
such exemption provides sufficient safeguards to protect the par-
ticipant’s interests.
195 Sec. 4975(d) and ERISA sec. 408. The Code and ERISA also provide for the grant of admin-
istrative exemptions, on either an individual or class basis, subject to a finding that the exemp-
tion is administratively feasible, in the interests of the plan and of its participants and bene-
dlhill on DSK120RN23PROD with HEARING
ficiaries, and protective of the rights of participants and beneficiaries of the plan.
196 ERISA sec. 502(i).
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55
EXPLANATION OF PROVISION
The provision adds a new prohibited transaction exemption for
any transaction which consists of the receipt of fees and compensa-
tion by an automatic portability provider in connection with an
automatic portability transaction. An automatic portability pro-
vider is a person who executes automatic portability transactions.
An automatic portability transaction is defined as a transfer of
assets made from an individual retirement plan which is estab-
lished on behalf of an individual and to which amounts were trans-
ferred as a result of a mandatory distribution 197 (‘‘the individual
retirement plan’’) to an employer-sponsored retirement plan 198
(other than a defined benefit plan) in which such individual is an
active participant (‘‘the employer sponsored retirement plan’’), and
after such individual has been given advance notice of the transfer
and has not affirmatively opted out of such transfer.
The prohibited transaction exemption does not apply to an auto-
matic portability transaction unless the following requirements are
satisfied:
• The automatic portability provider must acknowledge in
writing, at such time and in such format as the Secretary
specifies, that the provider is a fiduciary with respect to the in-
dividual retirement plan;
• The fees and compensation received by the automatic port-
ability provider in connection with the automatic portability
transaction (including any increases in such fees or compensa-
tion) must not exceed reasonable compensation, and must be
fully disclosed and approved in writing in advance of the trans-
action by a plan fiduciary of the employer-sponsored retire-
ment plan that is independent of the automatic portability pro-
vider;
• The automatic portability provider must not market or sell
data relating to the individual retirement plan nor may the
automatic portability provider use the data for any purpose
other than the administration of the transfers, without the ex-
press consent of the independent plan fiduciary, after full dis-
closure by the automatic portability provider of how the data
will be used;
• The automatic portability provider must offer an auto-
matic portability transaction on the same terms to any em-
ployer sponsored retirement plan, regardless of whether the
provider provides other services for such plan;
• At least 30 days in advance of an automatic portability
transaction, the automatic portability provider must provide
notice to the individual on whose behalf the individual retire-
ment plan is established which includes:
» A description of the automatic portability transaction
and the fees which will be charged in connection with the
transaction;
» A description of the individual’s right to affirmatively
elect not to participate in the transaction, the procedures
197 Under sec. 401(a)(31)(B)(i).
198 A sec. 401(a) plan, a sec. 403(a) or sec. 403(b) plan, or an eligible deferred compensation
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plan under sec. 457(b) maintained by an eligible employer defined in sec. 457(e)(1)(A), other
than a defined benefit plan.
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56
for such an election, and a telephone number at which the
individual can contact the automatic portability provider;
and
» Such other disclosures as the Secretary may require
by regulation;
• Not later than three business days after an automatic
portability transaction, the automatic portability provider must
provide notice to the individual on whose behalf the individual
retirement plan was established of:
» The actions taken by the automatic portability pro-
vider with respect to the individual’s account;
» All relevant information regarding the location and
amount of any transferred assets;
» A statement of fees charged against the account by
the automatic portability provider or its affiliates in con-
nection with the transfer;
» A telephone number at which the individual can con-
tact the automatic portability provider; and
» Such other disclosures as the Secretary may require
by regulation;
• The notices required under this prohibited transaction ex-
emption must be written in a manner calculated to be under-
stood by the average intended recipient and must not include
materially misleading statements;
• After liquidating the assets of the individual retirement
plan to cash, an automatic portability provider must transfer
the account balance of that plan as soon as practicable to the
employer sponsored retirement plan;
• For six years, an automatic portability provider must
maintain the records sufficient to demonstrate that the re-
quirements of this prohibited transaction exemption are met;
and
• An automatic portability provider must conduct an annual
audit of automatic portability transactions occurring during
the calendar year in accordance with regulations promulgated
by the Secretary to demonstrate compliance with the require-
ments of this prohibited transaction exemption and must sub-
mit such audit annually to the Secretary, in such form and
manner as specified by the Secretary.
The provision authorizes the Secretary to promulgate regulations
that: (1) require the automatic portability provider to provide a no-
tice to individuals on whose behalf an individual retirement plan
is established in advance of the notices required under the prohib-
ited transaction exemption; (2) restrict the receipt of third party
compensation (other than a direct fee by an employer sponsoring
a plan that is in lieu of a fee imposed on an individual retirement
plan owner) by an automatic portability provider in connection
with an automatic portability transaction; (3) prohibit exculpatory
provisions in an automatic portability provider’s contracts or com-
munications with individuals disclaiming or limiting its liability in
the event that an automatic portability transaction results in an
improper transfer; and (4) require an automatic portability pro-
vider to take actions necessary to reasonably ensure that partici-
pant and beneficiary data is current and accurate, and that the ap-
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propriate participants and beneficiaries, in fact, receive all the re-
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57
quired notices and disclosures until the assets are transferred to a
new retirement plan account.
The Secretary must issue interim final rules no later than July
1, 2023.
EFFECTIVE DATE
The provision applies to transactions occurring after December
31, 2023.
19. Application of section 415 limit for certain employees of rural
electric cooperatives (sec. 119 of the bill and sec. 415(b) of the
Code)
PRESENT LAW
Limitations on benefits provided under a qualified defined benefit
plan
Benefits that may be provided to a participant under a qualified
defined benefit plan must not exceed certain specified limita-
tions.199 Under a defined benefit plan, the maximum annual ben-
efit payable to a participant at retirement cannot exceed the lesser
of (1) 100 percent of the participant’s average compensation for the
participant’s high three years, or (2) a specified dollar amount, in-
dexed for inflation ($245,000 for 2022).200 Other restrictions apply
under certain circumstances.201 The dollar amount limit is actuari-
ally reduced if benefits begin before age 62, and actuarially in-
creased if benefits being after age 65.202 These limits apply to
amounts for or with respect to a limitation year, which is generally
the calendar year unless the terms of the plan provide otherwise.
203
The 100-percent defined benefit compensation limitation does not
apply to governmental plans, multiemployer plans and certain col-
lectively bargained plans.204 In addition, the compensation limita-
tion does not apply to a participant in a plan maintained by certain
church organizations, who has never been a highly compensated
employee.205 An employee is a ‘‘highly compensated employee’’ for
the year if the employee was: (i) a five-percent owner at any time
during the plan year or the preceding plan year, or (ii) had com-
pensation for the preceding year from the employer in excess of a
specified dollar amount, indexed for inflation ($135,000 for
2022).206
For purposes of applying these limitations, in the case of a de-
fined benefit plan, the term annual benefit means a benefit that is
payable in the form of a straight life annuity. If a benefit is pay-
able other than as an annual straight life annuity, then the benefit
must be actuarially adjusted to an equivalent straight life annu-
ity.207 The interest rate assumption for this adjustment is specified
and cannot be less than the greater of five percent or the rate spec-
199 Sec. 415(b); Treas. Reg. sec. 1.415(b)–1.
200 Sec. 415(b)(1).
201 Secs. 415(b)(4); 415(b)(5); 415(b)(7).
202 Secs. 415(b)(2)(C); 415(b)(2)(D).
203 Treas. Reg. sec. 1.415(j)–1.
204 Secs. 415(b)(7) and 415(b)(11).
205 Sec. 415(b)(11).
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206 Sec. 414(q).
207 Sec. 415(b)(2)(B); Treas. Reg. sec. 1.415(b)–1(c).
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58
ified under the plan.208 If the benefit is payable in the form of a
single sum distribution, then the benefit is adjusted using an inter-
est rate that is not less than the greatest of: (i) 5.5 percent, (ii) the
rate that provides a benefit of not more than 105 percent of the
benefit that would be provided if the applicable interest rate 209
were the interest rate assumption, or (iii) the rate specified under
the plan.210
REASONS FOR CHANGE
The Committee recognizes that under present law certain defined
benefit plan designs and other factors (such as longer working
lives) may result in the limitation of benefits for non-highly com-
pensated employees in a way that was never intended. For exam-
ple, the benefit for a non-highly compensated employee with many
years of service may be limited by the 100 percent defined benefit
compensation limitation whereas the benefit of a more highly paid
employee with fewer years of service may not be so limited. In ad-
dition, if a participant elects a form of benefit other than a life an-
nuity, the benefit limitation may be more pronounced due to the re-
quired adjustments under the benefit limitation rules.
The Committee believes that including an exemption for certain
non-highly compensated employees in a rural electric cooperative
plan from the defined benefit plan compensation limitation helps to
address these unintended inequities and follows similar existing
exemptions.
EXPLANATION OF PROVISION
The provision exempts an employee who is a participant in an el-
igible rural electric cooperative plan from the defined benefit plan
compensation limitation, if the employee is a qualified non-highly
compensated employee. An employee is a qualified non-highly com-
pensated employee if the employee was not a highly compensated
employee 211 of an employer maintaining the plan for the earlier of
the plan year in which the employee terminated employment, or in
which distributions commence under the plan; or for any of the five
plan years immediately preceding those plans years.
For purposes of this provision, a plan is generally treated as an
eligible rural electric cooperative plan if it is maintained by more
than one employer and at least 85 percent of the employers are cer-
tain rural cooperatives that are engaged primarily in providing
electric service, or an organization which is a national association
of those organizations.212
208 Sec. 415(b)(2)(E)(i).
209 As defined in sec. 417(e)(3).
210 Sec. 415(b)(2)(E)(ii).
211 Within the meaning of sec. 414(q).
212 Section 401(k)(7)(B) defines ‘‘rural cooperative’’ as any organization which is (i) engaged
primarily in providing electric service on a mutual or cooperative basis, or engaged primarily
in providing electric service to the public in its service area and which is exempt from tax or
which is a State or local government (or an agency or instrumentality thereof), other than a
municipality; (ii) a certain type of civic league or business league exempt from tax, 80 percent
of the members of which are described in (i); (iii) a certain type of cooperative telephone com-
pany; (iv) a certain type of mutual irrigation or ditch company, or is a district organized under
the laws of a State as a municipal corporation for the purpose of irrigation, water conservation,
or drainage; and (v) a national association of the organizations described above. This provision
dlhill on DSK120RN23PROD with HEARING
is generally limited to non-highly compensated employees of rural cooperatives that provide elec-
tric service within the meaning of secs. 401(k)(7)(B)(i) or (ii).
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59
This provision is a permissible change and an employer partici-
pating in an eligible rural electric cooperative plan may choose to
keep the current limitation in its plan language. In addition, the
Secretary is directed to prescribe rules to limit the application of
this provision so that it does not result in increased benefits for
highly compensated employees.213
EFFECTIVE DATE
The provision is effective for limitation years ending after the
date of enactment.
20. Insurance-dedicated exchange-traded funds (sec. 120 of the bill
and Treas. Reg. secs. 1.817–5(f)(2) and (3))
Income exclusion and deferred tax treatment for life insurance and
annuity contracts
An exclusion from gross income is provided for amounts received
under a life insurance contract paid by reason of the death of the
insured.214 Further, no Federal income tax generally is imposed on
a policyholder with respect to the earnings under a life insurance
contract (‘‘inside buildup’’). Distributions from a life insurance con-
tract (other than a modified endowment contract 215) that are made
prior to the death of the insured generally are includible in income
only to the extent that the amounts distributed exceed the tax-
payer’s investment in the contract. Such distributions generally are
treated first as a tax-free recovery of the investment in the con-
tract, and then as income.216 Present law provides a definition of
life insurance designed to limit the investment orientation of the
contract.217
No Federal income tax is generally imposed on a deferred annu-
ity contract holder who is a natural person with respect to the
earnings on the contract (inside buildup) in the absence of a dis-
tribution under the contract. Annuity distributions generally are
treated as partially excludable return of basis and partially ordi-
nary income under an ‘‘exclusion ratio’’ (the ratio of the investment
in the contract to the expected return under the contract as of that
date).218 Other distributions (which for this purpose include loans)
are treated as income first, then as a tax-free return of basis.219
An additional 10-percent tax is imposed on the income portion of
distributions made before age 591⁄2, and in certain other cir-
cumstances.220 An annuity contract must provide for certain re-
quired distributions if the holder dies before the entire interest in
the contract has been distributed.221 No dollar limit is imposed on
213 For example, this provision is not intended to be used to provide large benefits to employ-
ees with low pay in order to avoid the impact of the nondiscrimination rules.
214 Sec. 101(a).
215 Sec. 7702A. A modified endowment contract is generally a life insurance contract funded
more rapidly than in seven level annual premiums. Distributions (including loans) from a modi-
fied endowment contract are generally treated as income first, then as a tax-free return of basis.
Sec. 72(e)(10).
216 Sec. 72(e).
217 Sec. 7702.
218 Sec. 72(b).
219 Sec. 72(e).
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220 Sec. 72(q).
221 Sec. 72(s).
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60
the amount that may be paid into an annuity contract (that is not
a pension plan contract) for Federal income tax purposes.
Variable contracts
A variable contract is generally an annuity or life insurance con-
tract whose death benefit, payout, or premium amounts are based
on the return on and market value of underlying assets. For tax
purposes, a variable contract is defined by statute.222 Under the
statutory criteria, all or part of the amounts received for the con-
tract (premiums) must be allocated to a segregated asset account
of the insurer. The contract must provide for the payment of annu-
ities, must be a life insurance contract,223 or must fund insurance
on retired lives.224 The contract must reflect the investment return
and the market value of the segregated asset account, or in the
case of a life insurance contract, the amount of the death benefit
or period of coverage must be adjusted on the basis of the invest-
ment return and the market value of the segregated asset account.
The segregated asset accounts for variable contracts generally are
invested in a variety of investment funds.
Diversification requirements
The investment assets held in the segregated asset account for
a variable contract must be adequately diversified.225 If the assets
are not adequately diversified, the variable contract is not treated
as an annuity or life insurance contract.226 As a result, otherwise
tax-deferred or excluded income on the contract is treated as ordi-
nary income received or accrued by the contract holder during the
taxable year.227
When the diversification requirement for variable contracts was
added in 1984, the Conference Report stated, ‘‘[i]n authorizing
Treasury to prescribe diversification standards, the conferees in-
tend that standards be designed to deny annuity or life insurance
treatment for investments that are publicly available to investors
and investments that are made, in effect, at the direction of the in-
vestor.’’ 228
The regulatory diversification requirements impose investment
concentration limits based on percentages of the total value of the
assets in the segregated asset account.229 A safe harbor is provided
222 Sec. 817(d).
223 As defined for Federal tax purposes in section 7702.
224 As described in section 807(c)(6) (governing life insurer reserve deductions).
225 Sec. 817(h).
226 The investor control doctrine can also apply in some fact situations. This two-pronged doc-
trine generally treats a contract as not a life insurance contract or not an annuity contract if
the contract holder has significant incidents of ownership with respect to the investments in the
insurer segregated asset account, or if segregated asset account assets are publicly available for
purchase (i.e, not exclusively available through purchase of the variable contract). See Rev. Rul.
81–225, 1981–2 C.B. 12, as modified by Rev. Proc. 99–44 and as clarified and amplified by Rev.
Rul. 2007–7; Christofferson v. U.S., 749 F.2d 513 (8th Cir. 1984); Webber v. Commissioner, 144
T. C. 324 (2015).
227 Secs. 72 and 7702, and Treas. Reg. sec. 1.817–5(a).
228 H.R. Conf. Rep. No. 861, 98th Cong., 2d Sess. (1984), page 1055. Similarly, the Blue Book
for the 1984 Act states that the diversification requirements were enacted ‘‘to discourage the
use of tax-preferred variable annuities and variable life insurance primarily as investment vehi-
cles. The Congress believed that a limitation on a customer’s ability to select specific invest-
ments underlying a variable contract will help ensure that a customer’s primary motivation in
purchasing the contract is more likely to be the traditional economic protections provided by an-
nuities and life insurance.’’ Joint Committee on Taxation, General Explanation of the Revenue
Provisions of the Deficit Reduction Act of 1984, Pub. L. No. 98–369, JCS–41–84, December 31,
dlhill on DSK120RN23PROD with HEARING
1984, page 607.
229 Treas. Reg. sec. 1.817–5(b).
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for a segregated asset account holding a regulated investment com-
pany (‘‘RIC’’ or mutual fund) that is at least as diversified as is re-
quired under the RIC rules of section 851(b)(4) and no more than
55 percent of the value of whose assets is in cash, cash items, gov-
ernment securities, and securities of other RICs.230
The diversification requirements provide a lookthrough rule for
assets held through a RIC, real estate investment trust (‘‘REIT’’),
partnership, or certain trusts such as a grantor trust. This
lookthrough rule provides that the RIC, REIT, partnership or trust
is not treated as a single investment of the segregated asset ac-
count, but rather, a pro rata portion of each of its assets is treated
as an asset of the account.231
However, the lookthrough rule imposes requirements.232 All the
beneficial interests in the RIC, REIT, partnership, or trust gen-
erally must be held by a segregated asset account. Public access to
the RIC, REIT, partnership, or trust must generally be available
exclusively through the purchase of a variable contract. For exam-
ple, if an investment fund’s interests are held by a market maker
or by a financial institution that, as a participant in a clearing
agency, is permitted to purchase and redeem shares directly from
the fund and sell them to third parties, then the fund does not sat-
isfy this requirement of the lookthrough rule.
REASONS FOR CHANGE
In order to treat ETFs similarly to mutual funds when they are
held as investments of a segregated asset account of an insurance
company with respect to variable insurance or annuity contracts,
the Committee believes it is appropriate to require a narrow modi-
fication to the Treasury regulations that currently prevent the use
of market makers to provide liquidity for ETF interests under the
diversification requirements for such variable contracts.
EXPLANATION OF PROVISION
Diversification requirements
The provision directs the Secretary to revise the regulations set-
ting forth diversification requirements with respect to variable con-
tracts under section 817(h) to facilitate the use of exchange-traded
funds (‘‘ETFs’’) under variable contracts. The provision directs that
the lookthrough rule requirements in the regulations be amended
so that satisfaction of those requirements with respect to an ETF
is not prevented by reason of beneficial interests in an investment
fund being held by one or more authorized participants or market
makers. The current regulations are to be amended no later than
the date that is seven years after the date of enactment of the bill.
Under the provision, an ETF means a RIC, partnership, or trust
that is registered with the SEC as an open-end investment com-
pany or unit investment trust, and the shares of which can be pur-
chased or redeemed directly from the fund only by an authorized
participant, and the shares of which are traded throughout the day
on a national stock exchange at market prices that may or may not
be the same as the net asset value of the shares. An authorized
230 Treas. Reg. sec. 1.817–5(b)(2).
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231 Treas. Reg. sec. 1.817(f)(1).
232 Treas. Reg. sec. 1.817(f)(2) and (3).
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62
participant means a financial institution that is a member or par-
ticipant in a clearing agency registered under section 17A(b) of the
Securities Exchange Act of 1934 that contracts with an ETF to per-
mit the financial institution to purchase or redeem shares of the
ETF and to sell the shares to third parties, provided that the finan-
cial institution is precluded from purchasing the shares for its own
investment purposes and from selling the shares to persons that
are not market makers. A market maker means a financial institu-
tion that is a registered broker or dealer under section 15(b) of the
Securities Exchange Act of 1934 and that maintains liquidity for an
ETF on a national stock exchange by always being ready to buy
and sell shares, provided that the financial institution is precluded
from buying or selling shares to or from persons who are not au-
thorized participants or who are persons not permitted to buy or
sell shares under the lookthrough rule in the regulations.
EFFECTIVE DATE
The provision is effective for segregated asset account invest-
ments made on or after the date that is seven years after the date
of enactment.
21. Modification of age requirement for qualified ABLE programs
(sec. 121 of the bill and sec. 529A of the Code)
PRESENT LAW
Qualified ABLE programs
In general
Section 529A233 provides for a tax-favored savings program in-
tended to benefit disabled individuals, known as a qualified ABLE
program.
A qualified ABLE program is a program established and main-
tained by a State or agency or instrumentality thereof.234 A quali-
fied ABLE program must meet the following conditions: (1) under
the provisions of the program, contributions may be made to an ac-
count (an ‘‘ABLE account’’), established for the purpose of meeting
the qualified disability expenses of the designated beneficiary of
the account; 235 (2) the program must limit a designated beneficiary
to one ABLE account; 236 and (3) the program must meet the other
requirements of section 529A.
Designated beneficiaries and eligible individuals
A designated beneficiary of an ABLE account is the owner of the
ABLE account.237 A designated beneficiary must generally be an
eligible individual at the time the ABLE account is established.238
An ABLE account may be transferred to a successor designated
beneficiary who is a member of same family as the original des-
ignated beneficiary.239 For this purpose, a member of the family in-
233 Except where otherwise provided, all section references are to the Internal Revenue Code
of 1986, as amended (the ‘‘Code’’).
234 Sec. 529A(b)(1).
235 Sec. 529A(b)(1)(A).
236 Sec. 529A(b)(1)(B).
237 Sec. 529A(e)(3).
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238 Ibid.
239 Sec. 529A(c)(1)(C)(ii).
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cludes the original designated beneficiary’s brother, sister, step-
brother, or stepsister.240 In the case of such a transfer, the suc-
cessor designated beneficiary must be an eligible individual at the
time of transfer.241
An eligible individual for a taxable year is an individual who
meets one of two requirements for the taxable year: 242
1. The individual is entitled to benefits based on blindness
or disability under Title II 243 or Title XVI 244 of the Social Se-
curity Act, and such blindness or disability occurred before the
date on which the individual attained age 26.245
2. A disability certification with respect to such individual is
filed with the Secretary for such taxable year.246
Tax treatment and additional requirements
A qualified ABLE program is generally exempt from income
tax,247 but it may be subject to the taxes imposed on the unrelated
business income of tax-exempt organizations.248
Contributions to an ABLE account must be made in cash 249 and
are not deductible for Federal income tax purposes. Aggregate con-
tributions to an ABLE account for a taxable year are generally lim-
ited to the gift tax annual exclusion.250 For contributions made be-
fore January 1, 2026, there is an increase to the contribution limit
for certain designated beneficiaries who are employees.251 Con-
tributions are treated as a completed gift to the designated bene-
ficiary which is not a future interest in property.252 Finally, a
qualified ABLE program must provide adequate safeguards to en-
sure that ABLE account contributions do not exceed the limit im-
posed on accounts under the section 529 program of the State
maintaining the qualified ABLE program.253
Excess contributions may be subject to a tax in an amount equal
to 6 percent of the excess.254
For taxable years beginning before January 1, 2026, a designated
beneficiary who makes contributions to the beneficiary’s ABLE ac-
count may be eligible for the credit under section 25B, the ‘‘saver’s
credit.’’ 255
Distributions (including earnings) from an ABLE account are not
includible in gross income if the distributions do not exceed the
designated beneficiary’s qualified disability expenses.256 Qualified
240 Sec. 152(d)(2)(B). For purposes of this definition, a rule similar to the adoption rule of sec-
tion 152(f)(1)(B) applies.
241 Sec. 529A(c)(1)(C)(ii).
242 Sec. 529A(e)(1).
243 42 U.S.C. secs. 401–433.
244 42 U.S.C. secs. 1381–1383f.
245 Sec. 529A(e)(1)(A).
246 Sec. 529A(e)(1)(B). Disability certification is defined in section 529A(e)(2).
247 Sec. 529A(a).
248 See sec. 511.
249 Sec. 529A(b)(2)(A).
250 See sec. 529A(b)(2)(B)(i). The amount of the exclusion is $16,000 for 2022. See sec. 2503(b);
Rev. Proc. 2021–45, 2021–48 I.R.B. 764, November 29, 2021. This limitation does not apply to
rollover contributions from another ABLE account or changes to the designated beneficiary. Sec.
529A(b)(2)(B).
251 Sec. 529A(b)(2)(B)(ii), (b)(7).
252 Sec. 529A(c)(2)(A)(i). Contributions are not treated as qualified transfers under section
2503(e). Sec. 529(c)(2)(A)(ii).
253 Sec. 529A(b)(6).
254 Sec. 4973.
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255 Sec. 25B(d)(1)(D).
256 Sec. 529A(c)(1)(B)(i).
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disability expenses are any expenses related to the eligible individ-
ual’s blindness or disability which are made for the benefit of an
eligible individual who is the designated beneficiary.257 If distribu-
tions are not used to pay qualified disability expenses, then the
portion of the distribution based on earnings must generally be in-
cluded in gross income.258
Distributions includible in gross income are also generally sub-
ject to an additional 10 percent tax.259 Distributions from an ABLE
account are not treated as a taxable gift.260
A qualified ABLE program must provide for separate accounting
for each designated beneficiary.261 The program must provide that
any designated beneficiary may, directly or indirectly, direct the in-
vestment of any contributions to the program, or earnings thereon,
not more than two times in any calendar year.262 The program
must not allow any interest in the program or any portion thereof
to be used as security for a loan.263 Qualified ABLE programs are
subject to reporting requirements.264
Qualified ABLE programs must provide adequate safeguards to
prevent aggregate contributions on behalf of a designated bene-
ficiary in excess of the limit established by the applicable State
under the State’s qualified tuition program.265
Treatment of ABLE accounts under Federal programs
Amounts in an individual’s ABLE account, contributions to the
individual’s ABLE account, and distributions from the individual’s
ABLE account for qualified disability expenses are disregarded for
purposes of determining eligibility to receive Federal assistance or
benefits, and for purposes of determining the amount of such as-
sistance or benefits.266 However, in the case of the supplemental
security income (‘‘SSI’’) program,267 a distribution for housing ex-
penses, and amounts in the individual’s ABLE account in excess of
$100,000, are not disregarded.268
In the case where an individual’s ABLE account balance exceeds
$100,000, such individual’s SSI benefits shall not be terminated,
but instead shall be suspended until such time as the individual’s
resources fall below $100,000.269 However, such suspension shall
not apply for purposes of Medicaid eligibility.270
257 Sec. 529A(e)(5). Enumerated qualified disability expenses include: education, housing,
transportation, employment training and support, assistive technology and personal support
services, health, prevention and wellness, financial management and administrative services,
legal fees, expenses for oversight and monitoring, funeral and burial expenses, and other ex-
penses, which are approved by the Secretary under regulations and consistent with the purposes
of this section. Id.
258 Treas. Reg. sec. 1.529A–3. Amounts that are rolled over to another ABLE account within
60 days are not includible in gross income.
259 Sec. 529A(c)(3).
260 Sec. 529A(c)(2)(B).
261 Sec. 529A(b)(3).
262 Sec. 529A(b)(4).
263 Sec. 529A(b)(5).
264 See sec. 529A(d).
265 Sec. 529A(b)(6).
266 P.L. 113–295(a).
267 See Title XVI of the Social Security Act (the SSI program).
268 Ibid.
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269 P.L. 113–295(b)(1).
270 P.L. 113–295(b)(2). See title XIX of the Social Security Act (the Medicare program).
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Treatment of ABLE accounts in bankruptcy
Property of a bankruptcy estate may not include certain amounts
contributed to an ABLE account, if the designated beneficiary of
such account was a child, stepchild, grandchild or stepgrandchild
of the debtor during the taxable year in which funds were placed
in the account.271 Such funds shall be excluded from the bank-
ruptcy estate only to the extent that they were contributed to an
ABLE account at least 365 days prior to the filing of the title 11
petition, are not pledged or promised to any entity in connection
with any extension of credit, and are not excess contributions.272
In the case of funds contributed to an ABLE account that are con-
tributed not earlier than 720 days (and not later than 365 days)
prior to the filing of the petition, only up to $6,225 may be ex-
cluded.
REASONS FOR CHANGE
The Committee believes that the ABLE program is an important
tool to provide funding for disability related expenses, and there-
fore it wishes to expand eligibility for the program.
EXPLANATION OF PROVISION
The provision modifies the definition of eligible individual for
purposes of a qualified ABLE program. Under the provision, an in-
dividual may be an eligible individual if entitled to benefits based
on blindness or disability, and such blindness or disability occurred
before the date on which the individual attains the age of 46 (in-
creased from 26).
EFFECTIVE DATE
The provision applies to taxable years beginning after December
31, 2025.
22. Assist savers in recovering unclaimed savings bonds (sec. 122
of the bill)
PRESENT LAW
The U.S. government issues bonds that pay a fixed rate of inter-
est every six months until they mature. The bonds are issued in
a term of 20 years or 30 years. The owner of a bond may hold it
until it matures or sell it before it matures. At maturity, the face
amount of the bond is paid to the owner of the bond.
REASONS FOR CHANGE
The Committee believes that the States may be useful in helping
owners of forgotten savings bonds claim those bonds.
EXPLANATION OF PROVISION
The provision amends Title 31 of the United States Code to re-
quire the Secretary of the Treasury (‘‘Secretary’’) to share certain
information relating to the registered owners of matured and
unredeemed savings bonds with the States to enable the States to
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271 11 U.S.C. sec. 541(b)(10).
272 As defined in section 4973(h).
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locate the owners in accordance with the States’ standards for re-
covery of abandoned property.
EFFECTIVE DATE
The provision is effective on the date of enactment.
TITLE II—RETIREES
1. Increase in age for required beginning date for mandatory
distributions (sec. 201 of the bill and sec. 401(a)(9) of the Code)
PRESENT LAW
In general
Employer-provided qualified retirement plans and IRAs are sub-
ject to required minimum distribution rules.273 Employer-sponsored
retirement plans are of two general types: defined benefit plans,
under which benefits are determined under a plan formula and
paid from general plan assets, rather than individual accounts; and
defined contribution plans, under which benefits are based on a
separate account for each participant, to which are allocated con-
tributions, earnings and losses. A qualified retirement plan for this
purpose means a tax-qualified plan described in section 401(a)
(such as a defined benefit pension plan or a section 401(k) plan),
an employee retirement annuity described in section 403(a), a tax-
sheltered annuity described in section 403(b), and a plan described
in section 457(b) that is maintained by a governmental em-
ployer.274
In general, under the minimum distribution rules, distribution of
minimum benefits must begin to an employee (or IRA owner) no
later than a required beginning date and a minimum amount must
be distributed each year (sometimes referred to as ‘‘lifetime’’ min-
imum distribution requirements). These lifetime requirements do
not apply to a Roth IRA.275 Minimum distribution rules also apply
to benefits payable with respect to an employee (or IRA owner) who
has died (sometimes referred to as ‘‘after-death’’ minimum distribu-
tion requirements). The regulations provide a methodology for cal-
culating the required minimum distribution from an individual ac-
count under a defined contribution plan or from an IRA.276 In the
case of annuity payments under a defined benefit plan or an annu-
ity contract, the regulations provide requirements that the stream
of annuity payments must satisfy.
Failure to make a required minimum distribution triggers a 50-
percent excise tax, payable by the individual or the individual’s
273 Secs. 401(a)(9) and 408(a)(6). Roth IRAs, however, are not subject to minimum distribution
rules during the owner’s lifetime. The IRS recently published new proposed regulations under
section 401(a)(9). 87 FR 10504, Feb. 24, 2022 (corrected March 21, 2022). The amendments to
Treas. Reg. § § 1.401(a)(9)–1 through 1.401(a)(9)–9, are proposed to apply for purposes of deter-
mining RMDs for calendar years beginning on or after Jan. 1, 2022.
274 The required minimum distribution rules also apply to section 457(b) plans maintained by
tax-exempt employers other than governmental employers.
275 Sec. 408A(c)(4). Roth IRAs are, however, subject to the post-death minimum distribution
rules that apply to traditional IRAs. For Roth IRAs, the IRA owner is treated as having died
before the individual’s required beginning date.
276 Reflecting the directive in section 823 of the Pension Protection Act of 2006 (Pub. L. No.
109–280), pursuant to Treas. Reg. sec. 1.401(a)(9)–1, A–2(d), a governmental plan within the
meaning of section 414(d) or a governmental eligible deferred compensation plan is treated as
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having complied with the statutory minimum distribution rules if the plan complies with a rea-
sonable and good faith interpretation of those rules.
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beneficiary. The tax is imposed during the taxable year that begins
with or within the calendar year during which the distribution was
required.277 The tax may be waived if the failure to distribute is
reasonable error and reasonable steps are taken to remedy the vio-
lation.278
Required beginning date
Required minimum distributions generally must begin by April 1
of the calendar year following the calendar year in which the indi-
vidual (employee or IRA owner) reaches age 72. Prior to January
1, 2020, the age after which required minimum distributions were
required to begin was 701⁄2.279 In the case of an employer-provided
qualified retirement plan, the required minimum distribution date
for an individual who is not a five-percent owner of the employer
maintaining the plan may be delayed to April 1 of the year fol-
lowing the year in which the individual retires, if the plan provides
for this later distribution date. For all subsequent years, including
the year in which the individual was paid the first required min-
imum distribution by April 1, the individual must take the re-
quired minimum distribution by December 31.
Lifetime rules
While an employee (or IRA owner) is alive, distributions of the
individual’s interest are required to be made (in accordance with
regulations) over the life of the employee (or IRA owner) or over
the joint lives of the employee (or IRA owner) and a designated
beneficiary (or over a period not extending beyond the life expect-
ancy of such employee (or IRA owner) or the life expectancy of such
employee (or IRA owner) and a designated beneficiary).280 For
IRAs and defined contribution plans, the required minimum dis-
tribution for each year generally is determined by dividing the ac-
count balance as of the end of the prior year by the number of
years in the distribution period.281 The distribution period is gen-
erally derived from the Uniform Lifetime Table.282 This table is
based on the joint life expectancies of the individual and a hypo-
thetical beneficiary 10 years younger than the individual. For an
individual with a spouse as designated beneficiary who is more
than 10 years younger, the joint life expectancy of the couple is
used (because the couple’s remaining joint life expectancy is longer
than the length provided in the Uniform Lifetime Table). The dis-
tribution period for annuity payments under a defined benefit plan
or annuity contract (to the extent not limited to the life of the em-
ployee (or IRA owner) or the joint lives of the employee (or IRA
owner) and a designated beneficiary) is generally subject to the
same limitations as apply to individual accounts.283
277 Sec. 4974(a).
278 Sec. 4974(d).
279 Section 114 of the SECURE Act increased the age after which required minimum distribu-
tions must begin from 70 to 72, effective for distributions required to be made after December
31, 2019, with respect to individuals who attain age 70 after that date.
280 Sec. 401(a)(9)(A).
281 Treas. Reg. sec. 1.401(a)(9)–5.
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282 Treas. Reg. sec. 1.401(a)(9)–9.
283 Treas. Reg. sec. 1.401(a)(9)–6.
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After-death rules for defined contributions plans and IRAs
In the case of a defined contribution plan or IRA, if an individual
dies before the individual’s entire interest is distributed, and the
individual has a designated beneficiary, unless the designated ben-
eficiary is an eligible designated beneficiary, the individual’s entire
account must be distributed within 10 years after the individual’s
death. This rule applies regardless of whether the individual dies
before or after the individual’s required beginning date. A des-
ignated beneficiary is an individual designated as a beneficiary
under the plan or IRA.284
In the case of an eligible designated beneficiary, the remaining
required minimum distributions are distributed over the life of the
beneficiary (or over a period not extending beyond the life expect-
ancy of such beneficiary). Such distributions generally must begin
no later than December 31 of the calendar year immediately fol-
lowing the calendar year in which the individual dies. An eligible
designated beneficiary is a designated beneficiary who is (1) the
surviving spouse of the individual; (2) a child of the individual who
has not reached majority; (3) disabled; (4) chronically ill; or (5) not
more than 10 years younger than the individual.285 The required
minimum distribution for each year is determined by dividing the
account balance as of the end of the prior year by a distribution
period, which is determined by reference to the beneficiary’s life ex-
pectancy.286 Special rules apply in the case of trusts for disabled
or chronically ill beneficiaries.287
In the case of an individual who does not have a designated ben-
eficiary, if an individual dies on or after the individual’s required
beginning date, the distribution period for the remaining required
minimum distributions is equal to the remaining years of the de-
ceased individual’s single life expectancy, using the age of the de-
ceased individual in the year of death.288 If an individual dies be-
fore the required beginning date, the individual’s entire account
must be distributed no later than December 31 of the calendar year
that includes the fifth anniversary of the individual’s death.289
After-death rules for defined benefit plans
In the case of a defined benefit plan, if an individual dies before
the individual’s entire interest is distributed, the minimum dis-
tribution rules vary depending on whether or not the individual
dies before or after the required beginning date. If the individual
dies after distributions have begun, the remaining interest must be
distributed at least as rapidly as under the method of distribution
prior to death.290 If the individual dies before distributions have
begun, the entire account must be distributed within five years
after the individual’s death, unless any portion is payable to a des-
284 Sec. 401(a)(9)(E)(i); Treas. Reg. sec. 1.401(a)(9)–4, Q&A–1. The individual need not be
named as long as the individual is identifiable under the terms of the plan (or IRA). However,
the fact that an interest under a plan or IRA passes to a certain individual under a will or oth-
erwise under State law does not make that individual a designated beneficiary unless the indi-
vidual is designated as a beneficiary under the plan or IRA.
285 Sec. 401(a)(9)(E)(ii).
286 Treas. Reg. sec. 1.401(a)(9)–5, A–5.
287 Sec. 401(a)(9)(H)(iv).
288 Treas. Reg. sec. 1.401(a)(9)–5, A–5(a).
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289 Treas. Reg. sec. 1.401(a)(9)–3, Q&As 1, 2.
290 Sec. 401(a)(9)(B)(i).
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69
ignated beneficiary.291 If any portion is payable to a designated
beneficiary, the remaining required minimum distributions are dis-
tributed over the life of the beneficiary (or over a period not extend-
ing beyond the life expectancy of such beneficiary). Such distribu-
tions generally must begin no later than December 31 of the cal-
endar year immediately following the calendar year in which the
individual dies.
Annuity distributions
The regulations provide rules for the amount of annuity distribu-
tions from a defined benefit plan, or from an annuity purchased by
the plan from an insurance company, that are paid over life (or a
period not extending beyond life expectancy). Annuity distributions
are generally required to be nonincreasing over time with certain
exceptions, which include, for example, (i) increases to the extent
of certain specified cost-of-living indices, (ii) a constant percentage
increase (for a qualified defined benefit plan, the constant percent-
age cannot exceed five percent per year), (iii) certain accelerations
of payments, and (iv) increases to reflect when an annuity is con-
verted to a single life annuity after the death of the beneficiary
under a joint and survivor annuity or after termination of the sur-
vivor annuity under a qualified domestic relations order.292 If dis-
tributions are in the form of a joint and survivor annuity and the
survivor annuitant both is an individual other than the surviving
spouse and is younger than the employee (or IRA owner), the sur-
vivor annuity benefit must be limited to a percentage of the life an-
nuity benefit for the employee (or IRA owner). The survivor benefit
as a percentage of the benefit of the primary annuitant is required
to be smaller (but not required to be less than 52 percent) as the
difference in the ages of the primary annuitant and the survivor
annuitant becomes greater.
Special rules for spouses
If the designated beneficiary is the individual’s spouse, com-
mencement of distributions is permitted to be delayed until Decem-
ber 31 of the calendar year in which the deceased individual would
have attained age 72. If the surviving spouse dies before distribu-
tions to such spouse begin, the after-death rules apply after the
death of the spouse as though the spouse were the employee (or
IRA owner).
In the case of an IRA, if the beneficiary is the surviving spouse,
the spouse is permitted to choose to calculate required minimum
distributions both while the surviving spouse is alive and after
death as though the surviving spouse is the IRA owner.293
REASONS FOR CHANGE
When mandatory distributions from qualified retirement plans
based on age were added to the Code in 1962,294 the life expectancy
of Americans was shorter. In addition, increasing numbers of
Americans are continuing to work past traditional retirement ages.
291 Sec. 401(a)(9)(B)(ii), (iii).
292 Treas. Reg. sec. 1.401(a)(9)–6, A–14.
293 Treas. Reg. sec. 1.408–8, Q&A 5.
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294 Sec. 2(2) of the Self-Employed Individuals Tax Retirement Act of 1962, Pub. L. No. 87–
792.
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70
For these reasons, the SECURE Act 295 increased the age at which
required minimum distributions generally must be made from age
701⁄2 to age 72. The Committee believes it is appropriate to further
increase this age to more accurately reflect present-day cir-
cumstances.
EXPLANATION OF PROVISION
The provision changes the age on which the required beginning
date for required minimum distributions is based, from the cal-
endar year in which the employee or IRA owner attains age 72 to
the calendar year in which the employee or IRA owner attains age
75, for calendar years after 2031. If an individual has not attained
the age that applies for a given calendar year, the individual is not
treated as having attained the age at which required minimum dis-
tributions must begin for that year, regardless of whether the indi-
vidual had attained the applicable age in a prior calendar year.
Thus, for example, an individual who attains age 73 in 2032 is not
required to take a required minimum distribution for that year,
even though the individual might have been required to take a re-
quired minimum distribution for calendar year 2031, on account of
having attained age 72 in 2031.
EFFECTIVE DATE
The provision is effective for calendar years beginning after the
date of enactment.
2. Qualifying longevity annuity contracts (sec. 202 of the bill and
Treas. Reg. sec. 1.401(a)(9)–6)
PRESENT LAW
Required minimum distributions
Background on required minimum distributions under qualified
retirement plans may be found in Title II, section 1 of this docu-
ment.
Qualifying longevity annuity contracts
A qualifying longevity annuity contract (‘‘QLAC’’) is a deferred
annuity contract that is purchased from an insurance company for
an employee that is generally scheduled to commence payments at
an advanced age (but no later than age 85) 296 and which satisfies
each of the following requirements: 297
1. Premiums for the QLAC do not exceed the lesser of a dollar
or percentage limitation. The dollar limitation is (1) $125,000 (as
adjusted) ($145,000 for 2022) over (2) the sum of (a) the premiums
previously paid with respect to the contract and (b) the premiums
previously paid with respect to any other QLAC that is purchased
for the employee under the plan, or any other plan of the em-
295 Sec. 114 of the SECURE Act.
296 Because under section 401(a)(9), minimum required distributions must generally begin no
later than the April 1 of the year following the year in which the individual attains age 72,
without these special rules, QLACs would violate the requirements of section 401(a)(9). See the
provision described in Title II, section 1 of this document, which proposes an increase in the
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age for the required beginning date for mandatory distributions.
297 Treas. Reg. sec. 401(a)(9)–6, Q&A–17.
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71
ployer.298 The percentage limitation is 25 percent of the employer’s
account balance under the plan (including the value of any QLAC
held under the plan for the employee) over the previously paid pre-
miums with respect to the contract or with respect to any other
QLAC that is purchased for the employee under the plan, or any
other plan of the employer.
2. The QLAC provides that distributions under the contract must
commence not later than the first day of the month following the
individual’s attainment of age 85.
3. The QLAC provides that once distributions begin under the
contract, the distributions satisfy the minimum required distribu-
tion rules, except for the rule that annuity payments commence on
or before the required beginning date.
4. The contract does not make available any commutation ben-
efit, cash surrender right, or other similar feature.
5. No benefits are provided under the contract after the death of
the employee other than those provided for in the regulations.
6. When the contract is issued, the contract (or a rider or en-
dorsement) states that it is intended to be a QLAC.
7. The contract is not a variable contract, an indexed contract or
a similar contract, except as provided in guidance.
Recently, IRS and Treasury issued proposed regulations relating
to required minimum distributions from qualified plans; section
403(b) annuity contracts, custodial accounts, and retirement income
accounts; individual retirement accounts and annuities; and eligi-
ble deferred compensation plans 299 to address the required min-
imum distribution requirements 300 and to update the regulations
to reflect the amendments made to such distributions by sections
114 and 401 of the SECURE Act. With respect to QLACs, the defi-
nition of a QLAC in the proposed regulations is the same as in the
current regulations.301
REASONS FOR CHANGE
QLACs are intended to be an inexpensive way for individuals to
hedge the risk of outliving their savings in defined contribution
plans and IRAs. In 2014, final regulations were published relating
to QLACs. However, the final regulations imposed certain limits on
QLACs in order to comply with statutory requirements. These lim-
its prevent QLACs from achieving their intended purpose in pro-
viding longevity protection by, for example, limiting the percentage
of an individual’s account that may be used to acquire such con-
tracts.
The Committee believes that repealing that 25 percent limita-
tion, increasing and indexing the dollar limitation in such con-
tracts, clarifying that free-look periods up to 90 days are permitted,
and facilitating the sales of such contracts with spousal survival
rights, will eliminate certain barriers to the purchase of QLACs.
298 Including any other plan, annuity, or account described in sections 401(a), 403(a), 403(b),
or 408, or an eligible governmental plan under section 457(b).
299 Under section 457.
300 87 FR 10504, Feb. 24, 2022 (corrected March 21, 2022). The amendments to Treas. Reg.
secs. 1.401(a)(9)–1 through 1.401(a)(9)–9, are proposed to apply for purposes of determining
RMDs for calendar years beginning on or after Jan. 1, 2022. For the 2021 distribution calendar
year, taxpayers must apply the existing regulations, but by taking into account a reasonable,
good faith interpretation of the amendments made by sections 114 and 401 of the SECURE Act.
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Compliance with the proposed regulations satisfy that requirement.
301 See Prop. Treas. Reg. sec. 1.401(a)(9)–6(q).
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EXPLANATION OF PROVISION
Under the provision, no later than 18 months after the date of
enactment, the Secretary (or the Secretary’s delegate) is directed to
amend the minimum required distribution regulation which applies
to QLACs:
• To eliminate the requirement that premiums for QLACs be
limited to 25 percent (or any other percentage) of an individ-
ual’s account balance;
• To increase the dollar limitation on premiums for QLACs
from $125,000 to $200,000, and to provide that, in the case of
calendar years beginning on or after January 1 of the second
year following the year of enactment of this Act, the $200,000
dollar limitation will be adjusted at the same time and in the
same manner as the limits are adjusted under section 415(d),
except that the base period will be the calendar quarter begin-
ning July 1 of the year of enactment of this Act, and any in-
crease to such dollar limitation which is not a multiple of
$10,000 will be rounded to the next lowest multiple of $10,000;
• To provide that in the case of a QLAC purchased with
joint and survivor annuity benefits for the individual and his
or her spouse that were permissible under the regulations at
the time the contract was originally purchased, a divorce occur-
ring after the original purchase and before the annuity pay-
ments commence under the contract, does not affect the per-
missibility of the joint and survivor annuity benefits or other
benefits under the contract, or require any adjustment to the
amount or duration of benefits payable under the contract pro-
vided that any qualified domestic relations order 302 or in the
case of an arrangement not subject to the qualified domestic
relations order provisions in the Code or ERISA,303 any divorce
or separation instrument (1) provides that the former spouse
is entitled to the survivor benefits under the contract, (2) does
not modify the treatment of the former spouse as beneficiary
under the contract who is entitled to the survivor benefits, or
(3) does not modify the treatment of the former spouse as the
measuring life for the survivor benefits under the contract. For
purposes of this provision, the term ‘‘divorce or separation in-
strument’’ means (1) a decree of divorce or separate mainte-
nance or a written instrument incident to such a decree, (2) a
written separation agreement, or (3) a decree (not described in
(1)) requiring a spouse to make payments for the support or
maintenance of the other spouse; and
• To ensure that the regulation does not preclude a contract
from including a provision under which an employee may re-
scind the purchase of the contract within a period not exceed-
ing 90 days from the date of purchase (the ‘‘short free look pe-
riod’’).
Regulatory Successor Provision
Any reference to a regulation is treated as including a reference
to any successor regulation.
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302 Within the meaning of section 414(p).
303 Sec. 414(p) or sec. 206(d) of ERISA.
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73
EFFECTIVE DATE
The provision is generally effective with respect to contracts pur-
chased or received in an exchange on or after the date of enact-
ment. The changes with respect to joint and survivor annuities and
the short free look period are effective with respect to contracts
purchased or received in an exchange on or after July 2, 2014.
Prior to the date the Secretary issues final regulations, the Sec-
retary shall administer and enforce the law in accordance with the
effective dates above, and taxpayers may rely upon their reason-
able good faith interpretations of the law prior to this provision be-
coming effective.
3. Remove required minimum distribution barriers for life
annuities (sec. 203 of the bill and sec. 401(a)(9) of the Code)
PRESENT LAW
Required minimum distributions
Background on required minimum distributions under qualified
retirement plans may be found in Title II, section 1 of this docu-
ment.
Annuities
A plan will not fail to satisfy the minimum required distribution
rules merely because distributions are made from an annuity con-
tract which is purchased with the employee’s benefit by the plan
from an insurance company.304 Prior to the date that an annuity
contract under an individual account plan commences benefits
under the contract, the interest of the employee or beneficiary
under that contract is treated as an individual account for purposes
of the required minimum distribution requirements.305 Once dis-
tributions are required to begin (on the required beginning date),
payments under the annuity contract will satisfy the required min-
imum distribution rules if distributions of the employee’s entire in-
terest are paid in the form of periodic annuity payments for the
employee’s life (or the joint lives of the employee and beneficiary)
or over a period certain as defined in the regulations.306
All annuity payments (whether paid over an employee’s life, joint
lives or a period certain) must be nonincreasing, or only increase
in accordance with certain exceptions.307
There are additional increases permitted for annuity payments
under annuity contracts purchased from insurance companies. If
the total future payments expected to be made under the annuity
contract (‘‘future expected payments’’) exceed the ‘‘total value being
annuitized,’’ the payments under the annuity contract will not fail
to satisfy the nonincreasing payment requirement merely because
the payments (1) are increased by a constant percentage, applied
not less frequently than annually; (2) provide for a final payment
304
Treas. Reg. sec. 1.401(a)(9)–6, A–4.
305
Treas. Reg. sec. 1.401(a)(9)–6, A–12(a).
306
Treas. Reg. sec. 1.401(a)(9)–6, A–1, ¥3 and ¥4. If the annuity contract is purchased after
the required beginning date, the first payment must begin on or before the purchase date and
the payment required must be made no later than the end of that required period.
307 Treas. Reg. sec. 1.401(a)(9)–6, A–14(a). The exceptions include eligible cost of living in-
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creases, increased benefits resulting from a plan amendment, and lump sum distributions made
to a beneficiary upon the death of the employee.
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upon the death of the employee that does not exceed the excess of
the total value being annuitized over the total of payments before
the death of the employee; (3) are increased as a result of dividend
payments or other payments that result from actuarial gains, but
only if actuarial gain is measured no less frequently than annually
and the resulting payments are either paid no later than the year
following the year for which the actuarial experience is measured
or paid in the same form as the payment of the annuity over the
remaining period of the annuity; and (4) are increased for certain
accelerations of payment.308 However, in operation, this actuarial
test does not permit certain guarantees in life annuities such as
certain guaranteed annual increases, return of premium death ben-
efits, and period certain guarantees for participating annuities.
Recently, IRS and Treasury issued proposed regulations relating
to required minimum distributions from qualified plans; section
403(b) annuity contracts, custodial accounts, and retirement income
accounts; individual retirement accounts and annuities; and eligi-
ble deferred compensation plans 309 to address the required min-
imum distribution requirements 310 and to update the regulations
to reflect the amendments made to such distributions by sections
114 and 401 of the SECURE Act.
Like the existing regulations, the proposed regulations generally
provide that all payments under a defined benefit plan or annuity
contract must be nonincreasing, subject to a number of exceptions.
The existing regulations provide a number of exceptions under
which payments from annuity contracts purchased from insurance
companies may increase, and certain of these exceptions apply only
if the total future expected payments under the contract exceed the
total value being annuitized. The proposed regulations make a
minor modification to the rules to clarify the calculation of the total
future expected payments and the total value being annuitized.
The proposed regulations also provide three additional exceptions
to the nonincreasing payments requirement for annuities issued by
insurance companies that apply without regard to a comparison of
the total future expected payments and the total value being
annuitized.311 First, the proposed regulations allow an annuity con-
tract to provide a final payment upon the death of the employee
that does not exceed the excess of total value being annuitized over
the total of payments before the death of the employee. Second, the
proposed regulations allow an annuity contract to offer a short-
term acceleration of payments, under which up to one year of an-
nuity payments are paid in advance of when those payments were
scheduled to be made. The third exception allows an annuity con-
tract to provide an acceleration of payments that is required to
comply with the special rules for certain defined contribution
plans.312
308
Treas. Reg. sec. 1.401(a)(9)–6, A–14(c).
309
Under section 457.
310 87 FR 10504, Feb. 24, 2022 (corrected March 21, 2022). The amendments to Treas. Reg.
§ § 1.401(a)(9)–1 through 1.401(a)(9)–9, are proposed to apply for purposes of determining RMDs
for calendar years beginning on or after Jan. 1, 2022. For the 2021 distribution calendar year,
taxpayers must apply the existing regulations, but by taking into account a reasonable, good
faith interpretation of the amendments made by Sections 114 and 401 of the SECURE Act.
Compliance with the proposed regulations satisfy that requirement.
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311 Prop. Treas. Reg. sec. 1.401(a)(9)–6(o)(4).
312 Under section 401(a)(9)(H).
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REASONS FOR CHANGE
The required minimum distribution rules contain an actuarial
test, intended to limit tax deferral by precluding commercial annu-
ities from providing payments that increase excessively over time.
In operation, however, the test commonly prohibits many impor-
tant guarantees and features of commercial annuities that provide
only modest benefit increases that make these annuities attractive
to individuals participating in defined contribution plans. For ex-
ample, guaranteed annual increases of only one or two percent, re-
turn of premium death benefits, and period certain guarantees for
participating annuities are commonly prohibited by this test. With-
out these types of guarantees, many individuals are unwilling to
elect a life annuity under a defined contribution plan or IRA.
Such annuities also provide individuals in defined contribution
plans with protection against outliving their assets in retirement.
The Committee believes that making it easier for commercial annu-
ities to offer these types of benefits will encourage individuals par-
ticipating in defined contribution plans to purchase such annuities.
EXPLANATION OF PROVISION
The provision amends the minimum required distribution rules
to permit commercial annuities 313 that are issued in connection
with any eligible retirement plan 314 to provide one or more of the
following types of payments on or after the annuity starting date:
• Annuity payments that increase by a constant percentage,
applied not less frequently than annually, at a rate that is less
than five percent per year;
• A lump sum payment that results in a shortening of the
payment period with respect to an annuity, or a full or partial
commutation of the future annuity payments, provided that
such a lump sum is determined using reasonable actuarial
methods and assumptions, determined in good faith by the
issuer of the contract;
• A lump sum payment that accelerates the receipt of annu-
ity payments that are scheduled to be received within the en-
suing 12 months, regardless of whether such acceleration
shortens the payment period with respect to the annuity, re-
duces the dollar amount of benefits to be paid under the con-
tract, or results in a suspension of annuity payments during
the period being accelerated;
• Dividends or similar distributions determined in an actu-
arially reasonable manner; and
• Lump sum return of premium death benefits.
EFFECTIVE DATE
The provision is effective as of the date of enactment.
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313 Within the meaning of section 3405(e)(6).
314 Within the meaning of section 402(c)(8)(B), other than a defined benefit plan.
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76
4. Eliminating a penalty on partial annuitization (sec. 204 of the
bill and Treas. Reg. secs. 1.401(a)(9)–5 and –6)
PRESENT LAW
Required minimum distributions
Background on required minimum distributions under qualified
retirement plans may be found in Title II, section 1 of this docu-
ment. Proposed regulations relating to required minimum distribu-
tions from qualified plans were recently issued 315 to update the
regulations to reflect the amendments made to such distributions
by the SECURE Act.316
Annuity distributions
Additional background on annuity distributions from a qualified
plan may be found in Title II, section 3 of this document.
For IRAs and defined contribution plans, the required minimum
distribution for each year generally is determined by dividing the
account balance as of the end of the prior year by the number of
years in the distribution period.317 A plan will not fail to satisfy
the minimum required distribution rules merely because distribu-
tions are made from an annuity contract which is purchased with
the employee’s benefit by the plan from an insurance company.318
Prior to the date that an annuity contract under an individual ac-
count plan commences benefits under the contract, the interest of
the employee or beneficiary under that contract is treated as an in-
dividual account for purposes of the required minimum distribution
requirements.319
Once distributions are required to begin (on the required begin-
ning date), payments under the annuity contract will satisfy the re-
quired minimum distribution rules if distributions of the employ-
ee’s entire interest are paid in the form of periodic annuity pay-
ments for the employee’s life (or the joint lives of the employee and
beneficiary) or over a period certain as defined in the regula-
tions.320 However, if a portion of the employee’s account balance
under a defined contribution plan is used to purchase an annuity
contract (while another portion stays in the account), the remain-
ing account under the plan must be distributed in accordance with
the required minimum distribution rules for defined contribution
plans, and the annuity payments under the annuity contract must
satisfy the required minimum distribution rules applicable to de-
315 87 FR 10504, Feb. 24, 2022 (corrected March 21, 2022). The amendments to Treas. Reg.
§ § 1.401(a)(9)–1 through 1.401(a)(9)–9, are proposed to apply for purposes of determining RMDs
for calendar years beginning on or after Jan. 1, 2022.
316 Sections 114 and 401.
317 Treas. Reg. sec. 1.401(a)(9)–5.
318 Treas. Reg. sec. 1.401(a)(9)–6, A–4.
319 Treas. Reg. sec. 1.401(a)(9)–6, A–12(a).
320 Treas. Reg. sec. 1.401(a)(9) 6, A–1,¥3 and ¥4. If the annuity contract is purchased after
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the required beginning date, the first payment must begin on or before the purchase date and
the payment required must be made no later the end of that required period.
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77
fined benefit plans and annuity contracts.321 The proposed regula-
tions generally retain this rule.322
REASONS FOR CHANGE
Under present law, if an individual takes a portion of their ac-
count balance in the form of an annuity, the required distribution
amount for the remainder of the account balance is not reduced by
those partial annuity payments (even if the partial annuity pay-
ments exceed the amount that would have been required to be dis-
tributed from the account if the annuity contract had not been pur-
chased). This could result in an individual having required min-
imum distributions from that account for a year that are more than
if the individual had not purchased an annuity. The Committee
therefore believes that partial annuity payments should be taken
into account for purposes of determining the required minimum
distributions from defined contribution plans, and other account
based plans.
EXPLANATION OF PROVISION
The provision directs the Secretary (or delegate) to amend the re-
quired minimum distribution rules for defined contribution plans
so that partial annuity payments could be taken into account for
purposes of satisfying the required distribution rules for those
plans.
Under the provision, if an employee’s benefit is in the form of an
individual account under a defined contribution plan, the plan may
allow the employee to elect to have the required distribution
amount from such account for a year be calculated as the excess
of the total required amount for such year over the annuity amount
for such year. The total required amount means the amount re-
quired to be distributed from a defined contribution plan under the
rules applicable to such plans for a year determined by treating the
account balance as of the last valuation date in the immediately
preceding calendar year as including the value on that date of all
annuity contracts that were purchased with a portion of the ac-
count and from which payments are made under the required dis-
tribution rules applicable to annuities. Annuity amount for the
year means the total amount distributed in the year from all annu-
ity contracts purchased from the individual account.
The provision also directs the Secretary to issue conforming
amendments for the distribution rules applicable to a tax-sheltered
annuity plan (‘‘section 403(b) plan’’), an eligible deferred compensa-
tion plan of a State or local government employer (a ‘‘governmental
section 457(b) plan’’), and an individual retirement arrangement
321 Treas. Reg. sec. 1.401(a)(9) 8, A–2(a). If a partial annuity is purchased, then the rules re-
quire the remaining account balance in the defined contribution plan to satisfy the required
minimum distribution rules applicable to defined contribution plans. The annuity payments
under the annuity contract must satisfy the rules applicable to defined benefit plans and annu-
ity contracts.
322 Prop. Treas. Reg. sec. 1.401(a)(9) 5. The proposed regulations specify that if an annuity is
purchased that the plan will satisfy the required minimum distribution rules only if, in the year
of purchase, distributions from the individual account satisfy the rules applicable to defined con-
tribution plans, and for calendar years following the year of purchase, payments under the an-
nuity contract are made in accordance with the rules applicable to defined benefit plans and
annuity contracts. Payments under the annuity contract during the year in which the annuity
contract is purchased are treated as distributions from the individual account for purposes of
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determining whether the distributions from the individual account satisfy the required min-
imum distribution rules in the calendar year of purchase.
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(an ‘‘IRA’’). Under these amendments, any IRA or section 403(b)
plan that an individual holds as the owner, or which an individual
holds as a beneficiary of the same, are treated as one plan for pur-
poses of determining the required distribution.
EFFECTIVE DATE
The modifications and amendments required by this provision
will be deemed to have been made (and laws will be applied as if
the actions the Secretary is required to take had been taken) as of
the date of enactment. Prior to the date the Secretary issues final
regulations, taxpayers may rely upon their reasonable, good faith
interpretations of the law.
5. Reduction in excise tax on certain accumulations in qualified
retirement plans (sec. 205 of the bill and sec. 4974 of the Code)
PRESENT LAW
Background on required minimum distributions under qualified
retirement plans may be found in Title II, section 1 of this docu-
ment.
The Code imposes an excise tax on an individual if the amount
distributed to an individual during a taxable year is less than the
required minimum distribution under the plan for that year.323
The excise tax is equal to 50 percent of the shortfall (that is, 50
percent of the amount by which the required minimum distribution
exceeds the actual distribution). However, the Secretary may waive
the tax if the individual establishes that the shortfall was due to
reasonable error and reasonable steps are being taken to remedy
the error.
REASONS FOR CHANGE
The Committee recognizes that in many cases, failures to take a
required minimum distribution are inadvertent. The Committee
thus wishes to reduce the overall excise tax that applies to such
failures, in particular in the case of an individual who discovers
such a failure and takes steps to correct it.
EXPLANATION OF PROVISION
The provision reduces the excise tax that generally applies to the
failure to take required minimum distributions from 50 percent of
the shortfall to 25 percent.
In addition, the provision further reduces the excise tax to 10
percent in the case of an individual who receives a distribution dur-
ing the correction window of the amount which resulted in the im-
position of the excise tax, and who submits a return during the cor-
rection period reflecting the excise tax. The correction window is
defined as the time period beginning on the date the excise tax is
imposed with respect to the shortfall of distributions from a quali-
fied retirement plan or eligible deferred compensation plan (as de-
fined in section 457(b)), and ending on the earliest of (1) the date
of mailing a notice of deficiency 324 with respect to the excise tax
imposed under this section, (2) the date on which the excise tax im-
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323 Sec. 4974.
324 Pursuant to section 6212.
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79
posed under this section is assessed, or (3) the last day of the sec-
ond taxable year that begins after the end of the taxable year in
which the excise tax is imposed.
EFFECTIVE DATE
The provision applies to taxable years beginning after the date
of enactment.
6. Clarification of substantially equal periodic payment rule
(sec. 206 of the bill and secs. 72(t) and (q) of the Code)
PRESENT LAW
Recapture of the early withdrawal tax for substantially equal peri-
odic payments
Distributions from a Qualified Retirement Plan
Additional background on distributions from tax-favored retire-
ment plans may be found in Title I, section 5 of this document.
A distribution from a qualified retirement plan, a section 403(b)
plan, or an IRA received before age 591⁄2 is subject to a 10-percent
additional tax (referred to as the ‘‘early withdrawal tax’’) on the
amount includible in income unless an exception applies.325 One
exception to the early withdrawal tax is for distributions made as
a series of substantially equal periodic payments (not less fre-
quently than annually) that are made for the life or life expectancy
of the employee or the joint lives or life expectancies of the em-
ployee and their designated beneficiary.326
However, if the series of payments is terminated or modified be-
fore the end of the 5-year period beginning on the date of the first
payment, or before the employee attains age 591⁄2, then the entire
series of distributions is subject to the 10-percent early withdrawal
tax.327 In that case, the 10-percent early withdrawal tax is imposed
for the first taxable year in which the payments were modified and
is the same amount as would have been imposed had the exception
not applied (plus interest for the deferral period).328
Payments are considered to be substantially equal periodic pay-
ments for purposes of the exception to the 10-percent early with-
drawal tax if they are made in accordance with one of three per-
missible calculation methods.329 An individual who begins distribu-
tions as a series of substantially equal periodic payments using one
method can, in certain circumstances, make a one-time modifica-
tion to the required minimum distribution method to determine the
payment for the year of the change and all subsequent years with-
out triggering the application of the 10-percent early withdrawal
325 Sec. 72(t). The 10-percent early withdrawal tax does not apply to distributions from a gov-
ernmental section 457(b) plan.
326 Sec. 72(t)(2)(A)(iv).
327 Sec. 72(t)(4) and sec. 72(t)(10). Modification due to death or disability, or by reason of dis-
tribution to a qualified public safety employee from a governmental plan is permitted without
penalty.
328 Sec. 72(t)(4)(A)(ii).
329 Notice 2022–6, 2022–5 I.R.B. 460. The three methods are based on the methods described
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in Rev. Proc. 2002–62, 2002–42 I.R.B. 710, and include the required minimum distribution
method, the fixed amortization method, and the fixed annuitization method.
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80
tax.330 However, because all three calculation methods for substan-
tially equal periodic payments are calculated using an account bal-
ance as of a specified valuation date, a modification is considered
to have occurred (and the 10-percent early withdrawal tax would
then apply) if, after that first valuation date, there is (1) any addi-
tion to the account balance other than gains or losses, (2) any
transfer of a portion of the account balance to another retirement
plan, or (3) a rollover of the amount received by the taxpayer to
another account.331
Distributions from Annuity Contracts
Similarly, if a taxpayer receives any amount under a non-quali-
fied annuity contract, the taxpayer’s income is increased by 10-per-
cent of the amount received which is includible in gross income.332
There are also exceptions to this 10-percent additional tax, one of
which is for a series of substantially equal periodic payments.333
The rules applying this exception are generally parallel to the rules
described above, including the recapture of the 10-percent addi-
tional tax if the series of substantially equal periodic payments is
subsequently modified.334 In addition, the same principles de-
scribed with respect to distributions from a qualified retirement
plan apply when determining whether a change in substantially
equal periodic payments will be treated as a modification for pur-
poses of the 10-percent additional tax.335
Tax-Reporting
Information reporting on distributions from qualified plans and
annuity contracts is required from certain persons, such as employ-
ers, plan administrators, trustees.336 Failure to comply with those
reporting requirements can result in penalties.337 These penalties
may be waived in certain circumstances, including with respect to
any failure due to reasonable cause and not willful neglect.338
REASONS FOR CHANGE
The Committee believes that certain transfers, rollovers or dis-
tributions should not be considered a modification of the substan-
tially equal periodic payment rules that would trigger the applica-
tion of the 10-percent early withdrawal tax. The Committee also
believes that annuity payments that meet the required minimum
distribution rules should be treated as substantially equal periodic
payments for purposes of the exception to the 10-percent early
withdrawal tax.
EXPLANATION OF PROVISION
If a series of equal periodic payments are being made from a
qualified retirement plan then, under the provision, the transfer or
330 Notice 2022–6, 2022–5 I.R.B. 460. Once this one-time change in method is made, any fur-
ther modification will result in application of the 10-percent early withdrawal tax.
331 Notice 2022–6, 2022–5 I.R.B. 460.
332 Sec. 72(q)(1).
333 Sec. 72(q)(2)(D).
334 Sec. 72(q)(3).
335 Notice 2022–6, 2022–5 I.R.B. 460.
336 Secs. 408(i); 6047(d).
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337 Secs. 6721; 6722.
338 Sec. 6724.
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a rollover from such qualified retirement plan of all or a portion of
the taxpayer’s benefit under the plan that is made to a subsequent
qualified plan is not considered a modification for purposes of the
10-percent early withdrawal tax provided that the transfer or roll-
over results in distributions that satisfy the series of substantially
equal period payment exception. Compliance with this exception is
determined based on the combined distributions from both plans as
if the payments had been made only from the transferor plan.
Qualified retirement plan for this purpose includes section 403(b)
plans and IRAs. Similar relief is available following the tax-free ex-
change of all or a portion of a non-qualified annuity contract for an-
other contract.
The provision also adds a safe harbor for annuity payments
specifying that periodic payments do not fail to be treated as sub-
stantially equal for purposes of the exception to the 10-percent
early withdrawal tax merely because they are amounts received as
an annuity. Such payments are deemed substantially equal if they
are payable over the time periods set forth in the exception to the
10-percent early withdrawal tax for substantially equal periodic
payments and satisfy the required minimum distribution require-
ments applicable to annuity payments.
The provision also provides relief from the penalties associated
with the applicable reporting requirements for distributions by per-
mitting reliance on a certification from the taxpayer that the trans-
fer or rollover meets the requirements needed for purposes of the
exception to the 10-percent additional tax, absent knowledge to the
contrary.
EFFECTIVE DATE
The amendments made by this provision will apply to transfers,
rollovers, exchanges, and distributions (as applicable) occurring on
or after the date of enactment.
7. Recovery of retirement plan overpayments (sec. 207 of the bill
and secs. 402 and 414 of the Code)
PRESENT LAW
Employee Plans Compliance Resolution System
A retirement plan that is intended to be a tax-qualified plan pro-
vides retirement benefits on a tax-favored basis if the plan satisfies
all of the qualification requirements under the Code.339 Similarly,
an annuity that is intended to be a tax-sheltered annuity provides
retirement benefits on a tax-favored basis if the program satisfies
all of the requirements under the Code applicable to section 403(b)
plans. Failure to satisfy all of the applicable requirements may dis-
qualify a plan or annuity for the intended tax-favored treatment.
The IRS has established the Employee Plans Compliance Resolu-
tion System (‘‘EPCRS’’), which is a comprehensive system of correc-
tion programs for sponsors of retirement plans and annuities that
are intended, but have failed, to satisfy the applicable require-
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339 Sec. 401(a).
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ments under the Code.340 EPCRS permits employers to correct
compliance failures and continue to provide their employees with
retirement benefits on a tax-favored basis.
The IRS designed EPCRS to (1) encourage operational and for-
mal compliance, (2) promote voluntary and timely correction of
compliance failures, (3) provide sanctions for compliance failures
identified on audit that are reasonable in light of the nature, ex-
tent, and severity of the violation, (4) provide consistent and uni-
form administration of the correction programs, and (5) permit em-
ployers to rely on the availability of EPCRS in taking corrective ac-
tions to maintain the tax-favored status of their retirement plans
and annuities.
The basic elements of the programs that comprise EPCRS are
self-correction, voluntary correction with IRS approval, and correc-
tion on audit. The Self-Correction Program (‘‘SCP’’) generally per-
mits a plan sponsor that has established practices and procedures
(formal or informal) reasonably designed to promote and facilitate
overall compliance in form and operation with applicable Code re-
quirements to correct certain insignificant failures at any time (in-
cluding during an audit), and certain significant failures within a
three-year period, without payment of any fee or sanction. The Vol-
untary Correction Program (‘‘VCP’’) permits an employer, at any
time before an audit, to pay a limited fee and receive IRS approval
of a correction. For a failure that is discovered on audit and cor-
rected, the Audit Closing Agreement Program (‘‘Audit CAP’’) pro-
vides for a sanction that bears a reasonable relationship to the na-
ture, extent, and severity of the failure and that takes into account
the extent to which correction occurred before audit.
SCP, VCP and Audit CAP are not available to correct failures re-
lating to the diversion or misuses of plan assets.341 With respect
to the SCP program, in the event that the plan or the plan sponsor
has been a party to an abusive tax avoidance transaction, SCP is
not available to correct any operational failure that is directly or
indirectly related to the abusive tax avoidance transaction.342
SEP and SIMPLE Plans
SCP and VCP 343 under EPCRS are available to a SEP or SIM-
PLE plan.344 SCP is only available to such a plan to correct insig-
nificant operational failures,345 and only if the SEP or SIMPLE
plan is established and maintained on a document approved by the
IRS.
Section 457(b) plans
EPCRS does not apply to section 457(b) plans. However, the IRS
will accept submissions relating to section 457(b) plans on a provi-
sional basis outside of EPCRS through standards that are similar
to those that apply to VCP filings.346
340 The requirements under sections 401(a), 403(a), or 403(b), as applicable. Rev. Proc. 2021–
30, 2021–30, I.R.B. 2021–31.
341 Sec. 4.11 of Rev. Proc. 2021–30.
342 Sec. 4.12 of Rev. Proc. 2021–30.
343 Sec. 6.11 of Rev. Proc. 2021–30.
344 Secs. 1.01 and 1.02 of Rev. Proc. 2021–30. A SEP is a plan intended to satisfy the require-
ments of Code section 408(k); a SIMPLE plan is a plan intended to satisfy the requirements
of Code section 408(p). Secs. 5.06 and 5.07 of Rev. Proc. 2021–30.
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345 Sec. 4.01(c) of Rev. Proc. 2021–30.
346 Sec. 4.09 of Rev. Proc. 2021–30.
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Recoupment of overpayments
An overpayment is defined as a qualification failure due to a pay-
ment being made to a participant or beneficiary that exceeds the
amount payable to such individual under the terms of the plan or
that exceeds a limitation provided in the Code or regulations.347
Overpayments include both payments from a defined benefit plan
and from a defined contribution plan (either not made from the in-
dividual’s account under the plan or not permitted to be paid under
the Code, the regulations, or the terms of the plan).
Overpayments from defined benefit plans
In general, subject to certain conditions, an overpayment from a
defined benefit plan may be corrected by adopting a retroactive
amendment to conform to the plan’s operation, by the return of
overpayment correction method, the adjustment of future payments
correction method, the funding exception correction method, or the
contribution correction method.348 Depending on the nature of the
overpayment, other appropriate correction methods may be used.
Any other correction method used must satisfy the EPCRS correc-
tion principles and other requirements set forth in the EPCRS
guidance.349
Under the funding exception correction method, corrective pay-
ments are not required for certain underfunded defined benefit
plans which are subject to certain benefit limitations,350 provided
that the plan’s certified or presumed adjusted funding target at-
tainment percentage (‘‘AFTAP’’) that is applicable to the plan at
the date of correction is equal to at least 100 percent (or, in the
case of a multiemployer plan, the plan’s most recent annual fund-
ing certification indicates that the plan is not in critical, critical
and declining, or endangered status,351 determined at the date of
correction). Future benefit payments to an overpayment recipient
must be reduced to the correct benefit payment amount. No further
corrective payments from an overpayment recipient or any other
party are required or permitted and no further reductions to future
benefit payments to an overpayment recipient, or any spouse or
beneficiary of an overpayment recipient, are permitted.
Under the contribution credit correction method, the amount of
overpayments required to be repaid to the plan is the amount of
the overpayments reduced (but not below zero) by: (A) the cumu-
lative increase in the plan’s minimum funding requirements attrib-
utable to the overpayments (including the increase attributable to
the overstatement of liabilities, whether funded through cash con-
tributions or through the use of a funding standard carryover bal-
ance, prefunding balance, or funding standard account credit bal-
ance), beginning with (1) the plan year for which the overpayments
are taken into account for funding purposes, through (2) the end
of the plan year preceding the plan year for which the corrected
benefit payment amount is taken into account for funding pur-
poses; and (B) certain additional contributions in excess of min-
347 Sec. 5.01(3)(c) and 5.02(4) of Rev. Proc. 2021–30.
348 Sec. 6.06(3) and sec. 2.05 of Appendix B of Rev. Proc. 2021–30. The funding exception cor-
rection method and the contribution credit correction method were added to EPCRS by Rev.
Proc. 2021–30.
349 Sec. 6.02 of Rev. Proc. 2021–30.
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350 Under sec. 436.
351 As defined in sec. 432.
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imum funding requirements paid to the plan after the first of the
overpayments was made. This reduction is referred to as a ‘‘con-
tribution credit.’’ Future benefit payments to an overpayment re-
cipient must be reduced to the correct benefit payment amount. For
purposes of EPCRS, if the amount of the overpayments is reduced
to zero after the contribution credit is applied, no further corrective
payments from any party are required, no further reductions to fu-
ture benefit payments to an overpayment recipient, or any spouse
or beneficiary of an overpayment recipient, are permitted, and no
further corrective payments from an overpayment recipient, or any
spouse or beneficiary of an overpayment recipient, are permitted.
However, if a net overpayment remains after the application of the
contribution credit, the plan sponsor or another party must take
further action to reimburse the plan for the remainder of the over-
payment.
Overpayments from defined contribution plans
An overpayment from a defined contribution plan or section
403(b) plan is generally corrected by plan amendment to conform
the plan to the plan’s operation, subject to the requirements of
EPCRS.352 If the overpayment is not corrected by plan amendment,
the plan sponsor may correct the overpayment in accordance with
the return of overpayment correction method.353 Depending on the
nature of the overpayment, other appropriate correction methods
may be used. An appropriate correction method may include using
rules similar to those described in the EPCRS guidance, but having
the employer or another person contribute the amount of the over-
payment (with the appropriate interest) to the plan instead of seek-
ing recoupment from an overpayment recipient. Any other correc-
tion method used must satisfy the correction principles 354 and any
other applicable EPCRS rules.
REASONS FOR CHANGE
On occasion, individuals may mistakenly receive more money
than they are entitled to under a retirement plan. These errors
may persist over a number of years before being discovered, cre-
ating issues when plan sponsors or other fiduciaries later seek to
recover these overpayments (plus interest), which may be substan-
tial, from unsuspecting retirees. Even small overpayment amounts
may create a hardship for a retiree living on a fixed income.
The Committee believes that allowing retirement plan sponsors
or other fiduciaries the discretion to determine how to correct such
inadvertent failures, for example, by making additional contribu-
tions to the plan rather than recouping such overpayments from
the retiree, will alleviate undue burdens on unsuspecting retirees.
EXPLANATION OF PROVISION 355
Under the provision, a plan will not fail to be treated as a quali-
fied plan, section 403(a) annuity, section 403(b) tax sheltered annu-
ity or a governmental plan 356 (and will not fail to be treated as
352 See secs. 6.06(4) and 2.04 of Appendix B of Rev. Proc. 2021–30.
353 Sec. 6.06(4)(c) of Rev. Proc. 2021–30.
354 As set forth in sec. 6.02 of Rev. Proc. 2021–30.
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355 Modifications to Labor provisions are necessary to effectuate this provision.
356 Under section 219(g)(5)(A)(i), (ii), (iii) or (iv).
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85
satisfying the requirements of section 401 or 403) merely because
(1) the plan fails to obtain payment from any participant, bene-
ficiary, employer, plan sponsor, fiduciary, or other party on account
of any inadvertent benefit overpayment made by the plan, or (2)
the plan sponsor amends the plan to increase past or future benefit
payments to affected participants and beneficiaries in order to ad-
just for prior inadvertent benefit overpayments. Notwithstanding
the foregoing, the plan may instead reduce future benefit payments
to the correct amount provided for under the terms of the plan or
seek recovery from the person or persons responsible for the over-
payment. If an employer decides not to recover an overpayment,
nothing in this provision relieves that employer of any obligation
imposed upon it to make contributions to a plan to satisfy the min-
imum funding requirements 357 or to prevent or restore an imper-
missible forfeiture.358 In addition, the plan must observe any sal-
ary, compensation or benefit limitations imposed upon it,359 and
may enforce such limitations using any method approved by the
Secretary for recouping benefits previously paid or allocations pre-
viously made in excess of such limitations.
The Secretary may issue regulations or other guidance of general
applicability specifying how benefit overpayments and their
recoupment or non-recoupment from a participant or beneficiary
are to be taken into account for purposes of satisfying any require-
ment applicable to such a plan.
Rollovers
In the case of an inadvertent benefit overpayment from a plan
which is transferred to an eligible retirement plan by or on behalf
of a participant or beneficiary, (1) the portion of the overpayment
with respect to which recoupment is not sought on behalf of the
plan will be treated as having been paid in an eligible rollover dis-
tribution if the payment would have been an eligible rollover dis-
tribution but for being an overpayment, and (2) the portion of such
overpayment with respect to which recoupment is sought on behalf
of the plan will be permitted to be returned to the plan, and in
such case, will be treated as an eligible rollover distribution trans-
ferred to such plan by the participant or beneficiary who received
the overpayment (and the plans making and receiving such trans-
fer will be treated as permitting such transfer).
EFFECTIVE DATE
The provision applies to plan years beginning after the date of
enactment.
Plans, fiduciaries, employers, and plan sponsors are entitled to
rely on a reasonable good faith interpretation of then existing ad-
ministrative guidance for inadvertent benefit overpayment
recoupments and recoveries that commenced before the first day of
the first plan year beginning after the date of enactment.
357 Under sections 412 and 430.
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358 In accordance with section 411.
359 Secs. 401(a)(17) and 415.
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8. Retirement Savings Lost and Found (sec. 208 of the bill and
secs. 402, 408, 411, 6011, 6057, 6652 and new section 7901 of the
Code)
PRESENT LAW
Pension Benefit Guaranty Corporation Missing Participants Pro-
gram
When a defined benefit pension plan (maintained by a single em-
ployer and subject to the plan termination insurance program
under Title IV of ERISA) terminates under a standard termination,
the plan administrator generally must purchase annuity contracts
from a private insurer to provide the benefits to which participants
are entitled and distribute the annuity contracts to the partici-
pants.
If the plan administrator of a terminating single employer plan
cannot locate a participant after a diligent search (has a ‘‘missing
participant’’), the plan administrator may satisfy the distribution
requirement only by purchasing an annuity from an insurer or
transferring the participant’s designated benefit to the Pension
Benefit Guaranty Corporation (‘‘PBGC’’). The PBGC holds the ben-
efit of the missing participant as trustee until the PBGC locates
the missing participant and distributes the benefit.360
Pursuant to the Pension Protection Act of 2006,361 the PBGC
prescribed rules for terminating multiemployer plans similar to the
missing participant rules applicable to terminating single employer
plans subject to Title IV of ERISA. In addition, plan administrators
of certain types of plans not otherwise subject to the PBGC termi-
nation insurance program are permitted, but not required, to elect
to transfer missing participants’ benefits to the PBGC upon plan
termination. Specifically, the prescribed rules extend the missing
participants program (in accordance with regulations) to defined
contribution plans,362 defined benefit pension plans that have no
more than 25 active participants and are maintained by profes-
sional service employers, and the portion of defined benefit pension
plans that provide benefits based upon the separate accounts of
participants and therefore are treated as defined contribution plans
under ERISA.
On December 22, 2017, PBGC established the PBGC Defined
Contribution Missing Participants Program (‘‘Missing Participants
Program’’) to hold retirement benefits for missing participants and
beneficiaries in most terminated defined contribution plans and to
help those participants and beneficiaries find and receive those
benefits.363
360 Sec.4041(b)(3)(A); sec. 4050 of ERISA.
361 Pub. L. No. 109–280, August 17, 2006.
362 The Missing Participants program for Defined Contribution plans covers common types of
defined contribution pension plans; specifically section 401(k) plans, profit sharing plans, money
purchase plans, target benefit plans, employee stock ownership plans, stock bonus plans, and
section 403(b)(7) plans subject to Title I of ERISA. Some examples of plans not covered are gov-
ernmental plans, church plans, and plans that cannot pay benefits to PBGC in cash. See 29
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C.F.R. sec. 4050.201.
363 29 C.F.R. sec. 4050.201–207.1.
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Department of Labor
A fiduciary safe harbor 364 may apply with respect to distribu-
tions from terminated individual account plans 365 and abandoned
plans 366 on behalf of participants and beneficiaries who fail to
make an election regarding a form of benefit distribution, including
‘‘missing participants.’’ The safe harbor generally requires that dis-
tributions be rolled over to an individual retirement account or an-
nuity (IRA), although in limited circumstances fiduciaries may
make distributions to certain bank accounts or to a state unclaimed
property fund. If the conditions of the safe harbor are met, a fidu-
ciary (including a Qualified Termination Administrator (‘‘QTA’’) in
the case of an abandoned plan) is deemed to have satisfied the re-
quirements of section 404(a) of ERISA with respect to distributing
benefits, selecting a transferee entity, and investing funds in con-
nection with the distribution.
The DOL consulted with the PBGC during the PBGC’s develop-
ment of its Missing Participants Program. As noted in the pre-
amble to the final rule adopting the Missing Participants Program,
the DOL may revise its fiduciary safe harbor regulation so that
transfers to the PBGC by terminating individual account plans
would be eligible for relief under the safe harbor.
On January 12, 2021, the DOL issued Field Assistance Bulletin
2021–01 367 in which it announced that pending further guidance,
the DOL will not pursue fiduciary violations against either respon-
sible plan fiduciaries of terminating defined contribution plans or
QTAs of abandoned plans 368 in connection with the transfer of a
missing or non-responsive participant’s or beneficiary’s account bal-
ance to the PBGC in accordance with the PBGC’s missing partici-
pant regulations (rather than to an IRA, certain bank accounts, or
to a state unclaimed property fund),369 if the plan fiduciary or QTA
complies with the guidance in the Bulletin and has acted in accord-
ance with a good faith, reasonable interpretation of the fiduciary
rules under ERISA 370 with respect to matters not specifically ad-
dressed in the guidance.
Mandatory rollovers
If a qualified retirement plan participant ceases to be employed
by the employer that maintains the plan, the plan may distribute
the participant’s nonforfeitable accrued benefit without the consent
of the participant and, if applicable, the participant’s spouse, if the
present value of the benefit does not exceed $5,000. If such an in-
voluntary distribution occurs and the participant subsequently re-
turns to employment covered by the plan, then service taken into
account in computing benefits payable under the plan after the re-
turn need not include service with respect to which a benefit was
involuntarily distributed unless the employee repays the benefit.
Generally, a participant may roll over an involuntary distribu-
tion from a qualified plan to an IRA or to another qualified plan.
364 29 C.F.R. sec. 2550.404a–3.
365 Sec. 3(34) of ERISA.
366 As described in 29 C.F.R. sec. 2578.1
367 Field Assistance Bulletin 2021–01 can be found at: https://www.dol.gov/agencies/ebsa/em-
ployers-and-advisers/guidance/field-assistance-bulletins/2021-01.
368 As described in 29 C.F.R. sec. 2578.1.
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369 As specified in 29 C.F.R. sec. 2550.404a–3.
370 Sec. 404 of ERISA.
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88
Before making a distribution that is eligible for rollover, a plan ad-
ministrator must provide the participant with a written expla-
nation of the ability to have the distribution rolled over directly to
an IRA or another qualified plan and the related tax consequences.
A direct rollover is the default option for involuntary distribu-
tions that exceed $1,000 and that are eligible rollover distributions
from qualified retirement plans. The distribution must be rolled
over automatically to a designated IRA, unless the participant af-
firmatively elects to have the distribution transferred to a different
IRA or a qualified plan or to receive it directly. The written expla-
nation provided by the plan administrator is required to explain
that an automatic direct rollover will be made unless the partici-
pant elects otherwise. The plan administrator is also required to
notify the participant in writing (as part of the general written ex-
planation or separately) that the distribution may be transferred
without cost to another IRA.
Under the fiduciary rules of ERISA, in the case of an automatic
direct rollover, the participant is treated as exercising control over
the assets in the IRA upon the earlier of: (1) the rollover of any
portion of the assets to another IRA, or (2) one year after the auto-
matic rollover.
Lost and Found
Under present law, there is not a ‘‘Lost and Found’’ database to
collect information on benefits owed to missing, lost or non-respon-
sive participants and beneficiaries in tax-qualified retirement plans
(other than terminated plans) and to assist such plan participants
and beneficiaries in locating those benefits.
REASONS FOR CHANGE
Every year, thousands of people approach retirement, but may be
unaware of, or are unable to locate and recover, benefits that they
have earned (frequently with employers from whom they have sep-
arated service) for a number of reasons, including because that em-
ployer moved, changed its name, or merged with a different com-
pany. Similarly, every year there are employers around the country
ready to pay these benefits to such individuals, but they cannot lo-
cate those individuals.
The Committee believes that the creation of a national, online,
lost and found database dedicated to matching these individuals
with their benefits would facilitate the recovery of such benefits by
these individuals, along with a program that preserves unclaimed
cash-outs of small account balances in employer retirement plans.
EXPLANATION OF PROVISION 371
Establishment of the Lost and Found
Under the provision, not later than three years after the date of
enactment, the Secretary, in consultation with the Secretary of
Labor, the Secretary of Commerce, and the Director of the PBGC,
will establish an online searchable database to be managed by the
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371 Because this provision also impacts parallel labor provisions, references to those labor pro-
visions would need to be revised before this provision could take effect.
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89
Department of Treasury (‘‘Treasury’’),372 to be known as the Retire-
ment Savings Lost and Found (the ‘‘Lost and Found’’), containing
information on plans, subject to the vesting standards under the
Code,373 as well as certain additional information related to the lo-
cation of certain unclaimed vested benefits of missing, lost and
non-responsive participants and beneficiaries in such plans.374 The
Lost and Found database will contain information: (1) provided by
plan administrators that are required to periodically report to the
Office of the Lost and Found each plan year; (2) provided by plan
administrators that transfer certain small benefits of non-respon-
sive participants and beneficiaries to the Lost and Found; and (3)
other relevant information obtained by Treasury.
The collection of this information in the Lost and Found will
allow Treasury to assist participants and beneficiaries by providing
contact information 375 on record for the plan administrator of any
plan in which the participant or beneficiary may have an un-
claimed benefit sufficient to allow that participant or beneficiary to
locate the individual’s plan in order to recover any benefit owing
to that individual under the plan. With respect to those plans
which have transferred such benefits to Treasury, Treasury will
also be able to pay those benefits to such participants and bene-
ficiaries. Because Treasury would be provided additional and up-
dated information from plan administrators through reporting re-
quirements, the Treasury will also be able to make any necessary
changes to the database reflecting updates to contact information
on record for the plan administrator based on any changes to such
plans including those arising from mergers or consolidations of the
plan with any other plan, division of the plan into two or more
plans, bankruptcy, termination, change in name of the plan,
change in name or address of the plan administrator, transfers of
such accounts to IRAs, purchase of annuities, or other causes.
Safeguarding participant privacy and security
In establishing the Lost and Found, the Secretary of Treasury,
in consultation with the Secretary of Labor, the Secretary of Com-
merce, and the Director of the PBGC must take all necessary and
proper precautions to ensure that individuals’ plan information
maintained by the Lost and Found is protected and that persons
other than the individual cannot fraudulently claim the benefits to
which any individual is entitled, and to allow any individual to opt
out of inclusion in the Lost and Found at the election of the indi-
vidual.
Treasury is also provided regulatory authority, as permitted
under present law, to provide guidance:
• To authorize Treasury to disclose to the agencies jointly
administering the database such return information as is nec-
essary to administer the Lost and Found database but only to
372 The Office of the Retirement Savings Lost and Found (the ‘‘Office of the Lost and Found’’)
will be established within the Department of Treasury to maintain the Retirement Savings Lost
and Found.
373 Sec. 411.
374 Tax-qualified defined benefit and defined contribution plans that are subject to the vesting
standards contained in Code section 411.
375 Such individuals will be provided only with the ability to view contact information for the
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plan administrator of any plan with respect to which the individual is or was a participant or
beneficiary.
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such employees whose official duties with respect to the data-
base require such disclosure, and
• To authorize Treasury to disclose to plan participants and
beneficiaries the contact information for the plan administrator
of any plan with respect to which the individual is or was a
participant or beneficiary.
Establishment and responsibilities of the Office of the Retirement
Savings Lost and Found
Not later than two years after the date of the enactment of this
Act, the Secretary must establish, within Treasury, an Office of the
Retirement Savings Lost and Found (‘‘Office of the Lost and
Found’’).
The Office of the Lost and Found will (1) maintain the Lost and
Found database; (2) facilitate the transfer of small benefits of non-
responsive participants and beneficiaries 376 to the Office of the
Lost and Found by (a) collecting information, applicable fees, and
benefits related to such individuals from the applicable plan and
(b) investing such benefits; (3) search for and pay out benefits to
those participants and beneficiaries for whom benefits have been
transferred to the Office of the Lost and Found; (4) perform an an-
nual audit of plan information contained in the Lost and Found;
and (5) ensure that such information is current and accurate.
Required transfer of small benefits of certain non-responsive
participants by plans to the Office of the Lost and Found
Under the provision, the administrator of a plan that is not ter-
minated 377 must transfer a non-responsive participant’s 378 benefit
to the Office of the Lost and Found 379 if the nonforfeitable accrued
benefit 380 is no greater than $1,000.
Upon making a transfer to the Office of the Lost and Found of
small benefits of non-responsive participants, the plan adminis-
trator must provide such information and certifications as the Of-
fice of the Lost and Found specifies including with respect to the
transferred amount of the benefit and the identification of the non-
responsive participant. In the event that, after such a transfer, the
relevant non-responsive participant contacts the plan administrator
or the plan administrator discovers information that may assist the
Office of the Lost and Found in locating the non-responsive partici-
pant, the plan administrator must notify and provide such informa-
tion to the Office of the Lost and Found as such Office specifies.
A transfer of such benefits to the Office of the Lost and Found
under this provision will be treated as a transfer to an individual
retirement plan. Such benefits will be held in a fund 381 established
for the payment of such benefits which fund will also be credited
with earnings on investments in the fund or on assets credited to
the fund. Whenever Treasury determines that the moneys of any
fund are in excess of current needs, it may request the investment
376 In defined benefit and defined contribution plans subject to the vesting requirements of
Code section 411.
377 And to which section 401(a)(31)(B) of the Code applies.
378 For this provision, a non-responsive participant means a participant or beneficiary of a
plan who is entitled to a benefit subject to a mandatory transfer under section 401(a)(31)(B)(iii)
and for whom the plan has satisfied the conditions in section 401(a)(31)(B)(iv).
379 Under sec. 401(a)(31)(B).
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380 Under sec. 401(a)(31)(B).
381 For amounts transferred to the Lost and Found.
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91
of such amounts as it determines advisable by the Secretary in ob-
ligations issued or guaranteed by the United States.
Following a transfer of such benefits to the Office of the Lost and
Found, the Office of the Lost and Found will periodically, and upon
receiving information from the plan administrator as described
above, conduct a search for the non-responsive participant for
whom the Office of the Lost and Found has received a transfer.
Upon location of such a non-responsive participant who claims ben-
efits, the Office of the Lost and Found will pay the non-responsive
participant the amount transferred to it in a single sum (plus an
amount reflecting the return on the investment attributable to
such amount). Treasury has the regulatory authority to prescribe
regulations as are necessary to carry out the transfer of small ben-
efits including rules relating to the amount payable to the Office
of the Lost and Found by the plan administrator and the amount
to be paid to the non-responsive participant or beneficiary by the
Office of the Lost and Found when that individual is located.
Annual reporting requirements
Under the provision, within such period after the end of each
plan year beginning after the second December 31 occurring after
the date of enactment, as the Office of the Lost and Found may
prescribe, the plan administrator of a plan to which the vesting
standards of the Code apply 382 will submit the following informa-
tion, and such other information as the Office of the Lost and
Found may require: 383
• The name of the plan;
• The name and address of the plan administrator;
• Any change in the name of the plan;
• Any change in the name or address of the plan adminis-
trator;
• The name and taxpayer identifying number of each partici-
pant or former participant in the plan:
» Who, during the current plan year or any previous
plan year, was reported to IRS 384 as a separated partici-
pant with a deferred vested benefit that had not been paid
as of the end of the previous plan year, and with respect
to whom such benefit was fully paid during the plan year;
» With respect to whom any amount was distributed as
a mandatory distribution during the plan year; or
» With respect to whom a deferred annuity contract was
distributed during the plan year;
• The termination of the plan;
• The merger or consolidation of the plan with any other
plan or its division into two or more plans;
• In the case of a participant or former participant whose
benefit was distributed as a mandatory distribution during the
plan year, the name and address of the designated trustee or
issuer and the account number of the individual retirement
plan to which the amount was distributed; and
382 Sec. 411.
383 Because this reporting begins approximately two years after the date of enactment, unless
the Office of the Lost and Found prescribes otherwise, this information will only be provided
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to the Office of the Lost and Found prospectively.
384 Under sec. 6057.
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• In the case of a participant or former participant to whom
a deferred annuity contract was distributed during the plan
year, the name and address of the issuer of such annuity con-
tract and the contract or certificate number.
Guidance
The Office of the Lost and Found will prescribe such regulations
as are necessary to carry out the purposes of this provision, includ-
ing rules relating to the amount payable to the Office of the Lost
and Found and the amount to be paid by the Office of the Lost and
Found.
Mandatory transfers of rollover distributions and coordination with
distribution requirements
Expansion of cap
The provision increases the cap on mandatory distributions from
$5,000 to $6,000.385
Distribution of larger amounts only to IRAs, not to the Office
of the Lost and Found
Under the provision, the Office of the Lost and Found is not
treated as a trustee eligible to receive mandatory distributions 386
that are in excess of $1,000 but not in excess of $6,000. In other
words, Treasury may only accept transfers of nonforfeitable ac-
crued benefits in the amount of $1,000 or less.
Mandatory distributions of lesser amounts for non-responsive
individuals to the Office of the Lost and Found
Under the provision, in the case of a plan that provides for man-
datory distributions of amounts of $6,000 or less, the trust of such
plan will not be considered a qualified trust under the Code unless
the plan provides that, if a participant in the plan separates from
the service covered by the plan and the participant’s nonforfeitable
accrued benefit is not in excess of $1,000, the plan administrator
must (either separately or as part of the written notice to recipients
of distributions eligible for rollover treatment) either (1) notify the
participant that the participant is entitled to such benefit, or (2) at-
tempt to pay the benefit directly to the participant.
If, after a plan administrator either notifies the participant of the
entitlement to the benefit or attempts to pay the benefit directly
to the participant, the participant does not:
• Within six months of the notification either make an elec-
tion to have the distribution paid directly to a specified eligible
retirement plan 387 or elect to receive a distribution of the ben-
efit directly, or
• Accept any direct payment made within six months of the
attempted payment (in other words, does not cash the check),
• Then the plan administrator must transfer the amount of
such benefit to the Office of the Lost and Found.
385 Under section 401(a)(31)(B)(ii)(I).
386 Sec. 401(a)(31)(B).
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387 Sec. 402(c)(8)(B), except that a qualified trust is considered an eligible retirement plan only
if it is a defined contribution plan that accepts rollovers.
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A transfer of such a distribution to the Office of the Lost and
Found is treated as a transfer to an individual retirement plan,
and the distribution of such amounts by the Office of the Lost and
Found to a non-responsive participant who is subsequently located
will be treated as a distribution from an individual retirement ac-
count.
Reporting for mandatory transfers
The provision modifies the reporting requirements by plan ad-
ministrators with respect to plans that are subject to the Code
vesting standards,388 which include tax qualified defined benefit
and defined contribution plans, as follows:
• By providing that plan administrators must report 389 the
name and taxpayer identification number of each participant
in the plan who, during the plan year immediately preceding
such plan year separated from the service covered by the plan.
• By requiring that the following information must also be
included:
» The name and taxpayer identifying number of each
participant or former participant in the plan:
➢ Who, during the current plan year or any pre-
vious plan year, was reported to IRS 390 as a separated
participant with a deferred vested benefit that had not
been paid as of the end of the previous plan year, and
with respect to whom such benefit was fully paid dur-
ing the plan year;
➢ With respect to whom any amount was distrib-
uted as a mandatory distribution during the plan year;
or
➢ With respect to whom a deferred annuity con-
tract was distributed during the plan year;
• In the case of a participant or former participant whose
benefit was distributed as a mandatory distribution during the
plan year, the name and address of the designated trustee or
issuer and the account number of the individual retirement
plan to which the amount was distributed; and
• In the case of a participant or former participant to whom
a deferred annuity contract was distributed during the plan
year, the name and address of the issuer of such annuity con-
tract and the contract or certificate number.
Rules relating to direct trustee-to-trustee transfers
Under the provision, additional reporting is required with respect
to direct trustee-to-trustee transfers as follows:
• Notification of the Trustee: In the case of a mandatory dis-
tribution under the Code,391 the plan administrator must no-
tify the designated trustee of the account or issuer, or the plan
administrator will be subject to a penalty equal to $100 for
each such failure, up to a maximum for all such failures during
any calendar year not to exceed $50,000, unless it is shown
388 Sec. 411.
389 Pursuant to sec. 6057.
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390 Under sec. 6057.
391 Pursuant to section 401(a)(31)(B).
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that the failure was due to reasonable cause and not to willful
neglect.392
• The reports required to be made to the Secretary by the
trustee of an IRA or the issuer of an endowment contract 393
are modified to require, in the case of an IRA account, endow-
ment contract or IRA annuity to which a mandatory trans-
fer 394 is made (including a transfer from the individual retire-
ment plan to which the original transfer was made to another
individual retirement plan), for the year of the transfer and
any year in which the information previously reported changes
that such report:
1. Identify the transfer as a required mandatory distribution; and
2. Include the name, address, and taxpayer identifying number
of the trustee or issuer of the individual retirement plan to which
the amount is transferred.
There is also a similar rule for Savings Incentive Match Plan for
Employees (‘‘SIMPLE’’) plans where the benefit is transferred from
a SIMPLE plan to another individual retirement plan. The report
required for the year of the transfer and any year in which the in-
formation previously reported is changed must: (1) identify the
transfer as a required mandatory distribution; and (2) include the
name, address, and taxpayer identifying number of the trustee or
issuer of the individual retirement plan to which the amount is
transferred.
Notification of participant upon separation of service
The individual registration statement that needs to be provided
to each separated participant 395 by the plan administrator must
include a notice of availability of, and the contact information for,
the Office of the Lost and Found.
Requirement of electronic filing
Under the provision, reports required with respect to separated
participants from retirement plans,396 information required with
respect to certain plans of deferred compensation,397 and periodic
reports of actuaries,398 as well as certain reports with respect to
IRAs, (including endowment contracts),399 information returns at
source,400 and information reports relating to certain trust and an-
nuity plans,401 (to the extent each such return or report relates to
the tax treatment of a distribution from a plan, account, contract,
or annuity) must be filed on magnetic media, but only with respect
to persons who are required to file at least 50 returns during the
calendar year which includes the first day of the plan year to which
such returns or reports relate.
392 Sec. 6652(i).
393 Sec. 408(i).
394 Under section 401(a)(31)(B).
395 Pursuant to section 6057(e).
396 Sec. 6057.
397 Sec. 6058.
398 Sec. 6059.
399 Pursuant to section 408(i).
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400 Sec. 6047.
401 Sec. 6041.
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EFFECTIVE DATE
The effective date of the provision is generally on the date of en-
actment.
The provisions related to the transfer of small benefits to the Of-
fice of the Lost and Found for certain non-responsive participants
and the submission of information by plan administrators to the
Office of the Lost and Found are effective with respect to plan
years beginning after the second December 31 occurring after the
date of the enactment.
The provisions related to changes to the mandatory distribution
rules are applicable to vested benefits with respect to participants
who separate from service connected to the plan in plan years be-
ginning after the second December 31 occurring after the date of
enactment.
The provisions related to modified reporting requirements under
the Code and to filing certain reports electronically are applicable
to returns and reports relating to years beginning after the second
December 31 occurring after the date of enactment.
9. Roth plan distribution rules (sec. 209 of the bill and sec. 402A(d)
of the Code)
PRESENT LAW
Qualified Roth contribution programs
An applicable retirement plan 402 may include a qualified Roth
contribution program that permits a participant to elect to have all
or a portion of the participant’s elective deferrals 403 under the plan
treated as designated Roth contributions.404 Designated Roth con-
tributions are elective deferrals that the participant designates as
not excludable from the participant’s gross income.405 The plan is
required to establish a separate account (a designated Roth ac-
count), and maintain separate recordkeeping, for a participant’s
designated Roth contributions (and earnings allocable thereto).406
A qualified distribution from a participant’s designated Roth ac-
count generally is not includible in the participant’s gross in-
come.407
Roth IRA distributions
There are two basic types of IRAs. In the case of traditional
IRAs,408 contributions in excess of the deductible amount are not
permitted,409 and distributions are includible in the gross income
of the payee or distributee.410
402 As defined in section 402A(e)(1).
403 As defined in section 402A(e)(2).
404 Sec. 402A(a).
405 Sec. 402A(c). The amount of elective deferrals an employee may so designate is limited
(sec. 402A(c)(2)).
406 Sec. 402A(b)(2).
407 Sec. 402A(d). Qualified distributions are defined in section 402A(d)(2). In general, qualified
distributions do not include distributions made within a five-year nonexclusion period and do
not include distributions of certain excess deferrals or excess contributions, or income thereon.
Rules are provided for the treatment of excess designated Roth contributions (sec. 402A(d)(3))
and rollovers (secs. 402A(c)(3) and (4)).
408 Sec.408.
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409 Sec. 219.
410 Sec. 408(d).
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In the case of Roth IRAs, only nondeductible (after-tax) contribu-
tions may be made.411 For a Roth IRA, if certain requirements are
satisfied, distributions are not includible in gross income.412
Exceptions to certain distribution requirements for Roth IRAs
Distributions from a participant’s designated Roth account under
a qualified Roth contribution program are subject to pre-death min-
imum distribution rules as well as incidental death benefit require-
ments.
However, under an exception, the pre-death minimum distribu-
tion rules that generally apply to IRAs 413 do not apply to Roth
IRAs. In addition, the incidental death benefit rules do not apply
to Roth IRAs.414
REASONS FOR CHANGE
The Committee believes that it is appropriate to extend to des-
ignated Roth accounts the exceptions that apply to Roth IRAs from
the pre-death minimum distribution rules and from the incidental
death benefit requirements.
EXPLANATION OF PROVISION
The provision adds an exception in the case of a designated Roth
account. Under the exception, the pre-death minimum distribution
rules 415 and the incidental death benefit requirements 416 do not
apply to a designated Roth account under a qualified Roth con-
tribution program.
EFFECTIVE DATE
The provision is effective generally for taxable years beginning
after December 31, 2023.
However, under a transition rule, the provision does not apply to
distributions which are required with respect to years beginning
before January 1, 2024, but are permitted to be paid on or after
that date.
10. One-time election for qualified charitable distribution to split-
interest entity; increase in qualified charitable distribution limi-
tation (sec. 210 of the bill and sec. 408(d)(8) of the Code)
PRESENT LAW
In general
If an amount withdrawn from a traditional individual retirement
arrangement (‘‘IRA’’) or a Roth IRA is donated to a charitable orga-
nization, the rules relating to the tax treatment of withdrawals
from IRAs apply to the amount withdrawn and the charitable con-
tribution is subject to the normally applicable limitations on de-
ductibility of such contributions. An exception applies in the case
of a qualified charitable distribution.
411 Sec. 408A.
412 Sec. 408A(d).
413 Secs. 408(a)(6) and (b)(3).
414 Secs. 408A(c)(4) and 401(a).
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415 Secs. 401(a)(9)(A).
416 Sec. 401(a).
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Charitable contributions
In computing taxable income, an individual taxpayer who
itemizes deductions generally is allowed to deduct the amount of
cash and up to the fair market value of property contributed to the
following entities: (1) a charity described in section 170(c)(2); (2)
certain veterans’ organizations, fraternal societies, and cemetery
companies; 417 and (3) a Federal, State, or local governmental enti-
ty, but only if the contribution is made for exclusively public pur-
poses.418 The deduction also is allowed for purposes of calculating
alternative minimum taxable income.
The amount of the deduction allowable for a taxable year with
respect to a charitable contribution of property may be reduced de-
pending on the type of property contributed, the type of charitable
organization to which the property is contributed, and the income
of the taxpayer.419
A taxpayer who takes the standard deduction (i.e., who does not
itemize deductions) generally may not take a separate deduction
for charitable contributions.420
A payment to a charity (regardless of whether it is termed a
‘‘contribution’’) in exchange for which the donor receives an eco-
nomic benefit is not deductible, except to the extent that the donor
can demonstrate, among other things, that the payment exceeds
the fair market value of the benefit received from the charity. To
facilitate distinguishing charitable contributions from purchases of
goods or services from charities, present law provides that no chari-
table contribution deduction is allowed for a separate contribution
of $250 or more unless the donor obtains a contemporaneous writ-
ten acknowledgement of the contribution from the charity indi-
cating whether the charity provided any good or service (and an es-
timate of the value of any such good or service provided) to the tax-
payer in consideration for the contribution.421 In addition, present
law requires that any charity that receives a contribution exceeding
$75 made partly as a gift and partly as consideration for goods or
services furnished by the charity (a ‘‘quid pro quo’’ contribution) is
required to inform the contributor in writing of an estimate of the
value of the goods or services furnished by the charity and that
only the portion exceeding the value of the goods or services may
be deductible as a charitable contribution.422
Under present law, total deductible contributions of an individual
taxpayer to public charities, private operating foundations, and cer-
tain types of private nonoperating foundations generally may not
exceed 50 percent of the taxpayer’s contribution base, which is the
taxpayer’s adjusted gross income for a taxable year (disregarding
any net operating loss carryback). To the extent a taxpayer has not
exceeded the 50-percent limitation, (1) contributions of capital gain
property to public charities generally may be deducted up to 30
percent of the taxpayer’s contribution base, (2) contributions of
417 Secs. 170(c)(3)–(5).
418 Sec. 170(c)(1).
419 Secs. 170(b) and (e).
420 Sec. 170(a).
421 Sec. 170(f)(8). For any contribution of a cash, check, or other monetary gift, no deduction
is allowed unless the donor maintains as a record of such contribution a bank record or written
communication from the donee charity showing the name of the donee organization, the date
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of the contribution, and the amount of the contribution. Sec. 170(f)(17).
422 Sec. 6115.
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cash to most private nonoperating foundations and certain other
charitable organizations generally may be deducted up to 30 per-
cent of the taxpayer’s contribution base, and (3) contributions of
capital gain property to private foundations and certain other char-
itable organizations generally may be deducted up to 20 percent of
the taxpayer’s contribution base. For taxable years beginning after
December 31, 2017, and before January 1, 2026, the 50-percent
limit is increased to 60 percent for contributions of cash.423
Contributions by individuals in excess of the applicable limits
generally may be carried over and deducted over the next five tax-
able years, subject to the relevant percentage limitations on the de-
duction in each of those years.
In general, a charitable deduction is not allowed for income, es-
tate, or gift tax purposes if the donor transfers an interest in prop-
erty to a charity (e.g., a remainder) while also either retaining an
interest in that property (e.g., an income interest) or transferring
an interest in that property to a noncharity for less than full and
adequate consideration.424 Exceptions to this general rule are pro-
vided for, among other interests, remainder interests in charitable
remainder trusts (discussed below), pooled income funds, and
present interests in the form of a guaranteed annuity or a fixed
percentage of the annual value of the property.425 For such inter-
ests, a charitable deduction is allowed to the extent of the present
value of the interest designated for a charitable organization.
Charitable remainder trusts and charitable gift annuities
Both charitable remainder trusts and charitable gift annuities
are arrangements under which a taxpayer contributes assets to
charity (directly or through a trust) but retains an interest. As part
of these arrangements, a stream of payments is guaranteed to one
or more noncharitable beneficiaries (possibly including the tax-
payer) over a period of time, with the remaining interest passing
to charity. The taxpayer generally claims a charitable deduction for
the portion of the transfer attributable to the charitable interest.
Charitable remainder trusts
A charitable remainder annuity trust is a trust that is required
to pay, at least annually, a fixed dollar amount of at least five per-
cent of the initial value of the trust to a noncharity for the life of
an individual or for a period of 20 years or less, with the remainder
passing to charity. A charitable remainder unitrust is a trust that
generally is required to pay, at least annually, a fixed percentage
of at least five percent of the fair market value of the trust’s assets
determined at least annually to a noncharity for the life of an indi-
vidual or for a period of 20 years or less, with the remainder pass-
ing to charity.426
423 Sec. 170(b)(1)(G).
424 Secs. 170(f), 2055(e)(2), and 2522(c)(2).
425 Sec. 170(f)(2).
426 Sec. 664(d). Charitable remainder annuity trusts and charitable remainder unitrusts are
exempt from Federal income tax for a tax year unless the trust has any unrelated business tax-
able income for the year (including certain debt financed income). A charitable remainder trust
that loses its exemption from income tax for a taxable year is taxed as a complex trust. As such,
the trust is allowed a deduction in computing taxable income for amounts required to be distrib-
uted in a taxable year, not to exceed the amount of the trust’s distributable net income for the
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year. Taxes imposed on the trust are required to be allocated to corpus. Treas. Reg. sec. 1.664–
1(d)(2).
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99
A trust does not qualify as a charitable remainder annuity trust
if the annuity for a year is greater than 50 percent of the initial
fair market value of the trust’s assets. A trust does not qualify as
a charitable remainder unitrust if the percentage of assets that are
required to be distributed at least annually is less than five percent
or greater than 50 percent. A trust does not qualify as a charitable
remainder annuity trust or a charitable remainder unitrust unless
the present value of the remainder interest in the trust (deter-
mined at the time of the transfer to the trust under section 7520)
is at least 10 percent of the value of the assets contributed to the
trust.
Distributions from a charitable remainder annuity trust or chari-
table remainder unitrust are treated in the following order as: (1)
ordinary income to the extent of the trust’s current and previously
undistributed ordinary income for the trust’s year in which the dis-
tribution occurred, (2) capital gains to the extent of the trust’s cur-
rent capital gain and previously undistributed capital gain for the
trust’s year in which the distribution occurred, (3) other income
(e.g., tax-exempt income) to the extent of the trust’s current and
previously undistributed other income for the trust’s year in which
the distribution occurred, and (4) corpus.427
In general, distributions to the extent they are characterized as
income are includible in the income of the beneficiary for the year
that the annuity or unitrust amount is required to be distributed
even though the annuity or unitrust amount is not distributed
until after the close of the trust’s taxable year.428
Charitable gift annuities
A charitable gift annuity is similar in concept to a charitable re-
mainder annuity trust, except that, under a contract between the
taxpayer and a charity, the assets are transferred to the charity
(not to a separate trust) in exchange for the charity’s promise to
make fixed annuity payments for life to the donor or to the donor
and one other person.
Charitable gift annuities are not treated as commercial-type in-
surance for purposes of section 501(m), under which an organiza-
tion is not described in section 501(c)(3) if a substantial part of its
activities consists of providing commercial-type insurance.429
IRA rules
Within limits, individuals may make deductible and nondeduct-
ible contributions to a traditional IRA. Amounts in a traditional
IRA are includible in income when withdrawn (except to the extent
the withdrawal represents a return of nondeductible contributions).
Certain individuals also may make nondeductible contributions to
a Roth IRA (deductible contributions cannot be made to a Roth
IRA). Qualified withdrawals from a Roth IRA are excludable from
gross income. Withdrawals from a Roth IRA that are not qualified
withdrawals are includible in gross income to the extent attrib-
utable to earnings. Includible amounts withdrawn from a tradi-
tional IRA or a Roth IRA before attainment of age 591⁄2 are subject
to an additional 10-percent early withdrawal tax unless an excep-
427 Sec. 664(b).
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428 Treas. Reg. sec. 1.664–1(d)(4).
429 Sec. 501(m)(3)(E) and (5).
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100
tion applies. Under present law, minimum distributions are re-
quired to be made from tax-favored retirement arrangements, in-
cluding IRAs. Minimum required distributions from a traditional
IRA must generally begin by April1 of the calendar year following
the year in which the IRA owner attains age 72.430
If an individual has made nondeductible contributions to a tradi-
tional IRA, a portion of each distribution from an IRA is non-
taxable until the total amount of nondeductible contributions has
been received. In general, the amount of a distribution that is non-
taxable is determined by multiplying the amount of the distribu-
tion by the ratio of the remaining nondeductible contributions to
the account balance. In making the calculation, all traditional IRAs
of an individual are treated as a single IRA, all distributions dur-
ing any taxable year are treated as a single distribution, and the
value of the contract, income on the contract, and investment in
the contract are computed as of the close of the calendar year.
In the case of a distribution from a Roth IRA that is not a quali-
fied distribution, in determining the portion of the distribution at-
tributable to earnings, contributions and distributions are deemed
to be distributed in the following order: (1) regular Roth IRA con-
tributions; (2) taxable conversion contributions; 431 (3) nontaxable
conversion contributions; and (4) earnings. In determining the
amount of taxable distributions from a Roth IRA, all Roth IRA dis-
tributions in the same taxable year are treated as a single distribu-
tion, all regular Roth IRA contributions for a year are treated as
a single contribution, and all conversion contributions during the
year are treated as a single contribution.
Distributions from an IRA (other than a Roth IRA) are generally
subject to withholding unless the individual elects not to have
withholding apply.432 Elections not to have withholding apply are
to be made in the time and manner prescribed by the Secretary.
Qualified charitable distributions
Otherwise-taxable IRA distributions from a traditional or Roth
IRA are excluded from gross income to the extent they are qualified
charitable distributions.433 The exclusion may not exceed $100,000
per taxpayer per taxable year.
An individual who receives a deduction for a contribution to a
traditional IRA for years ending on or after age 701⁄2 is not eligible
to exclude such amount from income as a qualified charitable dis-
tribution. Thus, the amount of qualified charitable distributions
otherwise excludable from an individual’s gross income for a tax-
able year is reduced (but not below zero) by the excess of (i) the
aggregate amount of deductions allowed to the taxpayer for con-
tributions to a traditional IRA for taxable years ending on or after
the individual attains age 701⁄2, over (ii) the aggregate amount of
reductions for all taxable years preceding the current year.
Special rules apply in determining the amount of an IRA dis-
tribution that is otherwise taxable. The otherwise applicable rules
430 Minimum distribution rules also apply in the case of distributions after the death of a tra-
ditional or Roth IRA owner.
431 Conversion contributions refer to conversions of amounts in a traditional IRA to a Roth
IRA.
432 Sec. 3405.
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433 Sec. 408(d)(8). The exclusion does not apply to distributions from employer-sponsored re-
tirement plans, including SIMPLE IRAs and simplified employee pensions (‘‘SEPs’’).
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101
regarding taxation of IRA distributions and the deduction of chari-
table contributions continue to apply to distributions from an IRA
that are not qualified charitable distributions. A qualified chari-
table distribution is taken into account for purposes of the min-
imum distribution rules applicable to traditional IRAs to the same
extent the distribution would have been taken into account under
such rules had the distribution not been directly distributed under
the qualified charitable distribution provision. An IRA does not fail
to qualify as an IRA as a result of qualified charitable distributions
being made from the IRA.
A qualified charitable distribution is any distribution from an
IRA directly by the IRA trustee to an organization described in sec-
tion 170(b)(1)(A) (generally, public charities) other than a sup-
porting organization (as described in section 509(a)(3)) or a donor
advised fund (as defined in section 4966(d)(2)). Distributions are el-
igible for the exclusion only if made on or after the date the IRA
owner attains age 701⁄2 and only to the extent the distribution
would be includible in gross income (without regard to this provi-
sion).
The exclusion applies only if a charitable contribution deduction
for the entire distribution otherwise would be allowable (under
present law), determined without regard to the generally applicable
percentage limitations. Thus, for example, if the deductible amount
is reduced because of a benefit received in exchange, or if a deduc-
tion is not allowable because the donor did not obtain sufficient
substantiation, the exclusion is not available with respect to any
part of the IRA distribution.
If the IRA owner has any IRA that includes nondeductible con-
tributions, a special rule applies in determining the portion of a
distribution that is includible in gross income (but for the qualified
charitable distribution provision) and thus is eligible for qualified
charitable distribution treatment. Under the special rule, the dis-
tribution is treated as consisting of income first, up to the aggre-
gate amount that would be includible in gross income (but for the
qualified charitable distribution provision) if the aggregate balance
of all IRAs having the same owner were distributed during the
same year. In determining the amount of subsequent IRA distribu-
tions includible in income, proper adjustments are to be made to
reflect the amount treated as a qualified charitable distribution
under the special rule.
Distributions that are excluded from gross income by reason of
the qualified charitable distribution provision are not taken into ac-
count in determining the deduction for charitable contributions
under section 170.
REASONS FOR CHANGE
The present-law qualified charitable distribution rules provide
senior citizens with flexibility in making gifts to charity by treating
certain charitable distributions from an IRA as required minimum
distributions while excluding these distributions from gross income.
The $100,000 annual exclusion limit, however, has not been in-
creased since the provision first went into effect in 2006. The Com-
mittee believes it is important to index the annual exclusion limit
for inflation to prevent future erosion of the qualified charitable
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distribution tax benefit. In addition, the Committee wishes to build
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102
on the success of the present-law rules by allowing additional flexi-
bility for seniors in the form of a one-time election to make quali-
fied charitable distributions to a split-interest entity, such as a
charitable gift annuity or a charitable remainder trust.
EXPLANATION OF PROVISION
First, the provision indexes the annual $100,000 exclusion limit
for inflation for taxable years beginning after 2023.
Second, the provision allows a taxpayer to elect for a taxable
year to treat certain distributions from an IRA to a split-interest
entity as if the contributions were made directly to a qualifying
charity for purposes of the exclusion from gross income for quali-
fied charitable distributions. Such an election may not have been
in effect for a preceding taxable year; thus, the election may be
made for only one taxable year during the taxpayer’s lifetime. The
aggregate amount of distributions of the taxpayer with respect to
the election may not exceed $50,000 (indexed for inflation for tax-
able years beginning after 2023).
A split-interest entity means: (1) a charitable remainder annuity
trust (as defined in section 664(d)(1)); (2) a charitable remainder
unitrust (as defined in section 664(d)(2)); or (3) a charitable gift an-
nuity (as defined in section 501(m)). In each case, the trust or ar-
rangement must be funded exclusively by qualified charitable dis-
tributions. In the case of a charitable gift annuity, fixed payments
of five percent or greater must commence not later than one year
from the date of funding.
In the case of a distribution from an IRA to a charitable remain-
der annuity trust or charitable remainder unitrust, the distribution
qualifies for the one-time election only if a charitable deduction for
the entire value of the charitable remainder interest would be al-
lowable under section 170 (determined without regard to this provi-
sion or the charitable deduction percentage limits under section
170(b)). In the case of a distribution to a charitable gift annuity,
the distribution qualifies for the one-time election only if a chari-
table deduction in an amount equal to the amount of the distribu-
tion reduced by the value of the annuity 434 would be allowable
under section 170 (determined without regard to this provision or
the charitable deduction percentage limits under section 170(b)).
In addition, a distribution from an IRA to a split-interest entity
qualifies for the one-time election only if: (1) no person holds an in-
come interest in the split-interest entity other than the individual
for whose benefit such account is maintained, the spouse of such
individual, or both; and (2) the income interest in the split-interest
entity is nonassignable.
In the case of a charitable remainder annuity trust or a chari-
table remainder unitrust that is funded by qualified charitable dis-
434 The annuity must be described in section 501(m)(5)(B), which provides that the annuity
is described in section 514(c)(5), determined as if the amount paid in cash for the issuance of
the annuity were property. Section 514(c)(5), in turn, describes when an obligation to pay an
annuity is not treated as ‘‘acquisition indebtedness’’ for purposes of the section 514 debt-financed
income rules. Under that section, the obligation to pay the annuity: (1) generally must be the
sole consideration issued in exchange for property if, at the time of the exchange, the value of
the annuity is less than 90 percent of the value of the property received in exchange; (2) is pay-
able over the life of one individual or the lives of two individuals in being at such time; and
(3) does not guarantee a minimum amount of payments or specify a maximum amount of pay-
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ments and does not provide for any adjustment of the amount of the annuity payments by ref-
erence to the income received from the transferred property or any other property. Sec. 514(c)(5).
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tributions, distributions are treated as ordinary income in the
hands of a beneficiary to whom an annuity or unitrust payment is
made. A qualified charitable distribution made to fund a charitable
gift annuity is not treated as an investment in the contract for pur-
poses of section 72(c).
EFFECTIVE DATE
The provision is effective for distributions made in taxable years
beginning after the date of enactment.
11. Exception to penalty on early distributions from qualified plans
for individuals with a terminal illness (sec. 211 of the bill and
sec. 72(t) of the Code)
PRESENT LAW
Distributions from tax-favored retirement plans
Background on distributions from tax-favored retirement plans
may be found in Title I, section 5 of this document.
REASON FOR CHANGE
The Committee believes that terminally ill individuals should be
able to access funds from retirement plans when needed, without
being subject to the 10-percent early withdrawal tax that otherwise
generally applies to early distributions from a retirement plan.
EXPLANATION OF PROVISION
Under the provision, an exception to the 10-percent early with-
drawal tax applies in the case of a distribution made to an em-
ployee who is a terminally ill individual on or after the date on
which such employee has been certified by a physician as having
a terminal illness. For purposes of this provision, terminally ill in-
dividual means an individual who has been certified by a physician
as having an illness or physical condition that can reasonably be
expected to result in death in 84 months or less after the date of
the certification.435 An employee will not be considered terminally
ill unless sufficient evidence is provided in a form and manner to
be determined by the Secretary.
EFFECTIVE DATE
The provision is effective for distributions made after the date of
enactment.
12. Surviving spouse election to be treated as employee (sec. 212
of the bill and sec. 401(a)(9) of the Code)
PRESENT LAW
General background on the requirements related to required
minimum distributions may be found in Title II, section 1 of this
document.
435 This definition has the same meaning given such term under sec. 101(g)(4)(A) (pertaining
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to the treatment of certain accelerated death benefits) except that ‘‘84 months’’ is substituted
for ‘‘24 months.’’
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REASONS FOR CHANGE
Under present law, a surviving spouse receives a more favorable
distribution period of his or her spouse’s interest in a retirement
plan if the surviving spouse rolls the amount to an IRA. The Com-
mittee wishes to remove this unnecessary step and ease the burden
on surviving spouses by providing a similar distribution period
under a retirement plan to that provided under an IRA.
EXPLANATION OF PROVISION
In the case of an employee who dies before the distribution of re-
quired minimum distributions has begun under the plan, and who
has designated a spouse as sole beneficiary, the provision permits
the spouse to elect to be treated as the employee for purposes of
determining the distribution period. The provision further directs
the Secretary to amend the regulations to provide that the distribu-
tion period for the spouse in such case is determined using the Uni-
form Life Table.436 Thus, the provision allows a designated bene-
ficiary who is a spouse to receive a similar distribution period for
lifetime distributions under an employer-sponsored retirement plan
as is permitted under present law in an IRA.
The provision also permits the spouse to elect whether to apply
the present-law rule that treats the spouse as the employee for
purposes of determining the distribution period in cases where the
spouse dies before distributions have begun.
The provision provides for the elections to be made in such time
and manner as prescribed by the Secretary. The election must in-
clude a timely notice to the plan administrator, and once made it
may not be revoked except with the consent of the Secretary.
EFFECTIVE DATE
The provision is effective for calendar years beginning after De-
cember 31, 2023.
13. Long-term care contracts purchased with retirement plan dis-
tributions (sec. 213 of the bill and new secs. 72(t)(2)(L),
401(a)(39), 403(a)(6), and 6050Z, and sec. 6724(d) of the Code)
PRESENT LAW
Background on the distribution rules that apply to retirement
plans, including the 10-percent early withdrawal tax, may be found
in Title I, section 14 of this document.
Qualified long-term care insurance contracts
Tax-favored treatment applies to premiums and benefits under a
qualified long-term care insurance contract.437 The contract is
treated as an accident and health insurance contract; thus,
amounts received under the contract generally are excludable from
income as amounts received for personal injuries or sickness.438
436 Treas. Reg. sec. 1.401(a)(9)–5, Q&A 5(a), or any successor regulation.
437 Sec. 7702B(a).
438 In the case of per diem contracts, the excludable amount is subject to a per-day dollar cap.
If payments under such contracts exceed the dollar cap, then the excess is excludable only to
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the extent of actual costs in excess of the dollar cap that are incurred for long-term care serv-
ices.
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105
An employer-sponsored health plan that provides employees with
coverage under a qualified long-term care insurance contract gen-
erally is treated in the same manner as employer-provided health
benefits. As a result, the employer’s premium payments are gen-
erally excluded from income and wages,439 and benefits payable
under the contract generally are excludable from the recipient’s in-
come. Long-term care insurance expenses of a self-employed indi-
vidual are deductible under the self-employed health insurance de-
duction.
In addition, premiums paid for a qualified long-term care insur-
ance contract and unreimbursed expenses for qualified long-term
care services are treated as medical expenses for purposes of the
itemized deduction for medical care.440
A qualified long-term care insurance contract is defined as any
insurance contract that provides only coverage for qualified long-
term care services and that meets additional requirements.441 Per
diem-type and reimbursement-type contracts are permitted. Quali-
fied long-term care services are necessary diagnostic, preventive,
therapeutic, curing, treating, mitigating, and rehabilitative serv-
ices, and maintenance or personal care services that are required
by a chronically ill individual and that are provided pursuant to a
plan of care prescribed by a licensed health care practitioner.442
REASONS FOR CHANGE
The Committee is aware of a widespread lack of coverage of cost-
ly long-term care risks across a significant cohort of the domestic
population. This provision seeks to address this coverage gap by
providing an opportunity to purchase long-term care coverage with
distributions (up to a dollar limitation) from a defined contribution
plan. Plan participants may choose to use taxable distributions of
such retirement savings, up to a dollar limitation, to pay for cer-
tified long-term care insurance. In addition, the otherwise applica-
ble 10-percent early withdrawal tax does not apply to such dis-
tributions. Benefits provided by such insurance can offset the cost
of care for an individual participant or spouse in need of long-term
care services. A reporting requirement applies to ensure that the
distributions from the defined contribution plan are applied for this
intended purpose.
EXPLANATION OF PROVISION
Qualified long-term care distributions
The provision provides that a defined contribution plan may
allow qualified long-term care distributions. Qualified long-term
439 However, section 106(c) provides that gross income of an employee includes employer-pro-
vided coverage of qualified long-term care services to the extent such coverage is provided
through a flexible spending or similar arrangement. Thus, the exclusion does not apply to quali-
fied long-term care insurance provided under a cafeteria plan.
440 Under section213(d)(10), premiums paid for long-term care coverage are deductible only to
the extent that the premiums do not exceed a dollar cap measured by the insured’s age at the
end of the taxable year.
441 Sec. 7702B(b). For example, the contract is not permitted to provide for a cash surrender
value or other money that can be paid, assigned or pledged as collateral for a loan, or borrowed
(and any premium refunds must be applied as a reduction in future premiums or to increase
future benefits).
442 Sec. 7702B(c)(1). A chronically ill individual is generally one who has been certified within
the previous 12 months by a licensed health care practitioner as being unable to perform (with-
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out substantial assistance) at least two activities of daily living (ADLs) for at least 90 days due
to a loss of functional capacity (or meeting other definitional requirements). Sec. 7702B(c)(2).
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106
care distributions are those distributions made during a taxable
year that do not exceed the lesser of $2,500,443 or the amount (gen-
erally, premiums) paid by the plan participant during the taxable
year for certain insurance coverage. The distributions must be in-
cludible in income.444
This insurance coverage must be for the participant or the par-
ticipant’s spouse (or other family member of the participant as pro-
vided by the Secretary by regulation). This insurance coverage (re-
ferred to as certified long-term care insurance) is (1) a qualified
long-term care insurance contract 445 covering qualified long-term
care services,446 (2) coverage of the risk that an insured individual
would become a chronically ill individual,447 or (3) coverage of
qualified long-term care services under a rider or other provision
of a life insurance or annuity contract if the rider or provision is
treated as a separate contract and meets specified consumer protec-
tion provisions.448
It is intended that only high-quality coverage meeting applicable
definitions is eligible for the favorable treatment provided. There-
fore, the provision requires that, to meet the definition of certified
long-term care insurance, coverage must provide meaningful finan-
cial assistance in the event the insured needs home-based or nurs-
ing home care. Providing meaningful financial assistance means
that benefits must be adjusted for inflation and consumer protec-
tions must be provided, including protection in the event the cov-
erage is terminated.
Qualified long-term care distributions are generally includible in
income. However, the provision provides an exemption for such dis-
tributions from the 10-percent early withdrawal tax provided that
applicable requirements are met.449 If the individual covered by the
long-term care coverage to which the distribution relates is the
spouse of the participant in the plan, this exclusion from the early
withdrawal tax applies only if the participant and the participant’s
spouse file a joint return. A qualified long-term care distribution is
not subject to mandatory withholding.450
Reporting requirements
Long-term care premium statement
For a distribution to be a qualified long-term care distribution
from a plan, a long-term care premium statement must be filed
with the plan.451 The statement is to be provided by the issuer of
the coverage. This statement must provide the name and TIN of
the issuer, provide a statement that the coverage is certified long-
443 The $2,500 amount is indexed by the cost-of-living adjustment in section 1(f)(3) for taxable
years beginning after December 31, 2024.
444 See new section 401(a)(39)(D), referring to section 402(1)(3).
445 Defined in section 7702B(b).
446 Defined in section 7702B(c).
447 This is a chronically ill individual within the meaning of section 101(g)(4)(B), under a rider
or other provision of a life insurance contract which satisfies the requirements relating to chron-
ically ill insureds in section 101(g)(3) (determined without regard to subparagraph (D) thereof,
relating to periodic payments).
448 Qualified long-term care services are defined in section 7702B(c). Whether a rider or other
provision of a life insurance or annuity contract is treated as a separate contract is determined
under section 7702B(e) and regulations thereunder. The consumer protection provisions are de-
fined in section 7702B(g).
449 New sec. 72(t)(2)(L).
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450 New sec. 72(t)(2)(L) and sec. 3405.
451 New sec. 401(a)(39)(E).
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107
term care insurance, identify the participant as the owner of the
coverage, identify the insured individual and their relationship to
the participant, state the amount of premiums for the coverage for
the calendar year, and provide such other information as is re-
quired by the Secretary. The long-term care premium statement
can be accepted only if the issuer has completed a disclosure to the
Secretary with respect to the product to which the long-term care
premium statement relates. The disclosure must identify the issuer
and type of coverage, and provide such other information required
by the Secretary which is included in the filing with respect to the
product with the applicable State insurance regulatory authority.
Reporting rules
An issuer of certified long-term care insurance that provides a
long-term care premium statement to any purchaser must make a
return to the IRS no later than February 1 of the succeeding cal-
endar year.452 On the return, the issuer is required to report the
name and TIN of the issuer, provide a statement that the coverage
is certified long-term care insurance, state the name of the owner
of the coverage, identify the insured individual and their relation-
ship to the owner, state the amount of premiums for the coverage
for the calendar year, and provide such other information as is re-
quired by the Secretary.
In addition, the issuer must furnish a written statement to each
individual whose name is required to be reported on the return.
The written statement is to be furnished on or before January 31
of the year following the calendar year for which the return was
required to be made.453 The written statement is to show the name
and contact information of the issuer and the aggregate premiums
and charges under the coverage for the calendar year.
Applicable penalties
The filing of the return and the furnishing of the written state-
ment are subject to penalties for failure to file correct information
returns and to furnish correct payee statements.454
Information for consumers
The provision also directs Treasury to maintain a website that
provides information about long-term care insurance policies such
as common policy features, factors to consider in selecting coverage
levels, consumer protections, tax rules for premiums and benefits,
rules applicable to certified long-term care insurance, and informa-
tion about issuers of such products by State.
EFFECTIVE DATE
The provision is effective for distributions made after the date
that is three years after the date of enactment.
452 New section 6050Z.
453 New section 6050Z(b). An individual to whom a written statement must be furnished may
request the written statement at any time before the close of the calendar year, and the person
required to furnish the return must comply with the request and also furnish a copy of the writ-
ten statement to the Secretary.
454 The present-law penalties for failure to file correct information returns and to furnish cor-
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rect payee statements apply with respect to new section 6050Z. See sections 6721 and 6722, as
well as sections 6724(d)(1) and (2) as modified by the provision.
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TITLE III—PUBLIC SAFETY OFFICERS AND MILITARY
1. Military spouse retirement plan eligibility credit for small
employers (sec. 301 of the bill and new sec. 45U of the Code)
PRESENT LAW
Present law does not currently provide a credit specifically with
respect to a military spouse who is eligible to participate during
the taxable year in a defined contribution plan of a small employer.
REASONS FOR CHANGE
The Committee believes that a tax credit for small employers
who permit military spouses to participate in the employer’s de-
fined contribution plan and an enhanced credit for small employers
who make contributions to the plan for military spouses will pro-
vide incentives for small employers to include military spouses in
their pension plans. The Committee believes such inclusion will in-
crease participation in employer-provided pension plans and im-
prove financial readiness for retirement for military families.
EXPLANATION OF PROVISION
The provision allows an eligible small employer to take a new
nonrefundable income tax credit with respect to each individual
who is married to a member of the uniformed services and self-cer-
tifies as such (referred to as a military spouse), who is an employee
of the employer, who is eligible to participate in an eligible defined
contribution plan of the employer during the taxable year, and who
is a nonhighly compensated employee.455 The credit is determined
to be the sum of $200 for each such employee plus the amount of
the contributions made to all eligible defined contribution plans by
the employer with respect to the employee up to a maximum of
$300 for the taxable year for each such employee. The credit ap-
plies for up to three consecutive years beginning with the first tax-
able year in which the individual begins participating in the plan.
An eligible small employer is an employer that, for the preceding
year, had no more than 100 employees, each with compensation of
$5,000 or more. Members of controlled groups and affiliated service
groups are treated as a single employer for purposes of these re-
quirements.456
An eligible defined contribution plan is a plan in which military
spouses are eligible to participate within two months of beginning
employment, and in which military spouses who are eligible to par-
ticipate (1) are immediately eligible to receive employer contribu-
tions in amounts not less than that received by similarly situated
nonmilitary spouses with two years of service, and (2) have an im-
mediate, nonforfeitable right to the accrued benefits derived from
employer contributions under the plan.
EFFECTIVE DATE
The provision applies to taxable years beginning after the date
of enactment.
455 A nonhighly compensated employee is an employee who is not a highly compensated em-
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ployee as defined under section 414(q).
456 Sec. 52(a) or (b) and 414(m) or (o).
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2. Distributions to firefighters (sec. 302 of the bill and sec. 72(t) of
the Code)
PRESENT LAW
Distributions from tax-favored retirement plans
A distribution from a qualified retirement plan,457 a tax-shel-
tered annuity plan (a ‘‘section 403(b) plan’’), an eligible deferred
compensation plan of a State or local government employer (a ‘‘gov-
ernmental section 457(b) plan’’), or an IRA generally is included in
income for the year distributed.458 These plans are referred to col-
lectively as ‘‘eligible retirement plans.’’ In addition, unless an ex-
ception applies, a distribution from a qualified retirement plan, a
section 403(b) plan, or an IRA received before age 591⁄2 is subject
to a 10-percent additional tax (referred to as the ‘‘early withdrawal
tax’’) on the amount includible in income.459
Qualified public safety employees in governmental plans
An exception to the early withdrawal tax applies if a distribution
is made to an employee after separation from service after attain-
ment of age 55.460 Under a special rule for distributions to quali-
fied public safety employees in a governmental plan,461 this excep-
tion applies to distributions made after separation from service
after attainment of age 50 (‘‘age 50 exception’’).462 For this purpose,
a qualified public safety employee means (1) any employee of a
State or a political subdivision of a State who provides police pro-
tection, firefighting services, or emergency medical services for any
area within the State or political subdivision’s jurisdiction; or (2)
any Federal law enforcement officer,463 any Federal customs and
border protection officer,464 any Federal firefighter,465 any Federal
employee who is an air traffic controller 466 or nuclear materials
courier,467 any member of the United States Capitol Police, any
member of the Supreme Court Police, or any diplomatic security
special agent of the Department of State.
REASONS FOR CHANGE
The Committee believes that private sector firefighters merit the
same treatment as public sector firefighters, and thus wishes to ex-
tend the age 50 exception to private sector firefighters.
EXPLANATION OF PROVISION
The provision amends the age 50 exception for qualified public
safety employees in governmental plans so that the exception also
457 Qualified under section 401(a).
458 Secs. 401(a), 403(a), 403(b), 457(b), and 408. Under section 3405, distributions from these
plans are generally subject to income tax withholding unless the recipient elects otherwise. In
addition, certain distributions from a qualified retirement plan, a section 403(b) plan, or a gov-
ernmental section 457(b) plan are subject to mandatory income tax withholding at a 20-percent
rate unless the distribution is rolled over.
459 Sec. 72(t). Under present law, the 10-percent early withdrawal tax does not apply to dis-
tributions from a governmental section 457(b) plan.
460 Sec. 72(t)(2)(A)(v).
461 As defined in section 414(d).
462 Sec. 72(t)(10).
463 As defined in 5 U.S.C. secs. 8331(20) or 8401(17).
464 As defined in 5 U.S.C. secs. 8331(31) or 8401(36).
465 As defined in 5 U.S.C. secs. 8331(21) or 8401(14).
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466 As defined in 5 U.S.C. secs. 8331(30) or 8401(35).
467 As defined in 5 U.S.C. secs. 8331(27) or 8401(33).
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110
apples to distributions from a qualified retirement plan or section
403(b) plan 468 to an employee who provides firefighting services.
Thus, the provision expands the age 50 exception to also apply to
private-sector firefighters receiving distributions from a qualified
retirement plan or section 403(b) plan.
EFFECTIVE DATE
The provision is effective for distributions made after the date of
enactment.
3. Exclusion of certain disability-related first responder retirement
payments (sec. 303 of the bill and new sec. 139C of the Code)
PRESENT LAW
Qualified retirement plans (and other tax-favored employer-spon-
sored retirement plans) are accorded special tax treatment and fall
into two categories: defined benefit plans and defined contribution
plans. A defined contribution plan is a type of qualified retirement
plan whereby contributions, earnings, and losses are allocated to a
separate account for each participant. Defined contribution plans
may provide for nonelective contributions and matching contribu-
tions by employers and pre-tax (that is, contributions are either ex-
cluded from income or deductible) or after-tax contributions by em-
ployees.
Disability-related payments
Amounts received under worker’s compensation acts as com-
pensation for personal injuries or sickness (‘‘disability payments’’)
generally are excluded from the gross income of the recipients.469
The exclusion from gross income includes compensation for per-
sonal injuries or sickness received under a statute in the nature of
a worker’s compensation act, and also extends such exclusion to
survivors of the affected worker. However, these exclusions gen-
erally do not apply to amounts received as a retirement pension or
annuity (including retirement disability payments) to the extent
that the amounts are determined by reference to the employee’s
age, length of service, or prior contributions. Such retirement pay-
ments, which may be distributed from a section 401(a) qualified re-
tirement plan, a section 403(a) or (b) tax-sheltered annuity plan, or
an eligible deferred compensation plan of a State or local govern-
ment employer under section 457(b) (‘‘retirement distributions’’),
generally are included in income for the year distributed.
REASONS FOR CHANGE
The Committee believes that certain retirement distributions
paid to qualified first responders should be excluded from gross in-
come to the extent such payments are related to the first respond-
ers’ disability.
468 The provision applies to a distribution from a qualified retirement plan, an annuity plan
described in section 403(a), or an annuity contract described in section 403(b). Sec.
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402(c)(8)(B)(iii), (iv), and (vi).
469 Sec. 104(a)(1).
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EXPLANATION OF PROVISION
The provision provides an exclusion from gross income for certain
disability-related retirement distributions paid to qualified first re-
sponders. An individual’s gross income does not include qualified
first responder retirement payments for any taxable year to the ex-
tent such payments do not exceed an annualized excludable dis-
ability amount. A qualified first responder retirement payment that
is excluded from gross income is an amount received as a retire-
ment pension or annuity that would otherwise be includible in
gross income, is received in connection with the individual’s quali-
fied first responder service, and is paid from a qualified trust, an-
nuity plan, governmental deferred compensation plan under section
457(b), or a section 403(b) plan.470 Also, for this purpose, qualified
first responder service means services performed as a law enforce-
ment officer, firefighter, paramedic, or emergency medical techni-
cian. The provision does not limit the exclusion from gross income
to individuals who provide such services in a public capacity or to
individuals who address only emergency situations.
The portion of the retirement distributions which is exempted
from gross income is the ‘‘annualized excludable disability amount.’’
This is based on the determination of the excludable amount of dis-
ability payments (‘‘service-connected excludable disability amount’’)
that the individual received during the 12-month period before the
individual attained retirement age. A service-connected excludable
disability amount means periodic payments which are not includ-
ible in the individual’s gross income because they are amounts re-
ceived under workmen’s compensation acts as compensation for
personal injuries or sickness,471 are received in connection with the
individual’s qualified first responder service, and terminate when
the individual attains retirement age.
The provision also provides that for an individual who only re-
ceives service-connected excludable disability amounts for a portion
of the year, the annualized excludable disability amount is deter-
mined by multiplying the service-connected excludable disability
amounts by the ratio of 365 to the number of days in such period
to which amounts were properly attributable.
Unlike worker’s compensation payments, the exclusion under the
provision that is applicable to eligible first responders does not ex-
tend to surviving spouses or other survivors once the eligible indi-
vidual is deceased.
EFFECTIVE DATE
The provision is effective for amounts received with respect to
taxable years beginning after the date of enactment.
470 These plans are described in clauses (iii), (iv), (v), and (vi) of section 402(c)(8)(B), respec-
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tively.
471 Sec. 104(a)(1).
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4. Repeal of direct payment requirement on exclusion from gross
income of distributions from governmental plans for health and
long-term care insurance (sec. 304 of the bill and sec. 402(l)(5)(A)
of the Code)
PRESENT LAW
Under present law, a distribution from a qualified retirement
plan is generally includible in income.472 Under an exception to
this general rule, certain pension distributions from an eligible re-
tirement plan used to pay for qualified health insurance premiums
are excludible from income, up to a maximum exclusion of $3,000
annually. An eligible retirement plan includes a governmental
qualified retirement or annuity plan, a section 403(b) annuity, or
a section 457 plan. The exclusion applies with respect to eligible re-
tired public safety officers who make an election to have qualified
health insurance premiums deducted from amounts distributed
from an eligible retirement plan and paid directly to the insurer.
An eligible retired public safety officer is an individual who, by rea-
son of disability or attainment of normal retirement age, is sepa-
rated from service as a public safety officer 473 with the employer
who maintains the eligible retirement plan from which pension dis-
tributions are made.
Qualified health insurance premiums include premiums for acci-
dent or health insurance or qualified long-term care insurance con-
tracts covering the taxpayer, the taxpayer’s spouse, and the tax-
payer’s dependents. The qualified health insurance premiums do
not have to be for a plan sponsored by the employer; however, the
exclusion does not apply to premiums paid by the employee and re-
imbursed with pension distributions. Amounts excluded from in-
come under the provision are not taken into account in determining
the itemized deduction for medical expenses under section 213 or
the deduction for health insurance of self-employed individuals
under section 162.
The exclusion applies to a distribution only if payment of the pre-
miums is made directly to the provider of the accident or health
plan or qualified long-term care insurance contract by deduction
from a distribution from the eligible retirement plan. For this pur-
pose, all eligible retirement plans of an employer are treated as a
single plan.474
REASONS FOR CHANGE
The Committee believes that the direct payment requirement of
present law is not needed to ensure that a pension distribution
from an eligible retirement plan is being used to pay for qualified
health insurance premiums, provided that the recipient employee
reports to the IRS that the amount of the distribution does not ex-
ceed the employee’s payment for qualified health insurance pre-
miums for that taxable year. Consequently, the Committee has de-
cided to modify present law so that this exclusion from income for
the distribution applies without regard to whether payment of the
472 Secs. 402(a), 403(a), 403(b), 408(d), and 457(a).
473 The term ‘‘public safety officer’’ has the same meaning as under section 1204(9)(A) of the
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Omnibus Crime Control and Safe Streets Act of 1986.
474 Sec. 402(l)(5).
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premiums is made directly to the provider of the contract by deduc-
tion from a distribution, or is made to the employee.
EXPLANATION OF PROVISION
The provision provides that the exclusion for distributions used
to pay for qualified health insurance premiums applies to a dis-
tribution without regard to whether payment of the premiums is
made directly to the provider of the accident or health plan or
qualified long-term care insurance contract by deduction from a
distribution from the eligible retirement plan, or is made to the em-
ployee.
The provision requires reporting in the case of a payment made
to the employee. The employee is required to include with the tax
return of tax for the taxable year of the distribution an attestation
that the distribution does not exceed the amount paid by the em-
ployee for qualified health insurance premiums for that taxable
year.
EFFECTIVE DATE
The provision applies to distributions made after the date of en-
actment.
5. Modification of eligible age for exemption from early withdrawal
penalty (sec. 305 of the bill and sec. 72(t) of the Code)
PRESENT LAW
Background on the early withdrawal tax and the rules that apply
to qualified public safety employees may be found in Title III, sec-
tion 2 of this document.
REASONS FOR CHANGE
The Committee recognizes that certain qualified public safety
employees retire after 25 years of service but before reaching age
50. The Committee wishes to afford such employees the same treat-
ment with respect to the taxation of retirement plan distributions
as is afforded to qualified public safety employees who separate
from service after age 50.
EXPLANATION OF PROVISION
The provision modifies the exception for distributions made to a
qualified public safety employee after separation from service after
age 50 to also apply if the employee separates after 25 years of
service under the plan. Thus, a distribution from a governmental
plan that is made to a qualified public safety employee after sepa-
ration from service after attainment of age 50 or 25 years of service
under the plan (whichever is earlier) is exempt from the early with-
drawal tax.
EFFECTIVE DATE
The provision is effective for distributions made after the date of
enactment.
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6. Exemption from early withdrawal penalty for certain State and
local government corrections employees (sec. 306 of the bill and
sec. 72(t) of the Code)
PRESENT LAW
Background on the early withdrawal tax and the rules that apply
to qualified public safety employees may be found in Title III, sec-
tion 2 of this document.
For purposes of an exception to the early withdrawal tax, a quali-
fied public safety employee means (1) any employee of a State or
a political subdivision of a State who provides police protection,
firefighting services, or emergency medical services for any area
within the State or political subdivision’s jurisdiction; or (2) any
Federal law enforcement officer,475 any Federal customs and border
protection officer,476 any Federal firefighter,477 any Federal em-
ployee who is an air traffic controller 478 or nuclear materials cou-
rier,479 any member of the United States Capitol Police, any mem-
ber of the Supreme Court Police, or any diplomatic security special
agent of the Department of State.
A Federal law enforcement officer means an employee, the duties
of whose position are primarily the investigation, apprehension, or
detention of individuals suspected or convicted of offenses against
the criminal laws of the United States, including an employee en-
gaged in this activity who is transferred to a supervisory or admin-
istrative position. ‘‘Detention’’ for this purpose includes the duties
of (1) employees of the Bureau of Prisons and Federal Prison In-
dustries, Incorporated; (2) employees of the Public Health Service
assigned to the field service of the Bureau of Prisons or of the Fed-
eral Prison Industries, Incorporated; (3) employees in the field serv-
ice at Army or Navy disciplinary barracks or at confinement and
rehabilitation facilities operated by any of the armed forces; and (4)
employees of the Department of Corrections of the District of Co-
lumbia, its industries and utilities; whose duties in connection with
individuals in detention suspected or convicted of offenses against
the criminal laws of the United States or of the District of Colum-
bia or offenses against the punitive articles of the Uniformed Code
of Military Justice require frequent direct contact with these indi-
viduals in their detention, direction, supervision, inspection, train-
ing, employment, care, transportation, or rehabilitation.
REASONS FOR CHANGE
The Committee believes that State and local corrections officers
and forensic security employees merit the same treatment as other
State and local public safety employees, and thus wishes to extend
the exemption from the early withdrawal tax that applies to sepa-
rations from service after age 50 to include this group of workers.
EXPLANATION OF PROVISION
The provision modifies the definition of qualified public safety
employee to also include any employee of a State or political sub-
475 As defined in 5 U.S.C. secs. 8331(20) or 8401(17).
476 As defined in 5 U.S.C. secs. 8331(31) or 8401(36).
477 As defined in 5 U.S.C. secs. 8331(21) or 8401(14).
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478 As defined in 5 U.S.C. secs. 8331(30) or 8401(35).
479 As defined in 5 U.S.C. secs. 8331(27) or 8401(33).
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115
division of a State who provides services as a corrections officer or
as a forensic security employee providing for the care, custody, and
control of forensic patients. Thus, a distribution from a govern-
mental plan that is made to such a corrections officer or forensic
security employee after separation from service after attainment of
age 50 is exempt from the early withdrawal tax.
EFFECTIVE DATE
The provision is effective for distributions made after the date of
enactment.
TITLE IV—NONPROFITS AND EDUCATORS
1. Enhancement of 403(b) plans (sec. 401 of the bill and sec. 403(b)
of the Code)
PRESENT LAW
Tax-sheltered annuities (‘‘section 403(b) plans’’)
Section 403(b) plans are a form of tax-favored employer-spon-
sored plan that provides tax benefits similar to qualified retirement
plans. Section 403(b) plans may be maintained only by (1) chari-
table tax-exempt organizations, and (2) educational institutions of
State or local governments (that is, public schools, including col-
leges and universities). Many of the rules that apply to section
403(b) plans are similar to the rules applicable to qualified retire-
ment plans, including section 401(k) plans.
Contributions to 403(b) plans
Employers may make nonelective or matching contributions to
such plans on behalf of their employees, and the plan may provide
for employees to make pre-tax elective deferrals, designated Roth
contributions (held in designated Roth accounts) 480 or other after-
tax contributions.
Annuity contracts
Generally, section 403(b) plans provide for contributions toward
the purchase of annuity contracts. The employee’s rights under the
annuity contract are nonforfeitable, except for a failure to pay fu-
ture premiums.481 Amounts contributed by an employer for an an-
nuity contract are excluded from the gross income of the employee
for the taxable year if certain requirements are satisfied.
Section 403(b) custodial accounts
Alternatively, such contributions may be held in custodial ac-
counts established for each employee if those accounts satisfy cer-
tain requirements.
Contributions to a section 403(b) plan that are held in a custodial
account are treated as contributions to an annuity contract 482 if
the assets are (1) held by a bank 483 or another person who dem-
480 Sec. 402A.
481 Sec. 403(b)(1)(C).
482 Sec. 403(b)(7).
483 A ‘‘bank’’ is defined as any bank as defined in section 581, an insured credit union within
the meaning of section 101, paragraph (6) or (7) of the Federal Credit Union Act, and a corpora-
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tion which, under the laws of the State of its incorporation, is subject to supervision and exam-
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onstrates, to the satisfaction of the Secretary, that the manner in
which the assets will be held is consistent with the requirements
for a qualified retirement plan 484 and (2) invested only in regu-
lated investment company stock.485
In addition, assets of a section 403(b) custodial account cannot be
commingled in a group trust with any assets other than those of
a regulated investment company.486 Contributions to a custodial
account are not permitted to be distributed before the employee
dies, attains age 591⁄2, has a severance from employment, becomes
disabled,487 or, in the case of elective deferrals, encounters finan-
cial hardship; or, with respect to lifetime income options, the date
that is 90 days prior to the date such lifetime income investment
no longer is held as an investment option and is distributed in the
form of a qualified distribution.488 Finally, a custodial account
must contain a written statement that the assets held in a custo-
dial account cannot be used for, or diverted to, purposes other than
for the exclusive benefit of plan participants and their bene-
ficiaries.489
Group trust
Under the Code, a trust created or organized in the United
States and forming a part of a stock bonus, pension, or profit-shar-
ing plan of an employer for the exclusive benefit of its employees
or their beneficiaries constitutes a qualified trust if it provides
that:
• Contributions made to the trust by the applicable em-
ployer or employers, or both, are used for the purpose of dis-
tributing the corpus and income of the trust, in accordance
with the terms of the plan, to such employees or their bene-
ficiaries; 490
• A trust described in section 401(a) is exempt from income
tax; 491 and
• Under each trust instrument, it must be impossible, at any
time prior to the satisfaction of all liabilities with respect to
employees and their beneficiaries under the plan and trust, for
any part of the corpus or income of the trust to be used for or
diverted to purposes other than for the exclusive benefit of the
employees or their beneficiaries.
A group trust is an arrangement under which individual retire-
ment plan trusts pool their assets in a group trust (usually created
for the purpose of providing diversification of investments), where
the trust is declared to be part of each participating retirement
plan and the trust instruments creating both the participating and
group trusts provide that amounts are transferred from one trust
ination by the Commissioner of Banking or other officer of such State in charge of the adminis-
tration of the banking laws of such State. Sec. 408(n).
484 Sec. 401(f)(2) and Treas. Reg. sec. 1.401(f)–1. A custodial account that satisfies the require-
ments of section 401(f)(2) is treated as an organization described in section 401(a) solely for pur-
poses of subchapter F of chapter 1 of Subtitle A (secs. 501–530) and subtitle F (pertaining to
procedure and administration) with respect to amounts received by the account and with respect
to any income from the investment of those amounts.
485 Sec. 403(b)(7) and Treas. Reg. sec. 1.403(b)–8(d)(2)(i).
486 Treas. Reg. sec. 1.403(b)–8(d)(2)(ii).
487 Within the meaning of section 72(m)(7).
488 In accordance with section 401(a)(38).
489 Treas. Reg. sec. 1.403(b)–8(d)(2)(iii).
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490 Sec. 401(a)(1).
491 Sec. 501(a).
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to the other at the direction of the trustee of the participating
trust.492
The tax status of the group trust is derived from the tax status
of the entities participating in the group trust to the extent of the
entities’ equitable interests in such trust if the following require-
ments are satisfied:
• The group trust is itself adopted as a part of each adopting
group trust retiree benefit plan;
• The group trust instrument expressly limits participation
to pension, profit-sharing, and stock bonus trusts or custodial
accounts qualifying under section 401(a) that are exempt under
section 501(a); individual retirement accounts that are exempt
under section 408(e); eligible governmental plan trusts or cus-
todial accounts under section 457(b) that are exempt under sec-
tion 457(g); custodial accounts under section 403(b)(7); retire-
ment income accounts under section 403(b)(9); and section
401(a)(24) governmental plans;
• The group trust instrument expressly prohibits any part of
its corpus or income that equitably belongs to any adopting
group trust retiree benefit plan from being used for, or diverted
to, any purpose other than for the exclusive benefit of the par-
ticipants and beneficiaries of the group trust retiree benefit
plan;
• Each group trust retiree benefit plan that adopts the group
trust is itself a trust, a custodial account, or a similar entity
that is tax-exempt under section 408(e) or section 501(a) (or is
treated as exempt under section 501(a));
• Each group trust retiree benefit plan that adopts the group
trust expressly provides in its governing document that it is
impossible for any part of the corpus or income of the group
trust retiree benefit plan to be used for, or diverted to, pur-
poses other than for the exclusive benefit of the plan partici-
pants and their beneficiaries;
• The group trust instrument expressly limits the assets
that may be held by the group trust to assets that are contrib-
uted by, or transferred from, a group trust retiree benefit plan
to the group trust (and the earnings thereon), and the group
trust instrument expressly provides for separate accounting to
reflect the interest that each adopting group trust retiree ben-
efit plan has in the group trust, including separate accounting
for contributions to the group trust from the adopting plan,
disbursements made from the adopting plan’s account in the
group trust, and investment experience of the group trust allo-
cable to that account;
• The group trust instrument expressly prohibits an assign-
ment by an adopting group trust retiree benefit plan of any
part of its equity or interest in the group trust; and
• The group trust is created or organized in the United
States and is maintained at all times as a domestic trust in the
United States.
492 See Rev. Rul. 81–100, 1981–1 C.B. 326, as modified by Rev. Rul. 2004–67, 2004–2 C.B.
28; Rev. Rul. 2008–40, 2008–2 C.B. 166; Rev. Rul. 2011–1, 2011–2 I.R.B. 251 which was modi-
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fied by Notice 2012–6, 2012–3 I.R.B. 293, January 17, 2012; and Rev. Rul. 2014–24, 2014–37
I.R.B. 529.
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118
With respect to section 403(b)(7) custodial accounts, under IRS
guidance, such an account fails to satisfy the requirements for a
group trust if the assets of the account are invested other than in
the stock of a regulated investment company, and any group trust
in which the assets of a section 403(b)(7) custodial account is in-
vested must comply with this restriction.493 As a result of this in-
vestment restriction, the assets of a custodial account under section
403(b)(7) generally will be commingled in a group trust that solely
contains the assets of other section 403(b)(7) custodial accounts.
REASONS FOR CHANGE
Under present law, group trusts permit certain retirement plans
and IRAs to pool their assets for investment purposes if certain
specified requirements are satisfied. These group trusts provide
certain cost savings and broader investment options to such plans
than might otherwise be available. Section 403(b) investments are
generally limited to annuity contracts and mutual funds. This limi-
tation restricts 403(b) plan participants who are generally employ-
ees of charities and public educational organizations from access to
these group trusts.
The Committee believes that section 403(b) custodial accounts
would benefit from participating in a group trust.
EXPLANATION OF PROVISION 494
The provision provides that contributions to a section 403(b) plan
that are held in a custodial account are treated as contributions to
an annuity contract if the assets are to be held in that custodial
account and invested in regulated investment company stock or a
group trust intended to satisfy the requirements of current or fu-
ture IRS guidance.495
EFFECTIVE DATE
The provision is applicable to amounts invested after the date of
enactment.
2. Hardship withdrawal rules for 403(b) plans (sec. 402 of the bill
and sec. 403(b) of the Code)
PRESENT LAW
Background on rules related to hardship distributions under a
section 403(b) plan may be found in Title I, section 13 of this docu-
ment.
REASONS FOR CHANGE
The Committee believes that the rules that apply to the types of
contributions that may be withdrawn upon hardship should be the
same for section 401(k) plans and section 403(b) plans.
493 Rev. Rul. 2011–1, 2011–2 I.R.B. 251.
494 In order to permit 403(b) plans to participate in a group trust, certain revisions to the secu-
rities laws will be required.
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495 See footnote 486 and the description of the guidance in the Present Law section of this
provision.
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119
EXPLANATION OF PROVISION
The provision conforms the hardship distribution rules for sec-
tion 403(b) plans to those of section 401(k) plans. Thus, the provi-
sion provides that in addition to elective deferrals, a section 403(b)
plan may distribute, on account of an employee’s hardship, quali-
fied nonelective contributions,496 qualified matching contribu-
tions,497 and earnings on any of these contributions (including on
elective deferrals). In addition, the provision provides that a dis-
tribution does not fail to qualify as a hardship distribution solely
because the employee does not take any available loan under the
plan.
EFFECTIVE DATE
The provision is effective for plan years beginning after the date
of enactment.
3. Multiple employer 403(b) plans (sec. 403 of the bill and
secs. 403(b), 6057 and 6058 of the Code)
PRESENT LAW
Retirement savings under the Code and ERISA
The Code provides tax-favored treatment for various types of re-
tirement plans, including employer-sponsored plans and IRAs.
Code provisions are generally within the jurisdiction of the Sec-
retary, through his or her delegate, the IRS.
The most common type of tax-favored employer-sponsored retire-
ment plan is a qualified retirement plan,498 which may be a de-
fined contribution plan or a defined benefit plan. Under a defined
contribution plan, separate individual accounts are maintained for
participants, to which accumulated contributions, earnings, and
losses are allocated, and participants’ benefits are based on the
value of their accounts.499 Defined contribution plans commonly
allow participants to direct the investment of their accounts, usu-
ally by choosing among investment options offered under the plan.
Under a defined benefit plan, benefits are determined under a plan
formula and paid from general plan assets, rather than individual
accounts.500 Besides qualified retirement plans, certain tax-exempt
employers and public schools may maintain tax-deferred annuity
plans.501
An IRA is generally established by the individual for whom the
IRA is maintained.502 However, in some cases, an employer may
496 As defined in section 401(m)(4)(C).
497 As defined in section 401(k)(3)(D)(ii)(I).
498 Sec. 401(a). A qualified annuity plan under section 403(a) is similar to and subject to re-
quirements similar to those applicable to qualified retirement plans.
499 Sec. 414(i). Defined contribution plans generally provide for contributions by employers and
may include a qualified cash or deferred arrangement under a section 401(k)) plan, under which
employees may elect to contribute to the plan.
500 Sec. 414(j).
501 Sec. 403(b). Private and governmental employers that are exempt from tax under section
501(c)(3), including tax-exempt private schools, may maintain tax-deferred annuity plans (dis-
cussed further below). State and local governmental employers may maintain another type of
tax-favored retirement plan, an eligible deferred compensation plan under section 457(b).
502 Sections 219, 408 and 408A provide rules for IRAs. Under section 408(a)(2) and (n), only
certain entities are permitted to be the trustee of an IRA. The trustee of an IRA generally must
be a bank, an insured credit union, or a corporation subject to supervision and examination by
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the Commissioner of Banking or other officer in charge of the administration of the banking
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establish IRAs on behalf of employees and provide retirement con-
tributions to the IRAs.503 In addition, IRA treatment may apply to
accounts maintained for employees under a trust created by an em-
ployer (or an employee association) for the exclusive benefit of em-
ployees or their beneficiaries, provided that the trust complies with
the relevant IRA requirements and separate accounting is main-
tained for the interest of each employee or beneficiary (referred to
herein as an ‘‘IRA trust’’).504 In that case, the assets of the trust
may be held in a common fund for the account of all individuals
who have an interest in the trust.
Tax-sheltered annuities (‘‘section 403(b) plans’’)
Section 403(b) plans are a form of tax-favored employer-spon-
sored plan that provide tax benefits similar to qualified retirement
plans. Section 403(b) plans may be maintained only by (1) chari-
table tax-exempt organizations, and (2) educational institutions of
State or local governments (that is, public schools, including col-
leges and universities).
Many of the rules that apply to section 403(b) plans are similar
to the rules applicable to qualified retirement plans, including sec-
tion 401(k) plans. Section 403(b) plans are generally subject to the
minimum coverage and nondiscrimination rules that apply to quali-
fied defined contribution plans. However, as in the case of a quali-
fied retirement plan, a governmental section 403(b) plan is not sub-
ject to the nondiscrimination rules.
Contributions to section 403(b) plans
Employers may make nonelective or matching contributions to
such plans on behalf of their employees, and the plan may provide
for employees to make pre-tax elective deferrals, designated Roth
contributions (held in designated Roth accounts) 505 or other after-
tax contributions.
Annuity contracts
Generally, section 403(b) plans provide for contributions toward
the purchase of annuity contracts for providing retirement benefits
for their employees. The employee’s rights under the annuity con-
tract are nonforfeitable, except for a failure to pay future pre-
miums.506 Section 403(b) generally provides that amounts contrib-
uted by an employer for an annuity contract are excluded from the
gross income of the employee for the taxable year if certain require-
ments are satisfied.
403(b) custodial accounts
Alternatively, such contributions may be held in custodial ac-
counts established for each employee if those accounts satisfy cer-
tain requirements.
laws of the State in which it is incorporated. Alternatively, an IRA trustee may be another per-
son who demonstrates to the satisfaction of the Secretary that the manner in which the person
will administer the IRA will be consistent with the IRA requirements.
503 Simplified employee pension (‘‘SEP’’) plans under section 408(k) and SIMPLE IRA plans
under section 408(p) are employer-sponsored retirement plans funded using IRAs for employees.
504 Sec. 408(c).
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505 Sec. 402A.
506 Sec. 403(b)(1)(C).
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Contributions to a section 403(b) plan that are held in a custodial
account are treated as contributions to an annuity contract 507 if
the assets (1) are held by a bank 508 or another person who dem-
onstrates, to the satisfaction of the Secretary, that the manner in
which the assets will be held is consistent with the requirements
for a qualified retirement plan 509 and (2) are invested only in regu-
lated investment company stock.510
Retirement Income Accounts
Assets of a section 403(b)) plan generally must be invested in an-
nuity contracts or mutual funds.511 However, the restrictions on in-
vestments do not apply to a retirement income account, which is
a type of 403(b) plan that is a defined contribution program estab-
lished or maintained by a church, or a convention or association of
churches, to provide benefits under the plan to employees of a reli-
gious, charitable or similar tax-exempt organization.512
Certain rules prohibiting discrimination in favor of highly com-
pensated employees, which apply to section 403(b) plans generally,
do not apply to a plan maintained by a church or qualified church-
controlled organization.513 For this purpose, church means a
church, a convention or association of churches, or an elementary
or secondary school that is controlled, operated, or principally sup-
ported by a church or by a convention or association of churches,
and includes a qualified church-controlled organization. A qualified
church-controlled organization is any church-controlled tax-exempt
organization other than an organization that (1) offers goods, serv-
ices, or facilities for sale, other than on an incidental basis, to the
general public, other than goods, services, or facilities that are sold
at a nominal charge substantially less than the cost of providing
the goods, services, or facilities, and (2) normally receives more
than 25 percent of its support from either governmental sources, or
receipts from admissions, sales of merchandise, performance of
services, or furnishing of facilities, in activities that are not unre-
lated trades or businesses, or from both. Church-controlled organi-
zations that are not qualified church-controlled organizations are
generally referred to as ‘‘nonqualified church-controlled organiza-
tions.’’
507 Sec. 403(b)(7).
508 A ‘‘bank’’ is defined as any bank as defined in section 581, an insured credit union within
the meaning of section 101, paragraph (6) or (7) of the Federal Credit Union Act, and a corpora-
tion which, under the laws of the State of its incorporation, is subject to supervision and exam-
ination by the Commissioner of Banking or other officer of such State in charge of the adminis-
tration of the banking laws of such State. Sec. 408(n).
509 Sec. 401(f)(2) and Treas. Reg. sec. 1.401(f)–1. A custodial account that satisfies the require-
ments of section 401(f)(2) is treated as an organization described in section 401(a) solely for pur-
poses of subchapter F of chapter 1 of subtitle A (secs. 501–530) and subtitle F (pertaining to
procedure and administration) with respect to amounts received by the account and with respect
to any income from the investment of those amounts.
510 Sec. 403(b)(7) and Treas. Reg. sec. 1.403(b)–8(d)(2)(i).
511 Sec. 403(b)(1)(A) and (7).
512 Sec. 403(b)(9)(B), referring to organizations exempt from tax under section 501(c)(3). For
this purpose, a church or a convention or association of churches includes an organization de-
scribed in section 414(e)(3)(A), that is, an organization, the principal purpose or function of
which is the administration or funding of a plan or program for the provision of retirement bene-
fits or welfare benefits, or both, for the employees of a church or a convention or association
of churches, provided that the organization is controlled by, or associated with, a church or a
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convention or association of churches.
513 Sec. 403(b)(1)(D) and (12).
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Church plans
A church plan is a plan established and maintained for employ-
ees (or their beneficiaries) by the church or by a convention or asso-
ciation of churches that is exempt from tax.514 Church plans in-
clude plans maintained by an organization, whether a corporation
or otherwise, that has as its principal purpose or function the ad-
ministration or funding of a plan or program for providing retire-
ment or welfare benefits for the employees of the church or conven-
tion or association of churches.515
Multiple employer plans under the Code
In general
Qualified retirement plans, either defined contribution or defined
benefit plans, are categorized as single employer plans or multiple
employer plans (‘‘MEPs’’). A single employer plan is a plan main-
tained by one employer. For this purpose, businesses and organiza-
tions that are members of a controlled group of corporations, a
group under common control, or an affiliated service group are
treated as one employer (referred to as ‘‘aggregation’’).516
A MEP generally is a single plan maintained by two or more un-
related employers (that is, employers that are not treated as a sin-
gle employer under the aggregation rules).517 MEPs are commonly
maintained by employers in the same industry and are used also
by professional employer organizations (‘‘PEOs’’) to provide quali-
fied retirement plan benefits to employees working for PEO cli-
ents.518
There is no specific provision in the Code that provides for sec-
tion 403(b) plans maintained by more than one employer.519
Application of Code requirements to MEPs
Some requirements are applied to a MEP on a plan-wide
basis.520 For example, all employees covered by the plan are treat-
ed as employees of all employers participating in the plan for pur-
poses of the exclusive benefit rule. Similarly, an employee’s service
with all participating employers is taken into account in applying
the minimum participation and vesting requirements. In applying
the limits on contributions and benefits, compensation, contribu-
tions, and benefits attributable to all employers are taken into ac-
count.521 Other requirements are applied separately, including the
minimum coverage requirements, nondiscrimination requirements
514 Sec. 414(e). The plan is exempt from tax under section 501.
515 Sec. 414(e)(3)(A). With respect to certain provisions (e.g., the exemption for church plans
from nondiscrimination rules applicable for tax-sheltered annuities), the more limited definition
of church under the employment-tax rules applies (secs. 312l(w)(3)(A) and (B)).
516 Sec. 414(b), (c), (m) and (o).
517 Sec.413(c). Multiple employer status does not apply if the plan is a multiemployer plan.
Multiemployer plans are different from single employer plans and MEPs. A multiemployer plan
is defined under section 414(f) as a plan maintained pursuant to one or more collective bar-
gaining agreements with two or more unrelated employers and to which the employers are re-
quired to contribute under the collective bargaining agreement(s). Multiemployer plans are also
known as Taft-Hartley plans.
518 Rev. Proc.2003–86, 2003–2 C.B. 1211, and Rev. Proc. 2002–21, 2002–1 C.B. 911, address
the application of the MEP rules to qualified defined contribution plans maintained by PEOs.
519 Section 413(c) provides rules governing MEPs subject to sections 401(a), 410(a) and 411,
in other words tax-qualified retirement plans, but does not apply those rules to section 403(b)
plans.
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520 Sec. 413(c).
521 Treas. Reg. sec.1.415(a)–1(e).
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(both the general requirements and the special tests for section
401(k) plans), and the top-heavy rules.522
‘‘One bad apple’’ rule
The qualified status of the plan as a whole is determined with
respect to all employers maintaining the plan, and the failure by
one employer (or by the plan itself) to satisfy an applicable quali-
fication requirement may result in disqualification of the plan with
respect to all employers (sometimes referred to as the ‘‘one bad
apple’’ rule).523
The SECURE Act provided relief from the ‘‘one bad apple’’ rule
under the Code for certain MEPs.524 MEPs that satisfy certain re-
quirements (referred to herein as a ‘‘covered MEP’’) may avoid the
consequences of the ‘‘one bad apple rule.’’ A ‘‘covered MEP’’ is a
multiple employer qualified defined contribution plan 525 or a plan
that consists of IRAs (referred to herein as an ‘‘IRA plan’’), includ-
ing under an IRA trust,526 that either (1) is maintained by employ-
ers which have a common interest other than having adopted the
plan, or (2) in the case of a plan not described in (1), has a pooled
plan provider (referred to herein as a ‘‘pooled provider plan’’),527
and which meets certain other requirements as described below.
Relief from the ‘‘one bad apple’’ rule does not apply to a plan un-
less the terms of the plan provide that, in the case of any employer
in the plan failing to take required actions (referred to herein as
a ‘‘noncompliant employer’’):
• Plan assets attributable to employees of the noncompliant
employer (or beneficiaries of such employees) will be trans-
ferred to a plan maintained only by that employer (or its suc-
cessor), to a tax-favored retirement plan for each individual
whose account is transferred,528 or to any other arrangement
that the Secretary determines is appropriate, unless the Sec-
retary determines it is in the best interests of the employees
of the noncompliant employer (and beneficiaries of such em-
ployees) to retain the assets in the plan, and
• The noncompliant employer (and not the plan with respect
to which the failure occurred or any other employer in the
plan) is, except to the extent provided by the Secretary, liable
for any plan liabilities attributable to employees of the non-
compliant employer (or beneficiaries of such employees).
In addition, in the case of a pooled provider plan, if the pooled
plan provider does not perform substantially all the administrative
duties required of the provider (as described below) for any plan
year, the Secretary may provide that the determination as to
522 Treas. Reg. secs.1.413–2(a)(3)(ii)–(iii) and 1.416–1, G–2.
523 Treas. Reg. sec. 1.413–2(a)(3)(iv).
524 Sec. 101. With respect to plans described under section 413(e)(1)(A), other than providing
relief from the ‘‘one bad apple’’ rule if certain requirements are met and adding certain reporting
requirements, the provision generally did not change present law and related guidance applica-
ble to such MEPs under the Code or ERISA.
525 To which section 413(c) applies.
526 In applying the exclusive benefit requirement under section 408(c) to an IRA plan with an
IRA trust covering employees of unrelated employers, all employees covered by the plan are
treated as employees of all employers participating in the plan.
527 Sec. 413(e)(1).
528 For this purpose, a tax-favored retirement plan means an eligible retirement plan as de-
fined in section 402(c)(8)(B), that is, an IRA, a qualified retirement plan, a tax-deferred annuity
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plan under section 403(b), or an eligible deferred compensation plan of a State or local govern-
mental employer under section 457(b).
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124
whether the plan meets the Code requirements for tax-favored
treatment will be made in the same manner as would be made
without regard to the relief under the provision.
‘‘Pooled’’ MEPs under the Code
As described above, the SECURE Act provided relief from the
‘‘one bad apple’’ rule under the Code for certain MEPs. The SE-
CURE Act also introduced the concept of a ‘‘pooled’’ MEP for pur-
poses of the Code. Various requirements apply to a ‘‘pooled provider
plan’’ under the Code.
Pooled provider plan
A ‘‘pooled provider plan’’ is a qualified defined contribution plan
that is established or maintained for the purpose of providing bene-
fits to the employees of a MEP administered by a ‘‘pooled plan pro-
vider.’’ A pooled provider plan does not include a plan maintained
by employers that have a common interest other than having
adopted the plan.
In the case of a pooled provider plan, if the pooled plan provider
does not perform substantially all the administrative duties re-
quired of the provider (as described below) for any plan year, the
Secretary may provide that the determination as to whether the
plan meets the Code requirements for tax-favored treatment will be
made in the same manner as would be made without regard to the
relief under the provision.
Pooled plan provider
A ‘‘pooled plan provider’’ with respect to a plan means a person
that:
• Is designated by the terms of the plan as a named fidu-
ciary under ERISA,529 as the plan administrator, and as the
person responsible to perform all administrative duties (includ-
ing conducting proper testing with respect to the plan and the
employees of each employer in the plan) that are reasonably
necessary to ensure that the plan meets the Code requirements
for tax-favored treatment and the requirements of ERISA and
to ensure that each employer in the plan takes actions as the
Secretary or the pooled plan provider determines necessary for
the plan to meet Code and ERISA requirements, including pro-
viding to the pooled plan provider any disclosures or other in-
formation that the Secretary may require or that the pooled
plan provider otherwise determines are necessary to admin-
ister the plan or to allow the plan to meet Code and ERISA
requirements,
• Registers with the Secretary as a pooled plan provider and
provides any other information that the Secretary may require,
before beginning operations as a pooled plan provider,
• Acknowledges in writing its status as a named fiduciary
under ERISA and as the plan administrator, and
• Is responsible for ensuring that all persons who handle
plan assets or are plan fiduciaries are bonded in accordance
with ERISA requirements.
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529 Within the meaning of ERISA section 402(a)(2).
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125
The Secretary may perform audits, examinations, and investiga-
tions of pooled plan providers as may be necessary to enforce and
carry out the purposes of the statute.
In addition, in determining whether a person meets the require-
ments to be a pooled plan provider with respect to any plan, all
persons who perform services for the plan and who are treated as
a single employer 530 are treated as one person.
Plan sponsor
Except with respect to the administrative duties (as a named fi-
duciary, as the plan administrator, and as the person responsible
for the performance of all administrative duties) for which the
pooled plan provider is responsible as described above, each em-
ployer in a plan which has a pooled plan provider is treated as the
plan sponsor with respect to the portion of the plan attributable to
that employer’s employees (or beneficiaries of such employees).
Guidance
The Secretary is directed to issue guidance (that the Secretary
determines appropriate) (1) to identify the administrative duties
and other actions required to be performed by a pooled plan pro-
vider, (2) that describes the procedures to be taken to terminate a
plan that fails to meet the requirements to be a covered MEP, in-
cluding the proper treatment of, and actions needed to be taken by,
any employer in the plan and plan assets and liabilities attrib-
utable to employees of that employer (or beneficiaries of such em-
ployees), and (3) to identify appropriate cases in which corrective
action will apply with respect to noncompliant employers.531 For
purposes of (3), the Secretary is to take into account whether the
failure of an employer or pooled plan provider to provide any disclo-
sures or other information, or to take any other action, necessary
to administer a plan or to allow a plan to meet the Code require-
ments for tax-favored treatment, has continued over a period of
time that demonstrates a lack of commitment to compliance. An
employer or pooled plan provider is not treated as failing to meet
a requirement of guidance issued by the Secretary if, before the
issuance of such guidance, the employer or pooled plan provider
complies in good faith with a reasonable interpretation of the provi-
sions to which the guidance relates.
The Secretary is directed to publish model plan language that
meets the Code and ERISA requirements and that may be adopted
in order for the plan to be treated as a pooled employer plan under
ERISA.
The Secretary (or the Secretary’s delegate) has the authority to
provide for the proper treatment of a failure to meet any Code re-
quirement with respect to any employer (and its employees) in a
MEP.
530 Under subsection (b), (c), (m), or (o) of section 414.
531 On March 28, 2022, the IRS issued proposed regulations with respect to multiple employer
plans. 87 Fed. Reg. 17225. That document also withdrew proposed regulations under section
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413(c) that were published on July 3, 2019, 84 Fed. Reg. 31777, prior to the enactment of the
SECURE Act.
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126
Form 5500 reporting
Under the Code, an employer maintaining a qualified retirement
plan generally is required to file an annual return containing infor-
mation required under regulations with respect to the qualification,
financial condition, and operation of the plan.532 This filing re-
quirement is met by filing a completed Form 5500, Annual Return/
Report of Employee Benefit Plan. Forms 5500 are filed with DOL,
and information from Forms 5500 is shared with the IRS.533
In the case of a MEP (including a pooled employer plan), the
Form 5500 filing must include a list of participating employers in
the plan; a good faith estimate of the percentage of total contribu-
tions made by the participating employers during the plan year;
and the aggregate account balances attributable to each employer
in the plan (determined as the sum of the account balances of the
employees of each employer (and the beneficiaries of such employ-
ees)); and with respect to a pooled employer plan, the identifying
information for the person designated under the terms of the plan
as the pooled plan provider. The Secretary of Labor may prescribe
simplified reporting for a MEP that covers fewer than 1,000 partici-
pants, but only if no single employer in the plan has 100 or more
participants covered by the plan.
REASONS FOR CHANGE
Under present law, employers eligible to sponsor section 401(a)
tax-qualified defined contribution retirement plans may maintain a
multiple employer plan if either (1) the employers have a common
interest (other than having adopted the plan) or (2) have a pooled
plan provider. Multiple employer plans afford an opportunity to
small employers to band together to obtain more favorable retire-
ment plan investment options and more efficient and less expensive
management services. However, the ability of employers eligible to
sponsor 403(b) arrangements to sponsor and maintain multiple em-
ployer plans is uncertain under the Code and ERISA.
The Committee believes that employers eligible to maintain sec-
tion 403(b) arrangements should have the same access to multiple
employer plans as is provided to sponsors of section 401(a) tax-
qualified retirement plans.
532 Sec. 6058. In addition, under section 6059, the plan administrator of a defined benefit plan
subject to the minimum funding requirements is required to file an annual actuarial report.
Under section 414(g) and ERISA section 3(16), plan administrator generally means the person
specifically so designated by the terms of the plan document. In the absence of a designation,
the plan administrator generally is (1) in the case of a plan maintained by a single employer,
the employer, (2) in the case of a plan maintained by an employee organization, the employee
organization, or (3) in the case of a plan maintained by two or more employers or jointly by
one or more employers and one or more employee organizations, the association, committee,
joint board of trustees, or other similar group of representatives of the parties that maintain
the plan. Under ERISA, the party described in (1), (2), or (3) is referred to as the ‘‘plan sponsor.’’
533 Information is shared also with the PBGC, as applicable. Form 5500 filings are also pub-
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licly released in accordance with section 6104(b) and Treas. Reg. sec. 301.6104(b)–1 and ERISA
sections 104(a)(1) and 106(a).
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127
EXPLANATION OF PROVISION 534
Section 403(b) MEPs under the Code
In general
The provision clarifies that a section 403(b) plan may be estab-
lished and maintained as a MEP. Specifically, it provides that, ex-
cept in the case of a church plan, section 403(b) annuity contracts
and 403(b) custodial accounts 535 do not fail to qualify as section
403(b) plans solely by reason of such contracts being purchased or
accounts being established under a plan maintained by more than
one employer.
For purposes of this provision, a section 403(b) plan includes
such a plan sponsored by (1) tax-exempt entities (described in sec-
tion 501(c)(3) which are exempt from tax under section 501(a)) and
(2) public schools (including State colleges and universities).
Relief from ‘‘one bad apple’’ rule
Under the provision, as long as such a section 403(b) plan main-
tained by more than one employer satisfies rules similar to certain
rules that apply to qualified retirement MEPs,536 the section 403(b)
plan will not fail to be treated as such merely because one or more
employers of employees covered by the plan fail to meet the re-
quirements of section 403(b). The rules applicable to qualified re-
tirement MEPs require that where one or more employers of em-
ployees covered by the MEP fails to meet the applicable qualifica-
tion requirements:
• the assets of the plan attributable to employees of such
employer (or beneficiaries of such employees) will be trans-
ferred to a plan maintained only by such employer (or its suc-
cessor), to an eligible retirement plan 537 for each individual
whose account is transferred, or to any other arrangement that
the Secretary determines is appropriate, unless the Secretary
determines it is in the best interests of the employees of such
employer (and the beneficiaries of such employees) to retain
the assets in the plan, and
• such employer (and not the plan with respect to which the
failure occurred or any other employer in such plan) will, ex-
cept to the extent provided by the Secretary, be liable for any
liabilities with respect to such plan attributable to employees
of such employer (or beneficiaries of such employees).
In addition, in the case of a section 403(b) MEP maintained by
tax-exempt entities, such a plan must also satisfy rules similar to
either the commonality rule (being maintained by employers which
have a common interest other than having adopted the plan) 538 or
having a pooled plan provider. This requirement does not apply to
plans maintained by governmental employers.
534 Modifications to Labor provisions are necessary to effectuate this provision.
535 Sec. 403(b)(7) provides that amounts paid by a tax-exempt employer to a custodial account
which satisfy the requirements of section 401(f)(2) are treated as amounts contributed by such
employer for an annuity contract for its employee if the amounts are to be invested in regulated
investment company stock to be held in that custodial account. Also see the provision in Title
IV, section 1 of this document, that would permit section 403(b)(7) custodial accounts to invest
in group trusts as well as in regulated investment company stock.
536 Under section 413(e)(2).
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537 As defined in section 402(c)(8)(B).
538 Sec. 413(e)(1)(A).
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DISCLOSURE RULES
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