109th CONGRESS
2d Session
S. 3951
To amend the Internal Revenue Code of 1986 and the Employee Retirement
Income Security Act of 1974 to increase the retirement security of women
and small business owners, and for other purposes.
IN THE SENATE OF THE UNITED STATES
September 27, 2006
Mr. SMITH (for himself, Mr. CONRAD, Mr. KERRY, and Mr. BINGAMAN) introduced
the following bill; which was read twice and referred to the Committee on
Finance
A BILL
To amend the Internal Revenue Code of 1986 and the Employee Retirement
Income Security Act of 1974 to increase the retirement security of women
and small business owners, and for other purposes.
Be it enacted by the Senate and House of Representatives of the United
States of America in Congress assembled,
SECTION 1. SHORT TITLE; AMENDMENT OF 1986 CODE; TABLE OF CONTENTS.
(a) Short Title- This Act may be cited as the `Women's Retirement Security
Act of 2006'.
(b) Amendment of 1986 Code- Except as otherwise expressly provided, whenever
in this Act an amendment or repeal is expressed in terms of an amendment
to, or repeal of, a section or other provision, the reference shall be considered
to be made to a section or other provision of the Internal Revenue Code
of 1986.
(c) Table of Contents- The table of contents for this Act is as follows:
Sec. 1. Short title; amendment of 1986 Code; table of contents.
TITLE I--PROVISIONS TO INCREASE RETIREMENT SAVINGS
Subtitle A--Employee Access to Retirement Savings at Work
Sec. 101. Employees not covered by qualified retirement plans or arrangements
entitled to participate in payroll deposit IRA arrangements.
Sec. 102. Credit for small employers maintaining payroll deposit IRA arrangements.
Sec. 103. Establishment of automatic IRAs.
Sec. 104. Establishment of TSP II Board.
Subtitle B--Other Provisions
Sec. 111. Modifications to computation of saver's credit.
Sec. 112. Qualified cash or deferred arrangements must allow long-term
employees working more than 500 but less than 1,000 hours per year to
participate.
Sec. 113. Transfers of unused benefits of health flexible spending arrangement
to certain retirement plans.
Sec. 114. Computation of limits on IRA and Roth IRA contributions.
Sec. 115. Contributions of military death gratuities to certain tax-favored
accounts.
TITLE II--PROVISIONS PROVIDING FOR PRESERVATION OF INCOME
Sec. 201. Exclusion of certain qualified annuity payments.
Sec. 202. Exclusion for lifetime annuity payments.
Sec. 203. Joint study of application of spousal consent rules to defined
contribution plans.
Sec. 204. Facilitating longevity insurance.
TITLE III--PROVISIONS ENSURING EQUITY IN DIVORCE
Sec. 301. Elimination of current connection requirement under Railroad
Retirement Act for certain survivors.
Sec. 302. Permitting divorced spouses and widows and widowers to remarry
after turning 60 without a penalty under Railroad Retirement Act.
Sec. 303. Repeal of jurisdictional requirement for court to treat military
retirement pay as property of the military member and spouse.
TITLE IV--PROVISIONS TO IMPROVE FINANCIAL LITERACY
Sec. 401. Grants to community-based taxpayer clinics to provide retirement
savings advice.
Sec. 402. Treatment of qualified retirement planning services.
Sec. 403. Retirement handbook and retirement readiness checklist.
TITLE V--INCENTIVES FOR SMALL BUSINESSES TO ESTABLISH AND MAINTAIN RETIREMENT
PLANS FOR EMPLOYEES
Sec. 501. Credit for qualified pension plan contributions of small employers.
Sec. 502. Deduction for pension contributions allowed in computing net
earnings from self-employment.
Sec. 503. Exemption of deferral-only qualified cash or deferred arrangements
from top-heavy plan rules.
Sec. 504. Extension of time for small pension plans to adopt required
plan qualification amendments.
TITLE I--PROVISIONS TO INCREASE RETIREMENT SAVINGS
Subtitle A--Employee Access to Retirement Savings at Work
SEC. 101. EMPLOYEES NOT COVERED BY QUALIFIED RETIREMENT PLANS OR ARRANGEMENTS
ENTITLED TO PARTICIPATE IN PAYROLL DEPOSIT IRA ARRANGEMENTS.
(a) In General- Subpart A of part I of subchapter A of chapter 1 (relating
to pension, profit-sharing, stock bonus plans, etc.) is amended by inserting
after section 408A the following new section:
`SEC. 408B. RIGHT TO PAYROLL DEPOSIT IRA ARRANGEMENTS AT WORK.
`(a) Requirement To Provide Payroll Deposit IRA Arrangement- Each employer
(other than an employer described in subsection (e)) shall provide to each
applicable employee of the employer for any calendar year the opportunity
to participate in a payroll deposit IRA arrangement which meets the requirements
of this section.
`(b) Payroll Deposit IRA Arrangement- For purposes of this section--
`(1) IN GENERAL- The term `payroll deposit IRA arrangement' means a written
arrangement of an employer--
`(A) under which an applicable employee eligible to participate in the
arrangement may elect to contribute to an individual retirement plan
established by or on behalf of the employee by having the employer make
periodic direct deposit or other payroll deposit payments (including
electronic payments) to the plan by payroll deduction, and
`(B) which meets the requirements of paragraph (2).
`(2) ADMINISTRATIVE REQUIREMENTS- The requirements of this paragraph are
met with respect to any payroll deposit IRA arrangement if--
`(A) the employer must make the payments elected under paragraph (1)(A)
on or before the later of--
`(i) the due date for the deposit of tax required to be deducted and
withheld under chapter 24 (relating to collection of income tax at
source on wages) for the payroll period to which such payments relate,
or
`(ii) the 30th day following the last day of the month with respect
to which the payments are to be made,
`(B) subject to a requirement for reasonable notice, an employee may
elect to terminate participation in the arrangement at any time during
a calendar year, except that if an employee so terminates, the arrangement
may provide that the employee may not elect to resume participation
until the beginning of the next calendar year,
`(C) each employee eligible to participate may elect, during the 60-day
period or other period specified by the Secretary before the beginning
of any calendar year (and during the 60-day period or other period specified
by the Secretary before the first day the employee is eligible to participate),
to participate in the arrangement, or to modify the employee's election
under the arrangement (including the amounts subject to the arrangement
and the manner in which such amounts are invested), for such year,
`(D) the employer provides--
`(i) immediately before the beginning of each period described in
subparagraph (C), a notice to each employee of the employee's opportunity
to make the election and the maximum amount which may be contributed
to an individual retirement plan on an annual basis, and
`(ii) if the arrangement includes an automatic contribution arrangement,
the notices required under subsection (g) with respect to the automatic
contribution arrangement,
`(E) subject to subsection (f), the arrangement provides that an employee
may elect to have contributions made to any individual retirement plan
specified by the employee, and
`(F) if the arrangement does not include an automatic contribution arrangement--
`(i) the arrangement requires the employer to take all reasonable
actions to solicit from all employees eligible to participate in the
arrangement an explicit election to either participate or not to participate
in the arrangement, and
`(ii) the arrangement provides that if an employee fails to make an
explicit election under clause (i) within the time prescribed under
the arrangement, the employee will be treated as having made an election
to participate in the arrangement (and amounts shall be invested on
behalf of the participant) in the same manner as if the arrangement
had included an automatic contribution arrangement under subsection
(g).
`(c) Applicable Employee Defined; Related Definitions and Rules- For purposes
of this section--
`(1) APPLICABLE EMPLOYEE-
`(A) IN GENERAL- The term `applicable employee' means, with respect
to any calendar year, any employee--
`(i) who was not eligible under a qualified plan or arrangement maintained
by the employer for service for the preceding calendar year, and
`(ii) with respect to whom it is reasonable to expect that the employee
will not be eligible during the calendar year under such a qualified
plan or arrangement.
`(B) SPECIAL RULES- For purposes of subparagraph (A)(i)--
`(i) ELIGIBILITY- An employee shall be treated as eligible under a
plan for a preceding calendar year if, as of the last day of the last
plan year ending in the preceding calendar year, the employee has
satisfied the plan's eligibility requirements.
`(ii) EXCLUDED PLANS- A qualified plan or arrangement shall not be
taken into account under this paragraph if--
`(I) the plan or arrangement is frozen as of the first day of the
preceding calendar year, or
`(II) in the case of a plan or arrangement under which the only
contributions are discretionary on the part of the sponsor, there
has not been an employer contribution made to the plan or arrangement
for the 2-plan-year period ending with the last plan year ending
in the second preceding calendar year and it is not reasonable to
assume that an employer contribution will be made for the plan year
ending in the preceding calendar year.
`(2) EXCLUDABLE EMPLOYEES- An employer may elect to exclude from treatment
as applicable employees under subparagraph (A)--
`(A) employees described in section 410(b)(3),
`(B) employees who have not attained the age of 18 before the beginning
of the calendar year,
`(C) employees who have not completed at least 3 months of service with
the employer,
`(D) employees who will be eligible to participate in a qualified plan
or arrangement of the employer upon completion of eligibility requirements
described in section 410(a)(1)(A) (without regard to section 410(a)(1)(B)),
`(E) employees who are eligible to make salary reduction contributions
under an arrangement which meets the requirements of section 403(b),
and
`(F) all employees of the employer if the employer maintains an arrangement
described in section 408(p).
`(3) QUALIFIED PLAN OR ARRANGEMENT- The term `qualified plan or arrangement'
means a plan, contract, pension, or trust described in section 219(g)(5).
`(4) EXCEPTION FOR EMPLOYEES OF GOVERNMENTS AND CHURCHES- The term `applicable
employee' shall not include an employee of--
`(A) a government or entity described in section 414(d), or
`(B) a church or a convention or association of churches which is exempt
from tax under section 501, including any employee described in section
414(e)(3)(B).
`(5) DESIGNATION OF APPLICABLE EMPLOYEES- The Secretary shall issue guidelines
for determining the class or classes of employees to be covered by a payroll
deposit IRA arrangement. Such guidelines shall provide that if an employer
elects under paragraph (2) to exclude employees from the arrangement,
the employer shall specify the classification or categories of employees
who are not so covered.
`(d) Payroll Deposit IRA Contributions Treated Like Other Contributions
to Individual Retirement Plans-
`(1) TAX TREATMENT UNAFFECTED- The fact that a contribution to an individual
retirement plan is made on behalf of an employee under a payroll deposit
IRA arrangement instead of being made directly by the employee shall not
affect the deductibility or other tax treatment of the contribution or
of other amounts under this title.
`(2) PAYROLL SAVINGS CONTRIBUTIONS TAKEN INTO ACCOUNT- Any contribution
made on behalf of an employee under a payroll deposit IRA arrangement
shall be taken into account in applying the limitations on contributions
to individual retirement plans and the other provisions of this title
applicable to individual retirement plans as if the contribution had been
made directly by the employee.
`(e) Exception for Certain Small and New Employers-
`(1) IN GENERAL- The requirements of this section shall not apply for
any calendar year to an employer if--
`(A) the employer did not have more than 10 employees who received at
least $5,000 of compensation from the employer for the preceding calendar
year, or
`(B) was not in existence at all times during the 2 preceding calendar
years and did not have more than 100 employees who received at least
$5,000 of compensation from the employer on any day during either of
the 2 preceding calendar years.
`(2) OPERATING RULES- In determining the number of employees for purposes
of this subsection--
`(A) any rule applicable in determining the number of employees for
purposes of section 408(p)(2)(C) shall be applicable under this subsection,
`(B) all members of the same family (within the meaning of section 318(a)(1))
shall be treated as 1 individual, and
`(C) any reference to an employer shall include a reference to any predecessor
employer.
`(f) Deposits to Individual Retirement Plans Other Than Those Selected by
Employee-
`(1) IN GENERAL- An employer shall not be treated as failing to satisfy
the requirements of this section or any other provision of this title
merely because the employer makes all contributions (or all contributions
on behalf of employees who do not specify an individual retirement plan,
trustee, or issuer to receive the contributions) to--
`(A) individual retirement plans specified in paragraph (2), or
`(B) individual retirement plans under the payroll tax deposit system
established under paragraph (3).
`(2) PLANS OF A DESIGNATED TRUSTEE OR ISSUER- An employer may elect to
have contributions for all applicable employees participating in a payroll
deposit IRA arrangement made to individual retirement plans of a designated
trustee or issuer under the arrangement. The preceding sentence shall
not apply unless each participant is notified in writing that the participant's
balance may be transferred without cost or penalty to another individual
retirement plan established by or on behalf of the participant.
`(3) PAYROLL TAX DEPOSIT SYSTEM- The Secretary, in consultation with the
TSP II Board, shall establish a system under which an employer--
`(A) includes with each deposit of tax required to be deducted and withheld
under chapter 24 the aggregate amounts, for the period covered by the
deposit, which applicable employees designated under subsection (b)(1)(A)
(or are deemed to have designated under subsection (b)(2)(F)(ii) or
under an automatic contribution arrangement described in subsection
(g)) for contribution to individual retirement plans, established on
behalf of the employees under paragraph (4), and
`(B) specifies, in such manner as the Secretary may prescribe, for each
applicable employee for whom a contribution is to be made the following
information:
`(i) The employee's name and TIN.
`(ii) The amount of the contribution.
`(iii) The investment options selected by the employee (or deemed
to have been selected by the employee under such automatic contribution
arrangement) and the amount of the contribution allocated to each
option.
`(4) ESTABLISHMENT AND MAINTENANCE OF ACCOUNTS UNDER PAYROLL TAX DEPOSIT
SYSTEM-
`(A) IN GENERAL- Subject to the provisions of this section and section
408C, the TSP II Board shall provide for the establishment and maintenance
of individual retirement plans (including automatic IRAs) into which
contributions may be deposited through the payroll tax deposit system.
To the maximum extent practicable, the TSP II Board shall--
`(i) enter into contracts with persons eligible to be trustees of
individual retirement plans under section 408 to establish such plans,
to provide the investment funds and investment management, and to
provide notice, record keeping, and other administrative services,
and
`(ii) ensure that the costs of investment management and administration
are kept to a minimum, including through consideration of the use
of investments which involve passive management and which seek to
replicate the performance of a portion of the market.
`(B) PAYROLL DEPOSIT FEATURES- The TSP II Board shall establish procedures
so that contributions may be made to individual retirement plans (including
automatic IRAs) through the payroll tax deposit system described in
paragraph (3) without undue administrative or paperwork requirements
on employers participating in the payroll tax deposit system. Such procedures
shall ensure that only 1 such plan may be established for each TIN.
`(C) LIMITATION ON ROLLOVERS TO PLANS OUTSIDE THE SYSTEM- If--
`(i) any amount is paid or distributed out of an individual retirement
plan established under this paragraph, and
`(ii) such amount is paid into an individual retirement plan established
outside of the payroll tax deposit system,
the payment described in clause (ii) shall be treated as a rollover
contribution for purposes of section 408(d)(3) if and only if the balance
to the credit of the individual in such individual retirement plan or
arrangement immediately before the payment described in clause (i) was
at least $15,000.
`(g) Coordination With Automatic Enrollment and Other Default Election Provisions-
`(1) IN GENERAL- A payroll deposit IRA arrangement may provide that contributions
under the arrangement will be made pursuant to an automatic contribution
arrangement but only if the arrangement meets requirements similar to
the requirements applicable to an eligible automatic contribution arrangement
under section 414(w). The Secretary shall modify such requirements to
the extent necessary to carry out the purposes of this section.
`(2) DEFAULT INVESTMENTS- If an employee is deemed under an automatic
contribution arrangement to have made an election to participate in a
payroll deposit IRA arrangement--
`(A) the employee shall be deemed to have made an election to make contributions
in the amount specified in paragraph (3),
`(B) such contributions shall be transferred to--
`(i) an automatic IRA, or,
`(ii) if the employer has made an election under subsection (f)(2),
to an individual retirement plan of the designated trustee or issuer
but only if the requirements of subparagraph (C) are met with respect
to such individual retirement plan, and
`(C) such contributions shall be invested as provided in paragraph (4).
`(3) AMOUNT OF CONTRIBUTIONS-
`(A) IN GENERAL- The amount specified in this paragraph is 3 percent
of compensation.
`(B) AUTHORITY OF BOARD TO PROVIDE FOR ANNUAL INCREASES- The TSP II
Board may by regulation provide for annual increases in the percentage
of compensation an employee is deemed to have elected under paragraph
(2) but in no event shall the percentage of compensation an employee
is deemed to have elected exceed 8 percent.
`(C) CONTRIBUTION LIMIT- The contributions under paragraph (2) on behalf
of an employee for any calendar year shall not exceed the dollar limits
applicable to the employee for the calendar year under section 219 or
408A.
`(4) INVESTMENT IN LIFE CYCLE FUND OR OTHER INVESTMENTS SPECIFIED BY THE
BOARD- Amounts contributed under paragraph (2) shall be invested in--
`(A) a life cycle fund similar to the life cycle funds offered under
the Thrift Savings Fund established under subchapter III of chapter
84 of title 5, United States Code, or
`(B) such other investment or investments as the TSP II Board specifies
in regulations and which entails asset allocation and extensive diversification.
A fund or investment shall meet the requirements of this paragraph only
if it is consistent with regulations prescribed by the Secretary of Labor
under section 404(c)(5) of the Employee Retirement Income Security Act
of 1974.
`(5) COORDINATION WITH WITHHOLDING- The Secretary shall modify the withholding
exemption certificate under section 3402(f) so that any notice and election
requirements with respect to an automatic contribution arrangement which
is part of a payroll deposit IRA arrangement may be met through the use
of such certificate.
`(h) Model Notice- The Secretary, in consultation with the TSP II Board,
shall--
`(1) provide a model notice, written in a manner calculated to be understandable
to the average worker, that is simple for employers to use--
`(A) to notify employees of the requirement under this section for the
employer to provide certain employees with the opportunity to participate
in a payroll deposit IRA arrangement, and
`(B) to satisfy the requirements of subsection (b)(2)(D).
`(2) provide uniform forms for enrollment, including automatic enrollment,
in a payroll deposit IRA arrangement, and
`(3) establish a web site or other electronic means for small employers
to access and use to obtain information on payroll deposit IRA arrangements
and to obtain required notices and forms.'.
(b) Preemption of Conflicting State Laws- Section 514(e)(1) of the Employee
Retirement Income Security Act of 1974 (29 U.S.C. 1144(e)(1)), as added
by section 902 of the Pension Protection Act of 2006, is amended to read
as follows:
`(1) IN GENERAL- Notwithstanding any other provision of this section,
this title shall supersede any law of a State which would directly or
indirectly prohibit or restrict--
`(A) the inclusion in any plan of an automatic contribution arrangement,
or
`(B) the establishment or operation of a deposit IRA arrangement meeting
the requirements of section 408B of the Internal Revenue Code of 1986
(and the inclusion in such arrangement of an automatic contribution
arrangement).
The Secretary may prescribe regulations which would establish minimum
standards that an automatic contribution arrangement would be required
to satisfy in order for this subsection to apply in the case of such arrangement.
This subsection shall apply to a plan or arrangement without regard to
whether this title applies to such plan or arrangement.'.
(c) Notice of Availability of Investment Guidelines- Section 408(i) (relating
to reports) is amended by adding at the end the following new sentence:
`Any report furnished under paragraph (2) to an individual shall include
notice of the availability of, and methods of acquiring, the basic investment
guidelines prepared by the Secretary of Labor.'.
(d) Development of Basic Investment Guidelines-
(1) IN GENERAL- The Secretary of Labor shall, in consultation with the
Secretary of Treasury, develop and publish basic guidelines for investing
for retirement. Except as otherwise provided by the Secretary of Labor,
such guidelines shall include--
(A) information on the benefits of diversification,
(B) information on the essential differences, in terms of risk and return,
between various pension plan investments, including stocks, bonds, mutual
funds, and money market investments,
(C) information on how an individual's pension plan investment allocations
may differ depending on the individual's age and years to retirement
and on other factors determined by the Secretary of Labor,
(D) sources of information where individuals may learn more about pension
rights, individual investing, and investment advice, and
(E) such other information related to individual investing as the Secretary
of Labor determines appropriate.
(2) CALCULATION INFORMATION- The guidelines under paragraph (1) shall
include addresses for Internet sites and worksheets which a participant
or beneficiary in a pension plan may use to calculate--
(A) the retirement age value of the participant's or beneficiary's nonforfeitable
pension benefits under the plan (expressed as an annuity amount and
determined by reference to varied historical annual rates of return
and annuity interest rates), and
(B) other important amounts relating to retirement savings, including
the amount which a participant or beneficiary would be required to save
annually to provide a retirement income equal to various percentages
of their current salary (adjusted for expected growth prior to retirement).
(3) PUBLIC COMMENT- The Secretary of Labor shall provide at least 90 days
for public comment on proposed guidelines before publishing the final
guidelines.
(4) RULES RELATING TO GUIDELINES- The guidelines under paragraph (1)--
(A) shall be written in a manner calculated to be understood by the
average plan participant, and
(B) may be delivered in written, electronic, or other appropriate manner
to the extent such manner would ensure that the guidelines are reasonably
accessible to participants and beneficiaries.
(e) Penalty for Failure To Provide Access to Payroll Savings Arrangements-
Chapter 43 (relating to qualified pension, etc., plans) is amended by adding
at the end the following new section:
`SEC. 4980H. REQUIREMENTS FOR EMPLOYERS TO PROVIDE EMPLOYEES ACCESS TO
PAYROLL DEPOSIT IRA ARRANGEMENTS.
`(a) General Rule- There is hereby imposed a tax on any failure by an employer
to meet the requirements of subsection (d) for a calendar year.
`(1) IN GENERAL- The amount of the tax imposed by subsection (a) on any
failure for any calendar year shall be $100 with respect to each employee
to whom such failure relates.
`(2) TAX NOT TO APPLY WHERE FAILURE NOT DISCOVERED AND REASONABLE DILIGENCE
EXERCISED- No tax shall be imposed by subsection (a) on any failure during
any period for which it is established to the satisfaction of the Secretary
that the employer subject to liability for the tax did not know that the
failure existed and exercised reasonable diligence to meet the requirements
of subsection (d). In no event shall the tax be imposed with respect to
any failure that ends before the expiration of 90 days after the employer
has responded or has had a reasonable opportunity to respond to a request
for confirmation of compliance under subsection (c).
`(3) TAX NOT TO APPLY TO FAILURES CORRECTED WITHIN 30 DAYS- No tax shall
be imposed by subsection (a) on any failure if--
`(A) the employer subject to liability for the tax under subsection
(a) exercised reasonable diligence to meet the requirements of subsection
(d), and
`(B) the employer provides the payroll deposit IRA arrangement described
in section 408B to each employee eligible to participate in the arrangement
by the end of the 30-day period beginning on the first date the employer
knew, or exercising reasonable diligence would have known, that such
failure existed.
`(4) WAIVER BY SECRETARY- In the case of a failure which is due to reasonable
cause and not to willful neglect, the Secretary may waive part or all
of the tax imposed by subsection (a) to the extent that the payment of
such tax would be excessive or otherwise inequitable relative to the failure
involved.
`(c) Procedures for Notice- Not later than 6 months after the date of the
enactment of this section, the Secretary shall prescribe and implement procedures
for obtaining from employers confirmation that such employers are in compliance
with the requirements of subsection (d). The Secretary, in the Secretary's
discretion, may prescribe that the confirmation shall be obtained on an
annual or less frequent basis, and may use for this purpose the annual report
or quarterly report for employment taxes, or such other means as the Secretary
may deem advisable.
`(d) Requirement To Provide Employee Access to Payroll Deposit IRA Arrangements-
The requirements of this subsection are met if the employer meets the requirements
of section 408B.'.
(f) Coordination With ERISA Fiduciary Duties- Section 404(c)(2) of such
Act (29 U.S.C. 1104(c)(2)) is amended--
(1) by inserting `or an individual retirement plan designated by the employer
under section 408B of such Code' after `1986',
(2) by inserting `(7 days after notice has been given to an employee that
an individual retirement plan has been established on behalf of the employee
under section 408B of such Code)' after `established' in subparagraph
(C), and
(3) by inserting `or with respect to an individual retirement plan designated
by an employer under section 408B of such Code' after `arrangement' in
the last sentence.
(g) Conforming Amendments-
(1) The table of sections for subpart A of part I of subchapter A of chapter
1 is amended by inserting after the item relating to section 408A the
following new item:
`Sec. 408B. Right to payroll deposit IRA arrangements at work.'.
(2) The table of sections for chapter 43 is amended by adding at the end
the following new item:
`Sec. 4980H. Requirements for employers to provide employees access to
payroll deposit IRA arrangements.'.
(h) Effective Date- The amendments made by this section shall apply to calendar
years beginning after December 31, 2007.
SEC. 102. CREDIT FOR SMALL EMPLOYERS MAINTAINING PAYROLL DEPOSIT IRA ARRANGEMENTS.
(a) In General- Subpart D of part IV of subchapter A of chapter 1 (relating
to business related credits) is amended by adding at the end the following
new section:
`SEC. 45N. SMALL EMPLOYER PAYROLL DEPOSIT IRA ARRANGEMENT COSTS.
`(a) General Rule- For purposes of section 38, in the case of an eligible
employer maintaining a payroll deposit IRA arrangement meeting the requirements
of section 408B (without regard to whether or not the employer is required
to maintain the arrangement), the small employer payroll deposit IRA arrangement
cost credit determined under this section for any taxable year is the amount
determined under subsection (b).
`(1) IN GENERAL- The amount of the credit determined under this section
for any taxable year with respect to an eligible employer shall be equal
to the lesser of--
`(A) $25 multiplied by the number of applicable employees (within the
meaning of section 408B(c)) for whom contributions are made under the
payroll deposit IRA arrangement referred to in subsection (a) for the
calendar year in which the taxable year begins, or
`(2) DURATION OF CREDIT- No credit shall be determined under this section
for any taxable year other than a taxable year which begins in the first
2 calendar years in which the eligible employer maintains a payroll deposit
IRA arrangement meeting the requirements of section 408B.
`(3) COORDINATION WITH SMALL EMPLOYER STARTUP CREDIT- No credit shall
be allowed under this section for any taxable year if a credit is determined
under section 45E for the taxable year.
`(c) Eligible Employer- For purposes of this section, the term `eligible
employer' means, with respect to any calendar year in which the taxable
year begins, an employer which maintains a payroll deposit IRA arrangement
meeting the requirements of section 408B and which, on each day during the
preceding calendar year, had no more than 100 employees.'.
(b) Credit Allowed as Part of General Business Credit- Section 38(b) (defining
current year business credit) is amended by striking `and' at the end of
paragraph (29), by striking the period at the end of paragraph (30) and
inserting `, and', and by adding at the end the following new paragraph:
`(31) in the case of an eligible employer (as defined in section 45N(c))
maintaining a payroll deposit IRA arrangement meeting the requirements
of section 408B, the small employer payroll deposit IRA arrangement cost
credit determined under section 45N(a).'.
(c) Clerical Amendment- The table of sections for subpart D of part IV of
subchapter A of chapter 1 is amended by adding at the end the following
new item:
`Sec. 45N. Small employer payroll deposit IRA arrangement costs.'.
(d) Effective Date- The amendments made by this section shall apply to taxable
years beginning after December 31, 2007.
SEC. 103. ESTABLISHMENT OF AUTOMATIC IRAS.
(a) In General- Subpart A of part I of subchapter A of chapter 1 (relating
to pension, profit-sharing, stock bonus plans, etc.), as amended by section
101, is amended by inserting after section 408B the following new section:
`SEC. 408C. AUTOMATIC IRAS.
`(a) General Rule- An automatic IRA shall be treated for purposes of this
title in the same manner as an individual retirement plan. An automatic
IRA may also be treated as a Roth IRA for purposes of this title if it meets
the requirements of section 408A.
`(b) Automatic IRA- For purposes of this section, the term `automatic IRA'
means an individual retirement plan (as defined in section 7701(a)(37))
which meets the investment and fee requirements under the regulations under
subsection (c).
`(c) Investment and Fee Requirements-
`(1) IN GENERAL- The TSP II Board, in consultation with the Secretary
and the Secretary of Labor, shall, not later than 1 year after the date
of the enactment of this section, prescribe regulations which set forth
the requirements of this subsection which an individual retirement plan
must meet in order to be treated as an automatic IRA.
`(2) INVESTMENT OPTIONS- The regulations under paragraph (1) shall provide
that an automatic IRA shall allow the individual on whose behalf the individual
retirement plan is established to invest contributions to, and earnings
of, the plan in all of the following investment options:
`(A) Options which are similar to all investment options which are available
(at the time the plan is established) to a participant in the Thrift
Savings Fund established under subchapter III of chapter 84 of title
5, United States Code.
`(B) Any other investment option specified in the regulations.
Such regulations shall specify which of the investment options shall be
treated as default investment options for purposes of section 408B(g)(4).
`(A) IN GENERAL- The regulations under paragraph (1) shall provide that
an automatic IRA shall not charge any investment fees which, in the
aggregate, are not reasonable (as determined under such regulations).
`(B) INVESTMENT FEES- For purposes of this paragraph, the term `investment
fees' includes any fee, commission, asset management fee, compensation
for services, or any other charge or fee specified in the regulations
under paragraph (1) which is imposed with respect to the automatic IRA.'.
(b) Mandatory Transfers- Section 401(a)(31)(B) is amended--
(1) by inserting `(including an automatic IRA)' after `individual retirement
plan' each place it appears, and
(2) by adding at the end the following new sentence: `Any amount so transferred
(and any earnings thereon) shall be invested in a default investment described
in section 408B(g)(4).'.
(c) Clerical Amendment- The table of sections for subpart A of part I of
subchapter A of chapter 1 is amended by inserting after the item relating
to section 408B the following new item:
`Sec. 408C. Automatic IRAs.'.
(d) Effective Date- The amendments made by this section shall apply to calendar
years beginning on or after the date on which proposed and temporary or
final regulations described in section 408C(c) of the Internal Revenue Code
of 1986 (as added by this Act) are issued.
SEC. 104. ESTABLISHMENT OF TSP II BOARD.
(a) Establishment- There is established in the executive branch of the Government
a TSP II Board. The board shall be established and maintained in the same
manner as the Federal Retirement Thrift Investment Board under subchapter
VII of chapter 84 of title 5, United States Code.
(b) Executive Director- The TSP II Board shall appoint an Executive Director
in a similar manner and with similar functions as the Executive Director
of the Federal Retirement Thrift Investment Board under section 8474 of
title 5, United States Code.
(c) Duties of Board- The TSP II Board shall establish policies and procedures
for--
(1) establishment and maintenance of individual retirement plans under
the payroll tax deposit system established under section 408B(f)(3) of
the Internal Revenue Code of 1986,
(2) the investment and management of contributions to such individual
retirement plans,
(3) the amount of contributions, and the investment of such contributions,
under automatic contribution arrangements under section 408B(g) of such
Code, including the designation of investment funds in which such contributions
may be invested, and
(4) the establishment of automatic IRAs under section 408C of such Code,
including the issuance of regulations under subsection (c) of such section.
(d) Best Practices- The TSP II Board shall, on a continual basis, prescribe
and encourage best practices (including cost efficiencies and innovations)
in enrollment, investment, distribution, and other procedures or arrangements
relating to retirement savings and investment. In carrying out its responsibilities
under this section, the TSP II Board may implement (by contract or otherwise)
pilot projects to help assess the efficacy and workability of specific practices
and arrangements.
(e) Expansion of Use of IRAs by Self-Employed and Other Individuals- The
TSP II Board shall establish procedures to disseminate information (through
use of the Internet and other appropriate means) to--
(1) facilitate and encourage the use by self-employed and other individuals
of automatic debit and similar arrangements for investment in individual
retirement plans, including automatic IRAs,
(2) facilitate and encourage efforts by voluntary associations to promote
savings in individual retirement plans, including automatic IRAs, by their
members and others, and
(3) facilitate and encourage the direct deposit of Federal and State income
tax refunds in individual retirement plans, including automatic IRAs.
(f) Exclusive Interest- The members of the TSP II Board shall discharge
their responsibilities solely in the interest of participants and beneficiaries
under the payroll tax deposit system established under section 408B of the
Internal Revenue Code of 1986.
(g) Other Provisions Made Applicable- The provisions of subsections (f)(3),
(g), (i), and (j) of section 8472 of title 5, United States Code, shall
apply to the TSP II Board.
Subtitle B--Other Provisions
SEC. 111. MODIFICATIONS TO COMPUTATION OF SAVER'S CREDIT.
(a) In General- Section 25B(b) (defining applicable percentage), as amended
by section 833 of the Pension Protection Act of 2006, is amended to read
as follows:
`(b) Applicable Percentage- For purposes of this section--
`(1) IN GENERAL- The applicable percentage is--
`(A) if the taxpayer's adjusted gross income does not exceed the first
threshold amount plus $5,000, 50 percent, reduced by 1 percentage point
for each $250 (or fraction thereof) by which such adjusted gross income
exceeds the first threshold amount,
`(B) if the taxpayer's adjusted gross income exceeds the first threshold
amount plus $5,000, but does not exceed the second threshold amount
plus $5,000, 30 percent, reduced by 1 percentage point for each $167
(or fraction thereof) by which such adjusted gross income exceeds the
second threshold amount, and
`(C) if the taxpayer's adjusted gross income exceeds the second threshold
amount plus $5,000, zero percent.
`(A) JOINT RETURNS- In the case of a joint return--
`(i) the first threshold amount is $30,000, and
`(ii) the second threshold amount is $55,000.
`(B) OTHER RETURNS- In the case of--
`(i) a head of household, the first and second threshold amounts shall
be 75 percent of such amounts for joint returns, and
`(ii) any taxpayer not described in subparagraph (A) or clause (i),
the first and second threshold amounts shall be 50 percent of such
amounts for joint returns.
`(C) INFLATION ADJUSTMENT- In the case of any taxable year beginning
in a calendar year after 2006, each of the dollar amounts in subparagraph
(A) shall be increased by an amount equal to--
`(i) such dollar amount, multiplied by
`(ii) the cost-of-living adjustment determined under section 1(f)(3)
for the calendar year in which the taxable year begins, determined
by substituting `calendar year 2005' for `calendar year 1992' in subparagraph
(B) thereof.
Any increase determined under the preceding sentence shall be rounded
to the nearest multiple of $500.'.
(b) Effective Date- The amendments made by this section shall apply to taxable
years beginning after December 31, 2006.
SEC. 112. QUALIFIED CASH OR DEFERRED ARRANGEMENTS MUST ALLOW LONG-TERM
EMPLOYEES WORKING MORE THAN 500 BUT LESS THAN 1,000 HOURS PER YEAR TO PARTICIPATE.
(a) Participation Requirement-
(1) IN GENERAL- Subparagraph (D) of section 401(k)(2) (defining qualified
cash or deferred arrangement) is amended to read as follows:
`(D) which does not require, as a condition of participation in the
arrangement, that an employee complete a period of service with the
employer (or employers) maintaining the plan extending beyond the close
of the earlier of--
`(i) the period permitted under section 410(a)(1) (determined without
regard to subparagraph (B)(i) thereof), or
`(ii) subject to the provisions of paragraph (14), the first period
of 3 consecutive 12-month periods during each of which the employee
has at least 500 hours of service.'.
(2) SPECIAL RULES- Section 401(k) (relating to cash or deferred arrangements),
as amended by section 902 of the Pension Protection Act of 2006, is amended
by adding at the end the following new paragraph:
`(14) SPECIAL RULES FOR PARTICIPATION REQUIREMENT FOR LONG-TERM, PART-TIME
WORKERS- For purposes of paragraph (2)(D)(ii)--
`(A) AGE REQUIREMENT MUST BE MET- Paragraph (2)(D)(ii) shall not apply
to an employee unless the employee has met the requirement of section
410(a)(1)(A)(i) by the close of the last of the 12-month periods described
in such paragraph.
`(B) NONDISCRIMINATION AND TOP-HEAVY RULES NOT TO APPLY-
`(i) NONDISCRIMINATION RULES- In the case of employees who are eligible
to participate in the arrangement solely by reason of paragraph (2)(D)(ii))--
`(I) notwithstanding subsection (a)(4), an employer shall not be
required to make nonelective or matching contributions on behalf
of such employees even if such contributions are made on behalf
of other employees eligible to participate in the arrangement, and
`(II) an employer may elect to exclude such employees from the application
of paragraph (3) and subsection (m)(2).
`(ii) TOP-HEAVY RULES- An employer may elect to exclude all employees
who are eligible to participate in a plan maintained by the employer
solely by reason of paragraph (2)(D)(ii) from--
`(I) the determination of whether the plan is a top-heavy plan under
section 416, and
`(II) if the plan is a top-heavy plan under such section, the application
of the vesting and benefit requirements under subsections (b) and
(c) of such section.
`(iii) VESTING- For purposes of determining whether an employee described
in clause (i) has a nonforfeitable right to employer contributions
(other than contributions described in paragraph (3)(D)(i)) under
the arrangement, each 12-month period for which the employee has at
least 500 hours of service shall be treated as a year of service.
`(iv) EMPLOYEES WHO BECOME FULL-TIME EMPLOYEES- This subparagraph
shall cease to apply to any employee after the date on which the employee
meets the requirements of section 410(a)(1)(A)(ii) without regard
to paragraph (2)(D)(ii).
`(C) EXCEPTION FOR EMPLOYEES UNDER COLLECTIVELY BARGAINED PLANS, ETC-
Paragraph (2)(D)(ii) shall not apply to employees described in section
410(b)(3).
`(i) TIME OF PARTICIPATION- The rules of section 410(a)(4) shall apply
to an employee eligible to participate in an arrangement solely by
reason of paragraph (2)(D)(ii).
`(ii) 12-month PERIODS- 12-month periods shall be determined in the
same manner as under the last sentence of section 410(a)(3)(A).'.
(b) Effective Date- The amendments made by this section shall apply to plan
years beginning after December 31, 2007, except that, for purposes of section
401(k)(2)(D)(ii) of the Internal Revenue Code of 1986 (as added by such
amendments), 12-month periods beginning before such date shall not be taken
into account.
SEC. 113. TRANSFERS OF UNUSED BENEFITS OF HEALTH FLEXIBLE SPENDING ARRANGEMENT
TO CERTAIN RETIREMENT PLANS.
(a) In General- Section 125 (relating to cafeteria plans) is amended by
redesignating subsections (h) and (i) as subsections (i) and (j), respectively,
and by inserting after subsection (g) the following:
`(h) Contributions of Certain Unused Health Benefits-
`(1) IN GENERAL- For purposes of this title, a plan or other arrangement
shall not fail to be treated as a cafeteria plan solely because qualified
benefits of a participant under such plan include a health flexible spending
arrangement under which not more than $500 of unused health benefits may
be contributed on behalf of the participant to--
`(A) a qualified retirement plan (as defined in section 4974(c)), or
`(B) an eligible deferred compensation plan (as defined in section 457(b))
maintained by an eligible employer described in section 457(e)(1)(A).
`(2) TREATMENT OF CONTRIBUTION OF UNUSED HEALTH BENEFITS-
`(A) IN GENERAL- For purposes of this title, contributions described
in paragraph (1) shall be treated as elective contributions made pursuant
to an election by the participant between such contributions and compensation
which would otherwise be includible in the gross income of the employee.
`(B) EXCLUSION OR DEDUCTION- Contributions described in paragraph (1)
shall be excluded from gross income, or included in gross income and
allowed as a deduction, to the same extent that elective contributions
would be so treated under this title.
`(3) HEALTH FLEXIBLE SPENDING ARRANGEMENT- For purposes of this subsection,
the term `health flexible spending arrangement' means a flexible spending
arrangement (as defined in section 106(c)) which is a qualified benefit
and only permits reimbursement for expenses for medical care (as defined
in section 213(d)(1) without regard to subparagraphs (C) and (D) thereof).
`(4) UNUSED HEALTH BENEFITS- For purposes of this subsection, the term
`unused health benefits' means, with respect to a participant, the excess
of--
`(A) the maximum amount of reimbursement allowable to the participant
with respect to a plan year under a health flexible spending arrangement,
taking into account any election by the participant, over
`(B) the actual amount of reimbursement with respect to such year under
such arrangement.'.
(b) Special Rules- The Secretary of the Treasury shall prescribe such rules
as are appropriate to carry out the purposes of the amendments made by this
section. Such rules may permit elections by plan sponsors with respect to
the year to which the contributions relate and may provide for special treatment
for purposes of applying the requirements applicable to such contributions.
(c) Effective Date- The amendment made by subsection (a) shall apply to
years beginning after December 31, 2006.
SEC. 114. COMPUTATION OF LIMITS ON IRA AND ROTH IRA CONTRIBUTIONS.
(a) Certain Wage Replacement Income Treated as Compensation-
(1) WAGE REPLACEMENT INCOME- Section 219(f) (relating to other definitions
and special rules) is amended by redesignating paragraph (8) as paragraph
(9) and by inserting after paragraph (7) the following new paragraph:
`(8) TREATMENT OF CERTAIN WAGE REPLACEMENT INCOME AS COMPENSATION-
`(A) IN GENERAL- Notwithstanding paragraph (1), applicable wage replacement
income not otherwise treated as compensation shall be treated as compensation
for purposes of this section.
`(B) APPLICABLE WAGE REPLACEMENT INCOME- For purposes of this paragraph,
the term `applicable wage replacement income' means any amount received
by an individual--
`(i) as the result of the individual having become disabled,
`(ii) as unemployment compensation (as defined in section 85(b)),
`(iii) under workmen's compensation acts, or
`(iv) which constitutes wage replacement income under regulations
prescribed by the Secretary.'.
(2) CERTAIN EXCLUDABLE AMOUNTS MAY BE TAKEN INTO ACCOUNT FOR PURPOSES
OF ROTH IRAS- Section 408A(c)(2) (relating to contribution limit) is amended
by adding at the end the following new flush sentence:
`In determining the maximum amount under subparagraph (A), subsections
(b)(1)(B) and (c) of section 219 shall be applied by taking into account
compensation described in section 219(f)(8) without regard to whether
it is includible in gross income.'.
(3) EFFECTIVE DATE- The amendments made by this subsection shall apply
to taxable years beginning after December 31, 2006.
(b) Computation of Maximum IRA Deduction for Roth IRAs Using Compensation
From 2 Preceding Taxable Years-
(1) IN GENERAL- Section 408A(c) (relating to treatment of contributions)
is amended by adding at the end the following new paragraph:
`(8) COMPENSATION FROM PRECEDING 2 YEARS MAY BE TAKEN INTO ACCOUNT-
`(A) IN GENERAL- A taxpayer may elect for purposes of paragraph (2)
to take into account any unused compensation from the 2 taxable years
immediately preceding the taxable year.
`(B) UNUSED COMPENSATION- For purposes of this paragraph, the term `unused
compensation' means with respect to an individual for any taxable year
the compensation includible in the individual's gross income for the
taxable year reduced by the sum of--
`(i) the amount allowed as a deduction under 219(a) to such individual
for such taxable year,
`(ii) the amount of any designated nondeductible contribution (as
defined in section 408(o)) on behalf of such individual for such taxable
year,
`(iii) the amount of any contribution on behalf of such individual
to a Roth IRA under this section for such taxable year, and
`(iv) the amount of compensation includible in such individual's gross
income for such taxable year taken into account under section 219(c)
in determining the limitation under section 219 or paragraph (2) for
the individual's spouse.
`(C) APPLICATION TO SPECIAL RULE FOR MARRIED INDIVIDUALS- Under rules
prescribed by the Secretary, in applying section 219(c) for any taxable
year for purposes of applying paragraph (2)(A), unused compensation
of an individual or an individual's spouse for the 2 taxable years immediately
preceding the taxable year may be taken into account.'.
(2) EFFECTIVE DATE- The amendment made by this subsection shall apply
to taxable years beginning after December 31, 2006, but unused compensation
for taxable years beginning before January 1, 2007, may be taken into
account for taxable years beginning after December 31, 2006.
SEC. 115. CONTRIBUTIONS OF MILITARY DEATH GRATUITIES TO CERTAIN TAX-FAVORED
ACCOUNTS.
(1) PROVISION IN EFFECT BEFORE PENSION PROTECTION ACT- Subsection (e)
of section 408A (relating to qualified rollover contribution), as in effect
before the amendments made by section 824 of the Pension Protection Act
of 2006, is amended to read as follows:
`(e) Qualified Rollover Contribution- For purposes of this section--
`(1) IN GENERAL- The term `qualified rollover contribution' means a rollover
contribution to a Roth IRA from another such account, or from an individual
retirement plan, but only if such rollover contribution meets the requirements
of section 408(d)(3). Such term includes a rollover contribution described
in section 402A(c)(3)(A). For purposes of section 408(d)(3)(B), there
shall be disregarded any qualified rollover contribution from an individual
retirement plan (other than a Roth IRA) to a Roth IRA.
`(2) MILITARY DEATH GRATUITY-
`(A) IN GENERAL- The term `qualified rollover contribution' includes
a contribution to a Roth IRA maintained for the benefit of an individual
to the extent that such contribution does not exceed the amount received
by such individual under section 1477 of title 10, United States Code,
or under section 1967 of title 38 of such Code, if such contribution
is made not later than 1 year after the day on which such individual
receives such amount.
`(B) ANNUAL LIMIT ON NUMBER OF ROLLOVERS NOT TO APPLY- Section 408(d)(3)(B)
shall not apply with respect to amounts treated as a rollover by the
subparagraph (A).
`(C) APPLICATION OF SECTION 72- For purposes of applying section 72
in the case of a distribution which is not a qualified distribution,
the amount treated as a rollover by reason of subparagraph (A) shall
be treated as investment in the contract.'.
(2) PROVISION IN EFFECT AFTER PENSION PROTECTION ACT- Subsection (e) of
section 408A, as in effect after the amendments made by section 824 of
the Pension Protection Act of 2006, is amended to read as follows:
`(e) Qualified Rollover Contribution- For purposes of this section--
`(1) IN GENERAL- The term `qualified rollover contribution' means a rollover
contribution--
`(A) to a Roth IRA from another such account,
`(B) from an eligible retirement plan, but only if--
`(i) in the case of an individual retirement plan, such rollover contribution
meets the requirements of section 408(d)(3), and
`(ii) in the case of any eligible retirement plan (as defined in section
402(c)(8)(B) other than clauses (i) and (ii) thereof), such rollover
contribution meets the requirements of section 402(c), 403(b)(8),
or 457(e)(16), as applicable.
For purposes of section 408(d)(3)(B), there shall be disregarded any qualified
rollover contribution from an individual retirement plan (other than a
Roth IRA) to a Roth IRA.
`(2) MILITARY DEATH GRATUITY-
`(A) IN GENERAL- The term `qualified rollover contribution' includes
a contribution to a Roth IRA maintained for the benefit of an individual
to the extent that such contribution does not exceed the amount received
by such individual under section 1477 of title 10, United States Code,
or under section 1967 of title 38 of such Code, if such contribution
is made not later than 1 year after the day on which such individual
receives such amount.
`(B) ANNUAL LIMIT ON NUMBER OF ROLLOVERS NOT TO APPLY- Section 408(d)(3)(B)
shall not apply with respect to amounts treated as a rollover by the
subparagraph (A).
`(C) APPLICATION OF SECTION 72- For purposes of applying section 72
in the case of a distribution which is not a qualified distribution,
the amount treated as a rollover by reason of subparagraph (A) shall
be treated as investment in the contract.'.
(b) Health Savings Accounts and Archer MSAs- Sections 220(f)(5) and 223(f)(5)
are each amended by adding at the end the following flush sentence:
`For purposes of subparagraphs (A) and (B), rules similar to the rules
of section 408A(e)(2) (relating to rollover treatment for contributions
of military death gratuity) shall apply.'.
(c) Education Savings Accounts- Section 530(d)(5) is amended by adding at
the end the following new sentence: `For purposes of this paragraph, rules
similar to the rules of section 408A(e)(2) (relating to rollover treatment
for contributions of military death gratuity) shall apply.'.
(1) IN GENERAL- Except as provided by paragraphs (2) and (3), the amendments
made by this section shall apply with respect to deaths from injuries
occurring on or after the date of the enactment of this Act.
(2) APPLICATION OF AMENDMENTS TO DEATHS FROM INJURIES OCCURRING ON OR
AFTER OCTOBER 7, 2001, AND BEFORE ENACTMENT- The amendments made by this
section shall apply to any contribution made pursuant to section 408A(e)(2),
220(f)(5), 223(f)(5), or 530(d)(5) of the Internal Revenue Code of 1986,
as amended by this Act, with respect to amounts received under section
1477 of title 10, United States Code, or under section 1967 of title 38
of such Code, for deaths from injuries occurring on or after October 7,
2001, and before the date of the enactment of this Act if such contribution
is made not later than 1 year after the date of the enactment of this
Act.
(3) PENSION PROTECTION ACT CHANGES- Section 408A(e)(1) of the Internal
Revenue Code of 1986 (as in effect after the amendments made by subsection
(a)(2)) shall apply to taxable years beginning after December 31, 2007.
TITLE II--PROVISIONS PROVIDING FOR PRESERVATION OF INCOME
SEC. 201. EXCLUSION OF CERTAIN QUALIFIED ANNUITY PAYMENTS.
(1) QUALIFIED PLANS- Section 402(e) (relating to exempt trusts) is amended
by adding at the end the following new paragraph:
`(7) EXCLUSION OF PERCENTAGE OF LIFETIME ANNUITY PAYMENTS-
`(A) IN GENERAL- In the case of a lifetime annuity payment to a qualified
distributee from a qualified trust (within the meaning of subsection
(c)(8)(A)) maintained in connection with a defined contribution plan,
gross income shall not include 10 percent of the amount otherwise includible
in gross income (determined without regard to this paragraph). For purposes
of this paragraph, payments from an annuity contract distributed by
the qualified trust shall be treated as payments from the qualified
trust.
`(I) the aggregate amount of lifetime annuity payments to the distributee
during the taxable year which are includible in gross income (determined
without regard to this paragraph) and which are subject to this
paragraph or to rules similar to the rules of this paragraph (other
than section 72(b)(5) or 101(d)(4)), exceeds
`(II) 50 percent of the applicable amount for the taxable year under
section 415(a),
then the aggregate amount otherwise excludable under subparagraph
(A) for the taxable year shall be reduced by 10 percent of the portion
of such excess which is allocable under clause (ii) to payments which
are subject to this paragraph.
`(ii) ALLOCATION RULE- Any excess described in clause (i) for any
taxable year shall be allocated ratably among all lifetime annuity
payments to the qualified distributee described in clause (i)(I).
`(C) DEFINITIONS- For purposes of this paragraph--
`(i) LIFETIME ANNUITY PAYMENT-
`(I) IN GENERAL- Except as provided in this clause, the term `lifetime
annuity payment' means a distribution from an annuity contract which
is a part of a series of substantially equal periodic payments (not
less frequently than annually) made over the life of the qualified
distributee or the joint lives of the qualified distributee and
the qualified distributee's designated beneficiary. For purposes
of this paragraph, the term `annuity contract' means a commercial
annuity (as defined in section 3405(e)(6)), other than an endowment
or life insurance contract.
`(II) CERTAIN FLUCTUATING PAYMENTS- Annuity payments shall not fail
to be treated as part of a series of substantially equal periodic
payments merely because the amount of the periodic payments may
vary in accordance with investment experience, reallocations among
investment options, actuarial gains or losses, cost of living indices,
a constant percentage (not less than zero) applied not less frequently
than annually, or similar fluctuating criteria.
`(III) CERTAIN CHANGES IN THE MODE OF PAYMENT- Annuity payments
shall not fail to be treated as part of a series of substantially
equal periodic payments merely because the period between each such
payment is lengthened or shortened, but only if at all times such
period is not longer than 1 year.
`(IV) PERMITTED REDUCTIONS- Annuity payments shall not fail to be
treated as part of a series of substantially equal periodic payments
merely because, in the case of an annuity payable over the lives
of the qualified distributee and the qualified distributee's designated
beneficiary, the amounts paid after the death of the qualified distributee
or the qualified distributee's designated beneficiary are less than
the amounts payable during their joint lives.
`(V) CERTAIN CONTRACT BENEFITS- The availability of a commutation
benefit or other feature permitting acceleration of annuity payments
(or a modification of the period during which such a benefit is
available), a minimum period of payments or a minimum amount to
be paid in any event shall not affect the treatment of a distribution
as a lifetime annuity payment.
`(VI) TRUST PAYMENTS- In the case of lifetime annuity payments being
made to a qualified trust, payments by the qualified trust to a
qualified distributee of the entire amount received by the qualified
trust with respect to the qualified distributee shall constitute
lifetime annuity payments if such payments are made within a reasonable
period after receipt by the qualified trust.
`(VII) QUALIFIED DOMESTIC RELATIONS ORDERS- Annuity payments shall
not fail to be treated as a series of substantially equal periodic
payments merely because the payments are reduced on account of a
qualified domestic relations order (within the meaning of section
414(p)) that becomes effective after the commencement of the annuity
payments.
`(ii) QUALIFIED DISTRIBUTEE- The term `qualified distributee' means
the employee, the surviving spouse of the employee, and an alternate
payee who is the spouse or former spouse of the employee.
`(I) an amount is not includible in gross income by reason of subparagraph
(A), and
`(II) the series of payments of which such payment is a part is
subsequently modified (other than by reason of death or disability)
so that some or all future payments are not lifetime annuity payments,
the qualified distributee's gross income for the first taxable year
in which such modification occurs shall be increased by an amount,
determined under rules prescribed by the Secretary, equal to the amount
which (but for subparagraph (A)) would have been includible in the
qualified distributee's gross income if the modification had been
in effect at all times, plus interest for the deferral period at the
underpayment rate established under section 6621.
`(ii) DEFERRAL PERIOD- For purposes of this subparagraph, the term
`deferral period' means, with respect to any amount, the period beginning
with the taxable year in which (without regard to subparagraph (A))
the amount would have been includible in gross income and ending with
the taxable year in which the modification described in clause (i)(II)
occurs.
`(E) INVESTMENT IN THE CONTRACT- For purposes of section 72, the investment
in the contract shall be determined without regard to this paragraph.'.
(2) QUALIFIED ANNUITY PLANS- Section 403(a) (relating to qualified annuity
plans) is amended by adding at the end the following new paragraph:
`(6) EXCLUSION OF PERCENTAGE OF LIFETIME ANNUITY PAYMENTS- Rules similar
to the rules of section 402(e)(7) shall apply to distributions under any
annuity contract to which this subsection applies.'.
(3) PURCHASED ANNUITIES- Section 403(b) (relating to purchased annuities)
is amended by adding at the end the following new paragraph:
`(14) EXCLUSION OF PERCENTAGE OF LIFETIME ANNUITY PAYMENTS- Rules similar
to the rules of section 402(e)(7) shall apply to distributions under any
annuity contract or custodial account to which this subsection applies.'.
(4) IRAS- Section 408(d) (relating to tax treatment of distributions),
as amended by section 1201 of the Pension Protection Act of 2006, is amended
by adding at the end the following new paragraph:
`(9) EXCLUSION OF PERCENTAGE OF LIFETIME ANNUITY PAYMENTS- Rules similar
to the rules of section 402(e)(7) shall apply to distributions out of
an individual retirement plan.'.
(5) SECTION 457 PLANS- Section 457(e) (relating to special rules for deferred
compensation plans) is amended by adding at the end the following new
paragraph:
`(19) EXCLUSION OF PERCENTAGE OF LIFETIME ANNUITY PAYMENTS- Rules similar
to the rules of section 402(e)(7) shall apply to distributions from an
eligible deferred compensation plan of an eligible employer described
in subsection (e)(1)(A).'.
(b) Effective Date- The amendments made by this section shall apply to distributions
made after December 31, 2006.
SEC. 202. EXCLUSION FOR LIFETIME ANNUITY PAYMENTS.
(a) Lifetime Annuity Payments Under Annuity Contracts- Section 72(b) (relating
to exclusion ratio) is amended by adding at the end the following new paragraph:
`(5) EXCLUSION FOR LIFETIME ANNUITY PAYMENTS-
`(A) IN GENERAL- In the case of lifetime annuity payments received as
an annuity under 1 or more annuity contracts in any taxable year, gross
income shall not include the lesser of--
`(i) 50 percent of the portion of the lifetime annuity payments which
(without regard to this paragraph) is includible in gross income under
this section for the taxable year, or
`(B) COST-OF-LIVING ADJUSTMENT- In the case of taxable years beginning
after December 31, 2007, the $20,000 amount in subparagraph (A)(ii)
shall be increased by an amount equal to--
`(i) such dollar amount, multiplied by
`(ii) the cost-of-living adjustment determined under section 1(f)(3)
for the calendar year in which the taxable year begins, determined
by substituting `calendar year 2006' for `calendar year 1992' in subparagraph
(B) thereof.
If any amount as increased under the preceding sentence is not a multiple
of $500, such amount shall be rounded to the next lower multiple of
$500.
`(C) APPLICATION OF PARAGRAPH- Subparagraph (A) shall not apply to--
`(i) any amount received under an eligible deferred compensation plan
(as defined in section 457(b)) or under a qualified retirement plan
(as defined in section 4974(c)),
`(ii) any amount paid under an annuity contract which is received
by the beneficiary under the contract--
`(I) after the death of the annuitant in the case of payments described
in subsection (c)(5)(A)(ii)(III), unless the beneficiary is the
surviving spouse of the annuitant, or
`(II) after the death of the annuitant and joint annuitant in the
case of payments described in subsection (c)(5)(A)(ii)(IV), unless
the beneficiary is the surviving spouse of the last to die of the
annuitant and the joint annuitant, or
`(iii) any annuity contract that is a qualified funding asset (as
defined in section 130(d)), but without regard to whether there is
a qualified assignment.
`(D) INVESTMENT IN THE CONTRACT- For purposes of this section, the investment
in the contract shall be determined without regard to this paragraph.'.
(b) Definitions- Section 72(c) is amended by adding at the end the following
new paragraph:
`(5) LIFETIME ANNUITY PAYMENT-
`(A) IN GENERAL- For purposes of subsection (b)(5), the term `lifetime
annuity payment' means any amount received as an annuity under any portion
of an annuity contract, but only if--
`(i) the only person (or persons in the case of payments described
in subclause (II) or (IV) of clause (ii)) legally entitled (by operation
of the contract, a trust, or other legally enforceable means) to receive
such amount during the life of the annuitant or joint annuitant is
such annuitant or joint annuitant, and
`(ii) such amount is part of a series of substantially equal periodic
payments made not less frequently than annually over--
`(I) the life of the annuitant,
`(II) the lives of the annuitant and a joint annuitant, but only
if the annuitant is the spouse of the joint annuitant as of the
annuity starting date or the difference in age between the annuitant
and joint annuitant is 15 years or less,
`(III) the life of the annuitant with a minimum period of payments
or with a minimum amount that must be paid in any event, or
`(IV) the lives of the annuitant and a joint annuitant with a minimum
period of payments or with a minimum amount that must be paid in
any event, but only if the annuitant is the spouse of the joint
annuitant as of the annuity starting date or the difference in age
between the annuitant and joint annuitant is 15 years or less.
`(iii) EXCEPTIONS- For purposes of clause (ii), annuity payments shall
not fail to be treated as part of a series of substantially equal
periodic payments--
`(I) because the amount of the periodic payments may vary in accordance
with investment experience, reallocations among investment options,
actuarial gains or losses, cost-of-living indices, a constant percentage
(not less than zero) applied not less frequently than annually,
or similar fluctuating criteria,
`(II) due to the existence of, or modification of the duration of,
a provision in the contract permitting a lump-sum withdrawal after
the annuity starting date, or
`(III) because the period between each such payment is lengthened
or shortened, but only if at all times such period is no longer
than 1 calendar year.
`(B) ANNUITY CONTRACT- For purposes of subparagraph (A) and subsections
(b)(5) and (x), the term `annuity contract' means a commercial annuity
(as defined by section 3405(e)(6)), other than an endowment or life
insurance contract.
`(C) MINIMUM PERIOD OF PAYMENTS- For purposes of subparagraph (A), the
minimum period of payments is a guaranteed term of payments which does
not exceed the greater of--
`(ii) the life expectancy of--
`(I) the annuitant as of the annuity starting date, in the case
of lifetime annuity payments described in subparagraph (A)(ii)(III),
or
`(II) the annuitant and joint annuitant as of the annuity starting
date, in the case of lifetime annuity payments described in subparagraph
(A)(ii)(IV).
For purposes of this subparagraph, life expectancy shall be computed
with reference to the tables prescribed by the Secretary under paragraph
(3). For purposes of subsection (x)(1)(C)(ii), the permissible minimum
period of payments shall be determined as of the annuity starting date
and reduced by one for each subsequent year.
`(D) MINIMUM AMOUNT THAT MUST BE PAID IN ANY EVENT- For purposes of
subparagraph (A), the minimum amount that must be paid in any event
is an amount payable to the designated beneficiary under an annuity
contract which is in the nature of a refund and does not exceed the
greater of the amount applied to produce the lifetime annuity payments
under the contract or the amount, if any, available for withdrawal under
the contract on the date of death.'.
(c) Recapture Tax for Lifetime Annuity Payments- Section 72 is amended by
redesignating subsection (x) as subsection (y) and by inserting after subsection
(x) the following new subsection:
`(x) Recapture Tax for Modifications to or Reductions in Lifetime Annuity
Payments-
`(A) any amount received under an annuity contract is excluded from
income by reason of subsection (b)(5) (relating to lifetime annuity
payments) for any taxable year, and
`(B) a recapture event described in paragraph (2) occurs in any subsequent
taxable year,
then gross income for the first taxable year in which the recapture event
occurs shall be increased by the recapture amount.
`(2) RECAPTURE EVENT- For purposes of paragraph (1), a recapture event
occurs if--
`(A) the series of payments under an annuity contract is subsequently
modified so any future payments are not lifetime annuity payments,
`(B) after the date of receipt of the first lifetime annuity payment
under the contract an annuitant receives a lump sum and thereafter is
to receive annuity payments in a reduced amount under the contract,
or
`(C) after the date of receipt of the first lifetime annuity payment
under the contract the dollar amount of any subsequent annuity payment
is reduced and a lump sum is not paid in connection with the reduction,
unless such reduction is--
`(i) due to an event described in subsection (c)(5)(A)(iii), or
`(ii) due to the addition of, or increase in, a minimum period of
payments (within the meaning of subsection (c)(5)(C)) or a minimum
amount that must be paid in any event (within the meaning of subsection
(c)(5)(D)).
`(A) IN GENERAL- For purposes of this subsection, the recapture amount
shall be the amount, determined under rules prescribed by the Secretary,
equal to the amount which (but for subsection (b)(5)) would have been
includible in the taxpayer's gross income if the modification or reduction
described in subparagraph (A), (B), or (C) of paragraph (2) had been
in effect at all times, plus interest for the deferral period at the
underpayment rate established by section 6621.
`(B) DEFERRAL PERIOD- For purposes of this subsection, the term `deferral
period' means, with respect to any amount, the period beginning with
the taxable year in which (without regard to subsection (b)(5)) the
amount would have been includible in gross income and ending with the
taxable year in which the modification or reduction described in subparagraph
(A), (B), or (C) of paragraph (2) occurs.
`(4) EXCEPTIONS TO RECAPTURE TAX- Paragraph (1) shall not apply in the
case of any recapture event which occurs because an annuitant--
`(A) dies or becomes disabled (within the meaning of subsection (m)(7)),
`(B) becomes a chronically ill individual within the meaning of section
7702B(c)(2), or
`(C) encounters hardship.'.
(d) Lifetime Distributions of Life Insurance Death Benefits-
(1) IN GENERAL- Section 101(d) (relating to payment of life insurance
proceeds at a date later than death) is amended by adding at the end the
following new paragraph:
`(4) EXCLUSION FOR LIFETIME ANNUITY PAYMENTS-
`(A) IN GENERAL- In the case of amounts to which this subsection applies,
gross income for any taxable year shall not include the lesser of--
`(i) 50 percent of the portion of lifetime annuity payments which
(without regard to this paragraph) is includible in gross income under
this section, or
`(ii) the amount in effect under section 72(b)(5)(A)(ii) for the taxable
year.
`(B) RULES OF SECTION 72(b)(5) TO APPLY- For purposes of this paragraph,
rules similar to the rules of section 72(b)(5) and section 72(x) shall
apply, except that the term `beneficiary of the life insurance contract'
shall be substituted for the term `annuitant' each place it appears,
and the term `life insurance contract' shall be substituted for the
term `annuity contract' each place it appears.'.
(2) CONFORMING AMENDMENT- Section 101(d)(1) is amended by inserting `or
paragraph (4)' after `to the extent not excluded by the preceding sentence'.
(1) IN GENERAL- The amendments made by this section shall apply to amounts
received in calendar years beginning after the date of the enactment of
this Act.
(2) SPECIAL RULE FOR EXISTING CONTRACTS- In the case of a contract in
force on the date of the enactment of this Act that does not satisfy the
requirements of section 72(c)(5)(A) of the Internal Revenue Code of 1986
(as added by this section), or requirements similar to such section 72(c)(5)(A)
in the case of a life insurance contract, any modification to such contract
(including a change in ownership) or to the payments under such contract
that is made to satisfy the requirements of such section (or similar requirements)
shall not result in the recognition of any gain or loss, any amount being
included in gross income, or any addition to tax that otherwise might
result from such modification, but only if the modification is completed
before the date which is 2 years after the date of the enactment of this
Act.
SEC. 203. JOINT STUDY OF APPLICATION OF SPOUSAL CONSENT RULES TO DEFINED
CONTRIBUTION PLANS.
(a) Study- The Secretary of Labor and the Secretary of the Treasury shall
jointly conduct a study of the feasibility and desirability of extending
the application of the requirements of section 205 of the Employee Retirement
Income Security Act of 1974 and sections 401(a)(11) and 417 of the Internal
Revenue Code of 1986 (relating to spousal consent requirements) to defined
contribution plans to which such requirements do not apply. Such study shall
include consideration of--
(1) any modifications of such requirements that are necessary to apply
such requirements to such plans, and
(2) the feasibility of providing notice and spousal consent in 1 or more
electronic forms that are capable of authentication.
(b) Report- Not later than 2 years after the date of the enactment of this
Act, the Secretaries shall report the results of the study, together with
any recommendations for legislative changes, to the Committees on Finance
and Health, Education, Labor, and Pensions of the Senate and the Committees
on Ways and Means and Education, and the Workforce of the House of Representatives.
SEC. 204. FACILITATING LONGEVITY INSURANCE.
