(f) Employers may disregard rollovers for purposes of cashout rules (sec. 408 of the House bill, sec. 648 of the Senate amendment, and sec. 411(a)(11) of the Code) PRESENT LAW 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 involuntary distribution occurs and the participant subsequently returns to employment covered by the plan, then service taken into account in computing benefits payable under the plan after the return need not include service with respect to which a benefit was involuntarily distributed unless the employee repays the benefit.110 Generally, a participant may roll over an involuntary distribution from a qualified plan to an IRA or to another qualified plan.111 HOUSE BILL For purposes of the cash-out rule, a plan is permitted to provide that the present value of a participant's nonforfeitable accrued benefit is determined without regard to the portion of such benefit that is attributable to rollover contributions (and any earnings allocable thereto). Effective date.-The House bill is effective for distributions after December 31, 2001. SENATE AMENDMENT The Senate amendment is the same as the House bill. CONFERENCE AGREEMENT The conference agreement follows the House bill and the Senate amendment. (g) Minimum distribution and inclusion requirements for section 457 plans (sec. 409 of the House bill, sec. 649 of the Senate amendment, and sec. 457 of the Code) PRESENT LAW A "section 457 plan" is an eligible deferred compensation plan of a State or local government or tax-exempt employer that meets certain requirements. For example, amounts deferred under a section 457 plan cannot exceed certain limits. Amounts deferred under a section 457 plan are generally includible in income when paid or made available. Amounts deferred under a plan of deferred compensation of a State or local government or tax-exempt employer that does not meet the requirements of section 457 are includible in income when the amounts are not subject to a substantial risk 110 A similar provision is contained in Title I of ERISA. 111 Other provisions expand the kinds of plans to which benefits may be rolled over. of forfeiture, regardless of whether the amounts have been paid or made available.112 Section 457 plans are subject to the minimum distribution rules applicable to tax-qualified pension plans. In addition, such plans are subject to additional minimum distribution rules (sec. 457(d)(2)(B)). HOUSE BILL The House bill provides that amounts deferred under a section 457 plan of a State or local government are includible in income when paid. The House bill also repeals the special minimum distribution rules applicable to section 457 plans. Thus, such plans are subject to the minimum distribution rules applicable to qualified plans. Effective date.-The House bill is effective for distributions after December 31, 2001. SENATE AMENDMENT The Senate amendment is the same as the House bill, with the following modification. The Senate amendment also modifies the transition rule adopted in the 1986 Act relating to deferred compensation plans of taxexempt employers. Under the Senate amendment, the transition rule applies to agreements providing cost-of-living adjustments to amounts that otherwise satisfy the requirements of the transition rule. The grandfather does not apply to the extent that the annual amount provided under such an agreement exceeds the annual grandfathered amount multiplied by the cumulative increase in the Consumer Price Index (as published by the Department of Labor). Effective date.-The Senate amendment is generally effective for distributions after December 31, 2001. The provision relating to plans of tax-exempt organizations is effective for taxable years ending after the date of enactment for cost-of-living increases after September 1993. CONFERENCE AGREEMENT The conference agreement follows the House bill. 4. Strengthening Pension Security and Enforcement (a) Phase in repeal of 160 percent of current liability funding limit; deduction for contributions to fund termination liability (secs. 501–502 of the House bill, secs. 651-652 of the Senate amendment, and secs. 404(a)(1), 412(c)(7), and 4972(c) of the Code) PRESENT LAW Under present law, defined benefit pension plans are subject to minimum funding requirements designed to ensure that pension plans have sufficient assets to pay benefits. A defined benefit pen 112 This rule of inclusion does not apply to amounts deferred under a tax-qualified retirement plan or similar plans. sion plan is funded using one of a number of acceptable actuarial cost methods. No contribution is required under the minimum funding rules in excess of the full funding limit. The full funding limit is generally defined as the excess, if any, of (1) the lesser of (a) the accrued liability under the plan (including normal cost) or (b) 160 percent of the plan's current liability, over (2) the value of the plan's assets (sec. 412(c)(7)).113 In general, current liability is all liabilities to plan participants and beneficiaries accrued to date, whereas the accrued liability full funding limit is based on projected benefits. The current liability full funding limit is scheduled to increase as follows: 165 percent for plan years beginning in 2003 and 2004, and 170 percent for plan years beginning in 2005 and thereafter.114 In no event is a plan's full funding limit less than 90 percent of the plan's current liability over the value of the plan's assets. An employer sponsoring a defined benefit pension plan generally may deduct amounts contributed to satisfy the minimum funding standard for the plan year. Contributions in excess of the full funding limit generally are not deductible. Under a special rule, an employer that sponsors a defined benefit pension plan (other than a multiemployer plan) which has more than 100 participants for the plan year may deduct amounts contributed of up to 100 percent of the plan's unfunded current liability. HOUSE BILL Current liability full funding limit The House bill gradually increases and then repeals the current liability full funding limit. Under the bill, the current liability full funding limit is 165 percent of current liability for plan years beginning in 2002, and 170 percent for plan years beginning in 2003. The current liability full funding limit is repealed for plan years beginning in 2004 and thereafter. Thus, in 2004 and thereafter, the full funding limit is the excess, if any, of (1) the accrued liability under the plan (including normal cost), over (2) the value of the plan's assets. Deduction for contributions to fund termination liability The special rule allowing a deduction for unfunded current liability generally is extended to all defined benefit pension plans, i.e., the House bill applies to multiemployer plans and plans with 100 or fewer participants. The special rule does not apply to plans not covered by the PBGC termination insurance program.115 The House bill also modifies the rule by providing that the deduction is for up to 100 percent of unfunded termination liability, determined as if the plan terminated at the end of the plan year. In the case of a plan with less than 100 participants for the plan 113 The minimum funding requirements, including the full funding limit, are also contained in title I of ERISA. 114 As originally enacted in the Pension Protection Act of 1997, the current liability full funding limit was 150 percent of current liability. The Taxpayer Relief Act of 1997 increased the current liability full funding limit to 155 percent in 1999 and 2000, 160 percent in 2001 and 2002, and adopted the scheduled increases described in the text. 115 The PBGC termination insurance program does not cover plans of professional service employers that have fewer than 25 participants. year, termination liability does not include the liability attributable to benefit increases for highly compensated employees resulting from a plan amendment which was made or became effective, whichever is later, within the last two years. General Accounting Office study In connection with the Committee's desire to strengthen pension security, the Committee directs the General Accounting Office to conduct a study examining the extent to which certain presentlaw rules create obstacles or disincentives for taxpayers experiencing financial hardships to make current and future contributions to underfunded defined benefit pension plans. The Committee is concerned that, as a result of not obtaining a current or carryback deduction for pension contributions, taxpayers experiencing financial hardships will be subject to higher after-tax costs of maintaining pension funding levels. In the study, the General Accounting Office is to consider whether pension funding would be enhanced if section 172(f), which since 1998 has permitted only listed items to be carried back, were modified to list deductions for payments to defined benefit pension plans as an item for which 10year specified loss carrybacks may be available. This study is to be submitted to the Committee on Ways and Means of the House of Representatives and the Committee on Finance of the Senate not later than one year after the date of enactment. Effective date.-The House bill is effective for plan years beginning after December 31, 2001. SENATE AMENDMENT Current liability full funding limit The Senate amendment gradually increases and then repeals the current liability full funding limit. Under the Senate amendment, the current liability full funding limit is 160 percent of current liability for plan years beginning in 2002, 165 percent for plan years beginning in 2003, and 170 percent for plan years beginning in 2004. The current liability full funding limit is repealed for plan years beginning in 2005 and thereafter. Thus, in 2005 and thereafter, the full funding limit is the excess, if any, of (1) the accrued liability under the plan (including normal cost), over (2) the value of the plan's assets. Deduction for contributions to fund termination liability The special rule allowing a deduction for unfunded current liability generally is extended to all defined benefit pension plans, i.e., the Senate amendment applies to multiemployer plans and plans with 100 or fewer participants. The special rule does not apply to plans not covered by the PBGC termination insurance program.116 The Senate amendment also modifies the rule by providing that the deduction is for up to 100 percent of unfunded termination liability, determined as if the plan terminated at the end of the plan year. In the case of a plan with less than 100 participants for 116 The PBGC termination insurance program does not cover plans of professional service employers that have fewer than 25 participants. the plan year, termination liability does not include the liability attributable to benefit increases for highly compensated employees resulting from a plan amendment which was made or became effective, whichever is later, within the last two years. Effective date.The Senate amendment is effective for plan years beginning after December 31, 2001. CONFERENCE AGREEMENT The conference agreement follows the Senate amendment, with modifications. The conference agreement gradually increases and then repeals the current liability full funding limit. Under the conference agreement, the current liability full funding limit is 165 percent of current liability for plan years beginning in 2002, and 170 percent for plan years beginning in 2003. The current liability full funding limit is repealed for plan years beginning in 2004 and thereafter. Thus, in 2004 and thereafter, the full funding limit is the excess, if any, of (1) the accrued liability under the plan (including normal cost), over (2) the value of the plan's assets. With respect to the special rule allowing a deduction for unfunded current liability, the modification of the rule to provide that the deduction is for up to 100 percent of unfunded termination liability is applicable only for a plan that terminates within the plan year. (b) Excise tax relief for sound pension funding (sec. 503 of the House bill, sec. 653 of the Senate amendment, and sec. 4972 of the Code) PRESENT LAW Under present law, defined benefit pension plans are subject to minimum funding requirements designed to ensure that pension plans have sufficient assets to pay benefits. A defined benefit pension plan is funded using one of a number of acceptable actuarial cost methods. No contribution is required under the minimum funding rules in excess of the full funding limit. The full funding limit is generally defined as the excess, if any, of (1) the lesser of (a) the accrued liability under the plan (including normal cost) or (b) 160 percent of the plan's current liability, over (2) the value of the plan's assets (sec. 412(c)(7)). In general, current liability is all liabilities to plan participants and beneficiaries accrued to date, whereas the accrued liability full funding limit is based on projected benefits. The current liability full funding limit is scheduled to increase as follows: 165 percent for plan years beginning in 2003 and 2004, and 170 percent for plan years beginning in 2005 and thereafter.117 In no event is a plan's full funding limit less than 90 percent of the plan's current liability over the value of the plan's assets. 117 As originally enacted in the Pension Protection Act of 1997, the current liability full funding limit was 150 percent of current liability. The Taxpayer Relief Act of 1997 increased the current liability full funding limit to 155 percent in 1999 and 2000, 160 percent in 2001 and 2002, and adopted the scheduled increases described in the text. Another provision would gradually increase and then repeal the current liability full funding limit. |