401(k) Enhancement Act: Encouraging Retirement Savings - Amends the Internal Revenue Code to allow 401(k) retirement plans to adopt automatic employee contribution arrangements. Provides for: (1) employer matching contributions; (2) employee elections to opt out of automatic contribution plans; (3) notice to employees of their rights under automatic contribution plans; and (4) default investment arrangements for employees who do not make investment decisions.
[Congressional Bills 109th Congress]
[From the U.S. Government Publishing Office]
[S. 1819 Introduced in Senate (IS)]
109th CONGRESS
1st Session
S. 1819
To amend the Internal Revenue Code of 1986 to increase participation
and savings in cash or deferred plans through automatic contribution
and default investment arrangements, and for other purposes.
_______________________________________________________________________
IN THE SENATE OF THE UNITED STATES
October 4, 2005
Mr. Santorum (for himself and Mr. Bennett) 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 to increase participation
and savings in cash or deferred plans through automatic contribution
and default investment arrangements, 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.
This Act may be cited as the ``401(k) Enhancement Act: Encouraging
Retirement Savings''.
SEC. 2. INCREASING PARTICIPATION AND SAVINGS IN CASH OR DEFERRED PLANS
THROUGH AUTOMATIC CONTRIBUTION ARRANGEMENTS.
(a) In General.--Section 401(k) of the Internal Revenue Code of
1986 (relating to cash or deferred arrangement) is amended by adding at
the end the following new paragraph:
``(13) Nondiscrimination requirements for automatic
contribution trusts.--
``(A) In general.--A cash or deferred arrangement
shall be treated as meeting the requirements of
paragraph (3)(A)(ii) if such arrangement constitutes an
automatic contribution trust.
``(B) Automatic contribution trust.--
``(i) In general.--For purposes of this
paragraph, the term `automatic contribution
trust' means an arrangement--
``(I) except as provided in clause
(ii), under which each employee
eligible to participate in the
arrangement is treated as having
elected to have the employer make
elective contributions in an amount
equal to the applicable percentage of
the employee's compensation, and
``(II) which meets the requirements
of subparagraphs (C) and (D).
``(ii) Exceptions.--
``(I) Employer election with
respect to existing employees.--An
employer may elect not to have clause
(i)(I) apply to all employees who were
eligible to participate in the
arrangement (or a predecessor
arrangement) immediately before the
first date on which the arrangement is
an automatic contribution trust. The
employer shall make the election under
this subclause before such first date.
``(II) Election out.--Each employee
eligible to participate in the
arrangement may specifically elect not
to have contributions made under clause
(i), and such clause shall cease to
apply to compensation paid on or after
the effective date of the election.
``(iii) Applicable percentage.--For
purposes of this subparagraph--
``(I) In general.--The term
`applicable percentage' means, with
respect to any employee, the percentage
(not less than 3 percent) determined
under the arrangement.
``(II) Increase in percentage.--In
the case of the second plan year
beginning after the first date on which
the election under clause (i)(I) is in
effect with respect to the employee and
any succeeding plan year, the
applicable percentage shall be a
percentage equal to the sum of the
applicable percentage for the employee
as of the close of the preceding plan
year plus the number of percentage
points (not less than 1 percentage
point) specified by the plan. Such
increase shall continue until the
applicable percentage is at least 10
percent or such higher percentage
specified by the plan.
``(C) Matching or nonelective contributions.--
``(i) In general.--The requirements of this
subparagraph are met if, under the arrangement,
the employer--
``(I) makes matching contributions
on behalf of each employee who is not a
highly compensated employee in an
amount equal to 50 percent of the
elective contributions of the employee
to the extent such elective
contributions do not exceed 6 percent
of compensation; or
``(II) is required, without regard
to whether the employee makes an
elective contribution or employee
contribution, to make a contribution to
a defined contribution plan on behalf
of each employee who is not a highly
compensated employee and who is
eligible to participate in the
arrangement in an amount equal to at
least 3 percent of the employee's
compensation,
The rules of clauses (ii) and (iii) of
paragraph (12)(B) shall apply for purposes of
subclause (I). The rules of paragraph
(12)(E)(ii) shall apply for purposes of
subclauses (I) and (II).
``(ii) Other plans.--An arrangement shall
be treated as meeting the requirements under
clause (i) if any other plan maintained by the
employer meets such requirements with respect
to employees eligible under the arrangement.
``(D) Notice requirements.--
``(i) In general.--The requirements of this
subparagraph are met if the requirements of
clauses (ii) and (iii) are met.
``(ii) Reasonable period to make
election.--The requirements of this clause are
met if each employee to whom subparagraph
(B)(i) applies--
``(I) receives a notice explaining
the employee's right under the
arrangement to elect not to have
elective contributions made on the
employee's behalf, and how
contributions made under the
arrangement will be invested in the
absence of any investment election by
the employee, and
``(II) has a reasonable period of
time after receipt of such notice and
before the first elective contribution
is made to make such election.
``(iii) Annual notice of rights and
obligations.--The requirements of this clause
are met if each employee eligible to
participate in the arrangement is, within a
reasonable period before any year, given notice
of the employee's rights and obligations under
the arrangement.
The requirements of clauses (i) and (ii) of paragraph
(12)(D) shall be met with respect to the notices
described in clauses (ii) and (iii) of this
subparagraph.''
(b) Matching Contributions.--Section 401(m) of the Internal Revenue
Code of 1986 (relating to nondiscrimination test for matching
contributions and employee contributions) is amended by redesignating
paragraph (12) as paragraph (13) and by inserting after paragraph (11)
the following new paragraph:
``(12) Alternate method for automatic contribution
trusts.--A defined contribution plan shall be treated as
meeting the requirements of paragraph (2) with respect to
matching contributions if the plan--
``(A) meets the contribution requirements of
subparagraphs (B)(i) and (C) of subsection (k)(13);
``(B) meets the notice requirements of subparagraph
(D) of subsection (k)(13); and
``(C) meets the requirements of paragraph (11)(B)
(ii) and (iii).''.
(c) Exclusion From Definition of Top-Heavy Plans.--
(1) Elective contribution rule.--Clause (i) of section
416(g)(4)(H) of the Internal Revenue Code of 1986 is amended by
inserting ``or 401(k)(13)'' after ``section 401(k)(12)''.
(2) Matching contribution rule.--Clause (ii) of section
416(g)(4)(H) of such Code is amended by inserting ``or
401(m)(12)'' after ``section 401(m)(11)''.
(d) Definition of Compensation.--
(1) Base pay or rate of pay.--The Secretary of the Treasury
shall, not later than December 31, 2006, modify Treasury
Regulation section 1.414(s)-1(d)(3) to facilitate the use of
the safe harbors in sections 401(k)(12), 401(k)(13),
401(m)(11), and 401(m)(12) of the Internal Revenue Code of
1986, and in Treasury Regulation section 1.401(a)(4)-3(b), by
plans that use base pay or rate of pay in determining
contributions or benefits. Such modifications shall include
increased flexibility in satisfying section 414(s) of such Code
in any case where the amount of overtime compensation payable
in a year can vary significantly.
(2) Application of requirements to separate payroll
periods.--Not later than December 31, 2005, the Secretary of
the Treasury shall issue rules under subparagraphs (B)(i) and
(C)(i) of section 401(k)(13) of such Code and under clause (i)
of section 401(m)(12)(A) of such Code that, effective for plan
years beginning after December 31, 2005, permit such
requirements to be applied separately to separate payroll
periods based on rules similar to the rules described in
Treasury Regulation sections 1.401(k)-3(c)(5)(ii) and 1.401(m)-
3(d)(4).
(e) Section 403(b) Contracts.--Paragraph (11) of section 401(m) of
the Internal Revenue Code of 1986 is amended by adding at the end the
following:
``(C) Section 403(b) contracts.--An annuity
contract under section 403(b) shall be treated as
meeting the requirements of paragraph (2) with respect
to matching contributions if such contract meets
requirements similar to the requirements under
subparagraph (A).''.
(f) Investments and Preemption.--
(1) Control deemed to have been exercised with respect to
default investment arrangements.--Section 404(c) of the
Employee Retirement Income Security Act of 1974 (29 U.S.C.
1104(c)) is amended by adding at the end the following new
paragraph:
``(4) Treatment of default investment arrangement.--
``(A) In general.--A participant in an individual
account plan shall, for purposes of paragraph (1), be
treated as exercising control over the assets in the
account with respect to the amount of contributions
made under a default investment arrangement.
``(B) Default investment arrangement defined.--For
purposes of this paragraph, the term `default
investment arrangement' means an arrangement--
``(i) which meets the requirements of
subparagraph (C),
``(ii) under which the participant is
treated as having elected to have the employer
exercise control over the assets in his account
until the participant specifically elects to
exercise such control, and
``(iii) under which assets described in
clause (ii) are invested in accordance with
regulations prescribed by the Secretary.
Such regulations shall provide guidance on the
appropriateness of designating default investments that
include a mix of asset classes consistent with long-
term capital appreciation. The regulations shall also
provide guidance on the designation of default
investments in individual account plans that are not
designed to meet the requirements of this section.
``(C) Notice requirements.--
``(i) Time for notice.--The administrator
of a default investment arrangement shall,
within a reasonable period before each plan
year, give to each employee to whom a default
investment arrangement applies for such plan
year notice of the employee's rights and
obligations under the arrangement which--
``(I) is sufficiently accurate and
comprehensive to apprise the employee
of such rights and obligations, and
``(II) is written in a manner
calculated to be understood by the
average employee to whom the
arrangement applies.
``(ii) Form of notice; response.--A notice
shall not be treated as meeting the
requirements of clause (i) with respect to an
employee unless--
``(I) the notice includes a notice
explaining the employee's right under
the arrangement to elect to exercise
control over the assets in his account,
``(II) the employee has a
reasonable period of time after receipt
of the notice described in subclause
(I) and before the assets are first
invested to make such election, and
``(III) the notice explains how
contributions made under the
arrangement will be invested in the
absence of any investment election by
the employee.''.
(2) Preemption of conflicting state regulation.--Section
514 of such Act (29 U.S.C. 1144) is amended by adding at the
end the following new subsection:
``(e) Automatic Contribution Arrangements.--
``(1) In general.--Notwithstanding any other provision of
this section, any law of a State which would directly or
indirectly prohibit or restrict the inclusion in any plan of an
automatic contribution arrangement shall be superseded. The
Secretary may prescribe regulations which would establish
minimum standards that such arrangements would be required to
satisfy in order for this subsection to apply.
``(2) Automatic contribution arrangement defined.--For
purposes of this subsection, the term `automatic contribution
arrangement' means an arrangement--
``(A) which meets the requirements of paragraph
(3),
``(B) under which a participant may elect to have
the employer make payments as contributions under the
plan on behalf of the participant, or to the
participant directly in cash,
``(C) under which the participant is treated as
having elected to have the employer make such
contributions in an amount equal to a uniform
percentage of compensation provided under the plan
until the participant specifically elects not to have
such contributions made (or specifically elects to have
such contributions made at a different percentage), and
``(D) under which contributions described in
subparagraph (C) are invested in accordance with
regulations prescribed by the Secretary.
Such regulations shall provide guidance on the appropriateness
of designating default investments that include a mix of asset
classes consistent with long-term capital appreciation.
``(3) Notice requirement.--
``(A) In general.--The administrator of an
individual account plan shall, within a reasonable
period before each plan year, give to each employee to
whom an automatic contribution arrangement applies for
such plan year notice of the employee's rights and
obligations under the arrangement which--
``(i) is sufficiently accurate and
comprehensive to apprise the employee of such
rights and obligations, and
``(ii) is written in a manner calculated to
be understood by the average employee to whom
the arrangement applies.
``(B) Other requirements.--A notice shall not be
treated as meeting the requirements of subparagraph (A)
with respect to an employee unless--
``(i) the notice includes a notice
explaining the employee's right under the
arrangement to elect not to have elective
contributions made on the employee's behalf (or
to elect to have such contributions made at a
different percentage),
``(ii) the employee has a reasonable period
of time after receipt of the notice described
in clause (i) and before the first elective
contribution is made to make such election, and
``(iii) the notice explains how
contributions made under the arrangement will
be invested in the absence of any investment
election by the employee.''.
(g) Corrective Distributions.--
(1) In general.--Section 414 of the Internal Revenue Code
of 1986 (relating to definitions and special rules) is amended
by adding at the end the following new subsection:
``(w) Automatic Contribution Arrangements.--
``(1) In general.--For purposes of this title, the amount
of any corrective distribution from a plan shall be treated as
if such amount had never been held in such plan and shall be
treated as a payment of compensation from the employer
maintaining the plan to the employee receiving such
distribution.
``(2) Corrective distribution.--For purposes of this
subsection, the term `corrective distribution' means a
distribution from an applicable employer plan of all amounts
attributable to an erroneous automatic contribution.
``(3) Erroneous automatic contribution.--For purposes of
this subsection, the term `erroneous automatic contribution'
means an elective contribution made on behalf of an employee
under any applicable employer plan pursuant to a plan provision
treating the employee as having elected to have the employer
make such elective contribution until the employee
affirmatively elects not to have such contribution made or
affirmatively elects to make contributions at a specified
level, if the following requirements are satisfied:
``(A) Within the applicable period, the employee
notifies the plan administrator that the employee
elects to have the elective contribution treated as an
erroneous automatic contribution.
``(B) The sum of the elective contributions that
are treated as erroneous automatic contributions with
respect to an employee does not exceed $500.
``(4) Applicable employer plan.--For purposes of this
subsection, the term `applicable employer plan' has the meaning
given such term by subsection (v)(6)(A).
``(5) Applicable period.--For purposes of this subsection,
the term `applicable period' means, with respect to an
employee, the 3-month period that begins on the first date that
an amount is withheld from compensation payable to the employee
in order to make a plan contribution pursuant to a plan
provision described in paragraph (3).''.
(2) Vesting conforming amendments.--
(A) Internal revenue code of 1986.--
(i) Section 411(a)(3)(G) of such Code is
amended by inserting ``an erroneous automatic
contribution under section 414(w),'' after
``402(g)(2)(A),''.
(ii) The heading of section 411(a)(3)(G) of
such Code is amended by inserting ``or
erroneous automatic contribution'' before the
period.
(iii) Section 401(k)(8)(E) of such Code is
amended by inserting ``an erroneous automatic
contribution under section 414(w),'' after
``402(g)(2)(A),''.
(iv) The heading of section 401(k)(8)(E) of
such Code is amended by inserting ``or
erroneous automatic contribution'' before the
period.
(B) Employee retirement income security act of
1974.--Section 203(a)(3)(F) of the Employee Retirement
Income Security Act of 1974 (29 U.S.C. 1053(a)(3)(F))
is amended by inserting ``an erroneous automatic
contribution under section 414(w) of such Code,'' after
``402(g)(2)(A) of such Code,''.
(h) Effective Date.--
(1) In general.--Except as provided in paragraph (2), the
amendments made by this section shall apply to plan years
beginning after December 31, 2005.
(2) Section 403(b) contracts.--The amendments made by
subsection (e) shall apply to years beginning after December
31, 1998.
(3) Regulations.--Final regulations under section
404(c)(4)(B)(iii) of the Employee Retirement Income Security
Act of 1974 (added by this section) shall be issued no later
than 6 months after the date of enactment of this Act.
<all>
Introduced in Senate
Read twice and referred to the Committee on Finance.
Llama 3.2 · runs locally in your browser
Ask anything about this bill. The AI reads the full text to answer.
Enter to send · Shift+Enter for new line