Pension Protection Act of 2006 (H.R. 4) as Signed by President Bush Aug. 17, 2006--Titles VIII - X

Legislative History

TITLE VIII--PENSION RELATED REVENUE PROVISIONS

Subtitle A--Deduction Limitations

SEC. 801. INCREASE IN DEDUCTION LIMIT FOR SINGLE-EMPLOYER PLANS.

(a) In General- Section 404 of the Internal Revenue Code of 1986 (relating to deduction for contributions of an employer to an employees' trust or annuity plan and compensation under a deferred payment plan) is amended--

(1) in subsection (a)(1)(A), by inserting 'in the case of a defined benefit plan other than a multiemployer plan, in an amount determined under subsection (o), and in the case of any other plan’ after 'section 501(a),’, and

(2) by inserting at the end the following new subsection:

'(o) Deduction Limit for Single-Employer Plans- For purposes of subsection (a)(1)(A)--

'(1) IN GENERAL- In the case of a defined benefit plan to which subsection (a)(1)(A) applies (other than a multiemployer plan), the amount determined under this subsection for any taxable year shall be equal to the greater of--

'(A) the sum of the amounts determined under paragraph (2) with respect to each plan year ending with or within the taxable year, or

'(B) the sum of the minimum required contributions under section 430 for such plan years.

'(2) DETERMINATION OF AMOUNT-

'(A) IN GENERAL- The amount determined under this paragraph for any plan year shall be equal to the excess (if any) of--

'(i) the sum of--

'(I) the funding target for the plan year,

'(II) the target normal cost for the plan year, and

'(III) the cushion amount for the plan year, over

'(ii) the value (determined under section 430(g)(2)) of the assets of the plan which are held by the plan as of the valuation date for the plan year.

'(B) SPECIAL RULE FOR CERTAIN EMPLOYERS- If section 430(i) does not apply to a plan for a plan year, the amount determined under subparagraph (A)(i) for the plan year shall in no event be less than the sum of--

'(i) the funding target for the plan year (determined as if section 430(i) applied to the plan), plus

'(ii) the target normal cost for the plan year (as so determined).

'(3) CUSHION AMOUNT- For purposes of paragraph (2)(A)(i)(III)--

'(A) IN GENERAL- The cushion amount for any plan year is the sum of--

'(i) 50 percent of the funding target for the plan year, and

'(ii) the amount by which the funding target for the plan year would increase if the plan were to take into account--

'(I) increases in compensation which are expected to occur in succeeding plan years, or

'(II) if the plan does not base benefits for service to date on compensation, increases in benefits which are expected to occur in succeeding plan years (determined on the basis of the average annual increase in benefits over the 6 immediately preceding plan years).

'(B) LIMITATIONS-

'(i) IN GENERAL- In making the computation under subparagraph (A)(ii), the plan's actuary shall assume that the limitations under subsection (l) and section 415(b) shall apply.

'(ii) EXPECTED INCREASES- In the case of a plan year during which a plan is covered under section 4021 of the Employee Retirement Income Security Act of 1974, the plan's actuary may, notwithstanding subsection (l), take into account increases in the limitations which are expected to occur in succeeding plan years.

'(4) SPECIAL RULES FOR PLANS WITH 100 OR FEWER PARTICIPANTS-

'(A) IN GENERAL- For purposes of determining the amount under paragraph (3) for any plan year, in the case of a plan which has 100 or fewer participants for the plan year, the liability of the plan attributable to benefit increases for highly compensated employees (as defined in section 414(q)) resulting from a plan amendment which is made or becomes effective, whichever is later, within the last 2 years shall not be taken into account in determining the target liability.

'(B) RULE FOR DETERMINING NUMBER OF PARTICIPANTS- For purposes of determining the number of plan participants, all defined benefit plans maintained by the same employer (or any member of such employer's controlled group (within the meaning of section 412(f)(4))) shall be treated as one plan, but only participants of such member or employer shall be taken into account.

'(5) SPECIAL RULE FOR TERMINATING PLANS- In the case of a plan which, subject to section 4041 of the Employee Retirement Income Security Act of 1974, terminates during the plan year, the amount determined under paragraph (2) shall in no event be less than the amount required to make the plan sufficient for benefit liabilities (within the meaning of section 4041(d) of such Act).

'(6) ACTUARIAL ASSUMPTIONS- Any computation under this subsection for any plan year shall use the same actuarial assumptions which are used for the plan year under section 430.

'(7) DEFINITIONS- Any term used in this subsection which is also used in section 430 shall have the same meaning given such term by section 430.’.

(b) Exception From Limitation on Deduction Where Combination of Defined Contribution and Defined Benefit Plans- Section 404(a)(7)(C) of such Code, as amended by this Act, is amended by adding at the end the following new clause:

'(iv) GUARANTEED PLANS- In applying this paragraph, any single-employer plan covered under section 4021 of the Employee Retirement Income Security Act of 1974 shall not be taken into account.’.

(c) Technical and Conforming Amendments-

(1) The last sentence of section 404(a)(1)(A) of such Code is amended by striking 'section 412’ each place it appears and inserting 'section 431’.

(2) Section 404(a)(1)(B) of such Code is amended--

(A) by striking 'In the case of a plan’ and inserting 'In the case of a multiemployer plan’,

(B) by striking 'section 412(c)(7)’ each place it appears and inserting 'section 431(c)(6)’,

(C) by striking 'section 412(c)(7)(B)’ and inserting 'section 431(c)(6)(A)(ii)’,

(D) by striking 'section 412(c)(7)(A)’ and inserting 'section 431(c)(6)(A)(i)’, and

(E) by striking 'section 412’ and inserting 'section 431’.

(3) Section 404(a)(7) of such Code, as amended by this Act, is amended--

(A) by adding at the end of subparagraph (A) the following new sentence: 'In the case of a defined benefit plan which is a single employer plan, the amount necessary to satisfy the minimum funding standard provided by section 412 shall not be less than the plan's funding shortfall determined under section 430.’, and

(B) by striking subparagraph (D) and inserting:

'(D) INSURANCE CONTRACT PLANS- For purposes of this paragraph, a plan described in section 412(e)(3) shall be treated as a defined benefit plan.’.

(4) Section 404A(g)(3)(A) of such Code is amended by striking 'paragraphs (3) and (7) of section 412(c)’ and inserting 'paragraphs (3) and (6) of section 431(c)’.

(d) Special Rule for 2006 and 2007-

(1) IN GENERAL- Clause (i) of section 404(a)(1)(D) of the Internal Revenue Code of 1986 (relating to special rule in case of certain plans) is amended by striking 'section 412(l)’ and inserting 'section 412(l)(8)(A), except that section 412(l)(8)(A) shall be applied for purposes of this clause by substituting '150 percent (140 percent in the case of a multiemployer plan) of current liability’ for 'the current liability’ in clause (i).’.

(2) CONFORMING AMENDMENT- Section 404(a)(1) of the Internal Revenue Code of 1986 is amended by striking subparagraph (F).

(e) Effective Dates-

(1) IN GENERAL- Except as provided in paragraph (2), the amendments made by this section shall apply to years beginning after December 31, 2007.

(2) SPECIAL RULES- The amendments made by subsection (d) shall apply to years beginning after December 31, 2005.

SEC. 802. DEDUCTION LIMITS FOR MULTIEMPLOYER PLANS.

(a) Increase in Deduction- Section 404(a)(1)(D) of the Internal Revenue Code of 1986, as amended by this Act, is amended to read as follows:

'(D) AMOUNT DETERMINED ON BASIS OF UNFUNDED CURRENT LIABILITY- In the case of a defined benefit plan which is a multiemployer plan, except as provided in regulations, the maximum amount deductible under the limitations of this paragraph shall not be less than the excess (if any) of--

'(i) 140 percent of the current liability of the plan determined under section 431(c)(6)(C), over

'(ii) the value of the plan's assets determined under section 431(c)(2).’.

(b) Effective Date- The amendment made by subsection (a) shall apply to years beginning after December 31, 2007.

SEC. 803. UPDATING DEDUCTION RULES FOR COMBINATION OF PLANS.

(a) In General- Subparagraph (C) of section 404(a)(7) of the Internal Revenue Code of 1986 (relating to limitation on deductions where combination of defined contribution plan and defined benefit plan) is amended by adding after clause (ii) the following new clause:

'(iii) LIMITATION- In the case of employer contributions to 1 or more defined contribution plans, this paragraph shall only apply to the extent that such contributions exceed 6 percent of the compensation otherwise paid or accrued during the taxable year to the beneficiaries under such plans. For purposes of this clause, amounts carried over from preceding taxable years under subparagraph (B) shall be treated as employer contributions to 1 or more defined contributions to the extent attributable to employer contributions to such plans in such preceding taxable years.’.

(b) Exception From Limitation on Deduction Where Combination of Defined Contribution and Defined Benefit Plans- Section 404(a)(7)(C) of such Code, as amended by this Act, is amended by adding at the end the following new clause:

'(v) MULTIEMPLOYER PLANS- In applying this paragraph, any multiemployer plan shall not be taken into account.’.

(c) Conforming Amendment- Subparagraph (A) of section 4972(c)(6) of such Code (relating to nondeductible contributions) is amended to read as follows:

'(A) so much of the contributions to 1 or more defined contribution plans which are not deductible when contributed solely because of section 404(a)(7) as does not exceed the amount of contributions described in section 401(m)(4)(A), or’.

(d) Effective Date- The amendments made by this section shall apply to contributions for taxable years beginning after December 31, 2005.

Subtitle B--Certain Pension Provisions Made Permanent

SEC. 811. PENSIONS AND INDIVIDUAL RETIREMENT ARRANGEMENT PROVISIONS OF ECONOMIC GROWTH AND TAX RELIEF RECONCILIATION ACT OF 2001 MADE PERMANENT.

Title IX of the Economic Growth and Tax Relief Reconciliation Act of 2001 shall not apply to the provisions of, and amendments made by, subtitles A through F of title VI of such Act (relating to pension and individual retirement arrangement provisions).

SEC. 812. SAVER'S CREDIT.

Section 25B of the Internal Revenue Code of 1986 (relating to elective deferrals and IRA contributions by certain individuals) is amended by striking subsection (h).

Subtitle C--Improvements in Portability, Distribution, and Contribution Rules

SEC. 821. CLARIFICATIONS REGARDING PURCHASE OF PERMISSIVE SERVICE CREDIT.

(a) In General- Section 415(n) of the Internal Revenue Code of 1986 (relating to special rules for the purchase of permissive service credit) is amended--

(1) by striking 'an employee’ in paragraph (1) and inserting 'a participant’, and

(2) by adding at the end of paragraph (3)(A) the following new flush sentence:

'Such term may include service credit for periods for which there is no performance of service, and, notwithstanding clause (ii), may include service credited in order to provide an increased benefit for service credit which a participant is receiving under the plan.’.

(b) Special Rules for Trustee-to-Trustee Transfers- Section 415(n)(3) of such Code is amended by adding at the end the following new subparagraph:

'(D) SPECIAL RULES FOR TRUSTEE-TO-TRUSTEE TRANSFERS- In the case of a trustee-to-trustee transfer to which section 403(b)(13)(A) or 457(e)(17)(A) applies (without regard to whether the transfer is made between plans maintained by the same employer)--

'(i) the limitations of subparagraph (B) shall not apply in determining whether the transfer is for the purchase of permissive service credit, and

'(ii) the distribution rules applicable under this title to the defined benefit governmental plan to which any amounts are so transferred shall apply to such amounts and any benefits attributable to such amounts.’.

(c) Nonqualified Service- Section 415(n)(3) of such Code is amended--

(1) by striking 'permissive service credit attributable to nonqualified service’ each place it appears in subparagraph (B) and inserting 'nonqualified service credit’,

(2) by striking so much of subparagraph (C) as precedes clause (i) and inserting:

'(C) NONQUALIFIED SERVICE CREDIT- For purposes of subparagraph (B), the term 'nonqualified service credit’ means permissive service credit other than that allowed with respect to--’, and

(3) by striking 'elementary or secondary education (through grade 12), as determined under State law’ in subparagraph (C)(ii) and inserting 'elementary or secondary education (through grade 12), or a comparable level of education, as determined under the applicable law of the jurisdiction in which the service was performed’.

(d) Effective Dates-

(1) IN GENERAL- The amendments made by subsections (a) and (c) shall take effect as if included in the amendments made by section 1526 of the Taxpayer Relief Act of 1997.

(2) SUBSECTION (b)- The amendments made by subsection (b) shall take effect as if included in the amendments made by section 647 of the Economic Growth and Tax Relief Reconciliation Act of 2001.

SEC. 822. ALLOW ROLLOVER OF AFTER-TAX AMOUNTS IN ANNUITY CONTRACTS.

(a) In General- Subparagraph (A) of section 402(c)(2) (relating to the maximum amount which may be rolled over) is amended--

(1) by striking 'which is part of a plan which is a defined contribution plan and which agrees to separately account’ and inserting 'or to an annuity contract described in section 403(b) and such trust or contract provides for separate accounting’; and

(2) by inserting '(and earnings thereon)’ after 'so transferred’.

(b) Effective Date- The amendment made by subsection (a) shall apply to taxable years beginning after December 31, 2006.

SEC. 823. CLARIFICATION OF MINIMUM DISTRIBUTION RULES FOR GOVERNMENTAL PLANS.

The Secretary of the Treasury shall issue regulations under which a governmental plan (as defined in section 414(d) of the Internal Revenue Code of 1986) shall, for all years to which section 401(a)(9) of such Code applies to such plan, be treated as having complied with such section 401(a)(9) if such plan complies with a reasonable good faith interpretation of such section 401(a)(9).

SEC. 824. ALLOW DIRECT ROLLOVERS FROM RETIREMENT PLANS TO ROTH IRAS.

(a) In General- Subsection (e) of section 408A of the Internal Revenue Code of 1986 (defining qualified rollover contribution) is amended to read as follows:

'(e) Qualified Rollover Contribution- For purposes of this section, the term 'qualified rollover contribution’ means a rollover contribution--

'(1) to a Roth IRA from another such account,

'(2) from an eligible retirement plan, but only if--

'(A) in the case of an individual retirement plan, such rollover contribution meets the requirements of section 408(d)(3), and

'(B) 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.’.

(b) Conforming Amendments-

(1) Section 408A(c)(3)(B) of such Code, as in effect before the Tax Increase Prevention and Reconciliation Act of 2005, is amended--

(A) in the text by striking 'individual retirement plan’ and inserting 'an eligible retirement plan (as defined by section 402(c)(8)(B))’, and

(B) in the heading by striking 'IRA’ the first place it appears and inserting 'ELIGIBLE RETIREMENT PLAN’.

(2) Section 408A(d)(3) of such Code is amended--

(A) in subparagraph (A), by striking 'section 408(d)(3)’ inserting 'sections 402(c), 403(b)(8), 408(d)(3), and 457(e)(16)’,

(B) in subparagraph (B), by striking 'individual retirement plan’ and inserting 'eligible retirement plan (as defined by section 402(c)(8)(B))’,

(C) in subparagraph (D), by inserting 'or 6047’ after '408(i)’,

(D) in subparagraph (D), by striking 'or both’ and inserting 'persons subject to section 6047(d)(1), or all of the foregoing persons’, and

(E) in the heading, by striking 'IRA’ the first place it appears and inserting 'ELIGIBLE RETIREMENT PLAN’.

(c) Effective Date- The amendments made by this section shall apply to distributions after December 31, 2007.

SEC. 825. ELIGIBILITY FOR PARTICIPATION IN RETIREMENT PLANS.

An individual shall not be precluded from participating in an eligible deferred compensation plan by reason of having received a distribution under section 457(e)(9) of the Internal Revenue Code of 1986, as in effect prior to the enactment of the Small Business Job Protection Act of 1996.

SEC. 826. MODIFICATIONS OF RULES GOVERNING HARDSHIPS AND UNFORSEEN FINANCIAL EMERGENCIES.

Within 180 days after the date of the enactment of this Act, the Secretary of the Treasury shall modify the rules for determining whether a participant has had a hardship for purposes of section 401(k)(2)(B)(i)(IV) of the Internal Revenue Code of 1986 to provide that if an event (including the occurrence of a medical expense) would constitute a hardship under the plan if it occurred with respect to the participant's spouse or dependent (as defined in section 152 of such Code), such event shall, to the extent permitted under a plan, constitute a hardship if it occurs with respect to a person who is a beneficiary under the plan with respect to the participant. The Secretary of the Treasury shall issue similar rules for purposes of determining whether a participant has had--

(1) a hardship for purposes of section 403(b)(11)(B) of such Code; or

(2) an unforeseen financial emergency for purposes of sections 409A(a)(2)(A)(vi), 409A(a)(2)(B)(ii), and 457(d)(1)(A)(iii) of such Code.

SEC. 827. PENALTY-FREE WITHDRAWALS FROM RETIREMENT PLANS FOR INDIVIDUALS CALLED TO ACTIVE DUTY FOR AT LEAST 179 DAYS.

(a) In General- Paragraph (2) of section 72(t) of the Internal Revenue Code of 1986 (relating to 10-percent additional tax on early distributions from qualified retirement plans) is amended by adding at the end the following new subparagraph:

'(G) DISTRIBUTIONS FROM RETIREMENT PLANS TO INDIVIDUALS CALLED TO ACTIVE DUTY-

'(i) IN GENERAL- Any qualified reservist distribution.

'(ii) AMOUNT DISTRIBUTED MAY BE REPAID- Any individual who receives a qualified reservist distribution may, at any time during the 2-year period beginning on the day after the end of the active duty period, make one or more contributions to an individual retirement plan of such individual in an aggregate amount not to exceed the amount of such distribution. The dollar limitations otherwise applicable to contributions to individual retirement plans shall not apply to any contribution made pursuant to the preceding sentence. No deduction shall be allowed for any contribution pursuant to this clause.

'(iii) QUALIFIED RESERVIST DISTRIBUTION- For purposes of this subparagraph, the term 'qualified reservist distribution’ means any distribution to an individual if--

'(I) such distribution is from an individual retirement plan, or from amounts attributable to employer contributions made pursuant to elective deferrals described in subparagraph (A) or (C) of section 402(g)(3) or section 501(c)(18)(D)(iii),

'(II) such individual was (by reason of being a member of a reserve component (as defined in section 101 of title 37, United States Code)) ordered or called to active duty for a period in excess of 179 days or for an indefinite period, and

'(III) such distribution is made during the period beginning on the date of such order or call and ending at the close of the active duty period.

'(iv) APPLICATION OF SUBPARAGRAPH- This subparagraph applies to individuals ordered or called to active duty after September 11, 2001, and before December 31, 2007. In no event shall the 2-year period referred to in clause (ii) end before the date which is 2 years after the date of the enactment of this subparagraph.’.

(b) Conforming Amendments-

(1) Section 401(k)(2)(B)(i) of such Code is amended by striking 'or’ at the end of subclause (III), by striking 'and’ at the end of subclause (IV) and inserting 'or’, and by inserting after subclause (IV) the following new subclause:

'(V) in the case of a qualified reservist distribution (as defined in section 72(t)(2)(G)(iii)), the date on which a period referred to in subclause (III) of such section begins, and’.

(2) Section 403(b)(7)(A)(ii) of such Code is amended by inserting '(unless such amount is a distribution to which section 72(t)(2)(G) applies)’ after 'distributee’.

(3) Section 403(b)(11) of such Code is amended by striking 'or’ at the end of subparagraph (A), by striking the period at the end of subparagraph (B) and inserting ', or’, and by inserting after subparagraph (B) the following new subparagraph:

'(C) for distributions to which section 72(t)(2)(G) applies.’.

(c) Effective Date; Waiver of Limitations-

(1) EFFECTIVE DATE- The amendment made by this section shall apply to distributions after September 11, 2001.

(2) WAIVER OF LIMITATIONS- If refund or credit of any overpayment of tax resulting from the amendments made by this section is prevented at any time before the close of the 1-year period beginning on the date of the enactment of this Act by the operation of any law or rule of law (including res judicata), such refund or credit may nevertheless be made or allowed if claim therefor is filed before the close of such period.

SEC. 828. WAIVER OF 10 PERCENT EARLY WITHDRAWAL PENALTY TAX ON CERTAIN DISTRIBUTIONS OF PENSION PLANS FOR PUBLIC SAFETY EMPLOYEES.

(a) In General- Section 72(t) of the Internal Revenue Code of 1986 (relating to subsection not to apply to certain distributions) is amended by adding at the end the following new paragraph:

'(10) DISTRIBUTIONS TO QUALIFIED PUBLIC SAFETY EMPLOYEES IN GOVERNMENTAL PLANS-

'(A) IN GENERAL- In the case of a distribution to a qualified public safety employee from a governmental plan (within the meaning of section 414(d)) which is a defined benefit plan, paragraph (2)(A)(v) shall be applied by substituting 'age 50’ for 'age 55’.

'(B) QUALIFIED PUBLIC SAFETY EMPLOYEE- For purposes of this paragraph, the term 'qualified public safety employee’ means any employee of a State or political subdivision of a State who provides police protection, firefighting services, or emergency medical services for any area within the jurisdiction of such State or political subdivision.’.

(b) Effective Date- The amendment made by this section shall apply to distributions after the date of the enactment of this Act.

SEC. 829. ALLOW ROLLOVERS BY NONSPOUSE BENEFICIARIES OF CERTAIN RETIREMENT PLAN DISTRIBUTIONS.

(a) In General-

(1) QUALIFIED PLANS- Section 402(c) of the Internal Revenue Code of 1986 (relating to rollovers from exempt trusts) is amended by adding at the end the following new paragraph:

'(11) DISTRIBUTIONS TO INHERITED INDIVIDUAL RETIREMENT PLAN OF NONSPOUSE BENEFICIARY-

'(A) IN GENERAL- If, with respect to any portion of a distribution from an eligible retirement plan of a deceased employee, a direct trustee-to-trustee transfer is made to an individual retirement plan described in clause (i) or (ii) of paragraph (8)(B) established for the purposes of receiving the distribution on behalf of an individual who is a designated beneficiary (as defined by section 401(a)(9)(E)) of the employee and who is not the surviving spouse of the employee--

'(i) the transfer shall be treated as an eligible rollover distribution for purposes of this subsection,

'(ii) the individual retirement plan shall be treated as an inherited individual retirement account or individual retirement annuity (within the meaning of section 408(d)(3)(C)) for purposes of this title, and

'(iii) section 401(a)(9)(B) (other than clause (iv) thereof) shall apply to such plan.

'(B) CERTAIN TRUSTS TREATED AS BENEFICIARIES- For purposes of this paragraph, to the extent provided in rules prescribed by the Secretary, a trust maintained for the benefit of one or more designated beneficiaries shall be treated in the same manner as a trust designated beneficiary.’.

(2) SECTION 403(a) PLANS- Subparagraph (B) of section 403(a)(4) of such Code (relating to rollover amounts) is amended by inserting 'and (11)’ after '(7)’.

(3) SECTION 403(b) PLANS- Subparagraph (B) of section 403(b)(8) of such Code (relating to rollover amounts) is amended by striking 'and (9)’ and inserting ', (9), and (11)’.

(4) SECTION 457 PLANS- Subparagraph (B) of section 457(e)(16) of such Code (relating to rollover amounts) is amended by striking 'and (9)’ and inserting ', (9), and (11)’.

(b) Effective Date- The amendments made by this sectio n shall apply to distributions after December 31, 2006.

SEC. 830. DIRECT PAYMENT OF TAX REFUNDS TO INDIVIDUAL RETIREMENT PLANS.

(a) In General- The Secretary of the Treasury (or the Secretary's delegate) shall make available a form (or modify existing forms) for use by individuals to direct that a portion of any refund of overpayment of tax imposed by chapter 1 of the Internal Revenue Code of 1986 be paid directly to an individual retirement plan (as defined in section 7701(a)(37) of such Code) of such individual.

(b) Effective Date- The form required by subsection (a) shall be made available for taxable years beginning after December 31, 2006.

SEC. 831. ALLOWANCE OF ADDITIONAL IRA PAYMENTS IN CERTAIN BANKRUPTCY CASES.

(a) Allowance of Contributions- Section 219(b)(5) of the Internal Revenue Code of 1986 (relating to deductible amount) is amended by redesignating subparagraph (C) as subparagraph (D) and by inserting after subparagraph (B) the following new subparagraph:

'(C) CATCHUP CONTRIBUTIONS FOR CERTAIN INDIVIDUALS-

'(i) IN GENERAL- In the case of an applicable individual who elects to make a qualified retirement contribution in addition to the deductible amount determined under subparagraph (A)--

'(I) the deductible amount for any taxable year shall be increased by an amount equal to 3 times the applicable amount determined under subparagraph (B) for such taxable year, and

'(II) subparagraph (B) shall not apply.

'(ii) APPLICABLE INDIVIDUAL- For purposes of this subparagraph, the term 'applicable individual’ means, with respect to any taxable year, any individual who was a qualified participant in a qualified cash or deferred arrangement (as defined in section 401(k)) of an employer described in clause (iii) under which the employer matched at least 50 percent of the employee's contributions to such arrangement with stock of such employer.

'(iii) EMPLOYER DESCRIBED- An employer is described in this clause if, in any taxable year preceding the taxable year described in clause (ii)--

'(I) such employer (or any controlling corporation of such employer) was a debtor in a case under title 11 of the United States Code, or similar Federal or State law, and

'(II) such employer (or any other person) was subject to an indictment or conviction resulting from business transactions related to such case.

'(iv) QUALIFIED PARTICIPANT- For purposes of clause (ii), the term 'qualified participant’ means any applicable individual who was a participant in the cash or deferred arrangement described in such clause on the date that is 6 months before the filing of the case described in clause (iii).

'(v) TERMINATION- This subparagraph shall not apply to taxable years beginning after December 31, 2009.’.

(b) Effective Date- The amendments made by this section shall apply to taxable years beginning after December 31, 2006.

SEC. 832. DETERMINATION OF AVERAGE COMPENSATION FOR SECTION 415 LIMITS.

(a) In General- Section 415(b)(3) of the Internal Revenue Code of 1986 is amended by striking 'both was an active participant in the plan and’.

(b) Effective Date- The amendment made by this section shall apply to years beginning after December 31, 2005.

SEC. 833. INFLATION INDEXING OF GROSS INCOME LIMITATIONS ON CERTAIN RETIREMENT SAVINGS INCENTIVES.

(a) Saver's Credit- Subsection (b) of section 25B of the Internal Revenue Code of 1986 is amended to read as follows:

'(b) Applicable Percentage- For purposes of this section--

'(1) JOINT RETURNS- In the case of a joint return, the applicable percentage is--

'(A) if the adjusted gross income of the taxpayer is not over $30,000, 50 percent,

'(B) if the adjusted gross income of the taxpayer is over $30,000 but not over $32,500, 20 percent,

'(C) if the adjusted gross income of the taxpayer is over $32,500 but not over $50,000, 10 percent, and

'(D) if the adjusted gross income of the taxpayer is over $50,000, zero percent.

'(2) OTHER RETURNS- In the case of--

'(A) a head of household, the applicable percentage shall be determined under paragraph (1) except that such paragraph shall be applied by substituting for each dollar amount therein (as adjusted under paragraph (3)) a dollar amount equal to 75 percent of such dollar amount, and

'(B) any taxpayer not described in paragraph (1) or subparagraph (A), the applicable percentage shall be determined under paragraph (1) except that such paragraph shall be applied by substituting for each dollar amount therein (as adjusted under paragraph (3)) a dollar amount equal to 50 percent of such dollar amount.

'(3) INFLATION ADJUSTMENT- In the case of any taxable year beginning in a calendar year after 2006, each of the dollar amounts in paragraph (1) shall be increased by an amount equal to--

'(A) such dollar amount, multiplied by

'(B) 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) Deduction of Retirement Contributions for Active Participants- Section 219(g) of such Code is amended by adding at the end the following new paragraph:

'(8) INFLATION ADJUSTMENT- In the case of any taxable year beginning in a calendar year after 2006, the dollar amount in the last row of the table contained in paragraph (3)(B)(i), the dollar amount in the last row of the table contained in paragraph (3)(B)(ii), and the dollar amount contained in paragraph (7)(A), shall each be increased by an amount equal to--

'(A) such dollar amount, multiplied by

'(B) 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 $1,000.’.

(c) Contribution Limitation for Roth IRAs- Section 408A(c)(3) of such Code is amended by adding at the end the following new subparagraph:

'(C) INFLATION ADJUSTMENT- In the case of any taxable year beginning in a calendar year after 2006, the dollar amounts in subclauses (I) and (II) of subparagraph (C)(ii) shall each 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 $1,000.’.

(d) Effective Date- The amendments made by this section shall apply to taxable years beginning after 2006.

Subtitle D--Health and Medical Benefits

SEC. 841. USE OF EXCESS PENSION ASSETS FOR FUTURE RETIREE HEALTH BENEFITS AND COLLECTIVELY BARGAINED RETIREE HEALTH BENEFITS.

(a) In General- Section 420 of the Internal Revenue Code of 1986 (relating to transfers of excess pension assets to retiree health accounts) is amended by adding at the end the following new subsection:

'(f) Qualified Transfers To Cover Future Retiree Health Costs and Collectively Bargained Retiree Health Benefits-

'(1) IN GENERAL- An employer maintaining a defined benefit plan (other than a multiemployer plan) may, in lieu of a qualified transfer, elect for any taxable year to have the plan make--

'(A) a qualified future transfer, or

'(B) a collectively bargained transfer.

Except as provided in this subsection, a qualified future transfer and a collectively bargained transfer shall be treated for purposes of this title and the Employee Retirement Income Security Act of 1974 as if it were a qualified transfer.

'(2) QUALIFIED FUTURE AND COLLECTIVELY BARGAINED TRANSFERS- For purposes of this subsection--

'(A) IN GENERAL- The terms 'qualified future transfer’ and 'collectively bargained transfer’ mean a transfer which meets all of the requirements for a qualified transfer, except that--

'(i) the determination of excess pension assets shall be made under subparagraph (B),

'(ii) the limitation on the amount transferred shall be determined under subparagraph (C),

'(iii) the minimum cost requirements of subsection (c)(3) shall be modified as provided under subparagraph (D), and

'(iv) in the case of a collectively bargained transfer, the requirements of subparagraph (E) shall be met with respect to the transfer.

'(B) EXCESS PENSION ASSETS-

'(i) IN GENERAL- In determining excess pension assets for purposes of this subsection, subsection (e)(2) shall be applied by substituting '120 percent’ for '125 percent’.

'(ii) REQUIREMENT TO MAINTAIN FUNDED STATUS- If, as of any valuation date of any plan year in the transfer period, the amount determined under subsection (e)(2)(B) (after application of clause (i)) exceeds the amount determined under subsection (e)(2)(A), either--

'(I) the employer maintaining the plan shall make contributions to the plan in an amount not less than the amount required to reduce such excess to zero as of such date, or

'(II) there is transferred from the health benefits account to the plan an amount not less than the amount required to reduce such excess to zero as of such date.

'(C) LIMITATION ON AMOUNT TRANSFERRED- Notwithstanding subsection (b)(3), the amount of the excess pension assets which may be transferred--

'(i) in the case of a qualified future transfer shall be equal to the sum of--

'(I) if the transfer period includes the taxable year of the transfer, the amount determined under subsection (b)(3) for such taxable year, plus

'(II) in the case of all other taxable years in the transfer period, the sum of the qualified current retiree health liabilities which the plan reasonably estimates, in accordance with guidance issued by the Secretary, will be incurred for each of such years, and

'(ii) in the case of a collectively bargained transfer, shall not exceed the amount which is reasonably estimated, in accordance with the provisions of the collective bargaining agreement and generally accepted accounting principles, to be the amount the employer maintaining the plan will pay (whether directly or through reimbursement) out of such account during the collectively bargained cost maintenance period for collectively bargained retiree health liabilities.

'(D) MINIMUM COST REQUIREMENTS-

'(i) IN GENERAL- The requirements of subsection (c)(3) shall be treated as met if--

'(I) in the case of a qualified future transfer, each group health plan or arrangement under which applicable health benefits are provided provides applicable health benefits during the period beginning with the first year of the transfer period and ending with the last day of the 4th year following the transfer period such that the annual average amount of such the applicable employer cost during such period is not less than the applicable employer cost determined under subsection (c)(3)(A) with respect to the transfer, and

'(II) in the case of a collectively bargained transfer, each collectively bargained group health plan under which collectively bargained health benefits are provided provides that the collectively bargained employer cost for each taxable year during the collectively bargained cost maintenance period shall not be less than the amount specified by the collective bargaining agreement.

'(ii) ELECTION TO MAINTAIN BENEFITS FOR FUTURE TRANSFERS- An employer may elect, in lieu of the requirements of clause (i)(I), to meet the requirements of subsection (c)(3) by meeting the requirements of such subsection (as in effect before the amendments made by section 535 of the Tax Relief Extension Act of 1999) for each of the years described in the period under clause (i)(I).

'(iii) COLLECTIVELY BARGAINED EMPLOYER COST- For purposes of this subparagraph, the term 'collectively bargained employer cost’ means the average cost per covered individual of providing collectively bargained retiree health benefits as determined in accordance with the applicable collective bargaining agreement. Such agreement may provide for an appropriate reduction in the collectively bargained employer cost to take into account any portion of the collectively bargained retiree health benefits that is provided or financed by a government program or other source.

'(E) SPECIAL RULES FOR COLLECTIVELY BARGAINED TRANSFERS-

'(i) IN GENERAL- A collectively bargained transfer shall only include a transfer which--

'(I) is made in accordance with a collective bargaining agreement,

'(II) before the transfer, the employer designates, in a written notice delivered to each employee organization that is a party to the collective bargaining agreement, as a collectively bargained transfer in accordance with this section, and

'(III) involves a plan maintained by an employer which, in its taxable year ending in 2005, provided health benefits or coverage to retirees and their spouses and dependents under all of the benefit plans maintained by the employer, but only if the aggregate cost (including administrative expenses) of such benefits or coverage which would have been allowable as a deduction to the employer (if such benefits or coverage had been provided directly by the employer and the employer used the cash receipts and disbursements method of accounting) is at least 5 percent of the gross receipts of the employer (determined in accordance with the last sentence of subsection (c)(2)(E)(ii)(II)) for such taxable year, or a plan maintained by a successor to such employer.

'(ii) USE OF ASSETS- Any assets transferred to a health benefits account in a collectively bargained transfer (and any income allocable thereto) shall be used only to pay collectively bargained retiree health liabilities (other than liabilities of key employees not taken into account under paragraph (6)(B)(iii)) for the taxable year of the transfer or for any subsequent taxable year during the collectively bargained cost maintenance period (whether directly or through reimbursement).

'(3) COORDINATION WITH OTHER TRANSFERS- In applying subsection (b)(3) to any subsequent transfer during a taxable year in a transfer period or collectively bargained cost maintenance period, qualified current retiree health liabilities shall be reduced by any such liabilities taken into account with respect to the qualified future transfer or collectively bargained transfer to which such period relates.

'(4) SPECIAL DEDUCTION RULES FOR COLLECTIVELY BARGAINED TRANSFERS- In the case of a collectively bargained transfer--

'(A) the limitation under subsection (d)(1)(C) shall not apply, and

'(B) notwithstanding subsection (d)(2), an employer may contribute an amount to a health benefits account or welfare benefit fund (as defined in section 419(e)(1)) with respect to collectively bargained retiree health liabilities for which transferred assets are required to be used under subsection (c)(1)(B), and the deductibility of any such contribution shall be governed by the limits applicable to the deductibility of contributions to a welfare benefit fund under a collective bargaining agreement (as determined under section 419A(f)(5)(A)) without regard to whether such contributions are made to a health benefits account or welfare benefit fund and without regard to the provisions of section 404 or the other provisions of this section.

The Secretary shall provide rules to ensure that the application of this paragraph does not result in a deduction being allowed more than once for the same contribution or for 2 or more contributions or expenditures relating to the same collectively bargained retiree health liabilities.

'(5) TRANSFER PERIOD- For purposes of this subsection, the term 'transfer period’ means, with respect to any transfer, a period of consecutive taxable years (not less than 2) specified in the election under paragraph (1) which begins and ends during the 10-taxable-year period beginning with the taxable year of the transfer.

'(6) TERMS RELATING TO COLLECTIVELY BARGAINED TRANSFERS- For purposes of this subsection--

'(A) COLLECTIVELY BARGAINED COST MAINTENANCE PERIOD- The term 'collectively bargained cost maintenance period’ means, with respect to each covered retiree and his covered spouse and dependents, the shorter of--

'(i) the remaining lifetime of such covered retiree and his covered spouse and dependents, or

'(ii) the period of coverage provided by the collectively bargained health plan (determined as of the date of the collectively bargained transfer) with respect to such covered retiree and his covered spouse and dependents.

'(B) COLLECTIVELY BARGAINED RETIREE HEALTH LIABILITIES-

'(i) IN GENERAL- The term 'collectively bargained retiree health liabilities' means the present value, as of the beginning of a taxable year and determined in accordance with the applicable collective bargaining agreement, of all collectively bargained health benefits (including administrative expenses) for such taxable year and all subsequent taxable years during the collectively bargained cost maintenance period.

'(ii) REDUCTION FOR AMOUNTS PREVIOUSLY SET ASIDE- The amount determined under clause (i) shall be reduced by the value (as of the close of the plan year preceding the year of the collectively bargained transfer) of the assets in all health benefits accounts or welfare benefit funds (as defined in section 419(e)(1)) set aside to pay for the collectively bargained retiree health liabilities.

'(iii) KEY EMPLOYEES EXCLUDED- If an employee is a key employee (within the meaning of section 416(I)(1)) with respect to any plan year ending in a taxable year, such employee shall not be taken into account in computing collectively bargained retiree health liabilities for such taxable year or in calculating collectively bargained employer cost under subsection (c)(3)(C).

'(C) COLLECTIVELY BARGAINED HEALTH BENEFITS- The term 'collectively bargained health benefits' means health benefits or coverage which are provided to--

'(i) retired employees who, immediately before the collectively bargained transfer, are entitled to receive such benefits upon retirement and who are entitled to pension benefits under the plan, and their spouses and dependents, and

'(ii) if specified by the provisions of the collective bargaining agreement governing the collectively bargained transfer, active employees who, following their retirement, are entitled to receive such benefits and who are entitled to pension benefits under the plan, and their spouses and dependents.

'(D) COLLECTIVELY BARGAINED HEALTH PLAN- The term 'collectively bargained health plan’ means a group health plan or arrangement for retired employees and their spouses and dependents that is maintained pursuant to 1 or more collective bargaining agreements.’.

(b) Effective Date- The amendments made by this section shall apply to transfers after the date of the enactment of this Act.

SEC. 842. TRANSFER OF EXCESS PENSION ASSETS TO MULTIEMPLOYER HEALTH PLAN.

(a) In General- Section 420 of the Internal Revenue Code of 1986 is amended--

(1) by striking '(other than a multiemployer plan)’ in subsection (a), and

(2) by adding at the end of subsection (e) the following new paragraph:

'(5) APPLICATION TO MULTIEMPLOYER PLANS- In the case of a multiemployer plan, this section shall be applied to any such plan--

'(A) by treating any reference in this section to an employer as a reference to all employers maintaining the plan (or, if appropriate, the plan sponsor), and

'(B) in accordance with such modifications of this section (and the provisions of this title relating to this section) as the Secretary determines appropriate to reflect the fact the plan is not maintained by a single employer.’.

(b) Effective Date- The amendment made by this section shall apply to transfers made in taxable years beginning after December 31, 2006.

SEC. 843. ALLOWANCE OF RESERVE FOR MEDICAL BENEFITS OF PLANS SPONSORED BY BONA FIDE ASSOCIATIONS.

(a) In General- Section 419A(c) of the Internal Revenue Code of 1986 (relating to account limit) is amended by adding at the end the following new paragraph:

'(6) ADDITIONAL RESERVE FOR MEDICAL BENEFITS OF BONA FIDE ASSOCIATION PLANS-

'(A) IN GENERAL- An applicable account limit for any taxable year may include a reserve in an amount not to exceed 35 percent of the sum of--

'(i) the qualified direct costs, and

'(ii) the change in claims incurred but unpaid,

for such taxable year with respect to medical benefits (other than post-retirement medical benefits).

'(B) APPLICABLE ACCOUNT LIMIT- For purposes of this subsection, the term 'applicable account limit’ means an account limit for a qualified asset account with respect to medical benefits provided through a plan maintained by a bona fide association (as defined in section 2791(d)(3) of the Public Health Service Act (42 U.S.C. 300gg-91(d)(3)).’.

(b) Effective Date- The amendment made by this section shall apply to taxable years beginning after December 31, 2006.

SEC. 844. TREATMENT OF ANNUITY AND LIFE INSURANCE CONTRACTS WITH A LONG-TERM CARE INSURANCE FEATURE.

(a) Exclusion From Gross Income- Subsection (e) of section 72 of the Internal Revenue Code of 1986 (relating to amounts not received as annuities) is amended by redesignating paragraph (11) as paragraph (12) and by inserting after paragraph (10) the following new paragraph:

'(11) SPECIAL RULES FOR CERTAIN COMBINATION CONTRACTS PROVIDING LONG-TERM CARE INSURANCE- Notwithstanding paragraphs (2), (5)(C), and (10), in the case of any charge against the cash value of an annuity contract or the cash surrender value of a life insurance contract made as payment for coverage under a qualified long-term care insurance contract which is part of or a rider on such annuity or life insurance contract--

'(A) the investment in the contract shall be reduced (but not below zero) by such charge, and

'(B) such charge shall not be includible in gross income.’.

(b) Tax-Free Exchanges Among Certain Insurance Policies-

(1) ANNUITY CONTRACTS CAN INCLUDE QUALIFIED LONG-TERM CARE INSURANCE RIDERS- Paragraph (2) of section 1035(b) of such Code is amended by adding at the end the following new sentence: 'For purposes of the preceding sentence, a contract shall not fail to be treated as an annuity contract solely because a qualified long-term care insurance contract is a part of or a rider on such contract.’.

(2) LIFE INSURANCE CONTRACTS CAN INCLUDE QUALIFIED LONG-TERM CARE INSURANCE RIDERS- Paragraph (3) of section 1035(b) of such Code is amended by adding at the end the following new sentence: 'For purposes of the preceding sentence, a contract shall not fail to be treated as a life insurance contract solely because a qualified long-term care insurance contract is a part of or a rider on such contract.’.

(3) EXPANSION OF TAX-FREE EXCHANGES OF LIFE INSURANCE, ENDOWMENT, AND ANNUITY CONTRACTS FOR LONG-TERM CARE CONTRACTS- Subsection (a) of section 1035 of such Code (relating to certain exchanges of insurance policies) is amended--

(A) in paragraph (1) by inserting 'or for a qualified long-term care insurance contract’ before the semicolon at the end,

(B) in paragraph (2) by inserting ', or (C) for a qualified long-term care insurance contract’ before the semicolon at the end, and

(C) in paragraph (3) by inserting 'or for a qualified long-term care insurance contract’ before the period at the end.

(4) TAX-FREE EXCHANGES OF QUALIFIED LONG-TERM CARE INSURANCE CONTRACT- Subsection (a) of section 1035 of such Code (relating to certain exchanges of insurance policies) is amended by striking 'or’ at the end of paragraph (2), by striking the period at the end of paragraph (3) and inserting '; or’, and by inserting after paragraph (3) the following new paragraph:

'(4) a qualified long-term care insurance contract for a qualified long-term care insurance contract.’.

(c) Treatment of Coverage Provided as Part of a Life Insurance or Annuity Contract- Subsection (e) of section 7702B of such Code (relating to treatment of qualified long-term care insurance) is amended to read as follows:

'(e) Treatment of Coverage Provided as Part of a Life Insurance or Annuity Contract- Except as otherwise provided in regulations prescribed by the Secretary, in the case of any long-term care insurance coverage (whether or not qualified) provided by a rider on or as part of a life insurance contract or an annuity contract--

'(1) IN GENERAL- This title shall apply as if the portion of the contract providing such coverage is a separate contract.

'(2) DENIAL OF DEDUCTION UNDER SECTION 213- No deduction shall be allowed under section 213(a) for any payment made for coverage under a qualified long-term care insurance contract if such payment is made as a charge against the cash surrender value of a life insurance contract or the cash value of an annuity contract.

'(3) PORTION DEFINED- For purposes of this subsection, the term 'portion’ means only the terms and benefits under a life insurance contract or annuity contract that are in addition to the terms and benefits under the contract without regard to long-term care insurance coverage.

'(4) ANNUITY CONTRACTS TO WHICH PARAGRAPH (1) DOES NOT APPLY- For purposes of this subsection, none of the following shall be treated as an annuity contract:

'(A) A trust described in section 401(a) which is exempt from tax under section 501(a).

'(B) A contract--

'(i) purchased by a trust described in subparagraph (A),

'(ii) purchased as part of a plan described in section 403(a),

'(iii) described in section 403(b),

'(iv) provided for employees of a life insurance company under a plan described in section 818(a)(3), or

'(v) from an individual retirement account or an individual retirement annuity.

'(C) A contract purchased by an employer for the benefit of the employee (or the employee's spouse).

Any dividend described in section 404(k) which is received by a participant or beneficiary shall, for purposes of this paragraph, be treated as paid under a separate contract to which subparagraph (B)(i) applies.’.

(d) Information Reporting-

(1) Subpart B of part III of subchapter A of chapter 61 of such Code (relating to information concerning transactions with other persons) is amended by adding at the end the following new section:

'SEC. 6050U. CHARGES OR PAYMENTS FOR QUALIFIED LONG-TERM CARE INSURANCE CONTRACTS UNDER COMBINED ARRANGEMENTS.

'(a) Requirement of Reporting- Any person who makes a charge against the cash value of an annuity contract, or the cash surrender value of a life insurance contract, which is excludible from gross income under section 72(e)(11) shall make a return, according to the forms or regulations prescribed by the Secretary, setting forth--

'(1) the amount of the aggregate of such charges against each such contract for the calendar year,

'(2) the amount of the reduction in the investment in each such contract by reason of such charges, and

'(3) the name, address, and TIN of the individual who is the holder of each such contract.

'(b) Statements To Be Furnished to Persons With Respect to Whom Information Is Required- Every person required to make a return under subsection (a) shall furnish to each individual whose name is required to be set forth in such return a written statement showing--

'(1) the name, address, and phone number of the information contact of the person making the payments, and

'(2) the information required to be shown on the return with respect to such individual.

The written statement required under the preceding sentence shall be furnished to the individual on or before January 31 of the year following the calendar year for which the return under subsection (a) was required to be made.’.

(2) PENALTY FOR FAILURE TO FILE-

(A) RETURN- Subparagraph (B) of section 6724(d)(1) of such Code is amended by striking 'or’ at the end of clause (xvii), by striking 'and’ at the end of clause (xviii) and inserting 'or’, and by adding at the end the following new clause:

'(xix) section 6050U (relating to charges or payments for qualified long-term care insurance contracts under combined arrangements), and’.

(B) STATEMENT- Paragraph (2) of section 6724(d) of such Code is amended by striking 'or’ at the end of subparagraph (AA), by striking the period at the end of subparagraph (BB), and by inserting after subparagraph (BB) the following new subparagraph:

'(CC) section 6050U (relating to charges or payments for qualified long-term care insurance contracts under combined arrangements).’.

(3) CLERICAL AMENDMENT- The table of sections for subpart B of part III of subchapter A of such chapter 61 of such Code is amended by adding at the end the following new item:

'Sec. 6050U. Charges or payments for qualified long-term care insurance contracts under combined arrangements.’.

(e) Treatment of Policy Acquisition Expenses- Subsection (e) of section 848 of such Code (relating to classification of contracts) is amended by adding at the end the following new paragraph:

'(6) TREATMENT OF CERTAIN QUALIFIED LONG-TERM CARE INSURANCE CONTRACT ARRANGEMENTS- An annuity or life insurance contract which includes a qualified long-term care insurance contract as a part of or a rider on such annuity or life insurance contract shall be treated as a specified insurance contract not described in subparagraph (A) or (B) of subsection (c)(1).’.

(f) Technical Amendment- Paragraph (1) of section 7702B(e) of such Code (as in effect before amendment by subsection (c)) is amended by striking 'section’ and inserting 'title’.

(g) Effective Dates-

(1) IN GENERAL- Except as otherwise provided in this subsection, the amendments made by this section shall apply to contracts issued after December 31, 1996, but only with respect to taxable years beginning after December 31, 2009.

(2) TAX-FREE EXCHANGES- The amendments made by subsection (b) shall apply with respect to exchanges occurring after December 31, 2009.

(3) INFORMATION REPORTING- The amendments made by subsection (d) shall apply to charges made after December 31, 2009.

(4) POLICY ACQUISITION EXPENSES- The amendment made by subsection (e) shall apply to specified policy acquisition expenses determined for taxable years beginning after December 31, 2009.

(5) TECHNICAL AMENDMENT- The amendment made by subsection (f) shall take effect as if included in section 321(a) of the Health Insurance Portability and Accountability Act of 1996.

SEC. 845. DISTRIBUTIONS FROM GOVERNMENTAL RETIREMENT PLANS FOR HEALTH AND LONG-TERM CARE INSURANCE FOR PUBLIC SAFETY OFFICERS.

(a) In General- Section 402 of the Internal Revenue Code of 1986 (relating to taxability of beneficiary of employees' trust) is amended by adding at the end the following new subsection:

'(l) Distributions From Governmental Plans for Health and Long-Term Care Insurance-

'(1) IN GENERAL- In the case of an employee who is an eligible retired public safety officer who makes the election described in paragraph (6) with respect to any taxable year of such employee, gross income of such employee for such taxable year does not include any distribution from an eligible retirement plan to the extent that the aggregate amount of such distributions does not exceed the amount paid by such employee for qualified health insurance premiums of the employee, his spouse, or dependents (as defined in section 152) for such taxable year.

'(2) LIMITATION- The amount which may be excluded from gross income for the taxable year by reason of paragraph (1) shall not exceed $3,000.

'(3) DISTRIBUTIONS MUST OTHERWISE BE INCLUDIBLE-

'(A) IN GENERAL- An amount shall be treated as a distribution for purposes of paragraph (1) only to the extent that such amount would be includible in gross income without regard to paragraph (1).

'(B) APPLICATION OF SECTION 72- Notwithstanding section 72, in determining the extent to which an amount is treated as a distribution for purposes of subparagraph (A), the aggregate amounts distributed from an eligible retirement plan in a taxable year (up to the amount excluded under paragraph (1)) shall be treated as includible in gross income (without regard to subparagraph (A)) to the extent that such amount does not exceed the aggregate amount which would have been so includible if all amounts distributed from all eligible retirement plans were treated as 1 contract for purposes of determining the inclusion of such distribution under section 72. Proper adjustments shall be made in applying section 72 to other distributions in such taxable year and subsequent taxable years.

'(4) DEFINITIONS- For purposes of this subsection--

'(A) ELIGIBLE RETIREMENT PLAN- For purposes of paragraph (1), the term 'eligible retirement plan’ means a governmental plan (within the meaning of section 414(d)) which is described in clause (iii), (iv), (v), or (vi) of subsection (c)(8)(B).

'(B) ELIGIBLE RETIRED PUBLIC SAFETY OFFICER- The term 'eligible retired public safety officer’ means an individual who, by reason of disability or attainment of normal retirement age, is separated from service as a public safety officer with the employer who maintains the eligible retirement plan from which distributions subject to paragraph (1) are made.

'(C) PUBLIC SAFETY OFFICER- The term 'public safety officer’ shall have the same meaning given such term by section 1204(9)(A) of the Omnibus Crime Control and Safe Streets Act of 1968 (42 U.S.C. 3796b(9)(A)).

'(D) QUALIFIED HEALTH INSURANCE PREMIUMS- The term 'qualified health insurance premiums' means premiums for coverage for the eligible retired public safety officer, his spouse, and dependents, by an accident or health insurance plan or qualified long-term care insurance contract (as defined in section 7702B(b)).

'(5) SPECIAL RULES- For purposes of this subsection--

'(A) DIRECT PAYMENT TO INSURER REQUIRED- Paragraph (1) shall only apply to a distribution if payment of the premiums is made directly to the provider of the accident or health insurance plan or qualified long-term care insurance contract by deduction from a distribution from the eligible retirement plan.

'(B) RELATED PLANS TREATED AS 1- All eligible retirement plans of an employer shall be treated as a single plan.

'(6) ELECTION DESCRIBED-

'(A) IN GENERAL- For purposes of paragraph (1), an election is described in this paragraph if the election is made by an employee after separation from service with respect to amounts not distributed from an eligible retirement plan to have amounts from such plan distributed in order to pay for qualified health insurance premiums.

'(B) SPECIAL RULE- A plan shall not be treated as violating the requirements of section 401, or as engaging in a prohibited transaction for purposes of section 503(b), merely because it provides for an election with respect to amounts that are otherwise distributable under the plan or merely because of a distribution made pursuant to an election described in subparagraph (A).

'(7) COORDINATION WITH MEDICAL EXPENSE DEDUCTION- The amounts excluded from gross income under paragraph (1) shall not be taken into account under section 213.

'(8) COORDINATION WITH DEDUCTION FOR HEALTH INSURANCE COSTS OF SELF-EMPLOYED INDIVIDUALS- The amounts excluded from gross income under paragraph (1) shall not be taken into account under section 162(l).’.

(b) Conforming Amendments-

(1) Section 403(a) of such Code (relating to taxability of beneficiary under a qualified annuity plan) is amended by inserting after paragraph (1) the following new paragraph:

'(2) SPECIAL RULE FOR HEALTH AND LONG-TERM CARE INSURANCE- To the extent provided in section 402(l), paragraph (1) shall not apply to the amount distributed under the contract which is otherwise includible in gross income under this subsection.’.

(2) Section 403(b) of such Code (relating to taxability of beneficiary under annuity purchased by section 501(c)(3) organization or public school) is amended by inserting after paragraph (1) the following new paragraph:

'(2) SPECIAL RULE FOR HEALTH AND LONG-TERM CARE INSURANCE- To the extent provided in section 402(l), paragraph (1) shall not apply to the amount distributed under the contract which is otherwise includible in gross income under this subsection.’.

(3) Section 457(a) of such Code (relating to year of inclusion in gross income) is amended by adding at the end the following new paragraph:

'(3) SPECIAL RULE FOR HEALTH AND LONG-TERM CARE INSURANCE- In the case of a plan of an eligible employer described in subsection (e)(1)(A), to the extent provided in section 402(l), paragraph (1) shall not apply to amounts otherwise includible in gross income under this subsection.’.

(c) Effective Date- The amendments made by this section shall apply to distributions in taxable years beginning after December 31, 2006.

Subtitle E--United States Tax Court Modernization

SEC. 851. COST-OF-LIVING ADJUSTMENTS FOR TAX COURT JUDICIAL SURVIVOR ANNUITIES.

(a) In General- Subsection (s) of section 7448 of the Internal Revenue Code of 1986 (relating to annuities to surviving spouses and dependent children of judges) is amended to read as follows:

'(s) Increases in Survivor Annuities- Each time that an increase is made under section 8340(b) of title 5, United States Code, in annuities payable under subchapter III of chapter 83 of that title, each annuity payable from the survivors annuity fund under this section shall be increased at the same time by the same percentage by which annuities are increased under such section 8340(b).’.

(b) Effective Date- The amendment made by this section shall apply with respect to increases made under section 8340(b) of title 5, United States Code, in annuities payable under subchapter III of chapter 83 of that title, taking effect after the date of the enactment of this Act.

SEC. 852. COST OF LIFE INSURANCE COVERAGE FOR TAX COURT JUDGES AGE 65 OR OVER.

Section 7472 of the Internal Revenue Code of 1986 (relating to expenditures) is amended by inserting after the first sentence the following new sentence: 'Notwithstanding any other provision of law, the Tax Court is authorized to pay on behalf of its judges, age 65 or over, any increase in the cost of Federal Employees' Group Life Insurance imposed after the date of the enactment of the Pension Protection Act of 2006, including any expenses generated by such payments, as authorized by the chief judge in a manner consistent with such payments authorized by the Judicial Conference of the United States pursuant to section 604(a)(5) of title 28, United States Code.’.

SEC. 853. PARTICIPATION OF TAX COURT JUDGES IN THE THRIFT SAVINGS PLAN.

(a) In General- Section 7447 of the Internal Revenue Code of 1986 (relating to retirement of judges) is amended by adding at the end the following new subsection:

'(j) Thrift Savings Plan-

'(1) ELECTION TO CONTRIBUTE-

'(A) IN GENERAL- A judge of the Tax Court may elect to contribute to the Thrift Savings Fund established by section 8437 of title 5, United States Code.

'(B) PERIOD OF ELECTION- An election may be made under this paragraph only during a period provided under section 8432(b) of title 5, United States Code, for individuals subject to chapter 84 of such title.

'(2) APPLICABILITY OF TITLE 5 PROVISIONS- Except as otherwise provided in this subsection, the provisions of subchapters III and VII of chapter 84 of title 5, United States Code, shall apply with respect to a judge who makes an election under paragraph (1).

'(3) SPECIAL RULES-

'(A) AMOUNT CONTRIBUTED- The amount contributed by a judge to the Thrift Savings Fund in any pay period shall not exceed the maximum percentage of such judge's basic pay for such period as allowable under section 8440f of title 5, United States Code. Basic pay does not include any retired pay paid pursuant to this section.

'(B) CONTRIBUTIONS FOR BENEFIT OF JUDGE- No contributions may be made for the benefit of a judge under section 8432(c) of title 5, United States Code.

'(C) APPLICABILITY OF SECTION 8433(b) OF TITLE 5 WHETHER OR NOT JUDGE RETIRES- Section 8433(b) of title 5, United States Code, applies with respect to a judge who makes an election under paragraph (1) and who either--

'(i) retires under subsection (b), or

'(ii) ceases to serve as a judge of the Tax Court but does not retire under subsection (b).

Retirement under subsection (b) is a separation from service for purposes of subchapters III and VII of chapter 84 of that title.

'(D) APPLICABILITY OF SECTION 8351(b)(5) OF TITLE 5- The provisions of section 8351(b)(5) of title 5, United States Code, shall apply with respect to a judge who makes an election under paragraph (1).

'(E) EXCEPTION- Notwithstanding subparagraph (C), if any judge retires under this section, or resigns without having met the age and service requirements set forth under subsection (b)(2), and such judge's nonforfeitable account balance is less than an amount that the Executive Director of the Federal Retirement Thrift Investment Board prescribes by regulation, the Executive Director shall pay the nonforfeitable account balance to the participant in a single payment.’.

(b) Effective Date- The amendment made by this section shall take effect on the date of the enactment of this Act, except that United States Tax Court judges may only begin to participate in the Thrift Savings Plan at the next open season beginning after such date.

SEC. 854. ANNUITIES TO SURVIVING SPOUSES AND DEPENDENT CHILDREN OF SPECIAL TRIAL JUDGES OF THE TAX COURT.

(a) Definitions- Section 7448(a) of the Internal Revenue Code of 1986 (relating to definitions), as amended by this Act, is amended by redesignating paragraphs (5), (6), (7), and (8) as paragraphs (7), (8), (9), and (10), respectively, and by inserting after paragraph (4) the following new paragraphs:

'(5) The term 'special trial judge’ means a judicial officer appointed pursuant to section 7443A, including any individual receiving an annuity under chapter 83 or 84 of title 5, United States Code, whether or not performing judicial duties under section 7443B.

'(6) The term 'special trial judge's salary’ means the salary of a special trial judge received under section 7443A(d), any amount received as an annuity under chapter 83 or 84 of title 5, United States Code, and compensation received under section 7443B.’.

(b) Election- Subsection (b) of section 7448 of such Code (relating to annuities to surviving spouses and dependent children of judges) is amended--

(1) by striking the subsection heading and inserting the following:

'(b) Election-

'(1) JUDGES- ’,

(2) by moving the text 2 ems to the right, and

(3) by adding at the end the following new paragraph:

'(2) SPECIAL TRIAL JUDGES- Any special trial judge may by written election filed with the chief judge bring himself or herself within the purview of this section. Such election shall be filed not later than the later of 6 months after--

'(A) 6 months after the date of the enactment of this paragraph,

'(B) the date the judge takes office, or

'(C) the date the judge marries.’.

(c) Conforming Amendments-

(1) The heading of section 7448 of such Code is amended by inserting 'and special trial judges' after 'judges’.

(2) The item relating to section 7448 in the table of sections for part I of subchapter C of chapter 76 of such Code is amended by inserting 'and special trial judges' after 'judges’.

(3) Subsections (c)(1), (d), (f), (g), (h), (j), (m), (n), and (u) of section 7448 of such Code, as amended by this Act, are each amended--

(A) by inserting 'or special trial judge’ after 'judge’ each place it appears other than in the phrase 'chief judge’, and

(B) by inserting 'or special trial judge's' after 'judge's' each place it appears.

(4) Section 7448(c) of such Code is amended--

(A) in paragraph (1), by striking 'Tax Court judges' and inserting 'Tax Court judicial officers’, and

(B) in paragraph (2)--

(i) in subparagraph (A), by inserting 'and section 7443A(d)’ after '(a)(4)’, and

(ii) in subparagraph (B), by striking 'subsection (a)(4)’ and inserting 'subsection (a)(4) and (a)(6)’.

(5) Section 7448(j)(1) of such Code is amended--

(A) in subparagraph (A), by striking 'service or retired’ and inserting 'service, retired’, and by inserting ', or receiving any annuity under chapter 83 or 84 of title 5, United States Code,’ after 'section 7447’, and

(B) in the last sentence, by striking 'subsections (a) (6) and (7)’ and inserting 'paragraphs (8) and (9) of subsection (a)’.

(6) Section 7448(m)(1) of such Code, as amended by this Act, is amended by inserting 'or any annuity under chapter 83 or 84 of title 5, United States Code’ after '7447(d)’.

(7) Section 7448(n) of such Code is amended by inserting 'his years of service pursuant to any appointment under section 7443A,’ after 'of the Tax Court,’.

(8) Section 3121(b)(5)(E) of such Code is amended by inserting 'or special trial judge’ before 'of the United States Tax Court’.

(9) Section 210(a)(5)(E) of the Social Security Act is amended by inserting 'or special trial judge’ before 'of the United States Tax Court’.

SEC. 855. JURISDICTION OF TAX COURT OVER COLLECTION DUE PROCESS CASES.

(a) In General- Paragraph (1) of section 6330(d) of the Internal Revenue Code of 1986 (relating to proceeding after hearing) is amended to read as follows:

'(1) JUDICIAL REVIEW OF DETERMINATION- The person may, within 30 days of a determination under this section, appeal such determination to the Tax Court (and the Tax Court shall have jurisdiction with respect to such matter).’.

(b) Effective Date- The amendment made by this section shall apply to determinations made after the date which is 60 days after the date of the enactment of this Act.

SEC. 856. PROVISIONS FOR RECALL.

(a) In General- Part I of subchapter C of chapter 76 of the Internal Revenue Code of 1986 is amended by inserting after section 7443A the following new section:

'SEC. 7443B. RECALL OF SPECIAL TRIAL JUDGES OF THE TAX COURT.

'(a) Recalling of Retired Special Trial Judges- Any individual who has retired pursuant to the applicable provisions of title 5, United States Code, upon reaching the age and service requirements established therein, may at or after retirement be called upon by the chief judge of the Tax Court to perform such judicial duties with the Tax Court as may be requested of such individual for any period or periods specified by the chief judge; except that in the case of any such individual--

'(1) the aggregate of such periods in any 1 calendar year shall not (without such individual's consent) exceed 90 calendar days, and

'(2) such individual shall be relieved of performing such duties during any period in which illness or disability precludes the performance of such duties.

Any act, or failure to act, by an individual performing judicial duties pursuant to this subsection shall have the same force and effect as if it were the act (or failure to act) of a special trial judge of the Tax Court.

'(b) Compensation- For the year in which a period of recall occurs, the special trial judge shall receive, in addition to the annuity provided under the applicable provisions of title 5, United States Code, an amount equal to the difference between that annuity and the current salary of the office to which the special trial judge is recalled.

'(c) Rulemaking Authority- The provisions of this section may be implemented under such rules as may be promulgated by the Tax Court.’.

(b) Conforming Amendment- The table of sections for part I of subchapter C of chapter 76 of such Code is amended by inserting after the item relating to section 7443A the following new item:

'Sec. 7443B. Recall of special trial judges of the Tax Court.’.

SEC. 857. AUTHORITY FOR SPECIAL TRIAL JUDGES TO HEAR AND DECIDE CERTAIN EMPLOYMENT STATUS CASES.

(a) In General- Section 7443A(b) of the Internal Revenue Code of 1986 (relating to proceedings which may be assigned to special trial judges) is amended by striking 'and’ at the end of paragraph (4), by redesignating paragraph (5) as paragraph (6), and by inserting after paragraph (4) the following new paragraph:

'(5) any proceeding under section 7436(c), and’.

(b) Conforming Amendment- Section 7443A(c) of such Code is amended by striking 'or (4)’ and inserting '(4), or (5)’.

(c) Effective Date- The amendments made by this section shall apply to any proceeding under section 7436(c) of the Internal Revenue Code of 1986 with respect to which a decision has not become final (as determined under section 7481 of such Code) before the date of the enactment of this Act.

SEC. 858. CONFIRMATION OF AUTHORITY OF TAX COURT TO APPLY DOCTRINE OF EQUITABLE RECOUPMENT.

(a) Confirmation of Authority of Tax Court To Apply Doctrine of Equitable Recoupment- Section 6214(b) of the Internal Revenue Code of 1986 (relating to jurisdiction over other years and quarters) is amended by adding at the end the following new sentence: 'Notwithstanding the preceding sentence, the Tax Court may apply the doctrine of equitable recoupment to the same extent that it is available in civil tax cases before the district courts of the United States and the United States Court of Federal Claims.’.

(b) Effective Date- The amendment made by this section shall apply to any action or proceeding in the United States Tax Court with respect to which a decision has not become final (as determined under section 7481 of the Internal Revenue Code of 1986) as of the date of the enactment of this Act.

SEC. 859. TAX COURT FILING FEE IN ALL CASES COMMENCED BY FILING PETITION.

(a) In General- Section 7451 of the Internal Revenue Code of 1986 (relating to fee for filing a Tax Court petition) is amended by striking all that follows 'petition’ and inserting a period.

(b) Effective Date- The amendment made by this section shall take effect on the date of the enactment of this Act.

SEC. 860. EXPANDED USE OF TAX COURT PRACTICE FEE FOR PRO SE TAXPAYERS.

(a) In General- Section 7475(b) of the Internal Revenue Code of 1986 (relating to use of fees) is amended by inserting before the period at the end 'and to provide services to pro se taxpayers’.

(b) Effective Date- The amendment made by this section shall take effect on the date of the enactment of this Act.

Subtitle F--Other Provisions

SEC. 861. EXTENSION TO ALL GOVERNMENTAL PLANS OF CURRENT MORATORIUM ON APPLICATION OF CERTAIN NONDISCRIMINATION RULES APPLICABLE TO STATE AND LOCAL PLANS.

(a) In General-

(1) Subparagraph (G) of section 401(a)(5) and subparagraph (G) of section 401(a)(26) of the Internal Revenue Code of 1986 are each amended by striking 'section 414(d))’ and all that follows and inserting 'section 414(d)).’.

(2) Subparagraph (G) of section 401(k)(3) of such Code and paragraph (2) of section 1505(d) of the Taxpayer Relief Act of 1997 (Public Law 105-34; 111 Stat. 1063) are each amended by striking 'maintained by a State or local government or political subdivision thereof (or agency or instrumentality thereof)’.

(b) Conforming Amendments-

(1) The heading of subparagraph (G) of section 401(a)(5) of the Internal Revenue Code of 1986 is amended by striking 'STATE AND LOCAL GOVERNMENTAL’ and inserting 'GOVERNMENTAL’.

(2) The heading of subparagraph (G) of section 401(a)(26) of such Code is amended by striking 'EXCEPTION FOR STATE AND LOCAL’ and inserting 'EXCEPTION FOR’.

(3) Section 401(k)(3)(G) of such Code is amended by inserting 'GOVERNMENTAL PLAN- ’ after '(G)’.

(c) Effective Date- The amendments made by this section shall apply to any year beginning after the date of the enactment of this Act.

SEC. 862. ELIMINATION OF AGGREGATE LIMIT FOR USAGE OF EXCESS FUNDS FROM BLACK LUNG DISABILITY TRUSTS.

(a) In General- So much of section 501(c)(21)(C) of the Internal Revenue Code of 1986 (relating to black lung disability trusts) as precedes the last sentence is amended to read as follows:

'(C) Payments described in subparagraph (A)(i)(IV) may be made from such trust during a taxable year only to the extent that the aggregate amount of such payments during such taxable year does not exceed the excess (if any), as of the close of the preceding taxable year, of--

'(i) the fair market value of the assets of the trust, over

'(ii) 110 percent of the present value of the liability described in subparagraph (A)(i)(I) of such person.’.

(b) Effective Date- The amendments made by this section shall apply to taxable years beginning after December 31, 2006.

SEC. 863. TREATMENT OF DEATH BENEFITS FROM CORPORATE-OWNED LIFE INSURANCE.

(a) In General- Section 101 of the Internal Revenue Code of 1986 (relating to certain death benefits) is amended by adding at the end the following new subsection:

'(j) Treatment of Certain Employer-Owned Life Insurance Contracts-

'(1) GENERAL RULE- In the case of an employer-owned life insurance contract, the amount excluded from gross income of an applicable policyholder by reason of paragraph (1) of subsection (a) shall not exceed an amount equal to the sum of the premiums and other amounts paid by the policyholder for the contract.

'(2) EXCEPTIONS- In the case of an employer-owned life insurance contract with respect to which the notice and consent requirements of paragraph (4) are met, paragraph (1) shall not apply to any of the following:

'(A) EXCEPTIONS BASED ON INSURED'S STATUS- Any amount received by reason of the death of an insured who, with respect to an applicable policyholder--

'(i) was an employee at any time during the 12-month period before the insured's death, or

'(ii) is, at the time the contract is issued--

'(I) a director,

'(II) a highly compensated employee within the meaning of section 414(q) (without regard to paragraph (1)(B)(ii) thereof), or

'(III) a highly compensated individual within the meaning of section 105(h)(5), except that '35 percent’ shall be substituted for '25 percent’ in subparagraph (C) thereof.

'(B) EXCEPTION FOR AMOUNTS PAID TO INSURED'S HEIRS- Any amount received by reason of the death of an insured to the extent--

'(i) the amount is paid to a member of the family (within the meaning of section 267(c)(4)) of the insured, any individual who is the designated beneficiary of the insured under the contract (other than the applicable policyholder), a trust established for the benefit of any such member of the family or designated beneficiary, or the estate of the insured, or

'(ii) the amount is used to purchase an equity (or capital or profits) interest in the applicable policyholder from any person described in clause (i).

'(3) EMPLOYER-OWNED LIFE INSURANCE CONTRACT-

'(A) IN GENERAL- For purposes of this subsection, the term 'employer-owned life insurance contract’ means a life insurance contract which--

'(i) is owned by a person engaged in a trade or business and under which such person (or a related person described in subparagraph (B)(ii)) is directly or indirectly a beneficiary under the contract, and

'(ii) covers the life of an insured who is an employee with respect to the trade or business of the applicable policyholder on the date the contract is issued.

For purposes of the preceding sentence, if coverage for each insured under a master contract is treated as a separate contract for purposes of sections 817(h), 7702, and 7702A, coverage for each such insured shall be treated as a separate contract.

'(B) APPLICABLE POLICYHOLDER- For purposes of this subsection--

'(i) IN GENERAL- The term 'applicable policyholder’ means, with respect to any employer-owned life insurance contract, the person described in subparagraph (A)(i) which owns the contract.

'(ii) RELATED PERSONS- The term 'applicable policyholder’ includes any person which--

'(I) bears a relationship to the person described in clause (i) which is specified in section 267(b) or 707(b)(1), or

'(II) is engaged in trades or businesses with such person which are under common control (within the meaning of subsection (a) or (b) of section 52).

'(4) NOTICE AND CONSENT REQUIREMENTS- The notice and consent requirements of this paragraph are met if, before the issuance of the contract, the employee--

'(A) is notified in writing that the applicable policyholder intends to insure the employee's life and the maximum face amount for which the employee could be insured at the time the contract was issued,

'(B) provides written consent to being insured under the contract and that such coverage may continue after the insured terminates employment, and

'(C) is informed in writing that an applicable policyholder will be a beneficiary of any proceeds payable upon the death of the employee.

'(5) DEFINITIONS- For purposes of this subsection--

'(A) EMPLOYEE- The term 'employee’ includes an officer, director, and highly compensated employee (within the meaning of section 414(q)).

'(B) INSURED- The term 'insured’ means, with respect to an employer-owned life insurance contract, an individual covered by the contract who is a United States citizen or resident. In the case of a contract covering the joint lives of 2 individuals, references to an insured include both of the individuals.’.

(b) Reporting Requirements- Subpart A of part III of subchapter A of chapter 61 of the Internal Revenue Code of 1986 (relating to information concerning persons subject to special provisions) is amended by inserting after section 6039H the following new section:

'SEC. 6039I. RETURNS AND RECORDS WITH RESPECT TO EMPLOYER-OWNED LIFE INSURANCE CONTRACTS.

'(a) In General- Every applicable policyholder owning 1 or more employer-owned life insurance contracts issued after the date of the enactment of this section shall file a return (at such time and in such manner as the Secretary shall by regulations prescribe) showing for each year such contracts are owned--

'(1) the number of employees of the applicable policyholder at the end of the year,

'(2) the number of such employees insured under such contracts at the end of the year,

'(3) the total amount of insurance in force at the end of the year under such contracts,

'(4) the name, address, and taxpayer identification number of the applicable policyholder and the type of business in which the policyholder is engaged, and

'(5) that the applicable policyholder has a valid consent for each insured employee (or, if all such consents are not obtained, the number of insured employees for whom such consent was not obtained).

'(b) Recordkeeping Requirement- Each applicable policyholder owning 1 or more employer-owned life insurance contracts during any year shall keep such records as may be necessary for purposes of determining whether the requirements of this section and section 101(j) are met.

'(c) Definitions- Any term used in this section which is used in section 101(j) shall have the same meaning given such term by section 101(j).’.

(c) Conforming Amendments-

(1) Paragraph (1) of section 101(a) of the Internal Revenue Code of 1986 is amended by striking 'and subsection (f)’ and inserting 'subsection (f), and subsection (j)’.

(2) The table of sections for subpart A of part III of subchapter A of chapter 61 of such Code is amended by inserting after the item relating to section 6039H the following new item:

'Sec. 6039I. Returns and records with respect to employer-owned life insurance contracts.’.

(d) Effective Date- The amendments made by this section shall apply to life insurance contracts issued after the date of the enactment of this Act, except for a contract issued after such date pursuant to an exchange described in section 1035 of the Internal Revenue Code of 1986 for a contract issued on or prior to that date. For purposes of the preceding sentence, any material increase in the death benefit or other material change shall cause the contract to be treated as a new contract except that, in the case of a master contract (within the meaning of section 264(f)(4)(E) of such Code), the addition of covered lives shall be treated as a new contract only with respect to such additional covered lives.

SEC. 864. TREATMENT OF TEST ROOM SUPERVISORS AND PROCTORS WHO ASSIST IN THE ADMINISTRATION OF COLLEGE ENTRANCE AND PLACEMENT EXAMS.

(a) In General- Section 530 of the Revenue Reconciliation Act of 1978 is amended by adding at the end the following new subsection:

'(f) Treatment of Test Room Supervisors and Proctors Who Assist in the Administration of College Entrance and Placement Exams-

'(1) IN GENERAL- In the case of an individual described in paragraph (2) who is providing services as a test proctor or room supervisor by assisting in the administration of college entrance or placement examinations, this section shall be applied to such services performed after December 31, 2006 (and remuneration paid for such services) without regard to subsection (a)(3) thereof.

'(2) APPLICABILITY- An individual is described in this paragraph if the individual--

'(A) is providing the services described in subsection (a) to an organization described in section 501(c), and exempt from tax under section 501(a), of the Internal Revenue Code of 1986, and

'(B) is not otherwise treated as an employee of such organization for purposes of subtitle C of such Code (relating to employment taxes).’.

(b) Effective Date- The amendment made by this section shall apply to remuneration for services performed after December 31, 2006.

SEC. 865. GRANDFATHER RULE FOR CHURCH PLANS WHICH SELF-ANNUITIZE.

(a) In General- In the case of any plan year ending after the date of the enactment of this Act, annuity payments provided with respect to any account maintained for a participant or beneficiary under a qualified church plan shall not fail to satisfy the requirements of section 401(a)(9) of the Internal Revenue Code of 1986 merely because the payments are not made under an annuity contract purchased from an insurance company if such payments would not fail such requirements if provided with respect to a retirement income account described in section 403(b)(9) of such Code.

(b) Qualified Church Plan- For purposes of this section, the term 'qualified church plan’ means any money purchase pension plan described in section 401(a) of such Code which--

(1) is a church plan (as defined in section 414(e) of such Code) with respect to which the election provided by section 410(d) of such Code has not been made, and

(2) was in existence on April 17, 2002.

SEC. 866. EXEMPTION FOR INCOME FROM LEVERAGED REAL ESTATE HELD BY CHURCH PLANS.

(a) In General- Section 514(c)(9)(C) of the Internal Revenue Code of 1986 is amended by striking 'or’ after clause (ii), by striking the period at the end of clause (iii) and inserting '; or’, and by inserting after clause (iii) the following:

'(iv) a retirement income account described in section 403(b)(9).’.

(b) Effective Date- The amendment made by subsection (a) shall apply to taxable years beginning on or after the date of enactment of this Act.

SEC. 867. CHURCH PLAN RULE.

(a) In General- Paragraph (11) of section 415(b) of the Internal Revenue Code of 1986 is amended by adding at the end the following: 'Subparagraph (B) of paragraph (1) shall not apply to a plan maintained by an organization described in section 3121(w)(3)(A) except with respect to highly compensated benefits. For purposes of this paragraph, the term 'highly compensated benefits' means any benefits accrued for an employee in any year on or after the first year in which such employee is a highly compensated employee (as defined in section 414(q)) of the organization described in section 3121(w)(3)(A). For purposes of applying paragraph (1)(B) to highly compensated benefits, all benefits of the employee otherwise taken into account (without regard to this paragraph) shall be taken into account.’.

(b) Effective Date- The amendment made by this section shall apply to years beginning after December 31, 2006.

SEC. 868. GRATUITOUS TRANSFER FOR BENEFITS OF EMPLOYEES.

(a) In General- Subparagraph (E) of section 664(g)(3) of the Internal Revenue Code of 1986 is amended by inserting '(determined on the basis of fair market value of securities when allocated to participants)’ after 'paragraph (7)’.

(b) Effective Date- The amendment made by this section shall take effect on the date of the enactment of this Act.

TITLE IX--INCREASE IN PENSION PLAN DIVERSIFICATION AND PARTICIPATION AND OTHER PENSION PROVISIONS

SEC. 901. DEFINED CONTRIBUTION PLANS REQUIRED TO PROVIDE EMPLOYEES WITH FREEDOM TO INVEST THEIR PLAN ASSETS.

(a) Amendments of Internal Revenue Code-

(1) QUALIFICATION REQUIREMENT- Section 401(a) of the Internal Revenue Code of 1986 (relating to qualified pension, profit-sharing, and stock bonus plans) is amended by inserting after paragraph (34) the following new paragraph:

'(35) DIVERSIFICATION REQUIREMENTS FOR CERTAIN DEFINED CONTRIBUTION PLANS-

'(A) IN GENERAL- A trust which is part of an applicable defined contribution plan shall not be treated as a qualified trust unless the plan meets the diversification requirements of subparagraphs (B), (C), and (D).

'(B) EMPLOYEE CONTRIBUTIONS AND ELECTIVE DEFERRALS INVESTED IN EMPLOYER SECURITIES- In the case of the portion of an applicable individual's account attributable to employee contributions and elective deferrals which is invested in employer securities, a plan meets the requirements of this subparagraph if the applicable individual may elect to direct the plan to divest any such securities and to reinvest an equivalent amount in other investment options meeting the requirements of subparagraph (D).

'(C) EMPLOYER CONTRIBUTIONS INVESTED IN EMPLOYER SECURITIES- In the case of the portion of the account attributable to employer contributions other than elective deferrals which is invested in employer securities, a plan meets the requirements of this subparagraph if each applicable individual who--

'(i) is a participant who has completed at least 3 years of service, or

'(ii) is a beneficiary of a participant described in clause (i) or of a deceased participant,

may elect to direct the plan to divest any such securities and to reinvest an equivalent amount in other investment options meeting the requirements of subparagraph (D).

'(D) INVESTMENT OPTIONS-

'(i) IN GENERAL- The requirements of this subparagraph are met if the plan offers not less than 3 investment options, other than employer securities, to which an applicable individual may direct the proceeds from the divestment of employer securities pursuant to this paragraph, each of which is diversified and has materially different risk and return characteristics.

'(ii) TREATMENT OF CERTAIN RESTRICTIONS AND CONDITIONS-

'(I) TIME FOR MAKING INVESTMENT CHOICES- A plan shall not be treated as failing to meet the requirements of this subparagraph merely because the plan limits the time for divestment and reinvestment to periodic, reasonable opportunities occurring no less frequently than quarterly.

'(II) CERTAIN RESTRICTIONS AND CONDITIONS NOT ALLOWED- Except as provided in regulations, a plan shall not meet the requirements of this subparagraph if the plan imposes restrictions or conditions with respect to the investment of employer securities which are not imposed on the investment of other assets of the plan. This subclause shall not apply to any restrictions or conditions imposed by reason of the application of securities laws.

'(E) APPLICABLE DEFINED CONTRIBUTION PLAN- For purposes of this paragraph--

'(i) IN GENERAL- The term 'applicable defined contribution plan’ means any defined contribution plan which holds any publicly traded employer securities.

'(ii) EXCEPTION FOR CERTAIN ESOPS- Such term does not include an employee stock ownership plan if--

'(I) there are no contributions to such plan (or earnings thereunder) which are held within such plan and are subject to subsection (k) or (m), and

'(II) such plan is a separate plan for purposes of section 414(l) with respect to any other defined benefit plan or defined contribution plan maintained by the same employer or employers.

'(iii) EXCEPTION FOR ONE PARTICIPANT PLANS- Such term does not include a one-participant retirement plan.

'(iv) ONE-PARTICIPANT RETIREMENT PLAN- For purposes of clause (iii), the term 'one-participant retirement plan’ means a retirement plan that--

'(I) on the first day of the plan year covered only one individual (or the individual and the individual's spouse) and the individual owned 100 percent of the plan sponsor (whether or not incorporated), or covered only one or more partners (or partners and their spouses) in the plan sponsor,

'(II) meets the minimum coverage requirements of section 410(b) without being combined with any other plan of the business that covers the employees of the business,

'(III) does not provide benefits to anyone except the individual (and the individual's spouse) or the partners (and their spouses),

'(IV) does not cover a business that is a member of an affiliated service group, a controlled group of corporations, or a group of businesses under common control, and

'(V) does not cover a business that uses the services of leased employees (within the meaning of section 414(n)).

For purposes of this clause, the term 'partner’ includes a 2-percent shareholder (as defined in section 1372(b)) of an S corporation.

'(F) CERTAIN PLANS TREATED AS HOLDING PUBLICLY TRADED EMPLOYER SECURITIES-

'(i) IN GENERAL- Except as provided in regulations or in clause (ii), a plan holding employer securities which are not publicly traded employer securities shall be treated as holding publicly traded employer securities if any employer corporation, or any member of a controlled group of corporations which includes such employer corporation, has issued a class of stock which is a publicly traded employer security.

'(ii) EXCEPTION FOR CERTAIN CONTROLLED GROUPS WITH PUBLICLY TRADED SECURITIES- Clause (i) shall not apply to a plan if--

'(I) no employer corporation, or parent corporation of an employer corporation, has issued any publicly traded employer security, and

'(II) no employer corporation, or parent corporation of an employer corporation, has issued any special class of stock which grants particular rights to, or bears particular risks for, the holder or issuer with respect to any corporation described in clause (i) which has issued any publicly traded employer security.

'(iii) DEFINITIONS- For purposes of this subparagraph, the term--

'(I) 'controlled group of corporations' has the meaning given such term by section 1563(a), except that '50 percent’ shall be substituted for '80 percent’ each place it appears,

'(II) 'employer corporation’ means a corporation which is an employer maintaining the plan, and

'(III) 'parent corporation’ has the meaning given such term by section 424(e).

'(G) OTHER DEFINITIONS- For purposes of this paragraph--

'(i) APPLICABLE INDIVIDUAL- The term 'applicable individual’ means--

'(I) any participant in the plan, and

'(II) any beneficiary who has an account under the plan with respect to which the beneficiary is entitled to exercise the rights of a participant.

'(ii) ELECTIVE DEFERRAL- The term 'elective deferral’ means an employer contribution described in section 402(g)(3)(A).

'(iii) EMPLOYER SECURITY- The term 'employer security’ has the meaning given such term by section 407(d)(1) of the Employee Retirement Income Security Act of 1974.

'(iv) EMPLOYEE STOCK OWNERSHIP PLAN- The term 'employee stock ownership plan’ has the meaning given such term by section 4975(e)(7).

'(v) PUBLICLY TRADED EMPLOYER SECURITIES- The term 'publicly traded employer securities' means employer securities which are readily tradable on an established securities market.

'(vi) YEAR OF SERVICE- The term 'year of service’ has the meaning given such term by section 411(a)(5).

'(H) TRANSITION RULE FOR SECURITIES ATTRIBUTABLE TO EMPLOYER CONTRIBUTIONS-

'(i) RULES PHASED IN OVER 3 YEARS-

'(I) IN GENERAL- In the case of the portion of an account to which subparagraph (C) applies and which consists of employer securities acquired in a plan year beginning before January 1, 2007, subparagraph (C) shall only apply to the applicable percentage of such securities. This subparagraph shall be applied separately with respect to each class of securities.

'(II) EXCEPTION FOR CERTAIN PARTICIPANTS AGED 55 OR OVER- Subclause (I) shall not apply to an applicable individual who is a participant who has attained age 55 and completed at least 3 years of service before the first plan year beginning after December 31, 2005.

'(ii) APPLICABLE PERCENTAGE- For purposes of clause (i), the applicable percentage shall be determined as follows:

'Plan year to which subparagraph (C) applies __, the applicable percentage is:

1st--33

2d--66

3d and following--100.’.

(2) CONFORMING AMENDMENTS-

(A) Section 401(a)(28)(B) of such Code (relating to additional requirements relating to employee stock ownership plans) is amended by adding at the end the following new clause:

'(v) EXCEPTION- This subparagraph shall not apply to an applicable defined contribution plan (as defined in paragraph (35)(E)).’.

(B) Section 409(h)(7) of such Code is amended by inserting 'or subparagraph (B) or (C) of section 401(a)(35)’ bef ore the period at the end.

(C) Section 4980(c)(3)(A) of such Code is amended by striking 'if--’ and all that follows and inserting 'if the requirements of subparagraphs (B), (C), and (D) are met.’.

(b) Amendments of ERISA-

(1) IN GENERAL- Section 204 of the Employee Retirement Income Security Act of 1974 (29 U.S.C. 1054) is amended by redesignating subsec tion (j) as subsection (k) and by inserting after subsection (i) the following new subsection:

'(j) Diversification Requirements for Certain Individual Account Plans-

'(1) IN GENERAL- An applicable individual account plan shall meet the diversification requirements of paragraphs (2), (3), and (4).

'(2) EMPLOYEE CONTRIBUTIONS AND ELECTIVE DEFERRALS INVESTED IN EMPLOYER SECURITIES- In the case of the portion of an applicable individual's account attributable to employee contributions and elective deferrals which is invested in employer securities, a plan meets the requirements of this paragraph if the applicable individual may elect to direct the plan to divest any such securities and to reinvest an equivalent amount in other investment options meeting the requirements of paragraph (4).

'(3) EMPLOYER CONTRIBUTIONS INVESTED IN EMPLOYER SECURITIES- In the case of the portion of the account attributable to employer contributions other than elective deferrals which is invested in employer securities, a plan meets the requirements of this paragraph if each applicable individual who--

'(A) is a participant who has completed at least 3 years of service, or

'(B) is a beneficiary of a participant described in subparagraph (A) or of a deceased participant,

may elect to direct the plan to divest any such securities and to reinvest an equivalent amount in other investment options meeting the requirements of paragraph (4).

'(4) INVESTMENT OPTIONS-

'(A) IN GENERAL- The requirements of this paragraph are met if the plan offers not less than 3 investment options, other than employer securities, to which an applicable individual may direct the proceeds from the divestment of employer securities pursuant to this subsection, each of which is diversified and has materially different risk and return characteristics.

'(B) TREATMENT OF CERTAIN RESTRICTIONS AND CONDITIONS-

'(i) TIME FOR MAKING INVESTMENT CHOICES- A plan shall not be treated as failing to meet the requirements of this paragraph merely because the plan limits the time for divestment and reinvestment to periodic, reasonable opportunities occurring no less frequently than quarterly.

'(ii) CERTAIN RESTRICTIONS AND CONDITIONS NOT ALLOWED- Except as provided in regulations, a plan shall not meet the requirements of this paragraph if the plan imposes restrictions or conditions with respect to the investment of employer securities which are not imposed on the investment of other assets of the plan. This subparagraph shall not apply to any restrictions or conditions imposed by reason of the application of securities laws.

'(5) APPLICABLE INDIVIDUAL ACCOUNT PLAN- For purposes of this subsection--

'(A) IN GENERAL- The term 'applicable individual account plan’ means any individual account plan (as defined in section 3(34)) which holds any publicly traded employer securities.

'(B) EXCEPTION FOR CERTAIN ESOPS- Such term does not include an employee stock ownership plan if--

'(i) there are no contributions to such plan (or earnings thereunder) which are held within such plan and are subject to subsection (k) or (m) of section 401 of the Internal Revenue Code of 1986, and

'(ii) such plan is a separate plan (for purposes of section 414(l) of such Code) with respect to any other defined benefit plan or individual account plan maintained by the same employer or employers.

'(C) EXCEPTION FOR ONE PARTICIPANT PLANS- Such term shall not include a one-participant retirement plan (as defined in section 101(i)(8)(B)).

'(D) CERTAIN PLANS TREATED AS HOLDING PUBLICLY TRADED EMPLOYER SECURITIES-

'(i) IN GENERAL- Except as provided in regulations or in clause (ii), a plan holding employer securities which are not publicly traded employer securities shall be treated as holding publicly traded employer securities if any employer corporation, or any member of a controlled group of corporations which includes such employer corporation, has issued a class of stock which is a publicly traded employer security.

'(ii) EXCEPTION FOR CERTAIN CONTROLLED GROUPS WITH PUBLICLY TRADED SECURITIES- Clause (i) shall not apply to a plan if--

'(I) no employer corporation, or parent corporation of an employer corporation, has issued any publicly traded employer security, and

'(II) no employer corporation, or parent corporation of an employer corporation, has issued any special class of stock which grants particular rights to, or bears particular risks for, the holder or issuer with respect to any corporation described in clause (i) which has issued any publicly traded employer security.

'(iii) DEFINITIONS- For purposes of this subparagraph, the term--

'(I) 'controlled group of corporations' has the meaning given such term by section 1563(a) of the Internal Revenue Code of 1986, except that '50 percent’ shall be substituted for '80 percent’ each place it appears,

'(II) 'employer corporation’ means a corporation which is an employer maintaining the plan, and

'(III) 'parent corporation’ has the meaning given such term by section 424(e) of such Code.

'(6) OTHER DEFINITIONS- For purposes of this paragraph--

'(A) APPLICABLE INDIVIDUAL- The term 'applicable individual’ means--

'(i) any participant in the plan, and

'(ii) any beneficiary who has an account under the plan with respect to which the beneficiary is entitled to exercise the rights of a participant.

'(B) ELECTIVE DEFERRAL- The term 'elective deferral’ means an employer contribution described in section 402(g)(3)(A) of the Internal Revenue Code of 1986.

'(C) EMPLOYER SECURITY- The term 'employer security’ has the meaning given such term by section 407(d)(1).

'(D) EMPLOYEE STOCK OWNERSHIP PLAN- The term 'employee stock ownership plan’ has the meaning given such term by section 4975(e)(7) of such Code.

'(E) PUBLICLY TRADED EMPLOYER SECURITIES- The term 'publicly traded employer securities' means employer securities which are readily tradable on an established securities market.

'(F) YEAR OF SERVICE- The term 'year of service’ has the meaning given such term by section 203(b)(2).

'(7) TRANSITION RULE FOR SECURITIES ATTRIBUTABLE TO EMPLOYER CONTRIBUTIONS-

'(A) RULES PHASED IN OVER 3 YEARS-

'(i) IN GENERAL- In the case of the portion of an account to which paragraph (3) applies and which consists of employer securities acquired in a plan year beginning before January 1, 2007, paragraph (3) shall only apply to the applicable percentage of such securities. This subparagraph shall be applied separately with respect to each class of securities.

'(ii) EXCEPTION FOR CERTAIN PARTICIPANTS AGED 55 OR OVER- Clause (i) shall not apply to an applicable individual who is a participant who has attained age 55 and completed at least 3 years of service before the first plan year beginning after December 31, 2005.

'(B) APPLICABLE PERCENTAGE- For purposes of subparagraph (A), the applicable percentage shall be determined as follows:

'Plan year to which paragraph (3) applies __, the applicable percentage is:

1st--33

2d--66

3d--100.’.

(2) CONFORMING AMENDMENT- Section 407(b)(3) of such Act (29 U.S.C. 1107(b)(3)) is amended by adding at the end the following:

'(D) For diversification requirements for qualifying employer securities held in certain individual account plans, see section 204(j).’.

(c) Effective Dates-

(1) IN GENERAL- Except as provided in paragraphs (2) and (3), the amendments made by this section shall apply to plan years beginning after December 31, 2006.

(2) SPECIAL RULE FOR COLLECTIVELY BARGAINED AGREEMENTS- In the case of a plan maintained pursuant to 1 or more collective bargaining agreements between employee representatives and 1 or more employers ratified on or before the date of the enactment of this Act, paragraph (1) shall be applied to benefits pursuant to, and individuals covered by, any such agreement by substituting for 'December 31, 2006’ the earlier of--

(A) the later of--

(i) December 31, 2007, or

(ii) the date on which the last of such collective bargaining agreements terminates (determined without regard to any extension thereof after such date of enactment), or

(B) December 31, 2008.

(3) SPECIAL RULE FOR CERTAIN EMPLOYER SECURITIES HELD IN AN ESOP-

(A) IN GENERAL- In the case of employer securities to which this paragraph applies, the amendments made by this section shall apply to plan years beginning after the earlier of--

(i) December 31, 2007, or

(ii) the first date on which the fair market value of such securities exceeds the guaranteed minimum value described in subparagraph (B)(ii).

(B) APPLICABLE SECURITIES- This paragraph shall apply to employer securities which are attributable to employer contributions other than elective deferrals, and which, on September 17, 2003--

(i) consist of preferred stock, and

(ii) are within an employee stock ownership plan (as defined in section 4975(e)(7) of the Internal Revenue Code of 1986), the terms of which provide that the value of the securities cannot be less than the guaranteed minimum value specified by the plan on such date.

(C) COORDINATION WITH TRANSITION RULE- In applying section 401(a)(35)(H) of the Internal Revenue Code of 1986 and section 204(j)(7) of the Employee Retirement Income Security Act of 1974 (as added by this section) to employer securities to which this paragraph applies, the applicable percentage shall be determined without regard to this paragraph.

SEC. 902. INCREASING PARTICIPATION 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) ALTERNATIVE METHOD FOR AUTOMATIC CONTRIBUTION ARRANGEMENTS TO MEET NONDISCRIMINATION REQUIREMENTS-

'(A) IN GENERAL- A qualified automatic contribution arrangement shall be treated as meeting the requirements of paragraph (3)(A)(ii).

'(B) QUALIFIED AUTOMATIC CONTRIBUTION ARRANGEMENT- For purposes of this paragraph, the term 'qualified automatic contribution arrangement’ means any cash or deferred arrangement which meets the requirements of subparagraphs (C) through (E).

'(C) AUTOMATIC DEFERRAL-

'(i) IN GENERAL- The requirements of this subparagraph are met if, under the arrangement, 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 a qualified percentage of compensation.

'(ii) ELECTION OUT- The election treated as having been made under clause (i) shall cease to apply with respect to any employee if such employee makes an affirmative election--

'(I) to not have such contributions made, or

'(II) to make elective contributions at a level specified in such affirmative election.

'(iii) QUALIFIED PERCENTAGE- For purposes of this subparagraph, the term 'qualified percentage’ means, with respect to any employee, any percentage determined under the arrangement if such percentage is applied uniformly, does not exceed 10 percent, and is at least--

'(I) 3 percent during the period ending on the last day of the first plan year which begins after the date on which the first elective contribution described in clause (i) is made with respect to such employee,

'(II) 4 percent during the first plan year following the plan year described in subclause (I),

'(III) 5 percent during the second plan year following the plan year described in subclause (I), and

'(IV) 6 percent during any subsequent plan year.

'(iv) AUTOMATIC DEFERRAL FOR CURRENT EMPLOYEES NOT REQUIRED- Clause (i) may be applied without taking into account any employee who--

'(I) was eligible to participate in the arrangement (or a predecessor arrangement) immediately before the date on which such arrangement becomes a qualified automatic contribution arrangement (determined after application of this clause), and

'(II) had an election in effect on such date either to participate in the arrangement or to not participate in the arrangement.

'(D) 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 the sum of 100 percent of the elective contributions of the employee to the extent that such contributions do not exceed 1 percent of compensation plus 50 percent of so much of such compensation as exceeds 1 percent but does 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.

'(ii) APPLICATION OF RULES FOR MATCHING CONTRIBUTIONS- The rules of clauses (ii) and (iii) of paragraph (12)(B) shall apply for purposes of clause (i)(I).

'(iii) WITHDRAWAL AND VESTING RESTRICTIONS- An arrangement shall not be treated as meeting the requirements of clause (i) unless, with respect to employer contributions (including matching contributions) taken into account in determining whether the requirements of clause (i) are met--

'(I) any employee who has completed at least 2 years of service (within the meaning of section 411(a)) has a nonforfeitable right to 100 percent of the employee's accrued benefit derived from such employer contributions, and

'(II) the requirements of subparagraph (B) of paragraph (2) are met with respect to all such employer contributions.

'(iv) APPLICATION OF CERTAIN OTHER RULES- The rules of subparagraphs (E)(ii) and (F) of paragraph (12) shall apply for purposes of subclauses (I) and (II) of clause (i).

'(E) NOTICE REQUIREMENTS-

'(i) IN GENERAL- The requirements of this subparagraph are met if, within a reasonable period before each plan year, each employee eligible to participate in the arrangement for such year receives written 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) TIMING AND CONTENT REQUIREMENTS- A notice shall not be treated as meeting the requirements of clause (i) with respect to an employee unless--

'(I) the notice explains 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) in the case of an arrangement under which the employee may elect among 2 or more investment options, the notice explains how contributions made under the arrangement will be invested in the absence of any investment election by the employee, and

'(III) the employee has a reasonable period of time after receipt of the notice described in subclauses (I) and (II) and before the first elective contribution is made to make either such election.’.

(b) Matching Contributions- Section 401(m) of such Code (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) ALTERNATIVE METHOD FOR AUTOMATIC CONTRIBUTION ARRANGEMENTS- A defined contribution plan shall be treated as meeting the requirements of paragraph (2) with respect to matching contributions if the plan--

'(A) is a qualified automatic contribution arrangement (as defined in subsection (k)(13)), and

'(B) meets the requirements of paragraph (11)(B).’.

(c) Exclusion From Definition of Top-Heavy Plans-

(1) ELECTIVE CONTRIBUTION RULE- Clause (i) of section 416(g)(4)(H) of such Code 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) Treatment of Withdrawals of Contributions During First 90 Days-

(1) IN GENERAL- Section 414 of the Internal Revenue Code of 1986 is amended by adding at the end the following new subsection:

'(w) Special Rules for Certain Withdrawals From Eligible Automatic Contribution Arrangements-

'(1) IN GENERAL- If an eligible automatic contribution arrangement allows an employee to elect to make permissible withdrawals--

'(A) the amount of any such withdrawal shall be includible in the gross income of the employee for the taxable year of the employee in which the distribution is made,

'(B) no tax shall be imposed under section 72(t) with respect to the distribution, and

'(C) the arrangement shall not be treated as violating any restriction on distributions under this title solely by reason of allowing the withdrawal.

In the case of any distribution to an employee by reason of an election under this paragraph, employer matching contributions shall be forfeited or subject to such other treatment as the Secretary may prescribe.

'(2) PERMISSIBLE WITHDRAWAL- For purposes of this subsection--

'(A) IN GENERAL- The term 'permissible withdrawal’ means any withdrawal from an eligible automatic contribution arrangement meeting the requirements of this paragraph which--

'(i) is made pursuant to an election by an employee, and

'(ii) consists of elective contributions described in paragraph (3)(B) (and earnings attributable thereto).

'(B) TIME FOR MAKING ELECTION- Subparagraph (A) shall not apply to an election by an employee unless the election is made no later than the date which is 90 days after the date of the first elective contribution with respect to the employee under the arrangement.

'(C) AMOUNT OF DISTRIBUTION- Subparagraph (A) shall not apply to any election by an employee unless the amount of any distribution by reason of the election is equal to the amount of elective contributions made with respect to the first payroll period to which the eligible automatic contribution arrangement applies to the employee and any succeeding payroll period beginning before the effective date of the election (and earnings attributable thereto).

'(3) ELIGIBLE AUTOMATIC CONTRIBUTION ARRANGEMENT- For purposes of this subsection, the term 'eligible automatic contribution arrangement’ means an arrangement under an applicable employer plan--

'(A) 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,

'(B) 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),

'(C) under which, in the absence of an investment election by the participant, contributions described in subparagraph (B) are invested in accordance with regulations prescribed by the Secretary of Labor under section 404(c)(5) of the Employee Retirement Income Security Act of 1974, and

'(D) which meets the requirements of paragraph (4).

'(4) NOTICE REQUIREMENTS-

'(A) IN GENERAL- The administrator of a plan containing an arrangement described in paragraph (3) shall, within a reasonable period before each plan year, give to each employee to whom an arrangement described in paragraph (3) 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) TIME AND FORM OF NOTICE- A notice shall not be treated as meeting the requirements of subparagraph (A) with respect to an employee unless--

'(i) the notice includes an explanation of 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.

'(5) APPLICABLE EMPLOYER PLAN- For purposes of this subsection, the term 'applicable employer plan’ means--

'(A) an employees' trust described in section 401(a) which is exempt from tax under section 501(a),

'(B) a plan under which amounts are contributed by an individual's employer for an annuity contract described in section 403(b), and

'(C) an eligible deferred compensation plan described in section 457(b) which is maintained by an eligible employer described in section 457(e)(1)(A).

'(6) SPECIAL RULE- A withdrawal described in paragraph (1) (subject to the limitation of paragraph (2)(C)) shall not be taken into account for purposes of section 401(k)(3).’.

(2) VESTING CONFORMING AMENDMENTS-

(A) 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),’.

(B) The heading of section 411(a)(3)(G) of such Code is amended by inserting 'or erroneous automatic contribution’ before the period.

(C) 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),’.

(D) The heading of section 401(k)(8)(E) of such Code is amended by inserting 'or erroneous automatic contribution’ before the period.

(E) 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,’.

(e) Excess Contributions-

(1) EXPANSION OF CORRECTIVE DISTRIBUTION PERIOD FOR AUTOMATIC CONTRIBUTION ARRANGEMENTS- Subsection (f) of section 4979 of the Internal Revenue Code of 1986 is amended--

(A) by inserting '(6 months in the case of an excess contribution or excess aggregate contribution to an eligible automatic contribution arrangement (as defined in section 414(w)(3)))’ after '2 1/2 months' in paragraph (1), and

(B) by striking '2 1/2 Months of’ in the heading and inserting 'Specified Period After’.

(2) YEAR OF INCLUSION- Paragraph (2) of section 4979(f) of such Code is amended to read as follows:

'(2) YEAR OF INCLUSION- Any amount distributed as provided in paragraph (1) shall be treated as earned and received by the recipient in the recipient's taxable year in which such distributions were made.’.

(3) SIMPLIFICATION OF ALLOCABLE EARNINGS-

(A) SECTION 4979- Paragraph (1) of section 4979(f) of such Code is amended by adding 'through the end of the plan year for which the contribution was made’ after 'thereto’.

(B) SECTION 401(k) AND 401(m)-

(i) Clause (i) of section 401(k)(8)(A) of such Code is amended by adding 'through the end of such year’ after 'such contributions’.

(ii) Subparagraph (A) of section 401(m)(6) of such Code is amended by adding 'through the end of such year’ after 'to such contributions’.

(f) Preemption of Conflicting State Regulation-

(1) IN GENERAL- Section 514 of the Employee Retirement Income Security Act of 1974 (29 U.S.C. 1144) is amended by adding at the end the following new subsection:

'(e)(1) Notwithstanding any other provision of this section, this title shall supersede any law of a State which would directly or indirectly prohibit or restrict the inclusion in any plan of an automatic contribution arrangement. The Secretary may prescribe regulations which would establish minimum standards that such an arrangement would be required to satisfy in order for this subsection to apply in the case of such arrangement.

'(2) For purposes of this subsection, the term 'automatic contribution arrangement’ means an arrangement--

'(A) under which a participant may elect to have the plan sponsor make payments as contributions under the plan on behalf of the participant, or to the participant directly in cash,

'(B) under which a participant is treated as having elected to have the plan sponsor 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

'(C) under which such contributions are invested in accordance with regulations prescribed by the Secretary under section 404(c)(5).

'(3)(A) The plan administrator of an automatic contribution arrangement shall, within a reasonable period before such plan year, provide to each participant to whom the arrangement applies for such plan year notice of the participant's rights and obligations under the arrangement which--

'(i) is sufficiently accurate and comprehensive to apprise the participant of such rights and obligations, and

'(ii) is written in a manner calculated to be understood by the average participant to whom the arrangement applies.

'(B) A notice shall not be treated as meeting the requirements of subparagraph (A) with respect to a participant unless--

'(i) the notice includes an explanation of the participant's right under the arrangement not to hav e elective contributions made on the participant's behalf (or to elect to have such contributions made at a different percentage),

'(ii) the participant 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 participant.’.

(2) ENFORCEMENT- Section 502(c)(4) of such Act (29 U.S.C. 1132(c)(4)) is amended by striking 'or section 302(b)(7)(F)(vi)’ inserting ', section 302(b)(7)(F)(vi), or section 514(e)(3)’.

(g) Effective Date- The amendments made by this section shall apply to plan years beginning after December 31, 2007, except that the amendments made by subsection (f) shall take effect on the date of the enactment of this Act.

SEC. 903. TREATMENT OF ELIGIBLE COMBINED DEFINED BENEFIT PLANS AND QUALIFIED CASH OR DEFERRED ARRANGEMENTS.

(a) Amendments of Internal Revenue Code- Section 414 of the Internal Revenue Code of 1986, as amended by this Act, is amended by adding at the end the following new subsection:

'(x) Special Rules for Eligible Combined Defined Benefit Plans and Qualified Cash or Deferred Arrangements-

'(1) GENERAL RULE- Except as provided in this subsection, the requirements of this title shall be applied to any defined benefit plan or applicable defined contribution plan which are part of an eligible combined plan in the same manner as if each such plan were not a part of the eligible combined plan.

'(2) ELIGIBLE COMBINED PLAN- For purposes of this subsection--

'(A) IN GENERAL- The term 'eligible combined plan’ means a plan--

'(i) which is maintained by an employer which, at the time the plan is established, is a small employer,

'(ii) which consists of a defined benefit plan and an applicable defined contribution plan,

'(iii) the assets of which are held in a single trust forming part of the plan and are clearly identified and allocated to the defined benefit plan and the applicable defined contribution plan to the extent necessary for the separate application of this title under paragraph (1), and

'(iv) with respect to which the benefit, contribution, vesting, and nondiscrimination requirements of subparagraphs (B), (C), (D), (E), and (F) are met.

For purposes of this subparagraph, the term 'small employer’ has the meaning given such term by section 4980D(d)(2), except that such section shall be applied by substituting '500’ for '50’ each place it appears.

'(B) BENEFIT REQUIREMENTS-

'(i) IN GENERAL- The benefit requirements of this subparagraph are met with respect to the defined benefit plan forming part of the eligible combined plan if the accrued benefit of each participant derived from employer contributions, when expressed as an annual retirement benefit, is not less than the applicable percentage of the participant's final average pay. For purposes of this clause, final average pay shall be determined using the period of consecutive years (not exceeding 5) during which the participant had the greatest aggregate compensation from the employer.

'(ii) APPLICABLE PERCENTAGE- For purposes of clause (i), the applicable percentage is the lesser of--

'(I) 1 percent multiplied by the number of years of service with the employer, or

'(II) 20 percent.

'(iii) SPECIAL RULE FOR APPLICABLE DEFINED BENEFIT PLANS- If the defined benefit plan under clause (i) is an applicable defined benefit plan as defined in section 411(a)(13)(B) which meets the interest credit requirements of section 411(b)(5)(B)(i), the plan shall be treated as meeting the requirements of clause (i) with respect to any plan year if each participant receives a pay credit for the year which is not less than the percentage of compensation determined in accordance with the following table:

'If the participant's age as of the beginning of the year is__, the percentage is--

30 or less--2

Over 30 but less than 40--4

40 or over but less than 50--6

50 or over--8.

'(iv) YEARS OF SERVICE- For purposes of this subparagraph, years of service shall be determined under the rules of paragraphs (4), (5), and (6) of section 411(a), except that the plan may not disregard any year of service because of a participant making, or failing to make, any elective deferral with respect to the qualified cash or deferred arrangement to which subparagraph (C) applies.

'(C) CONTRIBUTION REQUIREMENTS-

'(i) IN GENERAL- The contribution requirements of this subparagraph with respect to any applicable defined contribution plan forming part of an eligible combined plan are met if--

'(I) the qualified cash or deferred arrangement included in such plan constitutes an automatic contribution arrangement, and

'(II) the employer is required to make matching contributions on behalf of each employee eligible to participate in the arrangement in an amount equal to 50 percent of the elective contributions of the employee to the extent such elective contributions do not exceed 4 percent of compensation.

Rules similar to the rules of clauses (ii) and (iii) of section 401(k)(12)(B) shall apply for purposes of this clause.

'(ii) NONELECTIVE CONTRIBUTIONS- An applicable defined contribution plan shall not be treated as failing to meet the requirements of clause (i) because the employer makes nonelective contributions under the plan but such contributions shall not be taken into account in determining whether the requirements of clause (i)(II) are met.

'(D) VESTING REQUIREMENTS- The vesting requirements of this subparagraph are met if--

'(i) in the case of a defined benefit plan forming part of an eligible combined plan an employee who has completed at least 3 years of service has a nonforfeitable right to 100 percent of the employee's accrued benefit under the plan derived from employer contributions, and

'(ii) in the case of an applicable defined contribution plan forming part of eligible combined plan--

'(I) an employee has a nonforfeitable right to any matching contribution made under the qualified cash or deferred arrangement included in such plan by an employer with respect to any elective contribution, including matching contributions in excess of the contributions required under subparagraph (C)(i)(II), and

'(II) an employee who has completed at least 3 years of service has a nonforfeitable right to 100 percent of the employee's accrued benefit derived under the arrangement from nonelective contributions of the employer.

For purposes of this subparagraph, the rules of section 411 shall apply to the extent not inconsistent with this subparagraph.

'(E) UNIFORM PROVISION OF CONTRIBUTIONS AND BENEFITS- In the case of a defined benefit plan or applicable defined contribution plan forming part of an eligible combined plan, the requirements of this subparagraph are met if all contributions and benefits under each such plan, and all rights and features under each such plan, must be provided uniformly to all participants.

'(F) REQUIREMENTS MUST BE MET WITHOUT TAKING INTO ACCOUNT SOCIAL SECURITY AND SIMILAR CONTRIBUTIONS AND BENEFITS OR OTHER PLANS-

'(i) IN GENERAL- The requirements of this subparagraph are met if the requirements of clauses (ii) and (iii) are met.

'(ii) SOCIAL SECURITY AND SIMILAR CONTRIBUTIONS- The requirements of this clause are met if--

'(I) the requirements of subparagraphs (B) and (C) are met without regard to section 401(l), and

'(II) the requirements of sections 401(a)(4) and 410(b) are met with respect to both the applicable defined contribution plan and defined benefit plan forming part of an eligible combined plan without regard to section 401(l).

'(iii) OTHER PLANS AND ARRANGEMENTS- The requirements of this clause are met if the applicable defined contribution plan and defined benefit plan forming part of an eligible combined plan meet the requirements of sections 401(a)(4) and 410(b) without being combined with any other plan.

'(3) NONDISCRIMINATION REQUIREMENTS FOR QUALIFIED CASH OR DEFERRED ARRANGEMENT-

'(A) IN GENERAL- A qualified cash or deferred arrangement which is included in an applicable defined contribution plan forming part of an eligible combined plan shall be treated as meeting the requirements of section 401(k)(3)(A)(ii) if the requirements of paragraph (2)(C) are met with respect to such arrangement.

'(B) MATCHING CONTRIBUTIONS- In applying section 401(m)(11) to any matching contribution with respect to a contribution to which paragraph (2)(C) applies, the contribution requirement of paragraph (2)(C) and the notice requirements of paragraph (5)(B) shall be substituted for the requirements otherwise applicable under clauses (i) and (ii) of section 401(m)(11)(A).

'(4) SATISFACTION OF TOP-HEAVY RULES- A defined benefit plan and applicable defined contribution plan forming part of an eligible combined plan for any plan year shall be treated as meeting the requirements of section 416 for the plan year.

'(5) AUTOMATIC CONTRIBUTION ARRANGEMENT- For purposes of this subsection--

'(A) IN GENERAL- A qualified cash or deferred arrangement shall be treated as an automatic contribution arrangement if the arrangement--

'(i) provides that 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 4 percent of the employee's compensation unless the employee specifically elects not to have such contributions made or to have such contributions made at a different rate, and

'(ii) meets the notice requirements under subparagraph (B).

'(B) 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 (A)(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 or to have the contributions made at a different rate, 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 section 401(k)(12)(D) shall be met with respect to the notices described in clauses (ii) and (iii) of this subparagraph.

'(6) COORDINATION WITH OTHER REQUIREMENTS-

'(A) TREATMENT OF SEPARATE PLANS- Section 414(k) shall not apply to an eligible combined plan.

'(B) REPORTING- An eligible combined plan shall be treated as a single plan for purposes of sections 6058 and 6059.

'(7) APPLICABLE DEFINED CONTRIBUTION PLAN- For purposes of this subsection--

'(A) IN GENERAL- The term 'applicable defined contribution plan’ means a defined contribution plan which includes a qualified cash or deferred arrangement.

'(B) QUALIFIED CASH OR DEFERRED ARRANGEMENT- The term 'qualified cash or deferred arrangement’ has the meaning given such term by section 401(k)(2).’.

(b) Amendments to the Employee Retirement Income Security Act of 1974-

(1) IN GENERAL- Section 210 of the Employee Retirement Income Security Act of 1974 is amended by adding at the end the following new subsection:

'(e) Special Rules for Eligible Combined Defined Benefit Plans and Qualified Cash or Deferred Arrangements-

'(1) GENERAL RULE- Except as provided in this subsection, this Act shall be applied to any defined benefit plan or applicable individual account plan which are part of an eligible combined plan in the same manner as if each such plan were not a part of the eligible combined plan.

'(2) ELIGIBLE COMBINED PLAN- For purposes of this subsection--

'(A) IN GENERAL- The term 'eligible combined plan’ means a plan--

'(i) which is maintained by an employer which, at the time the plan is established, is a small employer,

'(ii) which consists of a defined benefit plan and an applicable individual account plan each of which qualifies under section 401(a) of the Internal Revenue Code of 1986,

'(iii) the assets of which are held in a single trust forming part of the plan and are clearly identified and allocated to the defined benefit plan and the applicable individual account plan to the extent necessary for the separate application of this Act under paragraph (1), and

'(iv) with respect to which the benefit, contribution, vesting, and nondiscrimination requirements of subparagraphs (B), (C), (D), (E), and (F) are met.

For purposes of this subparagraph, the term 'small employer’ has the meaning given such term by section 4980D(d)(2) of the Internal Revenue Code of 1986, except that such section shall be applied by substituting '500’ for '50’ each place it appears.

'(B) BENEFIT REQUIREMENTS-

'(i) IN GENERAL- The benefit requirements of this subparagraph are met with respect to the defined benefit plan forming part of the eligible combined plan if the accrued benefit of each participant derived from employer contributions, when expressed as an annual retirement benefit, is not less than the applicable percentage of the participant's final average pay. For purposes of this clause, final average pay shall be determined using the period of consecutive years (not exceeding 5) during which the participant had the greatest aggregate compensation from the employer.

'(ii) APPLICABLE PERCENTAGE- For purposes of clause (i), the applicable percentage is the lesser of--

'(I) 1 percent multiplied by the number of years of service with the employer, or

'(II) 20 percent.

'(iii) SPECIAL RULE FOR APPLICABLE DEFINED BENEFIT PLANS- If the defined benefit plan under clause (i) is an applicable defined benefit plan as defined in section 203(f)(3)(B) which meets the interest credit requirements of section 204(b)(5)(B)(i), the plan shall be treated as meeting the requirements of clause (i) with respect to any plan year if each participant receives pay credit for the year which is not less than the percentage of compensation determined in accordance with the following table:

'If the participant's age as of the beginning of the year is__, the percentage is--

30 or less--2

Over 30 but less than 40--4

40 or over but less than 50--6

50 or over--8.

'(iv) YEARS OF SERVICE- For purposes of this subparagraph, years of service shall be determined under the rules of paragraphs (1), (2), and (3) of section 203(b), except that the plan may not disregard any year of service because of a participant making, or failing to make, any elective deferral with respect to the qualified cash or deferred arrangement to which subparagraph (C) applies.

'(C) CONTRIBUTION REQUIREMENTS-

'(i) IN GENERAL- The contribution requirements of this subparagraph with respect to any applicable individual account plan forming part of an eligible combined plan are met if--

'(I) the qualified cash or deferred arrangement included in such plan constitutes an automatic contribution arrangement, and

'(II) the employer is required to make matching contributions on behalf of each employee eligible to participate in the arrangement in an amount equal to 50 percent of the elective contributions of the employee to the extent such elective contributions do not exceed 4 percent of compensation.

Rules similar to the rules of clauses (ii) and (iii) of section 401(k)(12)(B) of the Internal Revenue Code of 1986 shall apply for purposes of this clause.

'(ii) NONELECTIVE CONTRIBUTIONS- An applicable individual account plan shall not be treated as failing to meet the requirements of clause (i) because the employer makes nonelective contributions under the plan but such contributions shall not be taken into account in determining whether the requirements of clause (i)(II) are met.

'(D) VESTING REQUIREMENTS- The vesting requirements of this subparagraph are met if--

'(i) in the case of a defined benefit plan forming part of an eligible combined plan an employee who has completed at least 3 years of service has a nonforfeitable right to 100 percent of the employee's accrued benefit under the plan derived from employer contributions, and

'(ii) in the case of an applicable individual account plan forming part of eligible combined plan--

'(I) an employee has a nonforfeitable right to any matching contribution made under the qualified cash or deferred arrangement included in such plan by an employer with respect to any elective contribution, including matching contributions in excess of the contributions required under subparagraph (C)(i)(II), and

'(II) an employee who has completed at least 3 years of service has a nonforfeitable right to 100 percent of the employee's accrued benefit derived under the arrangement from nonelective contributions of the employer.

For purposes of this subparagraph, the rules of section 203 shall apply to the extent not inconsistent with this subparagraph.

'(E) UNIFORM PROVISION OF CONTRIBUTIONS AND BENEFITS- In the case of a defined benefit plan or applicable individual account plan forming part of an eligible combined plan, the requirements of this subparagraph are met if all contributions and benefits under each such plan, and all rights and features under each such plan, must be provided uniformly to all participants.

'(F) REQUIREMENTS MUST BE MET WITHOUT TAKING INTO ACCOUNT SOCIAL SECURITY AND SIMILAR CONTRIBUTIONS AND BENEFITS OR OTHER PLANS-

'(i) IN GENERAL- The requirements of this subparagraph are met if the requirements of clauses (ii) and (iii) are met.

'(ii) SOCIAL SECURITY AND SIMILAR CONTRIBUTIONS- The requirements of this clause are met if--

'(I) the requirements of subparagraphs (B) and (C) are met without regard to section 401(l) of the Internal Revenue Code of 1986, and

'(II) the requirements of sections 401(a)(4) and 410(b) of the Internal Revenue Code of 1986 are met with respect to both the applicable defined contribution plan and defined benefit plan forming part of an eligible combined plan without regard to section 401(l) of the Internal Revenue Code of 1986.

'(iii) OTHER PLANS AND ARRANGEMENTS- The requirements of this clause are met if the applicable defined contribution plan and defined benefit plan forming part of an eligible combined plan meet the requirements of sections 401(a)(4) and 410(b) of the Internal Revenue Code of 1986 without being combined with any other plan.

'(3) NONDISCRIMINATION REQUIREMENTS FOR QUALIFIED CASH OR DEFERRED ARRANGEMENT-

'(A) IN GENERAL- A qualified cash or deferred arrangement which is included in an applicable individual account plan forming part of an eligible combined plan shall be treated as meeting the requirements of section 401(k)(3)(A)(ii) of the Internal Revenue Code of 1986 if the requirements of paragraph (2) are met with respect to such arrangement.

'(B) MATCHING CONTRIBUTIONS- In applying section 401(m)(11) of such Code to any matching contribution with respect to a contribution to which paragraph (2)(C) applies, the contribution requirement of paragraph (2)(C) and the notice requirements of paragraph (5)(B) shall be substituted for the requirements otherwise applicable under clauses (i) and (ii) of section 401(m)(11)(A) of such Code.

'(4) AUTOMATIC CONTRIBUTION ARRANGEMENT- For purposes of this subsection--

'(A) IN GENERAL- A qualified cash or deferred arrangement shall be treated as an automatic contribution arrangement if the arrangement--

'(i) provides that 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 4 percent of the employee's compensation unless the employee specifically elects not to have such contributions made or to have such contributions made at a different rate, and

'(ii) meets the notice requirements under subparagraph (B).

'(B) 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 (A)(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 or to have the contributions made at a different rate, 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 this subparagraph shall not be treated as met unless the requirements of clauses (i) and (ii) of section 401(k)(12)(D) of the Internal Revenue Code of 1986 are met with respect to the notices described in clauses (ii) and (iii) of this subparagraph.

'(5) COORDINATION WITH OTHER REQUIREMENTS-

'(A) TREATMENT OF SEPARATE PLANS- The except clause in section 3(35) shall not apply to an eligible combined plan.

'(B) REPORTING- An eligible combined plan shall be treated as a single plan for purposes of section 103.

'(6) APPLICABLE INDIVIDUAL ACCOUNT PLAN- For purposes of this subsection--

'(A) IN GENERAL- The term 'applicable individual account plan’ means an individual account plan which includes a qualified cash or deferred arrangement.

'(B) QUALIFIED CASH OR DEFERRED ARRANGEMENT- The term 'qualified cash or deferred arrangement’ has the meaning given such term by section 401(k)(2) of the Internal Revenue Code of 1986.’.

(2) CONFORMING CHANGES-

(A) The heading for section 210 of such Act is amended to read as follows:

'SEC. 210. MULTIPLE EMPLOYER PLANS AND OTHER SPECIAL RULES.’.

(B) The table of contents in section 1 of such Act is amended by striking the item relating to section 210 and inserting the following new item:

'Sec. 210. Multiple employer plans and other special rules.’.

(c) Effective Date- The amendments made by this section shall apply to plan years beginning after December 31, 2009.

SEC. 904. FASTER VESTING OF EMPLOYER NONELECTIVE CONTRIBUTIONS.

(a) Amendments to the Internal Revenue Code of 1986-

(1) IN GENERAL- Paragraph (2) of section 411(a) of the Internal Revenue Code of 1986 (relating to employer contributions) is amended to read as follows:

'(2) EMPLOYER CONTRIBUTIONS-

'(A) DEFINED BENEFIT PLANS-

'(i) IN GENERAL- In the case of a defined benefit plan, a plan satisfies the requirements of this paragraph if it satisfies the requirements of clause (ii) or (iii).

'(ii) 5-year VESTING- A plan satisfies the requirements of this clause if an employee who has completed at least 5 years of service has a nonforfeitable right to 100 percent of the employee's accrued benefit derived from employer contributions.

'(iii) 3 TO 7 YEAR VESTING- A plan satisfies the requirements of this clause if an employee has a nonforfeitable right to a percentage of the employee's accrued benefit derived from employer contributions determined under the following table:

'Years of service__, the nonforfeitable percentage is:

3--20

4--40

5--60

6--80

7 or more--100.

'(B) DEFINED CONTRIBUTION PLANS-

'(i) IN GENERAL- In the case of a defined contribution plan, a plan satisfies the requirements of this paragraph if it satisfies the requirements of clause (ii) or (iii).

'(ii) 3-year VESTING- A plan satisfies the requirements of this clause if an employee who has completed at least 3 years of service has a nonforfeitable right to 100 percent of the employee's accrued benefit derived from employer contributions.

'(iii) 2 TO 6 YEAR VESTING- A plan satisfies the requirements of this clause if an employee has a nonforfeitable right to a percentage of the employee's accrued benefit derived from employer contributions determined under the following table:

'Years of service__, the nonforfeitable percentage is:

2--20

3--40

4--60

5--80

6 or more--100.’.

(2) CONFORMING AMENDMENT- Section 411(a) of such Code (relating to general rule for minimum vesting standards) is amended by striking paragraph (12).

(b) Amendments to the Employee Retirement Income Security Act of 1974-

(1) IN GENERAL- Paragraph (2) of section 203(a) of the Employee Retirement Income Security Act of 1974 (29 U.S.C. 1053(a)(2)) is amended to read as follows:

'(2)(A)(i) In the case of a defined benefit plan, a plan satisfies the requirements of this paragraph if it satisfies the requirements of clause (ii) or (iii).

'(ii) A plan satisfies the requirements of this clause if an employee who has completed at least 5 years of service has a nonforfeitable right to 100 percent of the employee's accrued benefit derived from employer contributions.

'(iii) A plan satisfies the requirements of this clause if an employee has a nonforfeitable right to a percentage of the employee's accrued benefit derived from employer contributions determined under the following table:

'Years of service__, the nonforfeitable percentage is:

3--20

4--40

5--60

6--80

7 or more--100.

'(B)(i) In the case of an individual account plan, a plan satisfies the requirements of this paragraph if it satisfies the requirements of clause (ii) or (iii).

'(ii) A plan satisfies the requirements of this clause if an employee who has completed at least 3 years of service has a nonforfeitable right to 100 percent of the employee's accrued benefit derived from employer contributions.

'(iii) A plan satisfies the requirements of this clause if an employee has a nonforfeitable right to a percentage of the employee's accrued benefit derived from employer contributions determined under the following table:

'Years of service__, the nonforfeitable percentage is:

2--20

3--40

4--60

5--80

6 or more--100.’.

(2) CONFORMING AMENDMENT- Section 203(a) of such Act is amended by striking paragraph (4).

(c) Effective Dates-

(1) IN GENERAL- Except as provided in paragraphs (2) and (4), the amendments made by this section shall apply to contributions for plan years beginning after December 31, 2006.

(2) COLLECTIVE BARGAINING AGREEMENTS- In the case of a plan maintained pursuant to one or more collective bargaining agreements between employee representatives and one or more employers ratified before the date of the enactment of this Act, the amendments made by this section shall not apply to contributions on behalf of employees covered by any such agreement for plan years beginning before the earlier of--

(A) the later of--

(i) the date on which the last of such collective bargaining agreements terminates (determined without regard to any extension thereof on or after such date of the enactment); or

(ii) January 1, 2007; or

(B) January 1, 2009.

(3) SERVICE REQUIRED- With respect to any plan, the amendments made by this section shall not apply to any employee before the date that such employee has 1 hour of service under such plan in any plan year to which the amendments made by this section apply.

(4) SPECIAL RULE FOR STOCK OWNERSHIP PLANS- Notwithstanding paragraph (1) or (2), in the case of an employee stock ownership plan (as defined in section 4975(e)(7) of the Internal Revenue Code of 1986) which had outstanding on September 26, 2005, a loan incurred for the purpose of acquiring qualifying employer securities (as defined in section 4975(e)(8) of such Code), the amendments made by this section shall not apply to any plan year beginning before the earlier of--

(A) the date on which the loan is fully repaid, or

(B) the date on which the loan was, as of September 26, 2005, scheduled to be fully repaid.

SEC. 905. DISTRIBUTIONS DURING WORKING RETIREMENT.

(a) Amendment to the Employee Retirement Income Security Act of 1974- Subparagraph (A) of section 3(2) of the Employee Retirement Income Security Act of 1974 (29 U.S.C. 1002(2)) is amended by adding at the end the following new sentence: 'A distribution from a plan, fund, or program shall not be treated as made in a form other than retirement income or as a distribution prior to termination of covered employment solely because such distribution is made to an employee who has attained age 62 and who is not separated from employment at the time of such distribution.’.

(b) Amendment to the Internal Revenue Code of 1986- Subsection (a) of section 401 of the Internal Revenue Code of 1986 (as amended by this Act) is amended by inserting after paragraph (35) the following new paragraph:

'(36) DISTRIBUTIONS DURING WORKING RETIREMENT- A trust forming part of a pension plan shall not be treated as failing to constitute a qualified trust under this section solely because the plan provides that a distribution may be made from such trust to an employee who has attained age 62 and who is not separated from employment at the time of such distribution.’.

(c) Effective Date- The amendments made by this section shall apply to distributions in plan years beginning after December 31, 2006.

SEC. 906. TREATMENT OF CERTAIN PENSION PLANS OF INDIAN TRIBAL GOVERNMENTS.

(a) Definition of Government Plan to Include Certain Pension Plans of Indian Tribal Governments-

(1) AMENDMENT TO INTERNAL REVENUE CODE OF 1986- Section 414(d) of the Internal Revenue Code of 1986 (defining governmental plan) is amended by adding at the end the following: 'The term 'governmental plan’ includes a plan which is established and maintained by an Indian tribal government (as defined in section 7701(a)(40)), a subdivision of an Indian tribal government (determined in accordance with section 7871(d)), or an agency or instrumentality of either, and all of the participants of which are employees of such entity substantially all of whose services as such an employee are in the performance of essential governmental functions but not in the performance of commercial activities (whether or not an essential government function).’.

(2) AMENDMENT TO EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974-

(A) Section 3(32) of the Employee Retirement Income Security Act of 1974 (29 U.S.C. 1002(32)) is amended by adding at the end the following: 'The term 'governmental plan’ includes a plan which is established and maintained by an Indian tribal government (as defined in section 7701(a)(40) of the Internal Revenue Code of 1986), a subdivision of an Indian tribal government (determined in accordance with section 7871(d) of such Code), or an agency or instrumentality of either, and all of the participants of which are employees of such entity substantially all of whose services as such an employee are in the performance of essential governmental functions but not in the performance of commercial activities (whether or not an essential government function)’.

(B) Section 4021(b)(2) of such Act is amended by adding at the end the following: 'or which is described in the last sentence of section 3(32)’.

(b) Clarification That Tribal Governments Are Subject to the Same Pension Plan Rules and Regulations Applied to State and Other Local Governments and Their Police and Firefighters-

(1) AMENDMENTS TO INTERNAL REVENUE CODE OF 1986-

(A) POLICE AND FIREFIGHTERS- Subparagraph (H) section 415(b)(2) of the Internal Revenue Code of 1986 (defining participant) is amended--

(i) in clause (i), by striking 'State or political subdivision’ and inserting 'State, Indian tribal government (as defined in section 7701(a)(40)), or any political subdivision’; and

(ii) in clause (ii)(I), by striking 'State or political subdivision’ each place it appears and inserting 'State, Indian tribal government (as so defined), or any political subdivision’.

(B) STATE AND LOCAL GOVERNMENT PLANS-

(i) IN GENERAL- Subparagraph (A) of section 415(b)(10) of such Code (relating to limitation to equal accrued benefit) is amended by inserting 'or a governmental plan described in the last sentence of section 414(d) (relating to plans of Indian tribal governments),’ after 'foregoing,’.

(ii) CONFORMING AMENDMENT- The heading of paragraph (1) of section 415(b) of such Code is amended by striking 'SPECIAL RULE FOR STATE AND’ and inserting 'SPECIAL RULE FOR STATE, INDIAN TRIBAL, AND’.

(C) GOVERNMENT PICK UP CONTRIBUTIONS- Paragraph (2) of section 414(h) of such Code (relating to designation by units of government) is amended by inserting 'or a governmental plan described in the last sentence of section 414(d) (relating to plans of Indian tribal governments),’ after 'foregoing,’.

(2) AMENDMENTS TO EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974- Section 4021(b) of the Employee Retirement Income Security Act of 1974 (29 U.S.C. 1321(b)) is amended--

(A) in paragraph (12), by striking 'or’ at the end;

(B) in paragraph (13), by striking 'plan.’ and inserting 'plan; or’; and

(C) by adding at the end the following:

'(14) established and maintained by an Indian tribal government (as defined in section 7701(a)(40) of the Internal Revenue Code of 1986), a subdivision of an Indian tribal government (determined in accordance with section 7871(d) of such Code), or an agency or instrumentality of either, and all of the participants of which are employees of such entity substantially all of whose services as such an employee are in the performance of essential governmental functions but not in the performance of commercial activities (whether or not an essential government function).’.

(c) Effective Date- The amendments made by this section shall apply to any year beginning on or after the date of the enactment of this Act.

TITLE X--PROVISIONS RELATING TO SPOUSAL PENSION PROTECTION

SEC. 1001. REGULATIONS ON TIME AND ORDER OF ISSUANCE OF DOMESTIC RELATIONS ORDERS.

Not later than 1 year after the date of the enactment of this Act, the Secretary of Labor shall issue regulations under section 206(d)(3) of the Employee Retirement Security Act of 1974 and section 414(p) of the Internal Revenue Code of 1986 which clarify that--

(1) a domestic relations order otherwise meeting the requirements to be a qualified domestic relations order, including the requirements of section 206(d)(3)(D) of such Act and section 414(p)(3) of such Code, shall not fail to be treated as a qualified domestic relations order solely because--

(A) the order is issued after, or revises, another domestic relations order or qualified domestic relations order; or

(B) of the time at which it is issued; and

(2) any order described in paragraph (1) shall be subject to the same requirements and protections which apply to qualified domestic relations orders, including the provisions of section 206(d)(3)(H) of such Act and section 414(p)(7) of such Code.

SEC. 1002. ENTITLEMENT OF DIVORCED SPOUSES TO RAILROAD RETIREMENT ANNUITIES INDEPENDENT OF ACTUAL ENTITLEMENT OF EMPLOYEE.

(a) In General- Section 2 of the Railroad Retirement Act of 1974 (45 U.S.C. 231a) is amended--

(1) in subsection (c)(4)(i), by striking '(A) is entitled to an annuity under subsection (a)(1) and (B)’; and

(2) in subsection (e)(5), by striking 'or divorced wife’ the second place it appears.

(b) Effective Date- The amendments made by this section shall take effect 1 year after the date of the enactment of this Act.

SEC. 1003. EXTENSION OF TIER II RAILROAD RETIREMENT BENEFITS TO SURVIVING FORMER SPOUSES PURSUANT TO DIVORCE AGREEMENTS.

(a) In General- Section 5 of the Railroad Retirement Act of 1974 (45 U.S.C. 231d) is amended by adding at the end the following:

'(d) Notwithstanding any other provision of law, the payment of any portion of an annuity computed under section 3(b) to a surviving former spouse in accordance with a court decree of divorce, annulment, or legal separation or the terms of any court-approved property settlement incident to any such court decree shall not be terminated upon the death of the individual who performed the service with respect to which such annuity is so computed unless such termination is otherwise required by the terms of such court decree.’.

(b) Effective Date- The amendment made by this section shall take effect 1 year after the date of the enactment of this Act.

SEC. 1004. REQUIREMENT FOR ADDITIONAL SURVIVOR ANNUITY OPTION.

(a) Amendments to Internal Revenue Code-

(1) ELECTION OF SURVIVOR ANNUITY- Section 417(a)(1)(A) of the Internal Revenue Code of 1986 is amended--

(A) in clause (i), by striking ', and’ and inserting a comma;

(B) by redesignating clause (ii) as clause (iii); and

(C) by inserting after clause (i) the following:

'(ii) if the participant elects a waiver under clause (i), may elect the qualified optional survivor annuity at any time during the applicable election period, and’.

(2) DEFINITION- Section 417 of such Code is amended by adding at the end the following:

'(g) Definition of Qualified Optional Survivor Annuity-

'(1) IN GENERAL- For purposes of this section, the term 'qualified optional survivor annuity’ means an annuity--

'(A) for the life of the participant with a survivor annuity for the life of the spouse which is equal to the applicable percentage of the amount of the annuity which is payable during the joint lives of the participant and the spouse, and

'(B) which is the actuarial equivalent of a single annuity for the life of the participant.

Such term also includes any annuity in a form having the effect of an annuity described in the preceding sentence.

'(2) APPLICABLE PERCENTAGE-

'(A) IN GENERAL- For purposes of paragraph (1), if the survivor annuity percentage--

'(i) is less than 75 percent, the applicable percentage is 75 percent, and

'(ii) is greater than or equal to 75 percent, the applicable percentage is 50 percent.

'(B) SURVIVOR ANNUITY PERCENTAGE- For purposes of subparagraph (A), the term 'survivor annuity percentage’ means the percentage which the survivor annuity under the plan's qualified joint and survivor annuity bears to the annuity payable during the joint lives of the participant and the spouse.’.

(3) NOTICE- Section 417(a)(3)(A)(i) of such Code is amended by inserting 'and of the qualified optional survivor annuity’ after 'annuity’.

(b) Amendments to ERISA-

(1) ELECTION OF SURVIVOR ANNUITY- Section 205(c)(1)(A) of the Employee Retirement Income Security Act of 1974 (29 U.S.C. 1055(c)(1)(A)) is amended--

(A) in clause (i), by striking ', and’ and inserting a comma;

(B) by redesignating clause (ii) as clause (iii); and

(C) by inserting after clause (i) the following:

'(ii) if the participant elects a waiver under clause (i), may elect the qualified optional survivor annuity at any time during the applicable election period, and’.

(2) DEFINITION- Section 205(d) of such Act (29 U.S.C. 1055(d)) is amended--

(A) by inserting '(1)’ after '(d)’;

(B) by redesignating paragraphs (1) and (2) as subparagraphs (A) and (B), respectively; and

(C) by adding at the end the following:

'(2)(A) For purposes of this section, the term 'qualified optional survivor annuity’ means an annuity--

'(i) for the life of the participant with a survivor annuity for the life of the spouse which is equal to the applicable percentage of the amount of the annuity which is payable during the joint lives of the participant and the spouse, and

'(ii) which is the actuarial equivalent of a single annuity for the life of the participant.

Such term also includes any annuity in a form having the effect of an annuity described in the preceding sentence.

'(B)(i) For purposes of subparagraph (A), if the survivor annuity percentage--

'(I) is less than 75 percent, the applicable percentage is 75 percent, and

'(II) is greater than or equal to 75 percent, the applicable percentage is 50 percent.

'(ii) For purposes of clause (i), the term 'survivor annuity percentage’ means the percentage which the survivor annuity under the plan's qualified joint and survivor annuity bears to the annuity payable during the joint lives of the participant and the spouse.’.

(3) NOTICE- Section 205(c)(3)(A)(i) of such Act (29 U.S.C. 1055(c)(3)(A)(i)) is amended by inserting 'and of the qualified optional survivor annuity’ after 'annuity’.

(c) Effective Dates-

(1) IN GENERAL- The amendments made by this section shall apply to plan years beginning after December 31, 2007.

(2) SPECIAL RULE FOR COLLECTIVELY BARGAINED PLANS- In the case of a plan maintained pursuant to 1 or more collective bargaining agreements between employee representatives and 1 or more employers ratified on or before the date of the enactment of this Act, the amendments made by this section shall not apply to plan years beginning before the earlier of--

(A) the later of--

(i) January 1, 2008, or

(ii) the date on which the last collective bargaining agreement related to the plan terminates (determined without regard to any extension thereof after the date of enactment of this Act), or

(B) January 1, 2009.

Copyright 2006, The Bureau of National Affairs, Inc., Washington, D.C.