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CHAPTER 2--INCREASED ACCESS TO RETIREMENT PLANS
Subchapter A--Simple Savings Plans
SEC. 1421. ESTABLISHMENT OF SAVINGS INCENTIVE MATCH PLANS FOR
EMPLOYEES OF SMALL EMPLOYERS.
(a) In General.--Section 408 (relating to individual
retirement accounts) is amended by redesignating subsection
(p) as subsection (q) and by inserting after subsection (o)
the following new subsection:
``(p) Simple Retirement Accounts.--
``(1) In general.--For purposes of this title, the term
`simple retirement account' means an individual retirement
plan (as defined in section 7701(a)(37))--
``(A) with respect to which the requirements of paragraphs
(3), (4), and (5) are met; and
``(B) with respect to which the only contributions allowed
are contributions under a qualified salary reduction
arrangement.
``(2) Qualified salary reduction arrangement.--
``(A) In general.--For purposes of this subsection, the
term `qualified salary reduction arrangement' means a written
arrangement of an eligible employer under which--
``(i) an employee eligible to participate in the
arrangement may elect to have the employer make payments--
``(I) as elective employer contributions to a simple
retirement account on behalf of the employee, or
``(II) to the employee directly in cash,
``(ii) the amount which an employee may elect under clause
(i) for any year is required to be expressed as a percentage
of compensation and may not exceed a total of $6,000 for any
year,
``(iii) the employer is required to make a matching
contribution to the simple retirement account for any year in
an amount equal to so much of the amount the employee elects
under clause (i)(I) as does not exceed the applicable
percentage of compensation for the year, and
``(iv) no contributions may be made other than
contributions described in clause (i) or (iii).
``(B) Employer may elect 2-percent nonelective
contribution.--
``(i) In general.--An employer shall be treated as meeting
the requirements of subparagraph (A)(iii) for any year if, in
lieu of the contributions described in such clause, the
employer elects to make nonelective contributions of 2
percent of compensation for each employee who is eligible to
participate in the arrangement and who has at least $5,000 of
compensation from the employer for the year. If an employer
makes an election under this subparagraph for any year, the
employer shall notify employees of such election within a
reasonable period of time before the 60-day period for such
year under paragraph (5)(C).
``(ii) Compensation limitation.--The compensation taken
into account under clause (i) for any year shall not exceed
the limitation in effect for such year under section
401(a)(17).
``(C) Definitions.--For purposes of this subsection--
``(i) Eligible employer.--
``(I) In general.--The term `eligible employer' means, with
respect to any year, an employer which had no more than 100
employees who received at least $5,000 of compensation from
the employer for the preceding year.
``(II) 2-year grace period.--An eligible employer who
establishes and maintains a plan under this subsection for 1
or more years and who fails to be an eligible employer for
any subsequent year shall be treated as an eligible employer
for the 2 years following the last year the employer was an
eligible employer. If such failure is due to any acquisition,
disposition, or similar transaction involving an eligible
employer, the preceding sentence shall apply only in
accordance with rules similar to the rules of section
410(b)(6)(C)(i).
``(ii) Applicable percentage.--
``(I) In general.--The term `applicable percentage' means 3
percent.
``(II) Election of lower percentage.--An employer may elect
to apply a lower percentage (not less than 1 percent) for any
year for all employees eligible to participate in the plan
for such year if the employer notifies the employees of such
lower percentage within a reasonable period of time before
the 60-day election period for such year under paragraph
(5)(C). An employer may not elect a lower percentage under
this subclause for any year if that election would result in
the applicable percentage being lower than 3 percent in more
than 2 of the years in the 5-year period ending with such
year.
``(III) Special rule for years arrangement not in effect.--
If any year in the 5-year period described in subclause (II)
is a year prior to the first year for which any qualified
salary reduction arrangement is in effect with respect to the
employer (or any predecessor), the employer shall be treated
as if the level of the employer matching contribution was
at 3 percent of compensation for such prior year.
``(D) Arrangement may be only plan of employer.--
``(i) In general.--An arrangement shall not be treated as a
qualified salary reduction arrangement for any year if the
employer (or any predecessor employer) maintained a qualified
plan with respect to which contributions were made, or
benefits were accrued, for service in any year in the period
beginning with the year such arrangement became effective and
ending with the year for which the determination is being
made.
``(ii) Qualified plan.--For purposes of this subparagraph,
the term `qualified plan' means a
[[Page H9579]]
plan, contract, pension, or trust described in subparagraph
(A) or (B) of section 219(g)(5).
``(E) Cost-of-living adjustment.--The Secretary shall
adjust the $6,000 amount under subparagraph (A)(ii) at the
same time and in the same manner as under section 415(d),
except that the base period taken into account shall be the
calendar quarter ending September 30, 1996, and any increase
under this subparagraph which is not a multiple of $500 shall
be rounded to the next lower multiple of $500.
``(3) Vesting requirements.--The requirements of this
paragraph are met with respect to a simple retirement account
if the employee's rights to any contribution to the simple
retirement account are nonforfeitable. For purposes of this
paragraph, rules similar to the rules of subsection (k)(4)
shall apply.
``(4) Participation requirements.--
``(A) In general.--The requirements of this paragraph are
met with respect to any simple retirement account for a year
only if, under the qualified salary reduction arrangement,
all employees of the employer who--
``(i) received at least $5,000 in compensation from the
employer during any 2 preceding years, and
``(ii) are reasonably expected to receive at least $5,000
in compensation during the year,
are eligible to make the election under paragraph (2)(A)(i)
or receive the nonelective contribution described in
paragraph (2)(B).
``(B) Excludable employees.--An employer may elect to
exclude from the requirement under subparagraph (A) employees
described in section 410(b)(3).
``(5) Administrative requirements.--The requirements of
this paragraph are met with respect to any simplified
retirement account if, under the qualified salary reduction
arrangement--
``(A) an employer must--
``(i) make the elective employer contributions under
paragraph (2)(A)(i) not later than the close of the 30-day
period following the last day of the month with respect to
which the contributions are to be made, and
``(ii) make the matching contributions under paragraph
(2)(A)(iii) or the nonelective contributions under paragraph
(2)(B) not later than the date described in section
404(m)(2)(B),
``(B) an employee may elect to terminate participation in
such arrangement at any time during the year, except that if
an employee so terminates, the arrangement may provide that
the employee may not elect to resume participation until the
beginning of the next year, and
``(C) each employee eligible to participate may elect,
during the 60-day period before the beginning of any year
(and the 60-day period before the first day such employee is
eligible to participate), to participate in the arrangement,
or to modify the amounts subject to such arrangement, for
such year.
``(6) Definitions.--For purposes of this subsection--
``(A) Compensation.--
``(i) In general.--The term `compensation' means amounts
described in paragraphs (3) and (8) of section 6051(a).
``(ii) Self-employed.--In the case of an employee described
in subparagraph (B), the term `compensation' means net
earnings from self-employment determined under section
1402(a) without regard to any contribution under this
subsection.
``(B) Employee.--The term `employee' includes an employee
as defined in section 401(c)(1).
``(C) Year.--The term `year' means the calendar year.
``(7) Use of designated financial institution.--A plan
shall not be treated as failing to satisfy the requirements
of this subsection or any other provision of this title
merely because the employer makes all contributions to the
individual retirement accounts or annuities of a designated
trustee or issuer. The preceding sentence shall not apply
unless each plan participant is notified in writing (either
separately or as part of the notice under subsection
(l)(2)(C)) that the participant's balance may be transferred
without cost or penalty to another individual account or
annuity in accordance with subsection (d)(3)(G).''.
(b) Tax Treatment of Simple Retirement Accounts.--
(1) Deductibility of contributions by employees.--
(A) Section 219(b) (relating to maximum amount of
deduction) is amended by adding at the end the following new
paragraph:
``(4) Special rule for simple retirement accounts.--This
section shall not apply with respect to any amount
contributed to a simple retirement account established under
section 408(p).''.
(B) Section 219(g)(5)(A) (defining active participant) is
amended by striking ``or'' at the end of clause (iv) and by
adding at the end the following new clause:
``(vi) any simple retirement account (within the meaning of
section 408(p)), or''.
(2) Deductibility of employer contributions.--Section 404
(relating to deductions for contributions of an employer to
pension, etc. plans) is amended by adding at the end the
following new subsection:
``(m) Special Rules for Simple Retirement Accounts.--
``(1) In general.--Employer contributions to a simple
retirement account shall be treated as if they are made to a
plan subject to the requirements of this section.
``(2) Timing.--
``(A) Deduction.--Contributions described in paragraph (1)
shall be deductible in the taxable year of the employer with
or within which the calendar year for which the contributions
were made ends.
``(B) Contributions after end of year.--For purposes of
this subsection, contributions shall be treated as made for a
taxable year if they are made on account of the taxable year
and are made not later than the time prescribed by law for
filing the return for the taxable year (including extensions
thereof).''.
(3) Contributions and distributions.--
(A) Section 402 (relating to taxability of beneficiary of
employees' trust) is amended by adding at the end the
following new subsection:
``(k) Treatment of Simple Retirement Accounts.--Rules
similar to the rules of paragraphs (1) and (3) of subsection
(h) shall apply to contributions and distributions with
respect to a simple retirement account under section
408(p).''.
(B) Section 408(d)(3) is amended by adding at the end the
following new subparagraph:
``(G) Simple retirement accounts.--This paragraph shall not
apply to any amount paid or distributed out of a simple
retirement account (as defined in subsection (p)) unless--
``(i) it is paid into another simple retirement account, or
``(ii) in the case of any payment or distribution to which
section 72(t)(6) does not apply, it is paid into an
individual retirement plan.''.
(C) Clause (i) of section 457(c)(2)(B) is amended by
striking ``section 402(h)(1)(B)'' and inserting ``section
402(h)(1)(B) or (k)''.
(4) Penalties.--
(A) Early withdrawals.--Section 72(t) (relating to
additional tax in early distributions) is amended by adding
at the end the following new paragraph:
``(6) Special rules for simple retirement accounts.--In the
case of any amount received from a simple retirement account
(within the meaning of section 408(p)) during the 2-year
period beginning on the date such individual first
participated in any qualified salary reduction arrangement
maintained by the individual's employer under section
408(p)(2), paragraph (1) shall be applied by substituting `25
percent' for `10 percent'.''.
(B) Failure to report.--Section 6693 is amended by
redesignating subsection (c) as subsection (d) and by
inserting after subsection (b) the following new subsection:
``(c) Penalties Relating to Simple Retirement Accounts.--
``(1) Employer penalties.--An employer who fails to provide
1 or more notices required by section 408(l)(2)(C) shall pay
a penalty of $50 for each day on which such failures
continue.
``(2) Trustee penalties.--A trustee who fails--
``(A) to provide 1 or more statements required by the last
sentence of section 408(i) shall pay a penalty of $50 for
each day on which such failures continue, or
``(B) to provide 1 or more summary descriptions required by
section 408(l)(2)(B) shall pay a penalty of $50 for each day
on which such failures continue.
``(3) Reasonable cause exception.--No penalty shall be
imposed under this subsection with respect to any failure
which the taxpayer shows was due to reasonable cause.''.
(5) Reporting requirements.--
(A) Section 408(l) is amended by adding at the end the
following new paragraph:
``(2) Simple retirement accounts.--
``(A) No employer reports.--Except as provided in this
paragraph, no report shall be required under this section by
an employer maintaining a qualified salary reduction
arrangement under subsection (p).
``(B) Summary description.--The trustee of any simple
retirement account established pursuant to a qualified salary
reduction arrangement under subsection (p) shall provide to
the employer maintaining the arrangement, each year a
description containing the following information:
``(i) The name and address of the employer and the trustee.
``(ii) The requirements for eligibility for participation.
``(iii) The benefits provided with respect to the
arrangement.
``(iv) The time and method of making elections with respect
to the arrangement.
``(v) The procedures for, and effects of, withdrawals
(including rollovers) from the arrangement.
``(C) Employee notification.--The employer shall notify
each employee immediately before the period for which an
election described in subsection (p)(5)(C) may be made of the
employee's opportunity to make such election. Such notice
shall include a copy of the description described in
subparagraph (B).''.
(B) Section 408(l) is amended by striking ``An employer''
and inserting the following:
``(1) In general.--An employer''.
(6) Reporting requirements.--Section 408(i) is amended by
adding at the end the following new flush sentence:
``In the case of a simple retirement account under subsection
(p), only one report under this subsection shall be required
to be submitted each calendar year to the Secretary (at the
time provided under paragraph (2)) but, in addition to the
report under this subsection, there shall be furnished,
within 30 days after each calendar year, to the individual on
whose behalf the account is maintained a statement with
respect to the account balance as of the close of, and the
account activity during, such calendar year.''.
(7) Exemption from top-heavy plan rules.--Section 416(g)(4)
(relating to special rules for top-heavy plans) is amended by
adding at the end the following new subparagraph:
``(G) Simple retirement accounts.--The term `top-heavy
plan' shall not include a simple retirement account under
section 408(p).''.
(8) Employment taxes.--
(A) Paragraph (5) of section 3121(a) is amended by striking
``or'' at the end of subparagraph (F), by inserting ``or'' at
the end of subparagraph (G), and by adding at the end the
following new subparagraph:
[[Page H9580]]
``(H) under an arrangement to which section 408(p) applies,
other than any elective contributions under paragraph
(2)(A)(i) thereof,''.
(B) Section 209(a)(4) of the Social Security Act is amended
by inserting ``; or (J) under an arrangement to which section
408(p) of such Code applies, other than any elective
contributions under paragraph (2)(A)(i) thereof'' before the
semicolon at the end thereof.
(C) Paragraph (5) of section 3306(b) is amended by striking
``or'' at the end of subparagraph (F), by inserting ``or'' at
the end of subparagraph (G), and by adding at the end the
following new subparagraph:
``(H) under an arrangement to which section 408(p) applies,
other than any elective contributions under paragraph
(2)(A)(i) thereof,''.
(D) Paragraph (12) of section 3401(a) is amended by adding
the following new subparagraph:
``(D) under an arrangement to which section 408(p) applies;
or''.
(9) Conforming amendments.--
(A) Section 280G(b)(6) is amended by striking ``or'' at the
end of subparagraph (B), by striking the period at the end of
subparagraph (C) and inserting ``, or'' and by adding after
subparagraph (C) the following new subparagraph:
``(D) a simple retirement account described in section
408(p).''.
(B) Section 402(g)(3) is amended by striking ``and'' at the
end of subparagraph (B), by striking the period at the end of
subparagraph (C) and inserting ``, and'', and by adding after
subparagraph (C) the following new subparagraph:
``(D) any elective employer contribution under section
408(p)(2)(A)(i).''.
(C) Subsections (b), (c), (m)(4)(B), and (n)(3)(B) of
section 414 are each amended by inserting ``408(p),'' after
``408(k),''.
(D) Section 4972(d)(1)(A) is amended by striking ``and'' at
the end of clause (ii), by striking the period at the end of
clause (iii) and inserting ``, and'', and by adding after
clause (iii) the following new clause:
``(iv) any simple retirement account (within the meaning of
section 408(p)).''.
(c) Repeal of Salary Reduction Simplified Employee
Pensions.--Section 408(k)(6) is amended by adding at the end
the following new subparagraph:
``(H) Termination.--This paragraph shall not apply to years
beginning after December 31, 1996. The preceding sentence
shall not apply to a simplified employee pension if the terms
of such pension, as in effect on December 31, 1996, provide
that an employee may make the election described in
subparagraph (A).''.
(d) Modifications of ERISA.--
(1) Reporting requirements.--Section 101 of the Employee
Retirement Income Security Act of 1974 (29 U.S.C. 1021) is
amended by redesignating subsection (g) as subsection (h) and
by inserting after subsection (f) the following new
subsection:
``(g) Simple Retirement Accounts.--
``(1) No employer reports.--Except as provided in this
subsection, no report shall be required under this section by
an employer maintaining a qualified salary reduction
arrangement under section 408(p) of the Internal Revenue Code
of 1986.
``(2) Summary description.--The trustee of any simple
retirement account established pursuant to a qualified salary
reduction arrangement under section 408(p) of such Code shall
provide to the employer maintaining the arrangement each year
a description containing the following information:
``(A) The name and address of the employer and the trustee.
``(B) The requirements for eligibility for participation.
``(C) The benefits provided with respect to the
arrangement.
``(D) The time and method of making elections with respect
to the arrangement.
``(E) The procedures for, and effects of, withdrawals
(including rollovers) from the arrangement.
``(3) Employee notification.--The employer shall notify
each employee immediately before the period for which an
election described in section 408(p)(5)(C) of such Code may
be made of the employee's opportunity to make such election.
Such notice shall include a copy of the description described
in paragraph (2).''
(2) Fiduciary duties.--Section 404(c) of such Act (29
U.S.C. 1104(c)) is amended by inserting ``(1)'' after
``(c)'', by redesignating paragraphs (1) and (2) as
subparagraphs (A) and (B), respectively, and by adding at the
end the following new paragraph:
``(2) In the case of a simple retirement account
established pursuant to a qualified salary reduction
arrangement under section 408(p) of the Internal Revenue Code
of 1986, a participant or beneficiary shall, for purposes of
paragraph (1), be treated as exercising control over the
assets in the account upon the earliest of--
``(A) an affirmative election among investment options with
respect to the initial investment of any contribution,
``(B) a rollover to any other simple retirement account or
individual retirement plan, or
``(C) one year after the simple retirement account is
established.
No reports, other than those required under section 101(g),
shall be required with respect to a simple retirement account
established pursuant to such a qualified salary reduction
arrangement.''.
(e) Effective Date.--The amendments made by this section
shall apply to taxable years beginning after December 31,
1996.
SEC. 1422. EXTENSION OF SIMPLE PLAN TO 401(k) ARRANGEMENTS.
(a) Alternative Method of Satisfying Section 401(k)
Nondiscrimination Tests.--Section 401(k) (relating to cash or
deferred arrangements) is amended by adding at the end the
following new paragraph:
``(11) Adoption of simple plan to meet nondiscrimination
tests.--
``(A) In general.--A cash or deferred arrangement
maintained by an eligible employer shall be treated as
meeting the requirements of paragraph (3)(A)(ii) if such
arrangement meets--
``(i) the contribution requirements of subparagraph (B),
``(ii) the exclusive plan requirements of subparagraph (C),
and
``(iii) the vesting requirements of section 408(p)(3).
``(B) Contribution requirements.--
``(i) In general.--The requirements of this subparagraph
are met if, under the arrangement--
``(I) an employee may elect to have the employer make
elective contributions for the year on behalf of the employee
to a trust under the plan in an amount which is expressed as
a percentage of compensation of the employee but which in no
event exceeds $6,000,
``(II) the employer is required to make a matching
contribution to the trust for the year in an amount equal to
so much of the amount the employee elects under subclause (I)
as does not exceed 3 percent of compensation for the year,
and
``(III) no other contributions may be made other than
contributions described in subclause (I) or (II).
``(ii) Employer may elect 2-percent nonelective
contribution.--An employer shall be treated as meeting the
requirements of clause (i)(II) for any year if, in lieu of
the contributions described in such clause, the employer
elects (pursuant to the terms of the arrangement) to make
nonelective contributions of 2 percent of compensation for
each employee who is eligible to participate in the
arrangement and who has at least $5,000 of compensation from
the employer for the year. If an employer makes an election
under this subparagraph for any year, the employer shall
notify employees of such election within a reasonable period
of time before the 60th day before the beginning of such
year.
``(C) Exclusive plan requirement.--The requirements of this
subparagraph are met for any year to which this paragraph
applies if no contributions were made, or benefits were
accrued, for services during such year under any qualified
plan of the employer on behalf of any employee eligible to
participate in the cash or deferred arrangement, other than
contributions described in subparagraph (B).
``(D) Definitions and special rule.--
``(i) Definitions.--For purposes of this paragraph, any
term used in this paragraph which is also used in section
408(p) shall have the meaning given such term by such
section.
``(ii) Coordination with top-heavy rules.--A plan meeting
the requirements of this paragraph for any year shall not be
treated as a top-heavy plan under section 416 for such
year.''.
(b) Alternative Methods of Satisfying Section 401(m)
Nondiscrimination Tests.--Section 401(m) (relating to
nondiscrimination test for matching contributions and
employee contributions) is amended by redesignating paragraph
(10) as paragraph (11) and by adding after paragraph (9) the
following new paragraph:
``(10) Alternative method of satisfying tests.--A defined
contribution plan shall be treated as meeting the
requirements of paragraph (2) with respect to matching
contributions if the plan--
``(A) meets the contribution requirements of subparagraph
(B) of subsection (k)(11),
``(B) meets the exclusive plan requirements of subsection
(k)(11)(C), and
``(C) meets the vesting requirements of section
408(p)(3).''.
(c) Effective Date.--The amendments made by this section
shall apply to plan years beginning after December 31, 1996.
[Conference report follows]
B. Increased Access to Retirement Savings Plans
1. Establish Simple Retirement Plans for Employees Of Small Employers
(Secs. 1421-1422 of the House bill and the Senate
amendment.)
Present law
Present law does not contain rules relating to SIMPLE
retirement plans. However, present law does provide a number
of ways in which individuals can save for retirement on a
tax-favored basis. These include employer-sponsored
retirement plans that meet the requirements of the Internal
Revenue Code (a ``qualified plan'') and individual retirement
arrangements (``IRAs''). Employees can earn significant
retirement benefits under employer-sponsored retirement
plans. However, in order to receive tax-favored treatment,
such plans must comply with a variety of rules, including
complex nondiscrimination and administrative rules (including
top-heavy rules). Such plans are also subject to certain
requirements under the labor law provisions of the Employee
Retirement Income Security Act of 1974 (``ERISA'').
Contributions to an IRA can also be made by an employer at
the election of an employee under a salary reduction
simplified employee pension (``SARSEP''). Under SARSEPs,
which are not qualified plans, employees can elect to have
contributions made to the SARSEP or to receive the
contributions in cash. The amount elects to have contributed
to the SARSEP is not currently includible in income.
House bill
In general
The House bill creates a simplified retirement plan for
small business called the savings incentive match plan for
employees (``SIMPLE'') retirement plan. SIMPLE plans can be
adopted by employers who employ 100 or fewer employees on any
day during the year and who do not maintain another employer-
sponsor retirement plan. A SIMPLE plan can be either an IRA
for each employee or part of a qualified cash or deferred
arrangement (``401(k) plan''). If established in IRA form, a
SIMPLE plan is not subject to the nondiscrimination rules
generally applicable to qualified plans (including the top-
heavy rules) and simplified reporting requirements apply.
Within limits, contributions to a SIMPLE plan are not taxable
until withdrawn.
A SIMPLE plan can also be adopted as part of a 401(k) plan.
In that case, the plan does not have to satisfy the special
nondiscrimination tests applicable to 401(k) plans and is not
subject to the top-heavy rules. The other qualified plan
rules continue to apply.
SIMPLE retirement plans in IRA form.
In general.--A SIMPLE retirement plan allows employees to
make elective contributions to an IRA. Employee contributions
have to be expressed as a percentage of the employee's
compensation, and cannot exceed $6,000 per year. The $6,000
dollar limit is indexed for inflation in $500 increments.
Under the House bill, the employer is required to satisfy
one of two contribution formulas. Under the matching
contribution formula, the employer generally is required to
match employee elective contributions on a dollar-for-dollar
basis up to 3 percent of the employee's compensation. Under a
special rule, the employer can elect a lower percentage
matching contribution for all employees (but not less than 1
percent of each employee's compensation). A lower percentage
cannot be elected for more than 2 out of any 5 years.
Alternatively, for any year, in lieu of making matching
contributions, an employer may elect to make a 2 percent of
compensation nonelective contribution on behalf of each
eligible employee with at least $5,000 in compensation for
such year. No contributions other than employee elective
contributions and required employer matching contributions
(or, alternatively, required employer nonelective
contributions) can be made to a SIMPLE account.
Each employee of the employer who received at least $5,000
in compensation from the employer during any 2 prior years
and who is reasonably expected to receive at least $5,000 in
compensation during the year generally must be eligible to
participate in the SIMPLE plan. Self-employed individuals can
participate in a SIMPLE plan.
All contributions to an employee's SIMPLE account have to
be fully vested.
Tax treatment of SIMPLE accounts, contributions, and
distributions.--Contributions to a SIMPLE account generally
are deductible by the employer. In the case of matching
contributions, the employer is allowed a deduction for a year
only if the contributions are made by the due date (including
extensions) for the employer's tax return. Contributions to a
SIMPLE account are excludable from the employee's income.
SIMPLE accounts, like IRAs, are not subject to tax.
Distributions from a SIMPLE retirement account generally are
taxed under the rules applicable to IRAs. Thus, they are
includable in income when withdrawn. Tax-free rollovers can
be made from one SIMPLE account to another. A SIMPLE account
can be rolled over to an IRA on a tax-free basis after a two-
year period has expired since the individual first
participated in the SIMPLE plan. To the extent an employee is
no longer participating in a SIMPLE plan (e.g., the employee
has terminated employment) and 2 years have expired since the
employee first participated in the SIMPLE plan, the
employee's SIMPLE account is treated as an IRA.
Early withdrawals from a SIMPLE account generally are
subject to the 10-percent early withdrawal tax applicable to
IRAs. However, withdrawals of contributions during the 2-year
period beginning on the date the employee first participated
in the SIMPLE plan are subject to a 25-percent early
withdrawal tax (rather than 10 percent).
Employer matching or nonelective contributions to a SIMPLE
account are not treated as wages for employment tax purposes.
Administrative requirements.--Each eligible employee can
elect, with the 30-day period before the beginning of any
year (or the 30-day period before first becoming eligible to
participate), to participate in the SIMPLE plan (i.e., to
make elective deferrals), and to modify any previous
elections regarding the amount of contributions. An employer
is required to contribute employees' elective deferrals to
the employee's SIMPLE account within 30 days after the end of
the month to which the contributions relate. Employees must
be allowed to terminate participation in the SIMPLE plan at
any time during the year (i.e., to stop making
contributions). The
[[Page H9628]]
plan can provide that an employee who terminates
participation cannot resume participation until the following
year. A plan can permit (but is not required to permit) an
individual to make other changes to his or her salary
reduction contribution election during the year (e.g., reduce
contributions). It is intended that an employer is permitted
to designate a SIMPLE account trustee to which contributions
on behalf of eligible employees are made.
Definitions.--For purposes of the rules relating to SIMPLE
plans, compensation means compensation required to be
reported by the employer on Form W-2, plus any elective
deferrals of the employee. In the case of a self-employed
individual, compensation means net earnings from self-
employment. The term employer includes the employer and
related employers. Related employers include trades or
businesses under common control (whether incorporated or
not), controlled groups of corporations, and affiliated
service groups. In addition, the leased employee rules apply.
SIMPLE 401(k) plans
In general, under the House bill, a cash or deferred
arrangement (i.e., 401(k) plan), is deemed to satisfy the
special nondiscrimination tests applicable to employee
elective deferrals and employer matching contributions if the
plan satisfies the contribution requirements applicable to
SIMPLE plans. In addition, the plan is not subject to the
top-heavy rules for any year for which this safe harbor is
satisfied. The plan is subject to the other qualified plan
rules.
The safe harbor is satisfied if, for the year, the employer
does not maintain another qualified plan and (1) employees'
elective deferrals are limited to no more than $6,000, (2)
the employer matches employees' elective deferrals up to 3
percent of compensation (or, alternatively, makes a 2 percent
of compensation nonelective contribution on behalf of all
eligible employees with at least $5,000 in compensation), and
(3) no other contributions are made to the arrangement.
Contributions under the safe harbor have to be 100 percent
vested. The employer cannot reduce the matching percentage
below 3 percent of compensation.
Repeal of SARSEPs
Under the House bill, SARSEPs are repealed.
Effective date
The provision relating to SIMPLE plans are effective for
years beginning after December 31, 1996. The repeal of
SARSEPs applies to years beginning after December 31, 1996,
unless the SARSEP was established before January 1, 1997.
Consequently, an employer is not permitted to establish a
SARSEP after December 31, 1996. SARSEPs established before
January 1, 1997, can continue to receive contributions under
present-law rules, and new employees of the employer hired
after December 31, 1996, can participate in the SARSEP in
accordance with such rules.
Senate amendment
The Senate amendment is the same as the House bill, except
for the following modifications.
Under the Senate amendment, a SIMPLE plan can be adopted by
employers who employed 100 employees or less with at least
$5,000 in compensation for the preceding year. Employers who
no longer qualify are given a 2-year grace period to continue
to maintain the plan.
Under the Senate amendment, eligible employees are given 60
days before the beginning of any year (or the 60-day period
before first beginning eligible to participate in the plan)
to elect to participate in the SIMPLE plan.
For purposes of the 2 percent of compensation nonelective
contribution formula, no more than $150,000 of compensation
can be taken into account in any year with respect to any
eligible employee.
The Senate amendment clarifies that an employer is
permitted to designate a SIMPLE account trustee to which
contributions on behalf of eligible employees are made. The
Senate amendment also amends title I of ERISA to provide that
only simplified reporting requirements apply to SIMPLE plans
and so that the employer (and any other plan fiduciary) will
not be subject to fiduciary liability resulting from the
employee (or beneficiary) exercising control over the assets
in the SIMPLE account. For this purpose, an employee (or
beneficiary) is treated as exercising control over the assets
in his or her account upon the earlier of (1) an affirmative
election with respect to the initial investment of any
contributions, (2) a rollover contribution (including a
trustee-to-trustee transfer) to another SIMPLE account or
IRA, or (3) one year after the SIMPLE account is established.
Conference agreement
The conference agreement follows the Senate amendment.
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