September 1996

Benefit Provisions of H.R. 3448: Small Business Job Protection Act 1996

Defined Benefit and Defined Contribution Plans

  • Replaces the current definition of highly compensated employees with a two-part test that defines a highly compensated employee (HCE) as either a 5 percent owner or a person who earned more than $80,000 in the preceding year. Repeals the rule requiring the highest paid officer to be treated as an HCE and repeals the top-100 rule. Repeals family aggregation rules in both the HCE definition and the $150,000 compensation cap.
    Effective Date: January 1, 1997
  • Repeals sec. 415 combined limit on defined benefit and defined contribution plans and suspends the excise tax on excess distributions until the repeal takes effect.
    Effective Date: January 1, 2000 (Excise tax suspension effective January 1, 1997).
  • Repeals the special aggregation rules under sec. 401(d)(1) that apply to plans maintained by owner-employees of unincorporated businesses and do not apply to other qualified plans.
    Effective Date: January 1, 1997
  • Provides that "makeup" contributions and benefits provided to employees reemployed after military leave, including "makeup" elective deferrals and employee and matching contributions required by the Uniformed Services Employment and Reemployment Rights Act of 1994, may be provided and deducted notwithstanding various limits and requirements under the tax law's qualification, exclusion, and deduction rules. Also, allows for suspending loan repayments during military leave.
    Effective Date: December 12, 1994
  • Requires the Internal Revenue Service (IRS) to develop easy-to-understand sample language for inclusion in a spousal consent and waiver form clarifying any waiver of the qualified joint and survivor annuity and qualified preretirement survivor annuity forms of benefit. Also requires IRS to develop sample language for inclusion in a qualified domestic relations order, focusing attention on the need to consider the treatment of any lump-sum payment, joint and survivor annuity, and preretirement survivor annuity benefit.
    Effective Date: sample language to be issued by January 1, 1997
  • Permits a plan to provide the written joint and survivor annuity explanation after the annuity starting date, provided that the applicable election period does not end before the 30th day after the date on which the explanation is provided. Authorizes IRS to limit this rule, except that IRS may not limit the period of time by which the annuity starting date precedes the provision of the written explanation other than by providing that the annuity starting date may not be earlier than the termination of employment.
    Effective Date: January 1, 1997
  • Modifies the required distribution rules to provide that, except for 5 percent owners, distributions must commence no later than April 1 following the later of (1) the employee's year of retirement or (2) the year the employee attains age 70-1/2. If an employee hasn't retired and distributions haven't commenced by age 70-1/2, the employee's accrued benefit must be actuarially increased to take into account the period after age 70-1/2 in which the employee was not receiving any benefits under the plan. Under a special rule, the 5 percent owner exception and the actuarial adjustment rule do not apply to governmental plans and church plans.
    Effective Date: January 1, 1997

    Defined Benefit Plans Only

  • Provides a uniform retirement age for pension nondiscrimination. In applying the general nondiscrimination rules, the Social Security retirement age is a uniform retirement age.
    Effective Date: January 1, 1997

    Defined Contribution Plans Only

  • Creates a new retirement vehicle, the savings incentive match plan for employees (SIMPLE), for businesses with 100 or fewer employees that do not maintain another employment-based retirement plan. A SIMPLE plan can be set up as an individual retirement account for each employee or it can be in the form of a 401(k) plan. Under a SIMPLE plan, each employee earning at least $5,000 (for two prior years and the current year) is eligible to make elective, nontaxable contributions up to $6,000 (indexed), and the employer is obligated to make either dollar-for-dollar matching contributions up to 3 percent of pay or a 2 percent nonelective contribution for all eligible employees. Under the matching contribution option, the employer may provide matching contributions of less than 3 percent of pay in elective contributions (but not less than 1 percent of pay) in two out of five years. Pay is capped at $150,000 (indexed). SIMPLE plans are not subject to nondiscrimination rules. All contributions must be 100 percent vested immediately. Salary reduction simplified employee pensions (SARSEPs) are repealed, although existing SARSEPs are grandfathered.
    Effective Date: January 1, 1997
  • Eliminates minimum participation rule for defined contribution plans. Provides that a defined benefit plan must benefit at least (1) the lesser of 50 employees; or (2) the greater of 40 percent of all employees or two employees (if an employer has only one employee, then just one employee). Repeals the requirement that a line of business have at least 50 employees when determining whether a plan satisfies the minimum participation rule.
    Effective Date: January 1, 1997

    401(k) Plans

  • Creates a nondiscrimination safe harbor alternative to ADP/ACP testing for all qualified cash or deferred arrangements . Employers must (1) match 3 percent of eligible non-HCEs compensation whether they make elective contributions or not, or (2) match 100 percent of each non-HCEs elective contribution up to 3 percent of compensation and an additional 50 percent from 3 percent to 5 percent of compensation. Employer contributions must be 100 percent vested.
    Effective Date: January 1, 1999
  • Permits a 401(k) plan, when running the ADP/ACP tests, to disregard non-highly compensated employees who are eligible to participate under the plan but have not yet met the minimum age and service requirements.
    Effective Date: January 1, 1999
  • Broadens 401(k) eligibility to tax-exempt organizations. Continues to bar state and local governments from maintaining 401(k) plans (subject to the grandfather for state and local plans adopted before May 6, 1986). Allows rural cooperatives and Indian tribal governments to maintain 401(k) plans.
    Effective Date: January 1, 1997
  • Allows rural cooperative 401(k) plans to make distributions available upon hardship and after age 59-1/2. Expands the definition of rural cooperative to include certain public utility districts.
    Effective Date: Date of enactment

    403(b) Plans

  • Requires that a new simplified table of "anticipated payments" be used for purposes of calculating the nontaxable portion of annuity distributions under qualified plans, 403(a) annuities, and 403(b) annuities.
    Effective Date: Applicable when annuity starting date is 90 days after date of enactment.
  • Permits sec. 403(b) tax-sheltered annuities to allow participants to change their salary reduction contribution elections during the year under rules similar to the more flexible rules that apply to 401(k) plans.
    Effective Date: 1996
  • Annual limit compliance. Provides that each 403(b) contract, rather than the 403(b) plan, must include language precluding elective contributions in excess of the annual limit ($9,500 for 1996).
    Effective Date: 1996 with 90-day transition period after enactment

    457 Plans

  • Requires that sec. 457 plan assets be held in trust. The House/Senate Conference Report says that amounts held in trust may be loaned to participants in accordance with the loan rules for qualified plans.
    Effective Date: Date of enactment for new plans; January 1, 1999 for existing plans.

    Individual Retirement Accounts (IRAs)

  • Allows nonworking spouses to contribute $2,000 (as opposed to $250) to an IRA.
    Effective Date: January 1, 1997

    Distributions from Tax Qualified Plans

  • Subjects failures to file reports relating to distributions from IRAs and qualified plans (e.g., Forms 5498 and 1099-R) to the generally applicable, uniform penalty provisions for failure to satisfy the Form 1099 reporting requirements.
    Effective Date: January 1, 1997
  • Suspends the 15 percent excise tax on excess qualified plan, 403(a), 403(b), and IRA distributions in 1997, 1998, and 1999. Also, in applying the excise tax to distributions in 2000 and subsequent years, treats distributions in 1997, 1998, and 1999 as having been made first from amounts that are not grandfathered from the excise tax (under sec. 4980A(f)).
    Effective Date: 1997, 1998, and 1999 only
  • Repeals five-year income averaging for all lump-sum distributions. Retains capital gains and 10-year averaging treatment grandfathered in the Tax Reform Act of 1986.
    Effective Date: 2000

    Special Provisions

  • Repeals the rule allowing banks and other financial institutions that make securities acquisition loans to ESOPs to exclude from income 50 percent of the interest they receive on such ESOP loans.
    Effective Date: Effective for loans made after the date of enactment.
  • Requires DOL to issue regulations providing guidance for purposes of determining which assets held in an insurer's general account (i.e., assets other than plan assets held in separate accounts) constitute plan assets under ERISA. These regulations will apply to all contracts between an insurer and an employee benefit plan (which are supported by assets in the general account) issued on or before December 31, 1998. The regulations must protect the interests and rights of the plan and its participants and beneficiaries and require general account policies to meet specific conditions, including disclosure and prudence. Compliance by an insurer with the regulations will be deemed compliance with ERISA.
    Effective Date: 1975 to December 31, 1998, except for civil actions commenced before 11/7/95
  • Modifies the tax rules for inbound grantor trusts with foreign grantors, foreign trusts that are not grantor trusts, outbound foreign grantor trusts with U.S. grantors, trust residency determinations, information reporting and penalties relating to foreign trusts, and reporting of foreign gifts.
    Effective Date: Date of enactment.

    Nonpension Provisions

  • Reinstates the sec. 127 exclusion for employer-provided educational assistance.
    Effective Date: Provision is effective with respect to taxable years beginning after 12/31/94 and before 1/1/97.

    For more information, contact Bill Pierron (202) 775-6353 or Ken McDonnell, (202) 775-6342.
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