ESTABLISHMENT OF SAVINGS INCENTIVE MATCH PLANS FOR EMPLOYEES OF SMALL EMPLOYERS.

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.— 110 STAT. 1793 “(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)(l7). “(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, position, 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 eriod 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 matching110 STAT. 1794 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 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 emplayer 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 under110 STAT. 1795 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 or Simple Retirement Accounts.— 110 STAT. 1796 “(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— 110 STAT. 1797 “(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: 110 STAT. 1798 “(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: “(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 pension110 STAT. 1799 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.”. 110 STAT. 1800 (e) Effective Date.— The amendments made by this section shall apply to taxable years beginning after December 31, 1996.