Principio de funcionamiento del sistema de control propuesto

Current Law

A qualified retirement plan sponsor is permitted to delay covering employees until after they work at least 1,000 hours in a year. In other words, retirement plans are not required to cover employees working less than about half time. Also, if a sponsor provides for immediate vesting, it can delay covering employees until they work at least 1,000 hours in each of two years. However, this two-year eligibility rule cannot delay beyond one year an employee’s eligibility to make section 401(k) elective contributions. Similar to the 1,000-hour threshold for coverage eligibility, employees also are not required to be credited with a year of service for purposes of vesting in employer contributions unless they work at least 1,000 hours in a year.

A qualified section 401(k) plan must benefit eligible employees in a way that does not

discriminate in favor of highly compensated employees (HCEs). In particular, the amount HCEs can contribute is limited based on the amount non-HCEs contribute. In general, all eligible employees (and their contributions) count in applying this test. To encourage employers to cover employees earlier than required, the plan sponsor may apply the test separately for the group of “early entry” employees as distinct from other eligible employees.

Reasons for Change

Part-time employees who work less than 1,000 hours each year can be permanently excluded not only from eligibility to participate in a qualified retirement plan and benefit from employer contributions but even from eligibility to make section 401(k) salary reduction contributions. Overall retirement savings could increase if more part-time employees were eligible at least to make section 401(k) salary reduction contributions under employer-sponsored plans, provided that the expansion was designed to avoid having the unintended effects of discouraging

employers from sponsoring plans or prompting employers to limit hours or refrain from hiring part-time workers.

Proposal

The proposal would require section 401(k) plans to expand eligibility to participate by permitting employees to make salary reduction contributions if the employee has worked at least 500 hours per year with the employer for at least three consecutive years. The proposal would not require expanded eligibility to receive employer contributions, including employer matching

contributions. The three-year condition would help address the concern that part-time workers tend to change jobs frequently, after accumulating only small account balances that either are cashed out or, if left behind in the plan, can be costly to administer relative to the size of the balance. The proposal would also require a plan to credit, for each year in which such an employee worked at least 500 hours, a year of service for purposes of vesting in any employer contributions.

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With respect to employees newly covered under the proposed change, employers would receive nondiscrimination testing relief (similar to current-law relief for plans covering otherwise

excludable employees), including permission to exclude these employees from top-heavy vesting and top-heavy benefit requirements.

142 FACILITATE ANNUITY PORTABILITY Current Law

A section 401(k) plan generally cannot distribute amounts attributable to an employee’s elective contributions before (i) the employee’s death, disability, severance from employment, attainment of age 59½, or hardship, or (ii) termination of the plan.

Distributions from a qualified retirement plan are subject to a 10-percent tax, in addition to any income or other applicable taxes, unless the distribution is (i) made on or after the employee has attained age 59½, (ii) made to a beneficiary on or after the death of the employee, (iii)

attributable to the employee being disabled, (iv) part of a series of substantially equal periodic payments (made not less frequently than annually) made for the life (or life expectancy) of the employee or the joint lives (or life expectancies) of the employee and a designated beneficiary, (v) made to an employee after separation from service after attaining age 55, (vi) a dividend paid with respect to certain employer securities held in an employee stock ownership plan, or (vii) made under certain other limited circumstances.

Reasons for Change

In recent years, the Department of the Treasury has sought to reduce or eliminate impediments to offering lifetime income options, such as annuities, within 401(k) and other defined contribution retirement plans. For example, the Department of the Treasury has issued guidance permitting qualified longevity annuities in retirement plans and IRAs and providing relief under

nondiscrimination rules to facilitate the inclusion of deferred annuities inside target date funds that are offered as a default investment in a section 401(k) plan.

Another impediment to offering annuities is a concern that employers making an accumulation annuity investment available within a plan do not have good options if the employer wants (or needs) to remove the annuity investment option from the plan (for example, because a new trustee or recordkeeper will not support the annuity investment or the annuity product is no longer available on favorable terms). In some cases, plans and participants may incur significant surrender charges or other penalties if the annuity investment option is discontinued.

Proposal

The proposal would permit a plan to allow participants to take a distribution of a lifetime income investment through a direct rollover to an IRA or other retirement plan if the annuity investment is no longer authorized to be held under the plan, without regard to whether another event permitting a distribution (such as a severance from employment) has occurred. The distribution would not be subject to the 10-percent additional tax. By requiring the distribution to be

accomplished through a direct rollover to an IRA or other retirement plan, the proposal would keep assets within the tax-favored retirement system to the extent possible.

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SIMPLIFY MINIMUM REQUIRED DISTRIBUTION (MRD) RULES