Home | About NCTR | Resources | Meetings | News Room | Member Directory

Rep. Earl Pomeroy, D-ND and Rep. Jim Kolbe, R-AZ

H.R. 3503 SECTION-BY-SECTION DESCRIPTION

SECTION 1. SHORT TITLE; AMENDMENT OF 1986 CODE.

Section 1 of RAP names the bill the Retirement Account Portability Act of 1998 and makes clear that all references in the bill to section and provision numbers are to the Internal Revenue Code of 1986 (unless otherwise noted).

SECTION 2. ROLLOVERS ALLOWED AMONG VARIOUS TYPES OF PLANS.

Section 457 Plans. State and local government employees typically have access to a tax deferred compensation plan called a 457 plan. Section 2 of RAP for the first time allows these employees to roll funds from their 457 plans into individual retirement accounts (IRAs) or into the retirement plans of their new employers when they switch jobs. Section 2 of RAP also allows workers moving from the for-profit and non-profit sectors into state and local government to roll their retirement savings from their prior jobs into the section 457 plan available at their new state or local government workplace.

Section 403(b) Plans. Section 403(b) plans are tax-deferred retirement plans available to the employees of many non-profit entities and public school systems. Section 2 of RAP for the first time allows these employees to roll funds from their 403(b) plans into the retirement plan of their new for-profit or state/local government employer when they switch jobs. Section 2 also allows workers moving from a for-profit or state/local government job to a job that offers a 403(b) plan to roll their retirement savings from their prior job into the 403(b) plan.

No Employer Mandates. While RAP removes the legal obstacles that have prevented rollovers in the situations described above, it contains no mandates requiring employers to accept rollovers from their new employees. Thus, under RAP, a rollover will occur when the employee chooses to move the money and when the employer agrees to accept it.

SECTION 3. ROLLOVERS OF IRAs INTO WORKPLACE RETIREMENT PLANS.

Expanded Conduit IRAs. Under current law, employees who switch jobs but who cannot or do not roll their retirement savings into a plan at a new workplace may place the money into a special IRA called a "conduit IRA." As long as they do not add other contributions to this conduit IRA, the funds in the conduit IRA can be rolled back into a workplace retirement plan at a later date. Under current law, however, a conduit IRA is severely limited with respect to the types of workplace retirement plan money it can accept and the types of workplace retirement plans into which the conduit IRA funds can later be transferred. Section 3 of RAP corrects this problem by allowing workers to move any kind of defined contribution plan money into a conduit IRA and then allowing this money to be rolled back into any variety of defined contribution plan.

Consolidation of Deductible IRA Contributions. Section 3 also allows many individuals to consolidate their IRA funds and their workplace retirement savings in a single place. Under Section 3 of RAP, individuals who have IRAs and whose IRA contributions have all been tax deductible will be offered the opportunity to transfer funds from their IRAs into their workplace retirement plan -- provided that the retirement plan trustee meets the same high standards as an IRA trustee.

SECTION 4. ROLLOVERS OF AFTER-TAX CONTRIBUTIONS.

While pre-tax contributions to retirement plans are perhaps the most common form of employee contribution, many plans also allow participants to make after-tax contributions., many plans also allow participants to make after-tax contributions. Under current law, these after-tax contributions cannot be rolled over when employees switch jobs, meaning workers face the confusing prospect of being able to roll over their pre-tax money but not their after-tax money. Section 4 of RAP will for the first time allow individuals to roll over their after-tax contributions to their new employer's plan or to an IRA as long as the plan or IRA provider agrees to track and report the after-tax portion of the rollover for the individual.

SECTION 5. FASTER VESTING FOR EMPLOYER MATCHING CONTRIBUTIONS TO DEFINED CONTRIBUTION PLANS.

Vesting schedules dictate the period of time it takes for employer contributions made to retirement plan accounts to become the property of the employee. When employer contributions have vested, they can be taken by workers if they leave employment. Under current law, matching contributions made by employers to defined contribution retirement plans must either be 100% vested after 5 years or gradually vested in increments over 7 years. Section 5 of RAP requires that employer matching contributions to defined contribution plans be vested either 100% after 3 years or gradually vested in increments over 6 years.

SECTION 6. EXTENSION OF MISSING PARTICIPANTS PROGRAM.

The Pension Benefit Guaranty Corporation (PBGC), an executive branch agency affiliated with the Department of Labor, currently operates the Missing Participant Program, which helps to reunite workers with pension benefits they may have earned earlier in their careers. Under the program, when a defined benefit pension plan terminates and the plan is unable to locate former workers who are entitled to pension benefits, the terminating plan transfers these benefits to the PBGC which then works to locate the employees in question. Section 6 of RAP extends this program to cover defined contribution plans (such as 401(k)s) and multiemployer defined benefit plans, helping the many workers covered by these retirement plans to be reunited with their benefits.

SECTION 7. WAIVER OF 60-DAY ROLLOVER PERIOD.

Under current law, a rollover of retirement money is sometimes made directly from the worker's old retirement plan to the retirement plan at her new workplace or to an individual retirement account (IRA). Alternatively, the retirement funds are paid directly to the worker at the time she changes jobs. In order not to be taxed on the money paid out, the individual must roll the funds over to another plan or IRA within 60 days. Section 7 of RAP extends this 60 day deadline in cases of natural disaster and military service so that individuals in these situations can avoid the substantial tax penalties (income tax and an additional 10% early withdrawal penalty) that would otherwise result from missing the 60-day rollover deadline.

SECTION 8. RATIONALIZE THE RESTRICTIONS ON DISTRIBUTIONS FROM DEFINED CONTRIBUTION PLANS.

Under current law, when a business is sold but an employee continues to work in the same role for the new employer, he can transfer much of his retirement money to the retirement plans of the new company. However, under the "same desk rule" this transfer is not permitted for funds in defined contribution plans such as 401(k)s, requiring the employee to leave the money in his former employer's plan. Section 8 of RAP repeals the same desk rule so that all of a worker's retirement funds can be transferred to the new employer's plan after the corporate sale has taken place.

SECTION 9. TRANSFEREE DEFINED CONTRIBUTION PLAN NEED NOT HAVE SAME DISTRIBUTION OPTIONS AS TRANSFEROR DEFINED CONTRIBUTION PLAN.

One barrier to portability under current law is that employees are restricted from transferring funds from a defined contribution plan in which they used to participate to their new employer's defined contribution plan if the new plan does not have the same benefit options as the old plan. Under section 9 of RAP, employees and their spouses who wish to transfer their funds to the new employer's plan may choose to do so even when the benefit options differ.

SECTION 10. ALLOWANCE OF EMPLOYERS TO DISREGARD ROLLOVERS FOR PURPOSES OF CASHOUT AMOUNTS.

Under current law, employers are allowed to cash out the retirement benefits of departing employees when these benefits are valued at less than $5,000. This reduces the administrative burden that would otherwise be placed on employers by management of many small retirement plan accounts. Section 10 of RAP makes clear that in determining whether employees' benefit levels fall below the $5,000 cashout threshold, employers' need not take into account any benefits that have been rolled over by the employee from a prior job. Thus, employers need only evaluate how retirement benefits earned at their own workplace compare to the $5,000 threshold. Without Section 10, employers might be reluctant to accept rollovers because they could be forced to maintain accounts even for workers who exceed the $5,000 threshold only by virtue of the money they brought with them from a prior job.

SECTION 11. PURCHASE OF SERVICE CREDITS IN GOVERNMENTAL DEFINED BENEFIT PLANS.

Employees of state and local governments, particularly teachers, often move between states and school districts in the course of their careers. Under state law, these employees often have the option of purchasing service credits in their state defined benefit pension plans in order to make up for time spent in another state or district. With purchase of these service credits, workers can earn a pension reflecting a full career of employment in the state in which they conclude their career. Under current law, these employees are not able to use the money they have saved in their 403(b) or 457 defined contribution plan to purchase these service credits and often lack other resources to use for this purpose. Under Section 10 of RAP, state and local government employees will for the first time be able to use funds from these retirement savings plans to purchase service credits and earn a full defined benefit pension.

SECTION 12. PROVISIONS RELATING TO PLAN AMENDMENTS.

Section 12 of RAP establishes a transition period so that retirement plans can preserve their tax qualified status while they make any plan amendments required by enactment of the RAP legislation.