[159] Explanation of provisions Under the bill, the administrator of every funded plan of deferred compensation (except for nonqualified governmental plans and nonqualified church plans) is to file an annual statement with the Secretary of the Treasury regarding individuals who have a right to a deferred vested benefit under the plan and who, during the year, separated from service covered by the plan. The Secretary of the Treasury is to provide this information to the Secretary of Health, Education, and Welfare; in this way it is contemplated that the plan administrator can file this statement together with other annual returns for the plan filed with the Secretary of the Treasury. (It is also contemplated that similar registration requirements will be established under the Labor Department. Consequently, to avoid the problem of duplicate reports, the bill provides that regulations issued by the Secretary of the Treasury respecting this provision will not be effective for plan years beginning after 1975. Your committee expects that the Secretary of the Treasury also will approve regulations issued by the Secretary of Labor.) The annual statement is to include the name of the plan, the name and address of the plan administrator, and the name and taxpayer identifying number (generally the Social Security number) of every individual who has separated from service covered by the plan in the plan year for which the statement is filed and who is entitled to a deferred vested benefit under the plan. The statement also is to include information on the nature, amount and form of the individual's deferred vested benefit as of the time he left employment. In addition, the statement is to include other information required by the Secretary of the Treasury. However, the statement need not include information about persons who separated from service if they were paid retirement benefits, such as annuities, from the plan during the year of separation. In addition, each covered plan is to notify the Secretary of the Treasury of any change of name of the plan or change of name or address of the plan administrator, any plan termination, or any plan division or merger or consolidation with any other plan. The plan administrator also is to furnish each individual included in the annual registration statement with the information in that statement regarding his plan rights. In addition, the plan administrator is to furnish satisfactory evidence to the Secretary of the Treasury, upon filing the annual registration statement, that he has furnished individual plan participants with a statement of their rights under the plan. It is expected that a declaration under penalty of perjury of delivery or mailing to each named individual will ordinarily be sufficient evidence. With respect to multiemployer plans, it may be difficult for plan administrators to determine when a plan participant has separated from service. Consequently, the Secretary of the Treasury is to establish regulations providing for annual registration statements by multiemployer plans. Upon the request of the plan participant (and in accordance with. regulations), the Social Security Administration will furnish him. any information which it has relating to his vested retirement plan benefits. In addition, when a person applies for Social Security retirement, disability, death, or hospital insurance benefits, on determining whether these benefits are due, the Social Security Administration will [160] also inform the claimant of any information which it has relating to the vested retirement plan benefits of the participant. The Social Security Administration is not to attempt to verify the accuracy of the information it receives with respect to plan rights, nor to determine the present value or status of any plan rights, but is only to report the information that it receives and records. Your committee understands that the value of plan rights will often change between the time that a report is made and the time a participant (or his beneficiaries) are informed of their rights by the Social Security Administration. However, your committee believes it is important for a plan to go on record as to these rights as of the time of separation from service. Additionally, it is expected that the Social Security Administration will make it quite clear, at the time it informs applicants of their rights, that the information given is what was received from the plan and that changes in rights may have occurred after the time the information was received from the plan. In order that persons who have left employment with vested rights before the effective date of this provision may benefit from the provision, the bill provides that the Secretary of the Treasury also may, pursuant to regulations, receive reports from covered plans relating to the deferred vested retirement benefits of any plan participant who has terminated his employment with the employer in plan years before the effective date of the provision. These reports would be filed by plan administrators on a voluntary basis. If a plan administrator fails to file the annual registration statement, he is to be subject to a penalty of $1 per day for each participant with respect to whom there has been a failure to file; the maximum penalty is $5,000 per plan year. However, plan administrators will not be subject to the penalty upon failure to file due to reasonable cause. A penalty also is to be imposed on a plan administrator who does not file with respect to changes in plan status. The penalty is to be $1 per day, up to a maximum of $1,000; however, no penalty will be owed if failure to file was due to reasonable cause. If a plan administrator willfully furnishes a false or fraudulent statement of vested rights to individual participants or willfully fails to furnish the required statement, he will be subject to a penalty of $50 per participant. Effective date The provisions of the bill which require an annual registration statement with respect to persons separating from service with vested benefits (and with respect to the certificate of rights furnished to each such person) are to with respect to plan years beginning after December 31, 1975. 2. REQUIREMENTS FOR QUALIFICATION OF TRUSTS BENEFITING OWNER EMPLOYEES Under present law (section 401 (d) of the code), if a trust provides benefits for employees some or all of whom are owner-employees, the [161] trust may qualify for tax benefits only if the trustee is a bank.1 The committee believes that this provision is too restrictive, and that other entities could handle the task as well. For that reason, the committee bill (section 1022) would permit a "person" other than a bank to be the trustee of such a trust without causing the trust's disqualification. The bank or other person performing as such a trustee must be able to satisfy the Internal Revenue Service that he will hold the trust assets in a manner consistent with the general eligibility requirements for tax qualification. Furthermore, the provision in present law allowing someone (including the employer) other than the trustee or custodian to have authority to control the investments of the plan account, whether by directing the investment policy or by exercising a veto power over investments, is retained under the committee bill. This provision generally applies to plan years beginning after the date of enactment. However, in case of a plan in existence on the date of enactment, the provision applies to plan years beginning after December 31, 1975. 3. CUSTODIAL ACCOUNTS AND ANNUITIES Present law permits custodial accounts to qualify for tax benefits as if they were trusts, provided that the custodian is a bank, and provided also that the custodial account meets the requirements that a trust would have to meet for qualification. Furthermore, the custodial account's assets must be invested solely in open-end mutual funds or solely in annuity, endowment, or life insurance contracts (and certain other conditions must be met) (sec. 401 (f) (1)). The committee believes that allowing entities other than banks to be custodians of custodial accounts that might be qualified would enhance competition and open the field to other types of enterprises that wish to engage in it and are suited for it. Accordingly, the committee bill permits a person other than a bank to be custodian of such a custodial account. In addition, in order to permit the participation of the insurance industry, the committee bill allows an annuity contract to be treated as a trust that is eligible for qualification, provided that the annuity contract meets the same requirements a custodial account must meet, just as it treats a custodial account as eligible for qualification. The bank or other person holding the assets of the custodial account or holding the annuity contract must satisfy the Internal Revenue Service that it will hold the assets in a manner consistent with the general eligibility requirements for tax qualification. (For example, any distributions prior to age 5911⁄2 to owner-employees would have to be reported to the Internal Revenue Service.) Just as the bank is treated as the trustee of a qualified custodial account under present law, so also would another entity holding the assets of a qualified custodial account or holding a qualified annuity contract be treated as the trustee under the proposed amendment. 1 This subsection of present law, and the proposed amendment, would be inapplicable for trusts created before October 10, 1962, that did not qualify for tax benefits on October 9. 1962. Those trusts would not be entitled to use either a bank or another person as trustee of a trust benefiting owner-employees. [162] This provision is to take effect as of January 1, 1974. 4. SECTION 403(B) ANNUITY PLANS Under present law, contributions to a section 403(b) plan (a plan funded by employers for the benefit of teachers or employees of taxexempt organizations) may be invested only in insurance contracts. The committee believes that it would be desirable to provide more flexibility in this area, and, accordingly, the committee bill provides that these contributions may also be placed in qualified custodial accounts if those funds are to be invested in mutual funds. The committee bill, however, would make these custodial accounts subject to certain requirements of the code, such as those pertaining to reporting, unrelated business income, and prohibited transactions. This provision is to take effect as of January 1, 1974. 5. REPORTING AND PUBLICATION OF RETURNS In order that many of the new rules governing qualified plans may be enforced, new reporting and publication requirements are needed.. The bill restates present law by requiring employers (or plan administrators) who establish or maintain deferred compensation plans. to file annual information returns. Also, the bill provides that the Secretary of the Treasury may provide reporting requirements with respect to the retirement savings deduction and individual retirement accounts, etc. The bill opens to public inspection the employer's application for a determination that a plan is qualified and that the trust under the plan is exempt (including papers submitted in support of these applications). Additionally, determination letters issued by the Internal Revenue Service dealing with qualification or exemption of plans and trusts are to be open to public inspection. Annual returns with respect to qualified plans are also to be open to public inspection. However, under the bill information contained in these papers and documents from which the compensation of any participant (or other person) may be ascertained is not to be open to public inspection. (However, all other information in these documents is to be available to the public, including information such as the numbers of individuals covered and not covered in a plan, listed by compensation range.) These rules are to enable plan participants and beneficiaries to obtain the full information needed to enforce their plan rights, pursuant to the new rules established in the bill, and are also to protect the confidentiality of information regarding the financial status of specific individuals. The bill establishes a penalty for failure to file annual returns; the penalty will be $10 for each day that a return is late, up to a maximum penalty of $5,000 for any one failure to file. However. this penalty will not be owed if failure to file is shown to be due to reasonable cause. For this purpose, your committee's intent is that a failure to provide material items of information called for on a return be treated as a failure to file a return. The provisions of the bill making applications, determination letters and other documents open to public inspection are to go into effect for [163] applications filed or documents issued after December 3, 1975. The provisions of the bill requiring annual returns to be filed are to become effective for plan years beginning after the date of enactment. The provisions regarding reporting with respect to individual retirement accounts are to become effective on January 1, 1974. Present law 6. CERTAIN PUERTO RICAN PENSION PLANS Under present law a pension trust, to be a qualified trust under section 401 of the code, must be created or organized in the United States. Thus, a Puerto Rican pension trust which qualifies for tax exemption under the laws of Puerto Rico (13 L.P.R.A. § 3165) is not exempt from U.S. tax on its income from U.S. sources. General reasons for change Puerto Rican pension trusts which satisfy the requirements of the Puerto Rican tax law are unable to diversify their portfolio by investing in U.S. securities without paying U.S. income tax on the income derived from such investments since they are not able to qualify for exemption under the U.S. tax law. On the other hand, since the requirements for qualification under U.S. and Puerto Rican law are roughly comparable, a Puerto Rican pension plan is able today to establish a trust in the United States which satisfies both the U.S. and the Puerto Rican tax provisions. Since the Puerto Rican Government has established requirements in its tax law for when a trust forming part of a pension plan for participants who are residents of the Commonwealth of Puerto Rico is entitled to be treated as a qualified trust, your committee believes it is appropriate to eliminate the distinction under U.S. law as to the place of organization or creation of a trust entitled to be qualified under U.S. law, if that trust is created or organized in Puerto Rico and if the trust has satisfied the requirements for qualification under the Puerto Rican tax laws. Explanation of provision Your committee's bill provides that for purposes of exemption from U.S. tax under section 501 (a) of the code, a trust which is part of a pension, profit-sharing, or stock bonus plan all of the participants of which are residents of the Commonwealth of Puerto Rico is to be treated as an organization described in section 401 (a) of the code, if the trust forming part of the plan is exempt from income taxes (13 L.P.R.A. § 3165) under the laws of the Commonwealth of Puerto Rico. Effective date The provision is to be effective for taxable years beginning after December 31, 1973. 7. DEDUCTION FOR CERTAIN EMPLOYER CONTRIBUTIONS FOR SEVERANCE PAYMENTS REQUIRED BY FOREIGN LAW Present law Under present law contributions to a nonqualified trust are deductible (sec. 404 (a)(5)) in the year in which an amount attributable to |