To amend the Internal Revenue Code of 1986 to allow roll-over contributions to individual retirement plans from deferred compensation plans maintained by States and local governments and to allow State and local governments to maintain 401(k) plans.

Summary: Amends the Internal Revenue Code to allow: (1) a rollover contribution to an individual retirement account from a State or local government deferred compensation plan (section 457 plan); and (2) such an entity to maintain a 401k plan.

SECTION 1. ROLLOVER CONTRIBUTIONS FROM DEFERRED COMPENSATION PLANS OF 
              STATE AND LOCAL GOVERNMENTS.

    (a) Rollovers From Section 457 Plans.--
            (1) In general.--Section 457(e) of the Internal Revenue 
        Code of 1986 (relating to other definitions and special rules) 
        is amended by adding at the end the following:
            ``(16) Rollover amounts.--
                    ``(A) General rule.--In the case of an eligible 
                deferred compensation plan of an eligible employer 
                described in paragraph (1)(A), if--
                            ``(i) any portion of the balance to the 
                        credit of an employee in such plan is paid to 
                        such employee in a rollover distribution (other 
                        than a distribution described in subsection 
                        (d)(1)(A)(iii) or in subparagraph (A) or (B) of 
                        section 402(c)(4)),
                            ``(ii) the employee transfers any portion 
                        of the property such employee receives in such 
                        distribution to an individual retirement plan 
                        (as defined in section 7701(a)(37)), and
                            ``(iii) in the case of a distribution of 
                        property other than money, the amount so 
                        transferred consists of the property 
                        distributed,
                then such distribution (to the extent so transferred) 
                shall not be includible in gross income for the taxable 
                year in which paid.
                    ``(B) Certain rules made applicable.--Rules similar 
                to the rules of section 401(a)(31), paragraphs (2), 
                (3), (5), (6), (7), and (9) of section 402(c), and 
                section 402(f) shall apply for purposes of subparagraph 
                (A).''.
            (2) Distribution requirements.--Section 457(d)(1)(A) of 
        such Code (relating to distribution requirements) is amended by 
        inserting ``except as provided in subsection (e)(16),'' after 
        ``(A)''.
            (3) Conforming amendments.--
                    (A) Section 72(o)(4) of such Code is amended--
                            (i) by striking ``and 408(d)(3)'' and 
                        inserting ``408(d)(3), and 457(e)(16)'',
                            (ii) by inserting ``or excludable'' after 
                        ``deductible'' each place it appears, and
                            (iii) in the heading by inserting ``or 
                        Excludable'' after ``Deductible''.
                    (B) Section 219(d)(2) of such Code is amended by 
                striking ``or 408(d)(3)'' and inserting ``408(d)(3), or 
                457(e)(16)''.
                    (C) Section 401(a)(31)(B) of such Code is amended 
                by striking ``and 403(a)(4)'' and inserting ``, 
                403(a)(4), and 457(e)(16)''.
                    (D) Paragraph (4) of section 402(c) of such Code is 
                amended by inserting ``or in an eligible deferred 
                compensation plan (as defined in section 457(b)) of an 
                eligible employer described in section 457(e)(1)(A)'' 
                after ``qualified trust''.
                    (E) Section 408(a)(1) of such Code is amended by 
                striking ``or 403(b)(8)'' and inserting ``, 403(b)(8), 
                or 457(e)(16)''.
                    (F) Section 408(d)(3)(A)(ii) of such Code is 
                amended by striking ``or'' after ``501(a)'' and 
                inserting a comma, and by inserting ``, or from an 
                eligible deferred compensation plan described in 
                section 457(b)'' after ``contribution)''.
                    (G) The first sentence of subsection (e) of section 
                408A of such Code is amended--
                            (i) by inserting ``, from an eligible 
                        deferred compensation plan (as defined in 
                        section 457(b)),'' after ``account'', and
                            (ii) by inserting before the period the 
                        following: ``or in the case of such eligible 
                        deferred compensation plan section 
                        457(e)(16)''.
                    (H) Subparagraphs (A) and (B) of section 415(b)(2) 
                of such Code are each amended by striking ``and 
                408(d)(3)'' and inserting ``408(d)(3), and 
                457(e)(16)''.
                    (I) Section 4973(b)(1)(A) of such Code is amended 
                by striking ``or 408(d)(3)'' and inserting ``408(d)(3), 
                or 457(e)(16)''.
    (b) Effective Date.--The amendments made by this section shall 
apply to distributions after December 31, 1998.

SEC. 2. STATE AND LOCAL GOVERNMENTS ELIGIBLE UNDER SECTION 401(K).

    (a) In General.--Subparagraph (B) of section 401(k)(4) of the 
Internal Revenue Code of 1986 (relating to eligibility of State and 
local governments and tax-exempt organizations) is amended by striking 
clause (ii) and redesignating clause (iii) as clause (ii).
    (b) Conforming Amendment.--Clause (i) of section 401(k)(4)(B) of 
such Code is amended by striking ``Except as provided in clause (ii), 
any'' and inserting ``Any''.
    (c) Effective Date.--The amendments made by this section shall 
apply to plan years beginning after December 31, 1998.