SECTION 1. SHORT TITLE.

    This Act may be cited as the ``401(k) Protection Act of 1996''.

SEC. 2. QUALIFIED EMPLOYER PLANS PROHIBITED FROM MAKING LOANS THROUGH 
              CREDIT CARDS AND OTHER INTERMEDIARIES.

    (a) In General.--Subsection (a) of section 401 of the Internal 
Revenue Code of 1986 is amended by adding at the end the following new 
paragraph:
            ``(35) Prohibition of loans through credit cards and other 
        intermediaries.--A trust shall not constitute a qualified trust 
        under this section if the plan makes any loan to any 
        beneficiary under the plan through the use of any credit card 
        or any other intermediary.''
    (b) Effective Date.--The amendment made by subsection (a) shall 
apply to plan years beginning after the date of the enactment of this 
Act.

SEC. 3. LOANS FROM QUALIFIED EMPLOYER PLANS TREATED AS DISTRIBUTIONS 
              UNLESS USED TO PURCHASE A FIRST HOME, TO PAY HIGHER 
              EDUCATION OR FINANCIALLY DEVASTATING MEDICAL EXPENSES, OR 
              DURING PERIODS OF UNEMPLOYMENT.

    (a) In General.--Subsection (p) of section 72 of the Internal 
Revenue Code of 1986 (relating to loans treated as distributions) is 
amended by redesignating paragraphs (3), (4), and (5) as paragraphs 
(4), (5), and (6), respectively, and by inserting after paragraph (2) 
the following new paragraph:
            ``(3) Exception only to apply to certain loans.--Paragraph 
        (2) shall apply to any loan only if such loan is--
                    ``(A) a qualified first-time homebuyer loan (as 
                defined in paragraph (7)),
                    ``(B) a qualified higher education loan (as defined 
                in paragraph (8)),
                    ``(C) a qualified medical expense loan (as defined 
                in paragraph (9)), or
                    ``(D) a qualified unemployment loan (as defined in 
                paragraph (10)).''
    (b) Definitions.--Subsection (p) of section 72 of such Code is 
amended by adding at the end the following new paragraphs:
            ``(7) Qualified first-time homebuyer loan.--
                    ``(A) In general.--For purposes of paragraph (3), 
                the term `qualified first-time homebuyer loan' means 
                any loan received by an individual to the extent the 
                amount of the loan is used within a reasonable period 
                to pay qualified acquisition costs with respect to a 
                principal residence of a first-time homebuyer who is 
                such individual, the spouse of such individual, or any 
                child, grandchild, or ancestor of such individual or 
                the individual's spouse.
                    ``(B) Qualified acquisition costs.--For purposes of 
                this paragraph, the term `qualified acquisition costs' 
                means the costs of acquiring, constructing, or 
                reconstructing a residence. Such term includes any 
                usual or reasonable settlement, financing, or other 
                closing costs.
                    ``(C) First-time homebuyer; other definitions.--For 
                purposes of this paragraph--
                            ``(i) First-time homebuyer.--The term 
                        `first-time homebuyer' means any individual 
                        if--
                                    ``(I) such individual (and if 
                                married, such individual's spouse) had 
                                no present ownership interest in a 
                                principal residence during the 2-year 
                                period ending on the date of 
                                acquisition of the principal residence 
                                to which this paragraph applies, and
                                    ``(II) subsection (h) or (k) of 
                                section 1034 did not suspend the 
                                running of any period of time specified 
                                in section 1034 with respect to such 
                                individual on the day before the date 
                                the loan is received.
                            ``(ii) Principal residence.--The term 
                        `principal residence' has the same meaning as 
                        when used in section 1034.
                            ``(iii) Date of acquisition.--The term 
                        `date of acquisition' means the date--
                                    ``(I) on which a binding contract 
                                to acquire the principal residence to 
                                which subparagraph (A) applies is 
                                entered into, or
                                    ``(II) on which construction or 
                                reconstruction of such a principal 
                                residence is commenced.
            ``(8) Qualified higher education loan.--For purposes of 
        paragraph (3)--
                    ``(A) In general.--The term `qualified higher 
                education loan' means any loan received by an 
                individual to the extent the amount of the loan is used 
                within a reasonable period to pay expenses for tuition, 
                fees, books, supplies, and equipment required for the 
                enrollment or attendance of--
                            ``(i) the individual,
                            ``(ii) the individual's spouse, or
                            ``(iii) any child (as defined in section 
                        151(c)(3)), grandchild, or ancestor of the 
                        individual or the individual's spouse,
                at an eligible educational institution (as defined in 
                section 135(c)(3)).
                    ``(B) Coordination with savings bond provisions.--
                The amount of qualified higher education expenses for 
                any taxable year shall be reduced by any amount 
                excludable from gross income under section 135.
            ``(9) Qualified medical expense loan.--The term `qualified 
        medical expense loan' means any loan received by an individual 
        to the extent the amount of the loan does not exceed the amount 
        allowable as a deduction under section 213 to the individual 
        for amounts paid during the taxable year for medical care 
        (determined without regard to whether the taxpayer itemizes 
        deductions for such taxable year).
            ``(10) Qualified unemployment loan.--The term `qualified 
        unemployment loan' means any loan to an individual after 
        separation from employment, if--
                    ``(A) such individual has received unemployment 
                compensation for 12 consecutive weeks under any Federal 
                or State unemployment compensation law by reason of 
                such separation, and
                    ``(B) such loan is received during any taxable year 
                during which such unemployment compensation is paid or 
                the succeeding taxable year.
        To the extent provided in regulations, a self-employed 
        individual shall be treated as meeting the requirements of 
        subparagraph (A) if, under Federal or State law, the individual 
        would have received unemployment compensation but for the fact 
        the individual was self-employed.''
    (c) Effective Date.--The amendments made by this section shall 
apply to loans made after the date of the enactment of this Act.
401(k) Protection Act of 1996 - Amends the Internal Revenue Code with respect to qualified employer plans to:  (1) prohibit loans made through credit cards or other intermediaries; and (2) treat loans as distributions unless used to purchase a first-time home, pay higher education or financially devastating medical costs, or used during periods of unemployment.
401(k) Protection Act of 1996