SECTION 1. SHORT TITLE.

    This Act may be cited as the ``Public Employee Retirement Security 
Act of 1996''.

SEC. 2. TREATMENT OF GOVERNMENTAL PLANS UNDER SECTION 415.

    (a) Compensation Limit.--Subsection (b) of section 415 of the 
Internal Revenue Code of 1986 is amended by adding immediately after 
paragraph (10) the following new paragraph:
            ``(11) Special limitation rule for governmental plans.--In 
        the case of a governmental plan (as defined in section 414(d)), 
        subparagraph (B) of paragraph (1) shall not apply.''
    (b) Treatment of Certain Excess Benefit Plans.--
            (1) In general.--Section 415 of such Code is amended by 
        adding at the end the following new subsection:
    ``(m) Treatment of Qualified Governmental Excess Benefit 
Arrangements.--
            ``(1) Governmental plan not affected.--In determining 
        whether a governmental plan (as defined in section 414(d)) 
        meets the requirements of this section, benefits provided under 
        a qualified governmental excess benefit arrangement shall not 
        be taken into account. Income accruing to a governmental plan 
        (or to a trust that is maintained solely for the purpose of 
        providing benefits under a qualified governmental excess 
        benefit arrangement) in respect of a qualified governmental 
        excess benefit arrangement shall constitute income derived from 
        the exercise of an essential governmental function upon which 
        such governmental plan (or trust) shall be exempt from tax 
        under section 115.
            ``(2) Taxation of participant.--For purposes of this 
        chapter--
                    ``(A) the taxable year or years for which amounts 
                in respect of a qualified governmental excess benefit 
                arrangement are includible in gross income by a 
                participant, and
                    ``(B) the treatment of such amounts when so 
                includible by the participant,
        shall be determined as if such qualified governmental excess 
        benefit arrangement were treated as a plan for the deferral of 
        compensation which is maintained by a corporation not exempt 
        from tax under this chapter and which does not meet the 
        requirements for qualification under section 401.
            ``(3) Qualified governmental excess benefit arrangement.--
        For purposes of this subsection, the term `qualified 
        governmental excess benefit arrangement' means a portion of a 
        governmental plan if--
                    ``(A) such portion is maintained solely for the 
                purpose of providing to participants in the plan that 
                part of the participant's annual benefit otherwise 
                payable under the terms of the plan that exceeds the 
limitations on benefits imposed by this section,
                    ``(B) under such portion no election is provided at 
                any time to the participant (directly or indirectly) to 
                defer compensation, and
                    ``(C) benefits described in subparagraph (A) are 
                not paid from a trust forming a part of such 
                governmental plan unless such trust is maintained 
                solely for the purpose of providing such benefits.''
            (2) Coordination with section 457.--Subsection (e) of 
        section 457 of such Code is amended by adding at the end the 
        following new paragraph:
            ``(14) Treatment of qualified governmental excess benefit 
        arrangements.--Subsections (b)(2) and (c)(1) shall not apply to 
        any qualified governmental excess benefit arrangement (as 
        defined in section 415(m)(3)), and benefits provided under such 
        an arrangement shall not be taken into account in determining 
        whether any other plan is an eligible deferred compensation 
        plan.''
            (3) Conforming amendment.--Paragraph (2) of section 457(f) 
        of such Code is amended by striking ``and'' at the end of 
        subparagraph (C), by striking the period at the end of 
        subparagraph (D) and inserting ``, and'', and by adding at the 
        end the following new subparagraph:
                    ``(E) a qualified governmental excess benefit 
                arrangement described in section 415(m).''
    (c) Exemption for Survivor and Disability Benefits.--Paragraph (2) 
of section 415(b) of such Code is amended by adding at the end the 
following new subparagraph:
                    ``(I) Exemption for survivor and disability 
                benefits provided under governmental plans.--Paragraph 
                (5) and subparagraph (C) of this paragraph shall not 
                apply to--
                            ``(i) income received from a governmental 
                        plan (as defined in section 414(d)) as a 
                        pension, annuity, or similar allowance as the 
                        result of the recipient becoming disabled by 
                        reason of personal injuries or sickness, or
                            ``(ii) amounts received from a governmental 
                        plan by the beneficiaries, survivors, or the 
                        estate of an employee as the result of the 
                        death of the employee.''
    (d) Revocation of Grandfather Election.--
            (1) In general.--Subparagraph (C) of section 415(b)(10) of 
        such Code is amended by adding at the end the following new 
        clause:
                            ``(ii) Revocation of election.--An election 
                        under clause (i) may be revoked not later than 
                        the last day of the third plan year beginning 
                        after the date of the enactment of this clause. 
                        The revocation shall apply to all plan years to 
                        which the election applied and to all 
                        subsequent plan years. Any amount paid by a 
                        plan in a taxable year ending after the 
                        revocation shall be includible in income in 
                        such taxable year under the rules of this 
                        chapter in effect for such taxable year, except 
                        that, for purposes of applying the limitations 
                        imposed by this section, any portion of such 
                        amount which is attributable to any taxable 
                        year during which the election was in effect 
                        shall be treated as received in such taxable 
                        year.''
            (2) Conforming amendment.--Subparagraph (C) of section 
        415(b)(10) of such Code is amended by striking ``This'' and 
        inserting:
                            ``(i) In general.--This''.
    (e) Compensation.--Subsection (k) of section 415 of such Code is 
amended by adding at the end the following new paragraph:
            ``(3) Definition of compensation for government plans.--For 
        purposes of this section, in the case of a governmental plan 
        (as defined in section 414(d)), the term `compensation' 
        includes, in addition to the amounts described in subsection 
        (c)(3)--
                    ``(A) any elective deferral (as defined in section 
                402(g)(3)), and
                    ``(B) any amount which is contributed by the 
                employer at the election of the employee and which is 
                not includible in the gross income of the employee 
                under section 125 or 457.''
    (f) Effective Date.--
            (1) In general.--The amendments made by subsections (a), 
        (b), (c), and (e) shall apply to years beginning after the date 
        of the enactment of this Act. The amendments made by subsection 
        (d) shall apply with respect to revocations adopted after the 
        date of the enactment of this Act.
            (2) Treatment for years beginning before date of 
        enactment.--Nothing in the amendments made by this section 
        shall be construed to infer that a governmental plan (as 
        defined in section 414(d) of the Internal Revenue Code of 1986) 
        fails to satisfy the requirements of section 415 of such Code 
        for any taxable year beginning before the date of the enactment 
        of this Act.

SEC. 3. TREATMENT OF DEFERRED COMPENSATION PLANS OF STATE AND LOCAL 
              GOVERNMENTS AND TAX-EXEMPT ORGANIZATIONS.

    (a) Special Rules for Plan Distributions.--Paragraph (9) of section 
457(e) of the Internal Revenue Code of 1986 (relating to other 
definitions and special rules) is amended to read as follows:
            ``(9) Benefits not treated as made available by reason of 
        certain elections, etc.--
                    ``(A) Total amount payable is $3,500 or less.--The 
                total amount payable to a participant under the plan 
                shall not be treated as made available merely because 
                the participant may elect to receive such amount (or 
                the plan may distribute such amount without the 
                participant's consent) if--
                            ``(i) such amount does not exceed $3,500, 
                        and
                            ``(ii) such amount may be distributed only 
                        if--
                                    ``(I) no amount has been deferred 
                                under the plan with respect to such 
                                participant during the 2-year period 
                                ending on the date of the distribution, 
                                and
                                    ``(II) there has been no prior 
                                distribution under the plan to such 
                                participant to which this subparagraph 
                                applied.
                A plan shall not be treated as failing to meet the 
                distribution requirements of subsection (d) by reason 
                of a distribution to which this subparagraph applies.
                    ``(B) Election to defer commencement of 
                distributions.--The total amount payable to a 
                participant under the plan shall not be treated as made 
                available merely because the participant may elect to 
                defer commencement of distributions under the plan if--
                            ``(i) such election is made after amounts 
                        may be available under the plan in accordance 
                        with subsection (d)(1)(A) and before 
                        commencement of such distributions, and
                            ``(ii) the participant may make only 1 such 
                        election.''.
    (b) Cost-of-Living Adjustment of Maximum Deferral Amount.--
Subsection (e) of section 457 of such Code, as amended by section 
2(b)(2) (relating to governmental plans), is amended by adding at the 
end the following new paragraph:
            ``(15) Cost-of-living adjustment of maximum deferral 
        amount.--The Secretary shall adjust the $7,500 amount specified 
        in subsections (b)(2) and (c)(1) at the same time and in the 
        same manner as under section 415(d), except that the base 
        period shall be the calendar quarter ending September 30, 1995, 
        and any increase under this paragraph which is not a multiple 
        of $500 shall be rounded to the next lowest multiple of 
        $500.''.
    (c) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after the date of the enactment of 
this Act.

SEC. 4. TRUST REQUIREMENT FOR DEFERRED COMPENSATION PLANS OF STATE AND 
              LOCAL GOVERNMENTS.

    (a) In General.--Section 457 of the Internal Revenue Code of 1986 
is amended by adding at the end the following new subsection:
    ``(g) Governmental Plans Must Maintain Set Asides for Exclusive 
Benefit of Participants.--
            ``(1) In general.--A plan maintained by an eligible 
        employer described in subsection (e)(1)(A) shall not be treated 
        as an eligible deferred compensation plan unless all assets and 
        income of the plan described in subsection (b)(6) are held in 
        trust for the exclusive benefit of participants and their 
        beneficiaries.
            ``(2) Taxability of trusts and participants.--For purposes 
        of this title--
                    ``(A) a trust described in paragraph (1) shall be 
                treated as an organization exempt from taxation under 
                section 501(a), and
                    ``(B) notwithstanding any other provision of this 
                title, amounts in the trust shall be includible in the 
                gross income of participants and beneficiaries only to 
                the extent, and at the time, provided in this section.
            ``(3) Custodial accounts and contracts.--For purposes of 
        this subsection, custodial accounts and contracts described in 
        section 401(f) shall be treated as trusts under rules similar 
        to the rules under section 401(f).''
    (b) Conforming Amendment.--Paragraph (6) of section 457(b) of such 
Code is amended by inserting ``except as provided in subsection (g),'' 
before ``which provides that''.
    (c) Effective Dates.--
            (1) In general.--Except as provided in paragraph (2), the 
        amendments made by this section shall apply to assets and 
        income described in section 457(b)(6) of such Code held by a 
        plan on and after the date of the enactment of this Act.
            (2) Transition rule.--In the case of assets and income 
        described in paragraph (1) held by a plan before the first day 
        of the first calendar quarter beginning after the close of the 
        first regular session of the State legislature of the State in 
        which the governmental entity maintaining the plan is located 
        beginning after the date of the enactment of this Act, a trust 
        need not be established by reason of the amendments made by 
        this section before such first day. For purposes of the 
        preceding sentence, in the case of a State that has a 2-year 
        legislative session, each year of such session shall be deemed 
        to be a separate regular session of the State legislature.
Public Employee Retirement Security Act of 1996 - Amends the Internal Revenue Code to make inapplicable to defined benefit governmental plans a rule limiting benefits to 100 percent of a participant's average compensation for the participant's high three years. 
Provides for the treatment of and defines qualified governmental excess benefit arrangements. 
Exempts survivor and disability benefits under governmental plans from certain otherwise required benefit reductions. 
Revises provisions concerning the treatment of deferred benefits plans of State and local governments and tax-exempt organizations.
Public Employee Retirement Security Act of 1996