PUBLIC LAW 107–16—JUNE 7, 2001

ECONOMIC GROWTH AND TAX RELIEF

RECONCILIATION ACT OF 2001

115 STAT. 38 PUBLIC LAW 107–16—JUNE 7, 2001

Public Law 107–16

107th Congress

An Act

To provide for reconciliation pursuant to section 104 of the concurrent resolution

on the budget for fiscal year 2002.

Be it enacted by the Senate and House of Representatives of

the United States of America in Congress assembled,

SECTION 1. SHORT TITLE; REFERENCES; TABLE OF CONTENTS.

(a) SHORT TITLE.—This Act may be cited as the ‘‘Economic

Growth and Tax Relief Reconciliation Act of 2001’’. (b) AMENDMENT OF 1986 CODE.—Except as otherwise expressly

provided, whenever in this Act an amendment or repeal is expressed

in terms of an amendment to, or repeal of, a section or other

provision, the reference shall be considered to be made to a section

or other provision of the Internal Revenue Code of 1986.

(c) TABLE OF CONTENTS.—The table of contents of this Act

is as follows:

Sec. 1. Short title; references; table of contents.

TITLE I—INDIVIDUAL INCOME TAX RATE REDUCTIONS

Sec. 101. Reduction in income tax rates for individuals.

Sec. 102. Repeal of phaseout of personal exemptions.

Sec. 103. Phaseout of overall limitation on itemized deductions.

TITLE II—TAX BENEFITS RELATING TO CHILDREN

Sec. 201. Modifications to child tax credit.

Sec. 202. Expansion of adoption credit and adoption assistance programs.

Sec. 203. Refunds disregarded in the administration of Federal programs and federally assisted programs.

Sec. 204. Dependent care credit.

Sec. 205. Allowance of credit for employer expenses for child care assistance.

TITLE III—MARRIAGE PENALTY RELIEF

Sec. 301. Elimination of marriage penalty in standard deduction.

Sec. 302. Phaseout of marriage penalty in 15-percent bracket.

Sec. 303. Marriage penalty relief for earned income credit; earned income to include

only amounts includible in gross income; simplification of earned income

credit.

TITLE IV—AFFORDABLE EDUCATION PROVISIONS

Subtitle A—Education Savings Incentives

Sec. 401. Modifications to education individual retirement accounts.

Sec. 402. Modifications to qualified tuition programs.

Subtitle B—Educational Assistance

Sec. 411. Extension of exclusion for employer-provided educational assistance.

Sec. 412. Elimination of 60-month limit and increase in income limitation on

student loan interest deduction.

Sec. 413. Exclusion of certain amounts received under the National Health Service

Corps Scholarship Program and the F. Edward Hebert Armed Forces

Health Professions Scholarship and Financial Assistance Program.

26 USC 1 note.

Economic Growth

and Tax Relief

Reconciliation

Act of 2001.

June 7, 2001

[H.R. 1836]

PUBLIC LAW 107–16—JUNE 7, 2001 115 STAT. 39

Subtitle C—Liberalization of Tax-Exempt Financing Rules for Public School

Construction

Sec. 421. Additional increase in arbitrage rebate exception for governmental bonds

used to finance educational facilities.

Sec. 422. Treatment of qualified public educational facility bonds as exempt facility

bonds.

Subtitle D—Other Provisions

Sec. 431. Deduction for higher education expenses.

TITLE V—ESTATE, GIFT, AND GENERATION-SKIPPING TRANSFER TAX

PROVISIONS

Subtitle A—Repeal of Estate and Generation-Skipping Transfer Taxes

Sec. 501. Repeal of estate and generation-skipping transfer taxes.

Subtitle B—Reductions of Estate and Gift Tax Rates

Sec. 511. Additional reductions of estate and gift tax rates.

Subtitle C—Increase in Exemption Amounts

Sec. 521. Increase in exemption equivalent of unified credit, lifetime gifts exemption, and GST exemption amounts.

Subtitle D—Credit for State Death Taxes

Sec. 531. Reduction of credit for State death taxes.

Sec. 532. Credit for State death taxes replaced with deduction for such taxes.

Subtitle E—Carryover Basis at Death; Other Changes Taking Effect With Repeal

Sec. 541. Termination of step-up in basis at death.

Sec. 542. Treatment of property acquired from a decedent dying after December 31,

2009.

Subtitle F—Conservation Easements

Sec. 551. Expansion of estate tax rule for conservation easements.

Subtitle G—Modifications of Generation-Skipping Transfer Tax

Sec. 561. Deemed allocation of GST exemption to lifetime transfers to trusts; retroactive allocations.

Sec. 562. Severing of trusts.

Sec. 563. Modification of certain valuation rules.

Sec. 564. Relief provisions.

Subtitle H—Extension of Time for Payment of Estate Tax

Sec. 571. Increase in number of allowable partners and shareholders in closely held

businesses.

Sec. 572. Expansion of availability of installment payment for estates with interests qualifying lending and finance businesses.

Sec. 573. Clarification of availability of installment payment.

Subtitle I—Other Provisions

Sec. 581. Waiver of statute of limitation for taxes on certain farm valuations.

TITLE VI—PENSION AND INDIVIDUAL RETIREMENT ARRANGEMENT

PROVISIONS

Subtitle A—Individual Retirement Accounts

Sec. 601. Modification of IRA contribution limits.

Sec. 602. Deemed IRAs under employer plans.

Subtitle B—Expanding Coverage

Sec. 611. Increase in benefit and contribution limits.

Sec. 612. Plan loans for subchapter S owners, partners, and sole proprietors.

Sec. 613. Modification of top-heavy rules.

Sec. 614. Elective deferrals not taken into account for purposes of deduction limits.

Sec. 615. Repeal of coordination requirements for deferred compensation plans of

State and local governments and tax-exempt organizations.

Sec. 616. Deduction limits.

Sec. 617. Option to treat elective deferrals as after-tax Roth contributions.

115 STAT. 40 PUBLIC LAW 107–16—JUNE 7, 2001

Sec. 618. Nonrefundable credit to certain individuals for elective deferrals and IRA

contributions.

Sec. 619. Credit for pension plan startup costs of small employers.

Sec. 620. Elimination of user fee for requests to IRS regarding pension plans.

Sec. 621. Treatment of nonresident aliens engaged in international transportation

services.

Subtitle C—Enhancing Fairness for Women

Sec. 631. Catch-up contributions for individuals age 50 or over.

Sec. 632. Equitable treatment for contributions of employees to defined contribution

plans. Sec. 633. Faster vesting of certain employer matching contributions.

Sec. 634. Modification to minimum distribution rules.

Sec. 635. Clarification of tax treatment of division of section 457 plan benefits upon

divorce.

Sec. 636. Provisions relating to hardship distributions.

Sec. 637. Waiver of tax on nondeductible contributions for domestic or similar

workers.

Subtitle D—Increasing Portability for Participants

Sec. 641. Rollovers allowed among various types of plans.

Sec. 642. Rollovers of IRAs into workplace retirement plans.

Sec. 643. Rollovers of after-tax contributions.

Sec. 644. Hardship exception to 60-day rule.

Sec. 645. Treatment of forms of distribution.

Sec. 646. Rationalization of restrictions on distributions.

Sec. 647. Purchase of service credit in governmental defined benefit plans.

Sec. 648. Employers may disregard rollovers for purposes of cash-out amounts.

Sec. 649. Minimum distribution and inclusion requirements for section 457 plans.

Subtitle E—Strengthening Pension Security and Enforcement

PART I—GENERAL PROVISIONS

Sec. 651. Repeal of 160 percent of current liability funding limit.

Sec. 652. Maximum contribution deduction rules modified and applied to all

defined benefit plans.

Sec. 653. Excise tax relief for sound pension funding.

Sec. 654. Treatment of multiemployer plans under section 415.

Sec. 655. Protection of investment of employee contributions to 401(k) plans.

Sec. 656. Prohibited allocations of stock in S corporation ESOP.

Sec. 657. Automatic rollovers of certain mandatory distributions.

Sec. 658. Clarification of treatment of contributions to multiemployer plan.

PART II—TREATMENT OF PLAN AMENDMENTS REDUCING FUTURE BENEFIT ACCRUALS

Sec. 659. Excise tax on failure to provide notice by defined benefit plans significantly reducing future benefit accruals.

Subtitle F—Reducing Regulatory Burdens

Sec. 661. Modification of timing of plan valuations.

Sec. 662. ESOP dividends may be reinvested without loss of dividend deduction.

Sec. 663. Repeal of transition rule relating to certain highly compensated employees. Sec. 664. Employees of tax-exempt entities.

Sec. 665. Clarification of treatment of employer-provided retirement advice.

Sec. 666. Repeal of the multiple use test.

Subtitle G—Miscellaneous Provisions

Sec. 671. Tax treatment and information requirements of Alaska Native Settlement

Trusts.

TITLE VII—ALTERNATIVE MINIMUM TAX

Sec. 701. Increase in alternative minimum tax exemption.

TITLE VIII—OTHER PROVISIONS

Sec. 801. Time for payment of corporate estimated taxes.

Sec. 802. Expansion of authority to postpone certain tax-related deadlines by reason of Presidentially declared disaster.

Sec. 803. No Federal income tax on restitution received by victims of the Nazi

regime or their heirs or estates.

TITLE IX—COMPLIANCE WITH CONGRESSIONAL BUDGET ACT

Sec. 901. Sunset of provisions of Act.

PUBLIC LAW 107–16—JUNE 7, 2001 115 STAT. 41

TITLE I—INDIVIDUAL INCOME TAX

RATE REDUCTIONS

SEC. 101. REDUCTION IN INCOME TAX RATES FOR INDIVIDUALS.

(a) IN GENERAL.—Section 1 (relating to tax imposed) is amended

by adding at the end the following new subsection:

‘‘(i) RATE REDUCTIONS AFTER 2000.—

‘‘(1) 10-PERCENT RATE BRACKET.—

‘‘(A) IN GENERAL.—In the case of taxable years beginning after December 31, 2000—

‘‘(i) the rate of tax under subsections (a), (b), (c),

and (d) on taxable income not over the initial bracket

amount shall be 10 percent, and

‘‘(ii) the 15 percent rate of tax shall apply only

to taxable income over the initial bracket amount but

not over the maximum dollar amount for the 15-percent

rate bracket.

‘‘(B) INITIAL BRACKET AMOUNT.—For purposes of this

paragraph, the initial bracket amount is—

‘‘(i) $14,000 ($12,000 in the case of taxable years

beginning before January 1, 2008) in the case of subsection (a),

‘‘(ii) $10,000 in the case of subsection (b), and

‘‘(iii) 1⁄2 the amount applicable under clause (i)

(after adjustment, if any, under subparagraph (C)) in

the case of subsections (c) and (d).

‘‘(C) INFLATION ADJUSTMENT.—In prescribing the tables

under subsection (f ) which apply with respect to taxable

years beginning in calendar years after 2000—

‘‘(i) the Secretary shall make no adjustment to

the initial bracket amount for any taxable year beginning before January 1, 2009,

‘‘(ii) the cost-of-living adjustment used in making

adjustments to the initial bracket amount for any taxable year beginning after December 31, 2008, shall

be determined under subsection (f )(3) by substituting

‘2007’ for ‘1992’ in subparagraph (B) thereof, and

‘‘(iii) such adjustment shall not apply to the

amount referred to in subparagraph (B)(iii).

If any amount after adjustment under the preceding sentence is not a multiple of $50, such amount shall be rounded

to the next lowest multiple of $50.

‘‘(D) COORDINATION WITH ACCELERATION OF 10 PERCENT

RATE BRACKET BENEFIT FOR 2001.—This paragraph shall

not apply to any taxable year to which section 6428 applies.

‘‘(2) REDUCTIONS IN RATES AFTER JUNE 30, 2001.—In the

case of taxable years beginning in a calendar year after 2000,

the corresponding percentage specified for such calendar year

in the following table shall be substituted for the otherwise

applicable tax rate in the tables under subsections (a), (b),

(c), (d), and (e).

Applicability.

26 USC 1.

115 STAT. 42 PUBLIC LAW 107–16—JUNE 7, 2001

‘‘In the case of taxable years

beginning during calendar year:

The corresponding percentages

shall be substituted for

the following percentages:

28% 31% 36% 39.6%

2001 ........................................................... 27.5% 30.5% 35.5% 39.1%

2002 and 2003 .......................................... 27.0% 30.0% 35.0% 38.6%

2004 and 2005 .......................................... 26.0% 29.0% 34.0% 37.6%

2006 and thereafter ................................. 25.0% 28.0% 33.0% 35.0%

‘‘(3) ADJUSTMENT OF TABLES.—The Secretary shall adjust

the tables prescribed under subsection (f ) to carry out this

subsection.’’. (b) ACCELERATION OF 10 PERCENT RATE BRACKET BENEFIT FOR

2001.— (1) IN GENERAL.—Subchapter B of chapter 65 (relating to

abatements, credits, and refunds) is amended by adding at

the end the following new section:

‘‘SEC. 6428. ACCELERATION OF 10 PERCENT INCOME TAX RATE

BRACKET BENEFIT FOR 2001.

‘‘(a) IN GENERAL.—In the case of an eligible individual, there

shall be allowed as a credit against the tax imposed by chapter

1 for the taxpayer’s first taxable year beginning in 2001 an amount

equal to 5 percent of so much of the taxpayer’s taxable income

as does not exceed the initial bracket amount (as defined in section

1(i)(1)(B)).

‘‘(b) LIMITATION BASED ON AMOUNT OF TAX.—The credit allowed

by subsection (a) shall not exceed the excess (if any) of—

‘‘(1) the sum of the regular tax liability (as defined in

section 26(b)) plus the tax imposed by section 55, over

‘‘(2) the sum of the credits allowable under part IV of

subchapter A of chapter 1 (other than the credits allowable

under subpart C thereof, relating to refundable credits).

‘‘(c) ELIGIBLE INDIVIDUAL.—For purposes of this section, the

term ‘eligible individual’ means any individual other than—

‘‘(1) any estate or trust,

‘‘(2) any nonresident alien individual, and

‘‘(3) any individual with respect to whom a deduction under

section 151 is allowable to another taxpayer for a taxable

year beginning in the calendar year in which the individual’s

taxable year begins.

‘‘(d) SPECIAL RULES.—

‘‘(1) COORDINATION WITH ADVANCE REFUNDS OF CREDIT.—

‘‘(A) IN GENERAL.—The amount of credit which would

(but for this paragraph) be allowable under this section

shall be reduced (but not below zero) by the aggregate

refunds and credits made or allowed to the taxpayer under

subsection (e). Any failure to so reduce the credit shall

be treated as arising out of a mathematical or clerical

error and assessed according to section 6213(b)(1).

‘‘(B) JOINT RETURNS.—In the case of a refund or credit

made or allowed under subsection (e) with respect to a

joint return, half of such refund or credit shall be treated

as having been made or allowed to each individual filing

such return.

‘‘(2) COORDINATION WITH ESTIMATED TAX.—The credit under

this section shall be treated for purposes of section 6654(f )

PUBLIC LAW 107–16—JUNE 7, 2001 115 STAT. 43

in the same manner as a credit under subpart A of part IV

of subchapter A of chapter 1.

‘‘(e) ADVANCE REFUNDS OF CREDIT BASED ON PRIOR YEAR

DATA.— ‘‘(1) IN GENERAL.—Each individual who was an eligible

individual for such individual’s first taxable year beginning

in 2000 shall be treated as having made a payment against

the tax imposed by chapter 1 for such first taxable year in

an amount equal to the advance refund amount for such taxable

year.‘‘(2) ADVANCE REFUND AMOUNT.—For purposes of paragraph

(1), the advance refund amount is the amount that would

have been allowed as a credit under this section for such

first taxable year if this section (other than subsection (d)

and this subsection) had applied to such taxable year. ‘‘(3) TIMING OF PAYMENTS.—In the case of any overpayment

attributable to this subsection, the Secretary shall, subject to

the provisions of this title, refund or credit such overpayment

as rapidly as possible and, to the extent practicable, before

October 1, 2001. No refund or credit shall be made or allowed

under this subsection after December 31, 2001. ‘‘(4) NO INTEREST.—No interest shall be allowed on any

overpayment attributable to this subsection.’’.

(2) CLERICAL AMENDMENT.—The table of sections for subchapter B of chapter 65 is amended by adding at the end

the following new item:

‘‘Sec. 6428. Acceleration of 10 percent income tax rate bracket benefit for

2001.’’.

(c) CONFORMING AMENDMENTS.—

(1) Subparagraph (B) of section 1(g)(7) is amended by

striking ‘‘15 percent’’ in clause (ii)(II) and inserting ‘‘10 percent.’’.

(2) Section 1(h) is amended—

(A) by striking ‘‘28 percent’’ both places it appears

in paragraphs (1)(A)(ii)(I) and (1)(B)(i) and inserting ‘‘25

percent’’, and

(B) by striking paragraph (13).

(3) Section 15 is amended by adding at the end the following new subsection:

‘‘(f ) RATE REDUCTIONS ENACTED BY ECONOMIC GROWTH AND

TAX RELIEF RECONCILIATION ACT OF 2001.—This section shall not

apply to any change in rates under subsection (i) of section 1

(relating to rate reductions after 2000).’’.

(4) Section 531 is amended by striking ‘‘equal to’’ and

all that follows and inserting ‘‘equal to the product of the

highest rate of tax under section 1(c) and the accumulated

taxable income.’’.

(5) Section 541 is amended by striking ‘‘equal to’’ and

all that follows and inserting ‘‘equal to the product of the

highest rate of tax under section 1(c) and the undistributed

personal holding company income.’’.

(6) Section 3402(p)(1)(B) is amended by striking ‘‘7, 15,

28, or 31 percent’’ and inserting ‘‘7 percent, any percentage

applicable to any of the 3 lowest income brackets in the table

under section 1(c),’’.

(7) Section 3402(p)(2) is amended by striking ‘‘15 percent’’

and inserting ‘‘10 percent’’.

26 USC 1.

115 STAT. 44 PUBLIC LAW 107–16—JUNE 7, 2001

(8) Section 3402(q)(1) is amended by striking ‘‘equal to

28 percent of such payment’’ and inserting ‘‘equal to the product

of the third lowest rate of tax applicable under section 1(c)

and such payment’’. (9) Section 3402(r)(3) is amended by striking ‘‘31 percent’’ and inserting ‘‘the fourth lowest rate of tax applicable under

section 1(c)’’. (10) Section 3406(a)(1) is amended by striking ‘‘equal to

31 percent of such payment’’ and inserting ‘‘equal to the product

of the fourth lowest rate of tax applicable under section 1(c)

and such payment’’. (11) Section 13273 of the Revenue Reconciliation Act of

1993 is amended by striking ‘‘28 percent’’ and inserting ‘‘the

third lowest rate of tax applicable under section 1(c) of the

Internal Revenue Code of 1986’’. (d) EFFECTIVE DATES.— (1) IN GENERAL.—Except as provided in paragraph (2), the

amendments made by this section shall apply to taxable years

beginning after December 31, 2000.

(2) AMENDMENTS TO WITHHOLDING PROVISIONS.—The

amendments made by paragraphs (6), (7), (8), (9), (10), and

(11) of subsection (c) shall apply to amounts paid after the

60th day after the date of the enactment of this Act. References

to income brackets and rates of tax in such paragraphs shall

be applied without regard to section 1(i)(1)(D) of the Internal

Revenue Code of 1986.

SEC. 102. REPEAL OF PHASEOUT OF PERSONAL EXEMPTIONS.

(a) IN GENERAL.—Paragraph (3) of section 151(d) (relating to

exemption amount) is amended by adding at the end the following

new subparagraphs: ‘‘(E) REDUCTION OF PHASEOUT.— ‘‘(i) IN GENERAL.—In the case of taxable years

beginning after December 31, 2005, and before January

1, 2010, the reduction under subparagraph (A) shall

be equal to the applicable fraction of the amount which

would (but for this subparagraph) be the amount of

such reduction. ‘‘(ii) APPLICABLE FRACTION.—For purposes of clause

(i), the applicable fraction shall be determined in

accordance with the following table:

‘‘For taxable years beginning The applicable

in calendar year— fraction is—

2006 and 2007 ............................................................................ 2⁄3

2008 and 2009 ............................................................................ 1⁄3.

‘‘(F) TERMINATION.—This paragraph shall not apply

to any taxable year beginning after December 31, 2009.’’.

(b) EFFECTIVE DATE.—The amendment made by this section

shall apply to taxable years beginning after December 31, 2005.

SEC. 103. PHASEOUT OF OVERALL LIMITATION ON ITEMIZED DEDUCTIONS.

(a) IN GENERAL.—Section 68 is amended by adding at the

end the following new subsections:

‘‘(f ) PHASEOUT OF LIMITATION.—

‘‘(1) IN GENERAL.—In the case of taxable years beginning

after December 31, 2005, and before January 1, 2010, the

reduction under subsection (a) shall be equal to the applicable

Applicability.

26 USC 151 note.

26 USC 1 note.

26 USC 3402.

PUBLIC LAW 107–16—JUNE 7, 2001 115 STAT. 45

fraction of the amount which would (but for this subsection)

be the amount of such reduction.

‘‘(2) APPLICABLE FRACTION.—For purposes of paragraph (1),

the applicable fraction shall be determined in accordance with

the following table:

‘‘For taxable years beginning The applicable

in calendar year— fraction is—

2006 and 2007 ............................................................................ 2⁄3

2008 and 2009 ............................................................................ 1⁄3.

‘‘(g) TERMINATION.—This section shall not apply to any taxable

year beginning after December 31, 2009.’’.

(b) EFFECTIVE DATE.—The amendment made by this section

shall apply to taxable years beginning after December 31, 2005.

TITLE II—TAX BENEFITS RELATING TO

CHILDREN

SEC. 201. MODIFICATIONS TO CHILD TAX CREDIT.

(a) INCREASE IN PER CHILD AMOUNT.—Subsection (a) of section

24 (relating to child tax credit) is amended to read as follows:

‘‘(a) ALLOWANCE OF CREDIT.—

‘‘(1) IN GENERAL.—There shall be allowed as a credit against

the tax imposed by this chapter for the taxable year with

respect to each qualifying child of the taxpayer an amount

equal to the per child amount.

‘‘(2) PER CHILD AMOUNT.—For purposes of paragraph (1),

the per child amount shall be determined as follows:

‘‘In the case of any taxable year

beginning in—

The per child amount is—

2001, 2002, 2003, or 2004 ................................................................ $ 600

2005, 2006, 2007, or 2008 ................................................................ 700

2009 ................................................................................................... 800

2010 or thereafter ............................................................................. 1,000.’’.

(b) CREDIT ALLOWED AGAINST ALTERNATIVE MINIMUM TAX.—

(1) IN GENERAL.—Subsection (b) of section 24 (relating to

child tax credit) is amended by adding at the end the following

new paragraph:

‘‘(3) LIMITATION BASED ON AMOUNT OF TAX.—The credit

allowed under subsection (a) for any taxable year shall not

exceed the excess of—

‘‘(A) the sum of the regular tax liability (as defined

in section 26(b)) plus the tax imposed by section 55, over

‘‘(B) the sum of the credits allowable under this subpart

(other than this section) and section 27 for the taxable

year.’’.

(2) CONFORMING AMENDMENTS.—

(A) The heading for section 24(b) is amended to read

as follows: ‘‘LIMITATIONS.—’’.

(B) The heading for section 24(b)(1) is amended to

read as follows: ‘‘LIMITATION BASED ON ADJUSTED GROSS

INCOME.—’’.

(C) Section 24(d), as amended by subsection (c), is

amended—

(i) by striking ‘‘section 26(a)’’ each place it appears

and inserting ‘‘subsection (b)(3)’’, and

26 USC 24.

Applicability.

26 USC 68 note.

115 STAT. 46 PUBLIC LAW 107–16—JUNE 7, 2001

(ii) in paragraph (1)(B) by striking ‘‘aggregate

amount of credits allowed by this subpart’’ and

inserting ‘‘amount of credit allowed by this section’’. (D) Paragraph (1) of section 26(a) is amended by

inserting ‘‘(other than section 24)’’ after ‘‘this subpart’’.

(E) Subsection (c) of section 23 is amended by striking

‘‘and section 1400C’’ and inserting ‘‘and sections 24 and

1400C’’.

(F) Subparagraph (C) of section 25(e)(1) is amended

by inserting ‘‘, 24,’’ after ‘‘sections 23’’.

(G) Section 904(h) is amended by inserting ‘‘(other

than section 24)’’ after ‘‘chapter’’.

(H) Subsection (d) of section 1400C is amended by

inserting ‘‘and section 24’’ after ‘‘this section’’.

(c) REFUNDABLE CHILD CREDIT.— (1) IN GENERAL.—So much of section 24(d) (relating to

additional credit for families with 3 or more children) as precedes paragraph (2) is amended to read as follows:

‘‘(d) PORTION OF CREDIT REFUNDABLE.—

‘‘(1) IN GENERAL.—The aggregate credits allowed to a taxpayer under subpart C shall be increased by the lesser of—

‘‘(A) the credit which would be allowed under this

section without regard to this subsection and the limitation

under section 26(a), or

‘‘(B) the amount by which the amount of credit allowed

by this section (determined without regard to this subsection) would increase if the limitation imposed by section

26(a) were increased by the greater of—

‘‘(i) 15 percent (10 percent in the case of taxable

years beginning before January 1, 2005) of so much

of the taxpayer’s earned income (within the meaning

of section 32) which is taken into account in computing

taxable income for the taxable year as exceeds $10,000,

or

‘‘(ii) in the case of a taxpayer with 3 or more

qualifying children, the excess (if any) of—

‘‘(I) the taxpayer’s social security taxes for the

taxable year, over

‘‘(II) the credit allowed under section 32 for

the taxable year.

The amount of the credit allowed under this subsection shall

not be treated as a credit allowed under this subpart and

shall reduce the amount of credit otherwise allowable under

subsection (a) without regard to section 26(a).’’.

(2) INFLATION ADJUSTMENT.—Subsection (d) of section 24

is amended by adding at the end the following new paragraph:

‘‘(4) INFLATION ADJUSTMENT.—In the case of any taxable

year beginning in a calendar year after 2001, the $10,000

amount contained in paragraph (1)(B) shall be increased by

an amount equal to—

‘‘(A) such dollar amount, multiplied by

‘‘(B) the cost-of-living adjustment determined under

section 1(f )(3) for the calendar year in which the taxable

year begins, determined by substituting ‘calendar year

2000’ for ‘calendar year 1992’ in subparagraph (B) thereof.

Any increase determined under the preceding sentence shall

be rounded to the nearest multiple of $50.’’.

26 USC 26.

PUBLIC LAW 107–16—JUNE 7, 2001 115 STAT. 47

(3) CONFORMING AMENDMENT.—Section 32 is amended by

striking subsection (n).

(d) ELIMINATION OF REDUCTION OF CREDIT TO TAXPAYER SUBJECT TO ALTERNATIVE MINIMUM TAX PROVISION.—Section 24(d) is

amended—

(1) by striking paragraph (2), and

(2) by redesignating paragraphs (3) and (4) as paragraphs

(2) and (3), respectively.

(e) EFFECTIVE DATES.— (1) IN GENERAL.—Except as provided in paragraph (2), the

amendments made by this section shall apply to taxable years

beginning after December 31, 2000.

(2) SUBSECTION (b).—The amendments made by subsection

(b) shall apply to taxable years beginning after December 31,

2001.

SEC. 202. EXPANSION OF ADOPTION CREDIT AND ADOPTION ASSISTANCE PROGRAMS.

(a) IN GENERAL.—

(1) ADOPTION CREDIT.—Section 23(a)(1) (relating to allowance of credit) is amended to read as follows:

‘‘(1) IN GENERAL.—In the case of an individual, there shall

be allowed as a credit against the tax imposed by this chapter—

‘‘(A) in the case of an adoption of a child other than

a child with special needs, the amount of the qualified

adoption expenses paid or incurred by the taxpayer, and

‘‘(B) in the case of an adoption of a child with special

needs, $10,000.’’.

(2) ADOPTION ASSISTANCE PROGRAMS.—Section 137(a)

(relating to adoption assistance programs) is amended to read

as follows:

‘‘(a) IN GENERAL.—Gross income of an employee does not

include amounts paid or expenses incurred by the employer for

adoption expenses in connection with the adoption of a child by

an employee if such amounts are furnished pursuant to an adoption

assistance program. The amount of the exclusion shall be—

‘‘(1) in the case of an adoption of a child other than a

child with special needs, the amount of the qualified adoption

expenses paid or incurred by the taxpayer, and

‘‘(2) in the case of an adoption of a child with special

needs, $10,000.’’.

(b) DOLLAR LIMITATIONS.—

(1) DOLLAR AMOUNT OF ALLOWED EXPENSES.—

(A) ADOPTION EXPENSES.—Section 23(b)(1) (relating to

allowance of credit) is amended—

(i) by striking ‘‘$5,000’’ and inserting ‘‘$10,000’’,

(ii) by striking ‘‘($6,000, in the case of a child

with special needs)’’, and

(iii) by striking ‘‘subsection (a)’’ and inserting ‘‘subsection (a)(1)(A)’’.

(B) ADOPTION ASSISTANCE PROGRAMS.—Section

137(b)(1) (relating to dollar limitations for adoption assistance programs) is amended—

(i) by striking ‘‘$5,000’’ and inserting ‘‘$10,000’’,

and

(ii) by striking ‘‘($6,000, in the case of a child

with special needs)’’, and

Applicability.

26 USC 24 note.

26 USC 32.

115 STAT. 48 PUBLIC LAW 107–16—JUNE 7, 2001

(iii) by striking ‘‘subsection (a)’’ and inserting ‘‘subsection (a)(1)’’.

(2) PHASE-OUT LIMITATION.—

(A) ADOPTION EXPENSES.—Clause (i) of section

23(b)(2)(A) (relating to income limitation) is amended by

striking ‘‘$75,000’’ and inserting ‘‘$150,000’’.

(B) ADOPTION ASSISTANCE PROGRAMS.—Section

137(b)(2)(A) (relating to income limitation) is amended by

striking ‘‘$75,000’’ and inserting ‘‘$150,000’’.

(c) YEAR CREDIT ALLOWED.—Section 23(a)(2) (relating to year

credit allowed) is amended by adding at the end the following

new flush sentence:

‘‘In the case of the adoption of a child with special needs,

the credit allowed under paragraph (1) shall be allowed for

the taxable year in which the adoption becomes final.’’.

(d) REPEAL OF TERMINATIONS.—

(1) CHILDREN WITHOUT SPECIAL NEEDS.—Paragraph (2) of

section 23(d) (relating to definition of eligible child) is amended

to read as follows:

‘‘(2) ELIGIBLE CHILD.—The term ‘eligible child’ means any

individual who—

‘‘(A) has not attained age 18, or

‘‘(B) is physically or mentally incapable of caring for

himself.’’.

(2) ADOPTION ASSISTANCE PROGRAMS.—Section 137 (relating

to adoption assistance programs) is amended by striking subsection (f ).

(e) ADJUSTMENT OF DOLLAR AND INCOME LIMITATIONS FOR

INFLATION.—

(1) ADOPTION CREDIT.—Section 23 (relating to adoption

expenses) is amended by redesignating subsection (h) as subsection (i) and by inserting after subsection (g) the following

new subsection:

‘‘(h) ADJUSTMENTS FOR INFLATION.—In the case of a taxable

year beginning after December 31, 2002, each of the dollar amounts

in subsection (a)(1)(B) and paragraphs (1) and (2)(A)(i) of subsection

(b) shall be increased by an amount equal to—

‘‘(1) such dollar amount, multiplied by

‘‘(2) the cost-of-living adjustment determined under section

1(f )(3) for the calendar year in which the taxable year begins,

determined by substituting ‘calendar year 2001’ for ‘calendar

year 1992’ in subparagraph (B) thereof.’’.

(2) ADOPTION ASSISTANCE PROGRAMS.—Section 137 (relating

to adoption assistance programs), as amended by subsection

(d), is amended by adding at the end the following new subsection:

‘‘(f ) ADJUSTMENTS FOR INFLATION.—In the case of a taxable

year beginning after December 31, 2002, each of the dollar amounts

in subsection (a)(2) and paragraphs (1) and (2)(A) of subsection

(b) shall be increased by an amount equal to—

‘‘(1) such dollar amount, multiplied by

‘‘(2) the cost-of-living adjustment determined under section

1(f )(3) for the calendar year in which the taxable year begins,

determined by substituting ‘calendar year 2001’ for ‘calendar

year 1992’ in subparagraph (B) thereof.’’.

(f ) CREDIT ALLOWED AGAINST ALTERNATIVE MINIMUM TAX.—

26 USC 23.

PUBLIC LAW 107–16—JUNE 7, 2001 115 STAT. 49

(1) IN GENERAL.—Subsection (b) of section 23 is amended

by adding at the end the following new paragraph: ‘‘(4) LIMITATION BASED ON AMOUNT OF TAX.—The credit

allowed under subsection (a) for any taxable year shall not

exceed the excess of— ‘‘(A) the sum of the regular tax liability (as defined

in section 26(b)) plus the tax imposed by section 55, over ‘‘(B) the sum of the credits allowable under this subpart

(other than this section) and section 27 for the taxable

year.’’. (2) CONFORMING AMENDMENTS.— (A) Section 23(c), as amended by section 201(b), is

amended—

(i) by striking ‘‘section 26(a)’’ and inserting ‘‘subsection (b)(4)’’, and

(ii) by striking ‘‘reduced by the sum of the credits

allowable under this subpart (other than this section

and sections 24 and 1400C)’’. (B) Section 24(b)(3)(B), as added by section 201(b),

is amended by striking ‘‘this section’’ and inserting ‘‘this

section and section 23’’. (C) Sections 26(a)(1), 904(h), and 1400C(d), as amended

by section 201(b), are each amended by striking ‘‘section

24’’ and inserting ‘‘sections 23 and 24’’. (g) EFFECTIVE DATE.— (1) IN GENERAL.—Except as provided in paragraph (2), the

amendments made by this section shall apply to taxable years

beginning after December 31, 2001.

(2) SUBSECTION (a).—The amendments made by subsection

(a) shall apply to taxable years beginning after December 31,

2002.

SEC. 203. REFUNDS DISREGARDED IN THE ADMINISTRATION OF FEDERAL PROGRAMS AND FEDERALLY ASSISTED PROGRAMS.

Any payment considered to have been made to any individual

by reason of section 24 of the Internal Revenue Code of 1986,

as amended by section 201, shall not be taken into account as

income and shall not be taken into account as resources for the

month of receipt and the following month, for purposes of determining the eligibility of such individual or any other individual

for benefits or assistance, or the amount or extent of benefits

or assistance, under any Federal program or under any State or

local program financed in whole or in part with Federal funds.

SEC. 204. DEPENDENT CARE CREDIT.

(a) INCREASE IN DOLLAR LIMIT.—Subsection (c) of section 21

(relating to expenses for household and dependent care services

necessary for gainful employment) is amended—

(1) by striking ‘‘$2,400’’ in paragraph (1) and inserting

‘‘$3,000’’, and

(2) by striking ‘‘$4,800’’ in paragraph (2) and inserting

‘‘$6,000’’.

(b) INCREASE IN APPLICABLE PERCENTAGE.—Section 21(a)(2)

(defining applicable percentage) is amended—

(1) by striking ‘‘30 percent’’ and inserting ‘‘35 percent’’,

and

(2) by striking ‘‘$10,000’’ and inserting ‘‘$15,000’’.

26 USC 24 note.

Applicability.

26 USC 23 note.

26 USC 23.

115 STAT. 50 PUBLIC LAW 107–16—JUNE 7, 2001

(c) EFFECTIVE DATE.—The amendments made by this section

shall apply to taxable years beginning after December 31, 2002.

SEC. 205. ALLOWANCE OF CREDIT FOR EMPLOYER EXPENSES FOR

CHILD CARE ASSISTANCE.

(a) IN GENERAL.—Subpart D of part IV of subchapter A of

chapter 1 (relating to business related credits), as amended by

section 619, is further amended by adding at the end the following:

‘‘SEC. 45F. EMPLOYER-PROVIDED CHILD CARE CREDIT.

‘‘(a) IN GENERAL.—For purposes of section 38, the employerprovided child care credit determined under this section for the

taxable year is an amount equal to the sum of—

‘‘(1) 25 percent of the qualified child care expenditures,

and

‘‘(2) 10 percent of the qualified child care resource and

referral expenditures,

of the taxpayer for such taxable year.

‘‘(b) DOLLAR LIMITATION.—The credit allowable under subsection (a) for any taxable year shall not exceed $150,000.

‘‘(c) DEFINITIONS.—For purposes of this section—

‘‘(1) QUALIFIED CHILD CARE EXPENDITURE.—

‘‘(A) IN GENERAL.—The term ‘qualified child care

expenditure’ means any amount paid or incurred—

‘‘(i) to acquire, construct, rehabilitate, or expand

property—

‘‘(I) which is to be used as part of a qualified

child care facility of the taxpayer,

‘‘(II) with respect to which a deduction for

depreciation (or amortization in lieu of depreciation) is allowable, and

‘‘(III) which does not constitute part of the

principal residence (within the meaning of section

121) of the taxpayer or any employee of the taxpayer,

‘‘(ii) for the operating costs of a qualified child

care facility of the taxpayer, including costs related

to the training of employees, to scholarship programs,

and to the providing of increased compensation to

employees with higher levels of child care training,

or

‘‘(iii) under a contract with a qualified child care

facility to provide child care services to employees of

the taxpayer.

‘‘(B) FAIR MARKET VALUE.—The term ‘qualified child

care expenditures’ shall not include expenses in excess

of the fair market value of such care.

‘‘(2) QUALIFIED CHILD CARE FACILITY.—

‘‘(A) IN GENERAL.—The term ‘qualified child care

facility’ means a facility—

‘‘(i) the principal use of which is to provide child

care assistance, and

‘‘(ii) which meets the requirements of all applicable

laws and regulations of the State or local government

in which it is located, including the licensing of the

facility as a child care facility.

Applicability.

26 USC 21 note.

PUBLIC LAW 107–16—JUNE 7, 2001 115 STAT. 51

Clause (i) shall not apply to a facility which is the principal

residence (within the meaning of section 121) of the operator of the facility. ‘‘(B) SPECIAL RULES WITH RESPECT TO A TAXPAYER.— A facility shall not be treated as a qualified child care

facility with respect to a taxpayer unless— ‘‘(i) enrollment in the facility is open to employees

of the taxpayer during the taxable year, ‘‘(ii) if the facility is the principal trade or business

of the taxpayer, at least 30 percent of the enrollees

of such facility are dependents of employees of the

taxpayer, and ‘‘(iii) the use of such facility (or the eligibility to

use such facility) does not discriminate in favor of

employees of the taxpayer who are highly compensated

employees (within the meaning of section 414(q)). ‘‘(3) QUALIFIED CHILD CARE RESOURCE AND REFERRAL

EXPENDITURE.— ‘‘(A) IN GENERAL.—The term ‘qualified child care

resource and referral expenditure’ means any amount paid

or incurred under a contract to provide child care resource

and referral services to an employee of the taxpayer.

‘‘(B) NONDISCRIMINATION.—The services shall not be

treated as qualified unless the provision of such services

(or the eligibility to use such services) does not discriminate

in favor of employees of the taxpayer who are highly compensated employees (within the meaning of section 414(q)).

‘‘(d) RECAPTURE OF ACQUISITION AND CONSTRUCTION CREDIT.—

‘‘(1) IN GENERAL.—If, as of the close of any taxable year,

there is a recapture event with respect to any qualified child

care facility of the taxpayer, then the tax of the taxpayer

under this chapter for such taxable year shall be increased

by an amount equal to the product of—

‘‘(A) the applicable recapture percentage, and

‘‘(B) the aggregate decrease in the credits allowed

under section 38 for all prior taxable years which would

have resulted if the qualified child care expenditures of

the taxpayer described in subsection (c)(1)(A) with respect

to such facility had been zero.

‘‘(2) APPLICABLE RECAPTURE PERCENTAGE.—

‘‘(A) IN GENERAL.—For purposes of this subsection, the

applicable recapture percentage shall be determined from

the following table:

The applicable

recapture

‘‘If the recapture event

occurs in:

percentage is:

Years 1–3 ................................................................................. 100

Year 4 ....................................................................................... 85

Year 5 ....................................................................................... 70

Year 6 ....................................................................................... 55

Year 7 ....................................................................................... 40

Year 8 ....................................................................................... 25

Years 9 and 10 ......................................................................... 10

Years 11 and thereafter .......................................................... 0.

‘‘(B) YEARS.—For purposes of subparagraph (A), year

1 shall begin on the first day of the taxable year in which

the qualified child care facility is placed in service by

the taxpayer.

115 STAT. 52 PUBLIC LAW 107–16—JUNE 7, 2001

‘‘(3) RECAPTURE EVENT DEFINED.—For purposes of this subsection, the term ‘recapture event’ means— ‘‘(A) CESSATION OF OPERATION.—The cessation of the

operation of the facility as a qualified child care facility. ‘‘(B) CHANGE IN OWNERSHIP.— ‘‘(i) IN GENERAL.—Except as provided in clause

(ii), the disposition of a taxpayer’s interest in a qualified child care facility with respect to which the credit

described in subsection (a) was allowable. ‘‘(ii) AGREEMENT TO ASSUME RECAPTURE

LIABILITY.—Clause (i) shall not apply if the person

acquiring such interest in the facility agrees in writing

to assume the recapture liability of the person disposing of such interest in effect immediately before

such disposition. In the event of such an assumption,

the person acquiring the interest in the facility shall

be treated as the taxpayer for purposes of assessing

any recapture liability (computed as if there had been

no change in ownership). ‘‘(4) SPECIAL RULES.—

‘‘(A) TAX BENEFIT RULE.—The tax for the taxable year

shall be increased under paragraph (1) only with respect

to credits allowed by reason of this section which were

used to reduce tax liability. In the case of credits not

so used to reduce tax liability, the carryforwards and

carrybacks under section 39 shall be appropriately

adjusted.

‘‘(B) NO CREDITS AGAINST TAX.—Any increase in tax

under this subsection shall not be treated as a tax imposed

by this chapter for purposes of determining the amount

of any credit under subpart A, B, or D of this part.

‘‘(C) NO RECAPTURE BY REASON OF CASUALTY LOSS.—

The increase in tax under this subsection shall not apply

to a cessation of operation of the facility as a qualified

child care facility by reason of a casualty loss to the extent

such loss is restored by reconstruction or replacement

within a reasonable period established by the Secretary.

‘‘(e) SPECIAL RULES.—For purposes of this section—

‘‘(1) AGGREGATION RULES.—All persons which are treated

as a single employer under subsections (a) and (b) of section

52 shall be treated as a single taxpayer.

‘‘(2) PASS-THRU IN THE CASE OF ESTATES AND TRUSTS.—

Under regulations prescribed by the Secretary, rules similar

to the rules of subsection (d) of section 52 shall apply.

‘‘(3) ALLOCATION IN THE CASE OF PARTNERSHIPS.—In the

case of partnerships, the credit shall be allocated among partners under regulations prescribed by the Secretary.

‘‘(f ) NO DOUBLE BENEFIT.—

‘‘(1) REDUCTION IN BASIS.—For purposes of this subtitle—

‘‘(A) IN GENERAL.—If a credit is determined under this

section with respect to any property by reason of expenditures described in subsection (c)(1)(A), the basis of such

property shall be reduced by the amount of the credit

so determined.

‘‘(B) CERTAIN DISPOSITIONS.—If, during any taxable

year, there is a recapture amount determined with respect

to any property the basis of which was reduced under

Regulations.

Applicability.

PUBLIC LAW 107–16—JUNE 7, 2001 115 STAT. 53

subparagraph (A), the basis of such property (immediately

before the event resulting in such recapture) shall be

increased by an amount equal to such recapture amount.

For purposes of the preceding sentence, the term ‘recapture

amount’ means any increase in tax (or adjustment in

carrybacks or carryovers) determined under subsection (d).

‘‘(2) OTHER DEDUCTIONS AND CREDITS.—No deduction or

credit shall be allowed under any other provision of this chapter

with respect to the amount of the credit determined under

this section.’’. (b) CONFORMING AMENDMENTS.— (1) Section 38(b), as amended by section 619, is amended

by striking ‘‘plus’’ at the end of paragraph (13), by striking

the period at the end of paragraph (14) and inserting ‘‘, plus’’, and by adding at the end the following: ‘‘(15) the employer-provided child care credit determined

under section 45F.’’.

(2) The table of sections for subpart D of part IV of subchapter A of chapter 1 is amended by adding at the end the

following:

‘‘Sec. 45F. Employer-provided child care credit.’’.

(3) Section 1016(a) is amended by striking ‘‘and’’ at the

end of paragraph (26), by striking the period at the end of

paragraph (27) and inserting ‘‘, and’’, and by adding at the

end the following:

‘‘(28) in the case of a facility with respect to which a

credit was allowed under section 45F, to the extent provided

in section 45F(f )(1).’’.

(c) EFFECTIVE DATE.—The amendments made by this section

shall apply to taxable years beginning after December 31, 2001.

TITLE III—MARRIAGE PENALTY RELIEF

SEC. 301. ELIMINATION OF MARRIAGE PENALTY IN STANDARD DEDUCTION.

(a) IN GENERAL.—Paragraph (2) of section 63(c) (relating to

standard deduction) is amended—

(1) by striking ‘‘$5,000’’ in subparagraph (A) and inserting

‘‘the applicable percentage of the dollar amount in effect under

subparagraph (C) for the taxable year’’;

(2) by adding ‘‘or’’ at the end of subparagraph (B);

(3) by striking ‘‘in the case of’’ and all that follows in

subparagraph (C) and inserting ‘‘in any other case.’’; and

(4) by striking subparagraph (D).

(b) APPLICABLE PERCENTAGE.—Section 63(c) (relating to

standard deduction) is amended by adding at the end the following

new paragraph:

‘‘(7) APPLICABLE PERCENTAGE.—For purposes of paragraph

(2), the applicable percentage shall be determined in accordance

with the following table:

‘‘For taxable years beginning The applicable

in calendar year— percentage is—

2005 ............................................................................................. 174

2006 ............................................................................................. 184

2007 ............................................................................................. 187

2008 ............................................................................................. 190

2009 and thereafter ................................................................... 200.’’.

Applicability.

26 USC 38 note.

26 USC 38.

115 STAT. 54 PUBLIC LAW 107–16—JUNE 7, 2001

(c) TECHNICAL AMENDMENTS.—

(1) Subparagraph (B) of section 1(f )(6) is amended by

striking ‘‘(other than with’’ and all that follows through ‘‘shall

be applied’’ and inserting ‘‘(other than with respect to sections

63(c)(4) and 151(d)(4)(A)) shall be applied’’.

(2) Paragraph (4) of section 63(c) is amended by adding

at the end the following flush sentence:

‘‘The preceding sentence shall not apply to the amount referred

to in paragraph (2)(A).’’.

(d) EFFECTIVE DATE.—The amendments made by this section

shall apply to taxable years beginning after December 31, 2004.

SEC. 302. PHASEOUT OF MARRIAGE PENALTY IN 15-PERCENT

BRACKET.

(a) IN GENERAL.—Section 1(f ) (relating to adjustments in tax

tables so that inflation will not result in tax increases) is amended

by adding at the end the following new paragraph:

‘‘(8) PHASEOUT OF MARRIAGE PENALTY IN 15-PERCENT

BRACKET.—

‘‘(A) IN GENERAL.—With respect to taxable years beginning after December 31, 2004, in prescribing the tables

under paragraph (1)—

‘‘(i) the maximum taxable income in the 15-percent

rate bracket in the table contained in subsection (a)

(and the minimum taxable income in the next higher

taxable income bracket in such table) shall be the

applicable percentage of the maximum taxable income

in the 15-percent rate bracket in the table contained

in subsection (c) (after any other adjustment under

this subsection), and

‘‘(ii) the comparable taxable income amounts in

the table contained in subsection (d) shall be 1⁄2 of

the amounts determined under clause (i).

‘‘(B) APPLICABLE PERCENTAGE.—For purposes of

subparagraph (A), the applicable percentage shall be determined in accordance with the following table:

‘‘For taxable years beginning The applicable

in calendar year— percentage is—

2005 ............................................................................................. 180

2006 ............................................................................................. 187

2007 ............................................................................................. 193

2008 and thereafter ................................................................... 200.

‘‘(C) ROUNDING.—If any amount determined under

subparagraph (A)(i) is not a multiple of $50, such amount

shall be rounded to the next lowest multiple of $50.’’.

(b) TECHNICAL AMENDMENTS.—

(1) Subparagraph (A) of section 1(f )(2) is amended by

inserting ‘‘except as provided in paragraph (8),’’ before ‘‘by

increasing’’.

(2) The heading for subsection (f ) of section 1 is amended

by inserting ‘‘PHASEOUT OF MARRIAGE PENALTY IN 15-PERCENT

BRACKET;’’ before ‘‘ADJUSTMENTS’’.

(c) EFFECTIVE DATE.—The amendments made by this section

shall apply to taxable years beginning after December 31, 2004.

Applicability.

26 USC 1 note.

Applicability.

26 USC 1 note.

26 USC 1.

PUBLIC LAW 107–16—JUNE 7, 2001 115 STAT. 55

SEC. 303. MARRIAGE PENALTY RELIEF FOR EARNED INCOME CREDIT;

EARNED INCOME TO INCLUDE ONLY AMOUNTS INCLUDIBLE IN GROSS INCOME; SIMPLIFICATION OF EARNED

INCOME CREDIT.

(a) INCREASED PHASEOUT AMOUNT.— (1) IN GENERAL.—Section 32(b)(2) (relating to amounts)

is amended— (A) by striking ‘‘AMOUNTS.—The earned’’ and inserting ‘‘AMOUNTS.— ‘‘(A) IN GENERAL.—Subject to subparagraph (B), the

earned’’, and

(B) by adding at the end the following new subparagraph: ‘‘(B) JOINT RETURNS.—In the case of a joint return

filed by an eligible individual and such individual’s spouse,

the phaseout amount determined under subparagraph (A)

shall be increased by— ‘‘(i) $1,000 in the case of taxable years beginning

in 2002, 2003, and 2004, ‘‘(ii) $2,000 in the case of taxable years beginning

in 2005, 2006, and 2007, and

‘‘(iii) $3,000 in the case of taxable years beginning

after 2007.’’.

(2) INFLATION ADJUSTMENT.—Paragraph (1)(B) of section

32( j) (relating to inflation adjustments) is amended to read

as follows:

‘‘(B) the cost-of-living adjustment determined under

section 1(f )(3) for the calendar year in which the taxable

year begins, determined—

‘‘(i) in the case of amounts in subsections (b)(2)(A)

and (i)(1), by substituting ‘calendar year 1995’ for ‘calendar year 1992’ in subparagraph (B) thereof, and

‘‘(ii) in the case of the $3,000 amount in subsection

(b)(2)(B)(iii), by substituting ‘calendar year 2007’ for

‘calendar year 1992’ in subparagraph (B) of such section 1.’’.

(3) ROUNDING.—Section 32( j)(2)(A) (relating to rounding)

is amended by striking ‘‘subsection (b)(2)’’ and inserting ‘‘subsection (b)(2)(A) (after being increased under subparagraph (B)

thereof )’’.

(b) EARNED INCOME TO INCLUDE ONLY AMOUNTS INCLUDIBLE

IN GROSS INCOME.—Clause (i) of section 32(c)(2)(A) (defining earned

income) is amended by inserting ‘‘, but only if such amounts are

includible in gross income for the taxable year’’ after ‘‘other

employee compensation’’.

(c) REPEAL OF REDUCTION OF CREDIT TO TAXPAYERS SUBJECT

TO ALTERNATIVE MINIMUM TAX.—Section 32(h) is repealed.

(d) REPLACEMENT OF MODIFIED ADJUSTED GROSS INCOME WITH

ADJUSTED GROSS INCOME.—

(1) IN GENERAL.—Section 32(a)(2)(B) is amended by striking

‘‘modified’’. (2) CONFORMING AMENDMENTS.—

(A) Section 32(c) is amended by striking paragraph

(5).

(B) Section 32(f )(2)(B) is amended by striking ‘‘modified’’ each place it appears.

(e) RELATIONSHIP TEST.—

26 USC 32.

115 STAT. 56 PUBLIC LAW 107–16—JUNE 7, 2001

(1) IN GENERAL.—Clause (i) of section 32(c)(3)(B) (relating

to relationship test) is amended to read as follows:

‘‘(i) IN GENERAL.—An individual bears a relationship to the taxpayer described in this subparagraph

if such individual is—

‘‘(I) a son, daughter, stepson, or stepdaughter,

or a descendant of any such individual,

‘‘(II) a brother, sister, stepbrother, or stepsister, or a descendant of any such individual,

who the taxpayer cares for as the taxpayer’s own

child, or

‘‘(III) an eligible foster child of the taxpayer.’’.

(2) ELIGIBLE FOSTER CHILD.—

(A) IN GENERAL.—Clause (iii) of section 32(c)(3)(B) is

amended to read as follows:

‘‘(iii) ELIGIBLE FOSTER CHILD.—For purposes of

clause (i), the term ‘eligible foster child’ means an

individual not described in subclause (I) or (II) of clause

(i) who—

‘‘(I) is placed with the taxpayer by an authorized placement agency, and

‘‘(II) the taxpayer cares for as the taxpayer’s

own child.’’.

(B) CONFORMING AMENDMENT.—Section 32(c)(3)(A)(ii)

is amended by striking ‘‘except as provided in subparagraph

(B)(iii),’’.

(f ) 2 OR MORE CLAIMING QUALIFYING CHILD.—Section

32(c)(1)(C) is amended to read as follows:

‘‘(C) 2 OR MORE CLAIMING QUALIFYING CHILD.—

‘‘(i) IN GENERAL.—Except as provided in clause

(ii), if (but for this paragraph) an individual may be

claimed, and is claimed, as a qualifying child by 2

or more taxpayers for a taxable year beginning in

the same calendar year, such individual shall be

treated as the qualifying child of the taxpayer who

is—

‘‘(I) a parent of the individual, or

‘‘(II) if subclause (I) does not apply, the taxpayer with the highest adjusted gross income for

such taxable year.

‘‘(ii) MORE THAN 1 CLAIMING CREDIT.—If the parents claiming the credit with respect to any qualifying

child do not file a joint return together, such child

shall be treated as the qualifying child of—

‘‘(I) the parent with whom the child resided

for the longest period of time during the taxable

year, or

‘‘(II) if the child resides with both parents

for the same amount of time during such taxable

year, the parent with the highest adjusted gross

income.’’.

(g) EXPANSION OF MATHEMATICAL ERROR AUTHORITY.—Paragraph (2) of section 6213(g) is amended by striking ‘‘and’’ at the

end of subparagraph (K), by striking the period at the end of

subparagraph (L) and inserting ‘‘, and’’, and by inserting after

subparagraph (L) the following new subparagraph:

26 USC 32.

PUBLIC LAW 107–16—JUNE 7, 2001 115 STAT. 57

‘‘(M) the entry on the return claiming the credit under

section 32 with respect to a child if, according to the Federal

Case Registry of Child Support Orders established under

section 453(h) of the Social Security Act, the taxpayer

is a noncustodial parent of such child.’’.

(h) CLERICAL AMENDMENT.—Subparagraph (E) of section

32(c)(3) is amended by striking ‘‘subparagraphs (A)(ii) and

(B)(iii)(II)’’ and inserting ‘‘subparagraph (A)(ii)’’.

(i) EFFECTIVE DATES.—

(1) IN GENERAL.—Except as provided in paragraph (2), the

amendments made by this section shall apply to taxable years

beginning after December 31, 2001.

(2) SUBSECTION (g).—The amendment made by subsection

(g) shall take effect on January 1, 2004.

TITLE IV—AFFORDABLE EDUCATION

PROVISIONS

Subtitle A—Education Savings Incentives

SEC. 401. MODIFICATIONS TO EDUCATION INDIVIDUAL RETIREMENT

ACCOUNTS.

(a) MAXIMUM ANNUAL CONTRIBUTIONS.—

(1) IN GENERAL.—Section 530(b)(1)(A)(iii) (defining education individual retirement account) is amended by striking

‘‘$500’’ and inserting ‘‘$2,000’’.

(2) CONFORMING AMENDMENT.—Section 4973(e)(1)(A) is

amended by striking ‘‘$500’’ and inserting ‘‘$2,000’’.

(b) MODIFICATION OF AGI LIMITS TO REMOVE MARRIAGE PENALTY.—Section 530(c)(1) (relating to reduction in permitted contributions based on adjusted gross income) is amended—

(1) by striking ‘‘$150,000’’ in subparagraph (A)(ii) and

inserting ‘‘$190,000’’, and

(2) by striking ‘‘$10,000’’ in subparagraph (B) and inserting

‘‘$30,000’’.

(c) TAX-FREE EXPENDITURES FOR ELEMENTARY AND SECONDARY

SCHOOL EXPENSES.—

(1) IN GENERAL.—Section 530(b)(2) (defining qualified

higher education expenses) is amended to read as follows:

‘‘(2) QUALIFIED EDUCATION EXPENSES.—

‘‘(A) IN GENERAL.—The term ‘qualified education

expenses’ means—

‘‘(i) qualified higher education expenses (as defined

in section 529(e)(3)), and

‘‘(ii) qualified elementary and secondary education

expenses (as defined in paragraph (4)).

‘‘(B) QUALIFIED STATE TUITION PROGRAMS.—Such term

shall include any contribution to a qualified State tuition

program (as defined in section 529(b)) on behalf of the

designated beneficiary (as defined in section 529(e)(1)); but

there shall be no increase in the investment in the contract

for purposes of applying section 72 by reason of any portion

of such contribution which is not includible in gross income

by reason of subsection (d)(2).’’.

Applicability.

26 USC 32 note.

26 USC 32.

115 STAT. 58 PUBLIC LAW 107–16—JUNE 7, 2001

(2) QUALIFIED ELEMENTARY AND SECONDARY EDUCATION

EXPENSES.—Section 530(b) (relating to definitions and special

rules) is amended by adding at the end the following new

paragraph:

‘‘(4) QUALIFIED ELEMENTARY AND SECONDARY EDUCATION

EXPENSES.—

‘‘(A) IN GENERAL.—The term ‘qualified elementary and

secondary education expenses’ means— ‘‘(i) expenses for tuition, fees, academic tutoring,

special needs services in the case of a special needs

beneficiary, books, supplies, and other equipment

which are incurred in connection with the enrollment

or attendance of the designated beneficiary of the trust

as an elementary or secondary school student at a

public, private, or religious school, ‘‘(ii) expenses for room and board, uniforms,

transportation, and supplementary items and services

(including extended day programs) which are required

or provided by a public, private, or religious school

in connection with such enrollment or attendance, and ‘‘(iii) expenses for the purchase of any computer

technology or equipment (as defined in section

170(e)(6)(F)(i)) or Internet access and related services,

if such technology, equipment, or services are to be

used by the beneficiary and the beneficiary’s family

during any of the years the beneficiary is in school.

Clause (iii) shall not include expenses for computer software designed for sports, games, or hobbies unless the

software is predominantly educational in nature.

‘‘(B) SCHOOL.—The term ‘school’ means any school

which provides elementary education or secondary education (kindergarten through grade 12), as determined

under State law.’’.

(3) CONFORMING AMENDMENTS.—Section 530 is amended—

(A) by striking ‘‘higher’’ each place it appears in subsections (b)(1) and (d)(2), and

(B) by striking ‘‘HIGHER’’ in the heading for subsection

(d)(2).

(d) WAIVER OF AGE LIMITATIONS FOR CHILDREN WITH SPECIAL

NEEDS.—Section 530(b)(1) (defining education individual retirement

account) is amended by adding at the end the following flush

sentence:

‘‘The age limitations in subparagraphs (A)(ii) and (E), and

paragraphs (5) and (6) of subsection (d), shall not apply to

any designated beneficiary with special needs (as determined

under regulations prescribed by the Secretary).’’.

(e) ENTITIES PERMITTED TO CONTRIBUTE TO ACCOUNTS.—Section 530(c)(1) (relating to reduction in permitted contributions based

on adjusted gross income) is amended by striking ‘‘The maximum

amount which a contributor’’ and inserting ‘‘In the case of a contributor who is an individual, the maximum amount the contributor’’. (f ) TIME WHEN CONTRIBUTIONS DEEMED MADE.—

(1) IN GENERAL.—Section 530(b) (relating to definitions and

special rules), as amended by subsection (c)(2), is amended

by adding at the end the following new paragraph:

‘‘(5) TIME WHEN CONTRIBUTIONS DEEMED MADE.—An individual shall be deemed to have made a contribution to an

Regulations.

26 USC 530.

PUBLIC LAW 107–16—JUNE 7, 2001 115 STAT. 59

education individual retirement account on the last day of

the preceding taxable year if the contribution is made on

account of such taxable year and is made not later than the

time prescribed by law for filing the return for such taxable

year (not including extensions thereof ).’’.

(2) EXTENSION OF TIME TO RETURN EXCESS CONTRIBUTIONS.—Subparagraph (C) of section 530(d)(4) (relating to additional tax for distributions not used for educational expenses)

is amended—

(A) by striking clause (i) and inserting the following

new clause:

‘‘(i) such distribution is made before the first day

of the sixth month of the taxable year following the

taxable year, and’’, and

(B) by striking ‘‘DUE DATE OF RETURN’’ in the heading

and inserting ‘‘CERTAIN DATE’’.

(g) COORDINATION WITH HOPE AND LIFETIME LEARNING CREDITS

AND QUALIFIED TUITION PROGRAMS.—

(1) IN GENERAL.—Section 530(d)(2)(C) is amended to read

as follows:

‘‘(C) COORDINATION WITH HOPE AND LIFETIME LEARNING

CREDITS AND QUALIFIED TUITION PROGRAMS.—For purposes

of subparagraph (A)—

‘‘(i) CREDIT COORDINATION.—The total amount of

qualified higher education expenses with respect to

an individual for the taxable year shall be reduced—

‘‘(I) as provided in section 25A(g)(2), and

‘‘(II) by the amount of such expenses which

were taken into account in determining the credit

allowed to the taxpayer or any other person under

section 25A.

‘‘(ii) COORDINATION WITH QUALIFIED TUITION PROGRAMS.—If, with respect to an individual for any taxable year—

‘‘(I) the aggregate distributions during such

year to which subparagraph (A) and section

529(c)(3)(B) apply, exceed

‘‘(II) the total amount of qualified education

expenses (after the application of clause (i)) for

such year,

the taxpayer shall allocate such expenses among such

distributions for purposes of determining the amount

of the exclusion under subparagraph (A) and section

529(c)(3)(B).’’.

(2) CONFORMING AMENDMENTS.—

(A) Subsection (e) of section 25A is amended to read

as follows:

‘‘(e) ELECTION NOT TO HAVE SECTION APPLY.—A taxpayer may

elect not to have this section apply with respect to the qualified

tuition and related expenses of an individual for any taxable year.’’.

(B) Section 135(d)(2)(A) is amended by striking ‘‘allowable’’ and inserting ‘‘allowed’’.

(C) Section 530(d)(2)(D) is amended—

(i) by striking ‘‘or credit’’ and inserting ‘‘, credit,

or exclusion’’, and

26 USC 530.

115 STAT. 60 PUBLIC LAW 107–16—JUNE 7, 2001

(ii) by striking ‘‘CREDIT OR DEDUCTION’’ in the

heading and inserting ‘‘DEDUCTION, CREDIT, OR EXCLU- SION’’.

(D) Section 4973(e)(1) is amended by adding ‘‘and’’ at the end of subparagraph (A), by striking subparagraph

(B), and by redesignating subparagraph (C) as subparagraph (B).

(h) EFFECTIVE DATE.—The amendments made by this section

shall apply to taxable years beginning after December 31, 2001.

SEC. 402. MODIFICATIONS TO QUALIFIED TUITION PROGRAMS.

(a) ELIGIBLE EDUCATIONAL INSTITUTIONS PERMITTED TO MAIN- TAIN QUALIFIED TUITION PROGRAMS.— (1) IN GENERAL.—Section 529(b)(1) (defining qualified State

tuition program) is amended— (A) by inserting ‘‘or by 1 or more eligible educational

institutions’’ after ‘‘maintained by a State or agency or

instrumentality thereof ’’ in the matter preceding subparagraph (A), and

(B) by adding at the end the following new flush sentence: ‘‘Except to the extent provided in regulations, a program established and maintained by 1 or more eligible educational institutions shall not be treated as a qualified tuition program unless

such program provides that amounts are held in a qualified

trust and such program has received a ruling or determination

that such program meets the applicable requirements for a

qualified tuition program. For purposes of the preceding sentence, the term ‘qualified trust’ means a trust which is created

or organized in the United States for the exclusive benefit

of designated beneficiaries and with respect to which the

requirements of paragraphs (2) and (5) of section 408(a) are

met.’’.

(2) PRIVATE QUALIFIED TUITION PROGRAMS LIMITED TO BENEFIT PLANS.—Clause (ii) of section 529(b)(1)(A) is amended by

inserting ‘‘in the case of a program established and maintained

by a State or agency or instrumentality thereof,’’ before ‘‘may

make’’.

(3) ADDITIONAL TAX ON NONQUALIFIED WITHDRAWALS.—Section 529 is amended—

(A) by striking paragraph (3) of subsection (b) and

by redesignating paragraphs (4), (5), (6), and (7) of such

subsection as paragraphs (3), (4), (5), and (6), respectively,

and

(B) by adding at the end of subsection (c) the following

new paragraph:

‘‘(6) ADDITIONAL TAX.—The tax imposed by section 530(d)(4)

shall apply to any payment or distribution from a qualified

tuition program in the same manner as such tax applies to

a payment or distribution from an education individual retirement account. This paragraph shall not apply to any payment

or distribution in any taxable year beginning before January

1, 2004, which is includible in gross income but used for qualified higher education expenses of the designated beneficiary.’’.

(4) CONFORMING AMENDMENTS.— (A) Sections 72(e)(9), 135(c)(2)(C), 135(d)(1)(D), 529,

530(b)(2)(B), 4973(e), and 6693(a)(2)(C) are amended by

Applicability.

26 USC 25A note.

26 USC 4973.

PUBLIC LAW 107–16—JUNE 7, 2001 115 STAT. 61

striking ‘‘qualified State tuition’’ each place it appears and

inserting ‘‘qualified tuition’’.

(B) The headings for sections 72(e)(9) and 135(c)(2)(C)

are amended by striking ‘‘QUALIFIED STATE TUITION’’ each

place it appears and inserting ‘‘QUALIFIED TUITION’’.

(C) The headings for sections 529(b) and 530(b)(2)(B)

are amended by striking ‘‘QUALIFIED STATE TUITION’’ each

place it appears and inserting ‘‘QUALIFIED TUITION’’.

(D) The heading for section 529 is amended by striking

‘‘STATE’’.

(E) The item relating to section 529 in the table of

sections for part VIII of subchapter F of chapter 1 is

amended by striking ‘‘State’’.

(b) EXCLUSION FROM GROSS INCOME OF EDUCATION DISTRIBUTIONS FROM QUALIFIED TUITION PROGRAMS.—

(1) IN GENERAL.—Section 529(c)(3)(B) (relating to distributions) is amended to read as follows:

‘‘(B) DISTRIBUTIONS FOR QUALIFIED HIGHER EDUCATION

EXPENSES.—For purposes of this paragraph—

‘‘(i) IN-KIND DISTRIBUTIONS.—No amount shall be

includible in gross income under subparagraph (A) by

reason of a distribution which consists of providing

a benefit to the distributee which, if paid for by the

distributee, would constitute payment of a qualified

higher education expense.

‘‘(ii) CASH DISTRIBUTIONS.—In the case of distributions not described in clause (i), if—

‘‘(I) such distributions do not exceed the qualified higher education expenses (reduced by

expenses described in clause (i)), no amount shall

be includible in gross income, and

‘‘(II) in any other case, the amount otherwise

includible in gross income shall be reduced by

an amount which bears the same ratio to such

amount as such expenses bear to such distributions.

‘‘(iii) EXCEPTION FOR INSTITUTIONAL PROGRAMS.—

In the case of any taxable year beginning before

January 1, 2004, clauses (i) and (ii) shall not apply

with respect to any distribution during such taxable

year under a qualified tuition program established and

maintained by 1 or more eligible educational institutions.

‘‘(iv) TREATMENT AS DISTRIBUTIONS.—Any benefit

furnished to a designated beneficiary under a qualified

tuition program shall be treated as a distribution to

the beneficiary for purposes of this paragraph.

‘‘(v) COORDINATION WITH HOPE AND LIFETIME

LEARNING CREDITS.—The total amount of qualified

higher education expenses with respect to an individual

for the taxable year shall be reduced—

‘‘(I) as provided in section 25A(g)(2), and

‘‘(II) by the amount of such expenses which

were taken into account in determining the credit

allowed to the taxpayer or any other person under

section 25A.

26 USC 72, 135.

115 STAT. 62 PUBLIC LAW 107–16—JUNE 7, 2001

‘‘(vi) COORDINATION WITH EDUCATION INDIVIDUAL

RETIREMENT ACCOUNTS.—If, with respect to an individual for any taxable year— ‘‘(I) the aggregate distributions to which

clauses (i) and (ii) and section 530(d)(2)(A) apply,

exceed

‘‘(II) the total amount of qualified higher education expenses otherwise taken into account

under clauses (i) and (ii) (after the application

of clause (v)) for such year,

the taxpayer shall allocate such expenses among such

distributions for purposes of determining the amount

of the exclusion under clauses (i) and (ii) and section

530(d)(2)(A).’’.

(2) CONFORMING AMENDMENTS.— (A) Section 135(d)(2)(B) is amended by striking ‘‘the

exclusion under section 530(d)(2)’’ and inserting ‘‘the exclusions under sections 529(c)(3)(B) and 530(d)(2)’’. (B) Section 221(e)(2)(A) is amended by inserting ‘‘529,’’ after ‘‘135,’’. (c) ROLLOVER TO DIFFERENT PROGRAM FOR BENEFIT OF SAME

DESIGNATED BENEFICIARY.—Section 529(c)(3)(C) (relating to change

in beneficiaries) is amended—

(1) by striking ‘‘transferred to the credit’’ in clause (i)

and inserting ‘‘transferred—

‘‘(I) to another qualified tuition program for

the benefit of the designated beneficiary, or

‘‘(II) to the credit’’,

(2) by adding at the end the following new clause:

‘‘(iii) LIMITATION ON CERTAIN ROLLOVERS.—Clause

(i)(I) shall not apply to any transfer if such transfer

occurs within 12 months from the date of a previous

transfer to any qualified tuition program for the benefit

of the designated beneficiary.’’, and

(3) by inserting ‘‘OR PROGRAMS’’ after ‘‘BENEFICIARIES’’ in

the heading.

(d) MEMBER OF FAMILY INCLUDES FIRST COUSIN.—Section

529(e)(2) (defining member of family) is amended by striking ‘‘and’’

at the end of subparagraph (B), by striking the period at the

end of subparagraph (C) and by inserting ‘‘; and’’, and by adding

at the end the following new subparagraph:

‘‘(D) any first cousin of such beneficiary.’’.

(e) ADJUSTMENT OF LIMITATION ON ROOM AND BOARD DISTRIBUTIONS.—Section 529(e)(3)(B)(ii) is amended to read as follows:

‘‘(ii) LIMITATION.—The amount treated as qualified

higher education expenses by reason of clause (i) shall

not exceed—

‘‘(I) the allowance (applicable to the student)

for room and board included in the cost of attendance (as defined in section 472 of the Higher Education Act of 1965 (20 U.S.C. 1087ll), as in effect

on the date of the enactment of the Economic

Growth and Tax Relief Reconciliation Act of 2001)

as determined by the eligible educational institution for such period, or

‘‘(II) if greater, the actual invoice amount the

student residing in housing owned or operated by

26 USC 135.

PUBLIC LAW 107–16—JUNE 7, 2001 115 STAT. 63

the eligible educational institution is charged by

such institution for room and board costs for such

period.’’.

(f ) SPECIAL NEEDS SERVICES.—Subparagraph (A) of section

529(e)(3) (defining qualified higher education expenses) is amended

to read as follows:

‘‘(A) IN GENERAL.—The term ‘qualified higher education

expenses’ means—

‘‘(i) tuition, fees, books, supplies, and equipment

required for the enrollment or attendance of a designated beneficiary at an eligible educational institution; and

‘‘(ii) expenses for special needs services in the case

of a special needs beneficiary which are incurred in

connection with such enrollment or attendance.’’.

(g) TECHNICAL AMENDMENTS.—Section 529(c)(3)(D) is

amended—

(1) by inserting ‘‘except to the extent provided by the Secretary,’’ before ‘‘all distributions’’ in clause (ii), and

(2) by inserting ‘‘except to the extent provided by the Secretary,’’ before ‘‘the value’’ in clause (iii).

(h) EFFECTIVE DATE.—The amendments made by this section

shall apply to taxable years beginning after December 31, 2001.

Subtitle B—Educational Assistance

SEC. 411. EXTENSION OF EXCLUSION FOR EMPLOYER-PROVIDED EDUCATIONAL ASSISTANCE.

(a) IN GENERAL.—Section 127 (relating to exclusion for educational assistance programs) is amended by striking subsection

(d) and by redesignating subsection (e) as subsection (d).

(b) REPEAL OF LIMITATION ON GRADUATE EDUCATION.—The last

sentence of section 127(c)(1) is amended by striking ‘‘, and such

term also does not include any payment for, or the provision of

any benefits with respect to, any graduate level course of a kind

normally taken by an individual pursuing a program leading to

a law, business, medical, or other advanced academic or professional

degree’’.

(c) CONFORMING AMENDMENT.—Section 51A(b)(5)(B)(iii) is

amended by striking ‘‘or would be so excludable but for section

127(d)’’.

(d) EFFECTIVE DATE.—The amendments made by this section

shall apply with respect to expenses relating to courses beginning

after December 31, 2001.

SEC. 412. ELIMINATION OF 60-MONTH LIMIT AND INCREASE IN INCOME

LIMITATION ON STUDENT LOAN INTEREST DEDUCTION.

(a) ELIMINATION OF 60-MONTH LIMIT.—

(1) IN GENERAL.—Section 221 (relating to interest on education loans), as amended by section 402(b)(2)(B), is amended

by striking subsection (d) and by redesignating subsections

(e), (f ), and (g) as subsections (d), (e), and (f ), respectively.

(2) CONFORMING AMENDMENT.—Section 6050S(e) is

amended by striking ‘‘section 221(e)(1)’’ and inserting ‘‘section

221(d)(1)’’.

Applicability.

26 USC 51A note.

Applicability.

26 USC 72 note.

26 USC 529.

115 STAT. 64 PUBLIC LAW 107–16—JUNE 7, 2001

(3) EFFECTIVE DATE.—The amendments made by this subsection shall apply with respect to any loan interest paid after

December 31, 2001, in taxable years ending after such date.

(b) INCREASE IN INCOME LIMITATION.—

(1) IN GENERAL.—Section 221(b)(2)(B) (relating to amount

of reduction) is amended by striking clauses (i) and (ii) and

inserting the following:

‘‘(i) the excess of—

‘‘(I) the taxpayer’s modified adjusted gross

income for such taxable year, over

‘‘(II) $50,000 ($100,000 in the case of a joint

return), bears to

‘‘(ii) $15,000 ($30,000 in the case of a joint

return).’’.

(2) CONFORMING AMENDMENT.—Section 221(g)(1) is

amended by striking ‘‘$40,000 and $60,000 amounts’’ and

inserting ‘‘$50,000 and $100,000 amounts’’.

(3) EFFECTIVE DATE.—The amendments made by this subsection shall apply to taxable years ending after December

31, 2001.

SEC. 413. EXCLUSION OF CERTAIN AMOUNTS RECEIVED UNDER THE

NATIONAL HEALTH SERVICE CORPS SCHOLARSHIP PROGRAM AND THE F. EDWARD HEBERT ARMED FORCES

HEALTH PROFESSIONS SCHOLARSHIP AND FINANCIAL

ASSISTANCE PROGRAM.

(a) IN GENERAL.—Section 117(c) (relating to the exclusion from

gross income amounts received as a qualified scholarship) is

amended—

(1) by striking ‘‘Subsections (a)’’ and inserting the following:

‘‘(1) IN GENERAL.—Except as provided in paragraph (2),

subsections (a)’’, and

(2) by adding at the end the following new paragraph:

‘‘(2) EXCEPTIONS.—Paragraph (1) shall not apply to any

amount received by an individual under—

‘‘(A) the National Health Service Corps Scholarship

Program under section 338A(g)(1)(A) of the Public Health

Service Act, or

‘‘(B) the Armed Forces Health Professions Scholarship

and Financial Assistance program under subchapter I of

chapter 105 of title 10, United States Code.’’.

(b) EFFECTIVE DATE.—The amendments made by subsection

(a) shall apply to amounts received in taxable years beginning

after December 31, 2001.

Subtitle C—Liberalization of Tax-Exempt

Financing Rules for Public School Construction

SEC. 421. ADDITIONAL INCREASE IN ARBITRAGE REBATE EXCEPTION

FOR GOVERNMENTAL BONDS USED TO FINANCE EDUCATIONAL FACILITIES.

(a) IN GENERAL.—Section 148(f )(4)(D)(vii) (relating to increase

in exception for bonds financing public school capital expenditures)

Applicability.

26 USC 117 note.

Applicability.

26 USC 221 note.

26 USC 221.

Applicability.

26 USC 221 note.

PUBLIC LAW 107–16—JUNE 7, 2001 115 STAT. 65

is amended by striking ‘‘$5,000,000’’ the second place it appears

and inserting ‘‘$10,000,000’’. (b) EFFECTIVE DATE.—The amendment made by subsection (a)

shall apply to obligations issued in calendar years beginning after

December 31, 2001.

SEC. 422. TREATMENT OF QUALIFIED PUBLIC EDUCATIONAL FACILITY

BONDS AS EXEMPT FACILITY BONDS.

(a) TREATMENT AS EXEMPT FACILITY BOND.—Subsection (a) of

section 142 (relating to exempt facility bond) is amended by striking

‘‘or’’ at the end of paragraph (11), by striking the period at the

end of paragraph (12) and inserting ‘‘, or’’, and by adding at the

end the following new paragraph: ‘‘(13) qualified public educational facilities.’’. (b) QUALIFIED PUBLIC EDUCATIONAL FACILITIES.—Section 142

(relating to exempt facility bond) is amended by adding at the

end the following new subsection: ‘‘(k) QUALIFIED PUBLIC EDUCATIONAL FACILITIES.—

‘‘(1) IN GENERAL.—For purposes of subsection (a)(13), the

term ‘qualified public educational facility’ means any school

facility which is—

‘‘(A) part of a public elementary school or a public

secondary school, and

‘‘(B) owned by a private, for-profit corporation pursuant

to a public-private partnership agreement with a State

or local educational agency described in paragraph (2).

‘‘(2) PUBLIC-PRIVATE PARTNERSHIP AGREEMENT

DESCRIBED.—A public-private partnership agreement is

described in this paragraph if it is an agreement—

‘‘(A) under which the corporation agrees—

‘‘(i) to do 1 or more of the following: construct,

rehabilitate, refurbish, or equip a school facility, and

‘‘(ii) at the end of the term of the agreement,

to transfer the school facility to such agency for no

additional consideration, and

‘‘(B) the term of which does not exceed the term of

the issue to be used to provide the school facility.

‘‘(3) SCHOOL FACILITY.—For purposes of this subsection,

the term ‘school facility’ means—

‘‘(A) any school building,

‘‘(B) any functionally related and subordinate facility

and land with respect to such building, including any stadium or other facility primarily used for school events,

and

‘‘(C) any property, to which section 168 applies (or

would apply but for section 179), for use in a facility

described in subparagraph (A) or (B).

‘‘(4) PUBLIC SCHOOLS.—For purposes of this subsection, the

terms ‘elementary school’ and ‘secondary school’ have the

meanings given such terms by section 14101 of the Elementary

and Secondary Education Act of 1965 (20 U.S.C. 8801), as

in effect on the date of the enactment of this subsection.

‘‘(5) ANNUAL AGGREGATE FACE AMOUNT OF TAX-EXEMPT

FINANCING.—

‘‘(A) IN GENERAL.—An issue shall not be treated as

an issue described in subsection (a)(13) if the aggregate

face amount of bonds issued by the State pursuant thereto

26 USC 142.

Applicability.

26 USC 148 note.

115 STAT. 66 PUBLIC LAW 107–16—JUNE 7, 2001

(when added to the aggregate face amount of bonds previously so issued during the calendar year) exceeds an

amount equal to the greater of— ‘‘(i) $10 multiplied by the State population, or

‘‘(ii) $5,000,000.

‘‘(B) ALLOCATION RULES.— ‘‘(i) IN GENERAL.—Except as otherwise provided

in this subparagraph, the State may allocate the

amount described in subparagraph (A) for any calendar

year in such manner as the State determines appropriate. ‘‘(ii) RULES FOR CARRYFORWARD OF UNUSED LIMITA- TION.—A State may elect to carry forward an unused

limitation for any calendar year for 3 calendar years

following the calendar year in which the unused limitation arose under rules similar to the rules of section

146(f ), except that the only purpose for which the

carryforward may be elected is the issuance of exempt

facility bonds described in subsection (a)(13).’’. (c) EXEMPTION FROM GENERAL STATE VOLUME CAPS.—Paragraph (3) of section 146(g) (relating to exception for certain bonds)

is amended—

(1) by striking ‘‘or (12)’’ and inserting ‘‘(12), or (13)’’, and

(2) by striking ‘‘and environmental enhancements of hydroelectric generating facilities’’ and inserting ‘‘environmental

enhancements of hydroelectric generating facilities, and qualified public educational facilities’’.

(d) EXEMPTION FROM LIMITATION ON USE FOR LAND ACQUISITION.—Section 147(h) (relating to certain rules not to apply to

mortgage revenue bonds, qualified student loan bonds, and qualified

501(c)(3) bonds) is amended by adding at the end the following

new paragraph:

‘‘(3) EXEMPT FACILITY BONDS FOR QUALIFIED PUBLIC-PRIVATE

SCHOOLS.—Subsection (c) shall not apply to any exempt facility

bond issued as part of an issue described in section 142(a)(13)

(relating to qualified public educational facilities).’’.

(e) CONFORMING AMENDMENT.—The heading for section 147(h)

is amended by striking ‘‘MORTGAGE REVENUE BONDS, QUALIFIED

STUDENT LOAN BONDS, AND QUALIFIED 501(c)(3) BONDS’’ and

inserting ‘‘CERTAIN BONDS’’.

(f ) EFFECTIVE DATE.—The amendments made by this section

shall apply to bonds issued after December 31, 2001.

Subtitle D—Other Provisions

SEC. 431. DEDUCTION FOR HIGHER EDUCATION EXPENSES.

(a) DEDUCTION ALLOWED.—Part VII of subchapter B of chapter

1 (relating to additional itemized deductions for individuals) is

amended by redesignating section 222 as section 223 and by

inserting after section 221 the following:

‘‘SEC. 222. QUALIFIED TUITION AND RELATED EXPENSES.

‘‘(a) ALLOWANCE OF DEDUCTION.—In the case of an individual,

there shall be allowed as a deduction an amount equal to the

qualified tuition and related expenses paid by the taxpayer during

the taxable year.

Applicability.

26 USC 142 note.

26 USC 146.

PUBLIC LAW 107–16—JUNE 7, 2001 115 STAT. 67

‘‘(b) DOLLAR LIMITATIONS.—

‘‘(1) IN GENERAL.—The amount allowed as a deduction

under subsection (a) with respect to the taxpayer for any taxable year shall not exceed the applicable dollar limit.

‘‘(2) APPLICABLE DOLLAR LIMIT.—

‘‘(A) 2002 AND 2003.—In the case of a taxable year

beginning in 2002 or 2003, the applicable dollar limit shall

be equal to—

‘‘(i) in the case of a taxpayer whose adjusted gross

income for the taxable year does not exceed $65,000

($130,000 in the case of a joint return), $3,000, and—

‘‘(ii) in the case of any other taxpayer, zero.

‘‘(B) 2004 AND 2005.—In the case of a taxable year

beginning in 2004 or 2005, the applicable dollar amount

shall be equal to—

‘‘(i) in the case of a taxpayer whose adjusted gross

income for the taxable year does not exceed $65,000

($130,000 in the case of a joint return), $4,000,

‘‘(ii) in the case of a taxpayer not described in

clause (i) whose adjusted gross income for the taxable

year does not exceed $80,000 ($160,000 in the case

of a joint return), $2,000, and

‘‘(iii) in the case of any other taxpayer, zero.

‘‘(C) ADJUSTED GROSS INCOME.—For purposes of this

paragraph, adjusted gross income shall be determined—

‘‘(i) without regard to this section and sections

911, 931, and 933, and

‘‘(ii) after application of sections 86, 135, 137, 219,

221, and 469.

‘‘(c) NO DOUBLE BENEFIT.—

‘‘(1) IN GENERAL.—No deduction shall be allowed under

subsection (a) for any expense for which a deduction is allowed

to the taxpayer under any other provision of this chapter.

‘‘(2) COORDINATION WITH OTHER EDUCATION INCENTIVES.—

‘‘(A) DENIAL OF DEDUCTION IF CREDIT ELECTED.—No

deduction shall be allowed under subsection (a) for a taxable year with respect to the qualified tuition and related

expenses with respect to an individual if the taxpayer

or any other person elects to have section 25A apply with

respect to such individual for such year.

‘‘(B) COORDINATION WITH EXCLUSIONS.—The total

amount of qualified tuition and related expenses shall be

reduced by the amount of such expenses taken into account

in determining any amount excluded under section 135,

529(c)(1), or 530(d)(2). For purposes of the preceding sentence, the amount taken into account in determining the

amount excluded under section 529(c)(1) shall not include

that portion of the distribution which represents a return

of any contributions to the plan.

‘‘(3) DEPENDENTS.—No deduction shall be allowed under

subsection (a) to any individual with respect to whom a deduction under section 151 is allowable to another taxpayer for

a taxable year beginning in the calendar year in which such

individual’s taxable year begins.

‘‘(d) DEFINITIONS AND SPECIAL RULES.—For purposes of this

section—

115 STAT. 68 PUBLIC LAW 107–16—JUNE 7, 2001

‘‘(1) QUALIFIED TUITION AND RELATED EXPENSES.—The term

‘qualified tuition and related expenses’ has the meaning given

such term by section 25A(f ). Such expenses shall be reduced

in the same manner as under section 25A(g)(2).

‘‘(2) IDENTIFICATION REQUIREMENT.—No deduction shall be

allowed under subsection (a) to a taxpayer with respect to

the qualified tuition and related expenses of an individual

unless the taxpayer includes the name and taxpayer identification number of the individual on the return of tax for the

taxable year.

‘‘(3) LIMITATION ON TAXABLE YEAR OF DEDUCTION.—

‘‘(A) IN GENERAL.—A deduction shall be allowed under

subsection (a) for qualified tuition and related expenses

for any taxable year only to the extent such expenses

are in connection with enrollment at an institution of

higher education during the taxable year. ‘‘(B) CERTAIN PREPAYMENTS ALLOWED.—Subparagraph

(A) shall not apply to qualified tuition and related expenses

paid during a taxable year if such expenses are in connection with an academic term beginning during such taxable

year or during the first 3 months of the next taxable

year.

‘‘(4) NO DEDUCTION FOR MARRIED INDIVIDUALS FILING SEPARATE RETURNS.—If the taxpayer is a married individual (within

the meaning of section 7703), this section shall apply only

if the taxpayer and the taxpayer’s spouse file a joint return

for the taxable year.

‘‘(5) NONRESIDENT ALIENS.—If the taxpayer is a nonresident

alien individual for any portion of the taxable year, this section

shall apply only if such individual is treated as a resident

alien of the United States for purposes of this chapter by

reason of an election under subsection (g) or (h) of section

6013.

‘‘(6) REGULATIONS.—The Secretary may prescribe such

regulations as may be necessary or appropriate to carry out

this section, including regulations requiring recordkeeping and

information reporting.

‘‘(e) TERMINATION.—This section shall not apply to taxable years

beginning after December 31, 2005.’’.

(b) DEDUCTION ALLOWED IN COMPUTING ADJUSTED GROSS

INCOME.—Section 62(a) is amended by inserting after paragraph

(17) the following:

‘‘(18) HIGHER EDUCATION EXPENSES.—The deduction

allowed by section 222.’’. (c) CONFORMING AMENDMENTS.— (1) Sections 86(b)(2), 135(c)(4), 137(b)(3), and 219(g)(3) are

each amended by inserting ‘‘222,’’ after ‘‘221,’’. (2) Section 221(b)(2)(C) is amended by inserting ‘‘222,’’ before ‘‘911’’. (3) Section 469(i)(3)(F) is amended by striking ‘‘and 221’’ and inserting ‘‘, 221, and 222’’. (4) The table of sections for part VII of subchapter B

of chapter 1 is amended by striking the item relating to section

222 and inserting the following:

‘‘Sec. 222. Qualified tuition and related expenses.

‘‘Sec. 223. Cross reference.’’.

26 USC 62.

Applicability.

PUBLIC LAW 107–16—JUNE 7, 2001 115 STAT. 69

(d) EFFECTIVE DATE.—The amendments made by this section

shall apply to payments made in taxable years beginning after

December 31, 2001.

TITLE V—ESTATE, GIFT, AND GENERATION-SKIPPING TRANSFER TAX PROVISIONS

Subtitle A—Repeal of Estate and

Generation-Skipping Transfer Taxes

SEC. 501. REPEAL OF ESTATE AND GENERATION-SKIPPING TRANSFER

TAXES.

(a) ESTATE TAX REPEAL.—Subchapter C of chapter 11 of subtitle

B (relating to miscellaneous) is amended by adding at the end

the following new section:

‘‘SEC. 2210. TERMINATION.

‘‘(a) IN GENERAL.—Except as provided in subsection (b), this

chapter shall not apply to the estates of decedents dying after

December 31, 2009.

‘‘(b) CERTAIN DISTRIBUTIONS FROM QUALIFIED DOMESTIC

TRUSTS.—In applying section 2056A with respect to the surviving

spouse of a decedent dying before January 1, 2010—

‘‘(1) section 2056A(b)(1)(A) shall not apply to distributions

made after December 31, 2020, and

‘‘(2) section 2056A(b)(1)(B) shall not apply after December

31, 2009.’’.

(b) GENERATION-SKIPPING TRANSFER TAX REPEAL.—Subchapter

G of chapter 13 of subtitle B (relating to administration) is amended

by adding at the end the following new section:

‘‘SEC. 2664. TERMINATION.

‘‘This chapter shall not apply to generation-skipping transfers

after December 31, 2009.’’.

(c) CONFORMING AMENDMENTS.—

(1) The table of sections for subchapter C of chapter 11

is amended by adding at the end the following new item:

‘‘Sec. 2210. Termination.’’.

(2) The table of sections for subchapter G of chapter 13

is amended by adding at the end the following new item:

‘‘Sec. 2664. Termination.’’.

(d) EFFECTIVE DATE.—The amendments made by this section

shall apply to the estates of decedents dying, and generation-skipping transfers, after December 31, 2009.

Applicability.

26 USC 2210

note.

Applicability.

26 USC 62 note.

115 STAT. 70 PUBLIC LAW 107–16—JUNE 7, 2001

Subtitle B—Reductions of Estate and Gift

Tax Rates

SEC. 511. ADDITIONAL REDUCTIONS OF ESTATE AND GIFT TAX RATES.

(a) MAXIMUM RATE OF TAX REDUCED TO 50 PERCENT.—The

table contained in section 2001(c)(1) is amended by striking the

two highest brackets and inserting the following:

‘‘Over $2,500,000 ................................ $1,025,800, plus 50% of the excess over

$2,500,000.’’.

(b) REPEAL OF PHASEOUT OF GRADUATED RATES.—Subsection

(c) of section 2001 is amended by striking paragraph (2).

(c) ADDITIONAL REDUCTIONS OF MAXIMUM RATE OF TAX.—Subsection (c) of section 2001, as amended by subsection (b), is amended

by adding at the end the following new paragraph: ‘‘(2) PHASEDOWN OF MAXIMUM RATE OF TAX.— ‘‘(A) IN GENERAL.—In the case of estates of decedents

dying, and gifts made, in calendar years after 2002 and

before 2010, the tentative tax under this subsection shall

be determined by using a table prescribed by the Secretary

(in lieu of using the table contained in paragraph (1))

which is the same as such table; except that—

‘‘(i) the maximum rate of tax for any calendar

year shall be determined in the table under subparagraph (B), and

‘‘(ii) the brackets and the amounts setting forth

the tax shall be adjusted to the extent necessary to

reflect the adjustments under subparagraph (A).

‘‘(B) MAXIMUM RATE.—

The maximum

‘‘In calendar year: rate is:

2003 ................................................................................................... 49 percent

2004 ................................................................................................... 48 percent

2005 ................................................................................................... 47 percent

2006 ................................................................................................... 46 percent

2007, 2008, and 2009 ....................................................................... 45 percent.’’.

(d) MAXIMUM GIFT TAX RATE REDUCED TO MAXIMUM INDIVIDUAL

RATE AFTER 2009.—Subsection (a) of section 2502 (relating to rate

of tax) is amended to read as follows:

‘‘(a) COMPUTATION OF TAX.—

‘‘(1) IN GENERAL.—The tax imposed by section 2501 for

each calendar year shall be an amount equal to the excess

of—

‘‘(A) a tentative tax, computed under paragraph (2),

on the aggregate sum of the taxable gifts for such calendar

year and for each of the preceding calendar periods, over

‘‘(B) a tentative tax, computed under paragraph (2),

on the aggregate sum of the taxable gifts for each of the

preceding calendar periods.

‘‘(2) RATE SCHEDULE.—

‘‘If the amount with respect to

which the tentative tax to be

computed is:

The tentative tax is:

Not over $10,000 ................................ 18% of such amount.

Over $10,000 but not over $20,000 ... $1,800, plus 20% of the excess over

$10,000.

Over $20,000 but not over $40,000 ... $3,800, plus 22% of the excess over

$20,000.

Regulations.

26 USC 2001.

PUBLIC LAW 107–16—JUNE 7, 2001 115 STAT. 71

‘‘If the amount with respect to

which the tentative tax to be

computed is:

The tentative tax is:

Over $40,000 but not over $60,000 ... $8,200, plus 24% of the excess over

$40,000.

Over $60,000 but not over $80,000 ... $13,000, plus 26% of the excess over

$60,000.

Over $80,000 but not over $100,000 $18,200, plus 28% of the excess over

$80,000.

Over $100,000 but not over $150,000 $23,800, plus 30% of the excess over

$100,000.

Over $150,000 but not over $250,000 $38,800, plus 32% of the excess over

$150,000.

Over $250,000 but not over $500,000 $70,800, plus 34% of the excess over

$250,000.

Over $500,000 .................................... $155,800, plus 35% of the excess over

$500,000.’’.

(e) TREATMENT OF CERTAIN TRANSFERS IN TRUST.—Section 2511

(relating to transfers in general) is amended by adding at the

end the following new subsection:

‘‘(c) TREATMENT OF CERTAIN TRANSFERS IN TRUST.—Notwithstanding any other provision of this section and except as provided

in regulations, a transfer in trust shall be treated as a taxable

gift under section 2503, unless the trust is treated as wholly owned

by the donor or the donor’s spouse under subpart E of part I

of subchapter J of chapter 1.’’.

(f ) EFFECTIVE DATES.—

(1) SUBSECTIONS (a) AND (b).—The amendments made by

subsections (a) and (b) shall apply to estates of decedents dying,

and gifts made, after December 31, 2001.

(2) SUBSECTION (c).—The amendment made by subsection

(c) shall apply to estates of decedents dying, and gifts made,

after December 31, 2002.

(3) SUBSECTIONS (d) AND (e).—The amendments made by

subsections (d) and (e) shall apply to gifts made after December

31, 2009.

Subtitle C—Increase in Exemption

Amounts

SEC. 521. INCREASE IN EXEMPTION EQUIVALENT OF UNIFIED CREDIT,

LIFETIME GIFTS EXEMPTION, AND GST EXEMPTION

AMOUNTS.

(a) IN GENERAL.—Subsection (c) of section 2010 (relating to

applicable credit amount) is amended by striking the table and

inserting the following new table:

‘‘In the case of estates of decedents The applicable

dying during: exclusion amount is:

2002 and 2003 ...................................................................... $1,000,000

2004 and 2005 ...................................................................... $1,500,000

2006, 2007, and 2008 ........................................................... $2,000,000

2009 ....................................................................................... $3,500,000.’’.

(b) LIFETIME GIFT EXEMPTION INCREASED TO $1,000,000.—

(1) FOR PERIODS BEFORE ESTATE TAX REPEAL.—Paragraph

(1) of section 2505(a) (relating to unified credit against gift

tax) is amended by inserting ‘‘(determined as if the applicable

exclusion amount were $1,000,000)’’ after ‘‘calendar year’’.

(2) FOR PERIODS AFTER ESTATE TAX REPEAL.—Paragraph

(1) of section 2505(a) (relating to unified credit against gift

Applicability.

26 USC 2001

note.

26 USC 2001

note.

26 USC 2502

note.

26 USC 2511.

115 STAT. 72 PUBLIC LAW 107–16—JUNE 7, 2001

tax), as amended by paragraph (1), is amended to read as

follows: ‘‘(1) the amount of the tentative tax which would be determined under the rate schedule set forth in section 2502(a)(2)

if the amount with respect to which such tentative tax is

to be computed were $1,000,000, reduced by’’.

(c) GST EXEMPTION.— (1) IN GENERAL.—Subsection (a) of 2631 (relating to GST

exemption) is amended by striking ‘‘of $1,000,000’’ and inserting ‘‘amount’’. (2) EXEMPTION AMOUNT.—Subsection (c) of section 2631

is amended to read as follows:

‘‘(c) GST EXEMPTION AMOUNT.—For purposes of subsection (a),

the GST exemption amount for any calendar year shall be equal

to the applicable exclusion amount under section 2010(c) for such

calendar year.’’. (d) REPEAL OF SPECIAL BENEFIT FOR FAMILY-OWNED BUSINESS

INTERESTS.—Section 2057 (relating to family-owned business

interests) is amended by adding at the end the following new

subsection:

‘‘( j) TERMINATION.—This section shall not apply to the estates

of decedents dying after December 31, 2003.’’.

(e) EFFECTIVE DATES.—

(1) IN GENERAL.—Except as provided in paragraphs (2)

and (3), the amendments made by this section shall apply

to estates of decedents dying, and gifts made, after December

31, 2001.

(2) SUBSECTION (b)(2).—The amendments made by subsection (b)(2) shall apply to gifts made after December 31,

2009.

(3) SUBSECTIONS (c) AND (d).—The amendments made by

subsections (c) and (d) shall apply to estates of decedents dying,

and generation-skipping transfers, after December 31, 2003.

Subtitle D—Credit for State Death Taxes

SEC. 531. REDUCTION OF CREDIT FOR STATE DEATH TAXES.

(a) IN GENERAL.—Section 2011(b) (relating to amount of credit)

is amended—

(1) by striking ‘‘CREDIT.—The credit allowed’’ and inserting

‘‘CREDIT.— ‘‘(1) IN GENERAL.—Except as provided in paragraph (2),

the credit allowed’’, (2) by striking ‘‘For purposes’’ and inserting the following: ‘‘(3) ADJUSTED TAXABLE ESTATE.—For purposes’’, and

(3) by inserting after paragraph (1) the following new paragraph:

‘‘(2) REDUCTION OF MAXIMUM CREDIT.—

‘‘(A) IN GENERAL.—In the case of estates of decedents

dying after December 31, 2001, the credit allowed by this

section shall not exceed the applicable percentage of the

credit otherwise determined under paragraph (1).

‘‘(B) APPLICABLE PERCENTAGE.—

‘‘In the case of estates of decedents The applicable

dying during: percentage is:

2002 ....................................................................................... 75 percent

Applicability.

26 USC 2010

note.

26 USC 2631.

PUBLIC LAW 107–16—JUNE 7, 2001 115 STAT. 73

2003 ....................................................................................... 50 percent

2004 ....................................................................................... 25 percent.’’.

(b) EFFECTIVE DATE.—The amendments made by this subsection shall apply to estates of decedents dying after December

31, 2001.

SEC. 532. CREDIT FOR STATE DEATH TAXES REPLACED WITH DEDUCTION FOR SUCH TAXES.

(a) REPEAL OF CREDIT.—Section 2011 (relating to credit for

State death taxes) is amended by adding at the end the following

new subsection: ‘‘(g) TERMINATION.—This section shall not apply to the estates

of decedents dying after December 31, 2004.’’. (b) DEDUCTION FOR STATE DEATH TAXES.—Part IV of subchapter A of chapter 11 is amended by adding at the end the

following new section:

‘‘SEC. 2058. STATE DEATH TAXES.

‘‘(a) ALLOWANCE OF DEDUCTION.—For purposes of the tax

imposed by section 2001, the value of the taxable estate shall

be determined by deducting from the value of the gross estate

the amount of any estate, inheritance, legacy, or succession taxes

actually paid to any State or the District of Columbia, in respect

of any property included in the gross estate (not including any

such taxes paid with respect to the estate of a person other than

the decedent). ‘‘(b) PERIOD OF LIMITATIONS.—The deduction allowed by this

section shall include only such taxes as were actually paid and

deduction therefor claimed before the later of— ‘‘(1) 4 years after the filing of the return required by

section 6018, or ‘‘(2) if—

‘‘(A) a petition for redetermination of a deficiency has

been filed with the Tax Court within the time prescribed

in section 6213(a), the expiration of 60 days after the

decision of the Tax Court becomes final, ‘‘(B) an extension of time has been granted under section 6161 or 6166 for payment of the tax shown on the

return, or of a deficiency, the date of the expiration of

the period of the extension, or

‘‘(C) a claim for refund or credit of an overpayment

of tax imposed by this chapter has been filed within the

time prescribed in section 6511, the latest of the expiration

of—

‘‘(i) 60 days from the date of mailing by certified

mail or registered mail by the Secretary to the taxpayer

of a notice of the disallowance of any part of such

claim,

‘‘(ii) 60 days after a decision by any court of competent jurisdiction becomes final with respect to a

timely suit instituted upon such claim, or ‘‘(iii) 2 years after a notice of the waiver of disallowance is filed under section 6532(a)(3).

Notwithstanding sections 6511 and 6512, refund based on the

deduction may be made if the claim for refund is filed within

the period provided in the preceding sentence. Any such refund

shall be made without interest.’’.

(c) CONFORMING AMENDMENTS.—

26 USC 2011.

Applicability.

26 USC 2011

note.

115 STAT. 74 PUBLIC LAW 107–16—JUNE 7, 2001

(1) Subsection (a) of section 2012 is amended by striking ‘‘the credit for State death taxes provided by section 2011

and’’.

(2) Subparagraph (A) of section 2013(c)(1) is amended by

striking ‘‘2011,’’. (3) Paragraph (2) of section 2014(b) is amended by striking ‘‘, 2011,’’. (4) Sections 2015 and 2016 are each amended by striking ‘‘2011 or’’. (5) Subsection (d) of section 2053 is amended to read as

follows:

‘‘(d) CERTAIN FOREIGN DEATH TAXES.— ‘‘(1) IN GENERAL.—Notwithstanding the provisions of subsection (c)(1)(B), for purposes of the tax imposed by section

2001, the value of the taxable estate may be determined, if

the executor so elects before the expiration of the period of

limitation for assessment provided in section 6501, by deducting

from the value of the gross estate the amount (as determined

in accordance with regulations prescribed by the Secretary)

of any estate, succession, legacy, or inheritance tax imposed

by and actually paid to any foreign country, in respect of

any property situated within such foreign country and included

in the gross estate of a citizen or resident of the United States,

upon a transfer by the decedent for public, charitable, or religious uses described in section 2055. The determination under

this paragraph of the country within which property is situated

shall be made in accordance with the rules applicable under

subchapter B (sec. 2101 and following) in determining whether

property is situated within or without the United States. Any

election under this paragraph shall be exercised in accordance

with regulations prescribed by the Secretary.

‘‘(2) CONDITION FOR ALLOWANCE OF DEDUCTION.—No deduction shall be allowed under paragraph (1) for a foreign death

tax specified therein unless the decrease in the tax imposed

by section 2001 which results from the deduction provided

in paragraph (1) will inure solely for the benefit of the public,

charitable, or religious transferees described in section 2055

or section 2106(a)(2). In any case where the tax imposed by

section 2001 is equitably apportioned among all the transferees

of property included in the gross estate, including those

described in sections 2055 and 2106(a)(2) (taking into account

any exemptions, credits, or deductions allowed by this chapter),

in determining such decrease, there shall be disregarded any

decrease in the Federal estate tax which any transferees other

than those described in sections 2055 and 2106(a)(2) are

required to pay. ‘‘(3) EFFECT ON CREDIT FOR FOREIGN DEATH TAXES OF

DEDUCTION UNDER THIS SUBSECTION.— ‘‘(A) ELECTION.—An election under this subsection shall

be deemed a waiver of the right to claim a credit, against

the Federal estate tax, under a death tax convention with

any foreign country for any tax or portion thereof in respect

of which a deduction is taken under this subsection. ‘‘(B) CROSS REFERENCE.—

‘‘See section 2014(f ) for the effect of a deduction taken under this

paragraph on the credit for foreign death taxes.’’.

(6) Subparagraph (A) of section 2056A(b)(10) is amended—

Regulations.

26 USC 2012.

PUBLIC LAW 107–16—JUNE 7, 2001 115 STAT. 75

(A) by striking ‘‘2011,’’, and

(B) by inserting ‘‘2058,’’ after ‘‘2056,’’.

(7)(A) Subsection (a) of section 2102 is amended to read

as follows:

‘‘(a) IN GENERAL.—The tax imposed by section 2101 shall be

credited with the amounts determined in accordance with sections

2012 and 2013 (relating to gift tax and tax on prior transfers).’’.

(B) Section 2102 is amended by striking subsection (b)

and by redesignating subsection (c) as subsection (b).

(C) Section 2102(b)(5) (as redesignated by subparagraph

(B)) and section 2107(c)(3) are each amended by striking ‘‘2011

to 2013, inclusive,’’ and inserting ‘‘2012 and 2013’’.

(8) Subsection (a) of section 2106 is amended by adding

at the end the following new paragraph:

‘‘(4) STATE DEATH TAXES.—The amount which bears the

same ratio to the State death taxes as the value of the property,

as determined for purposes of this chapter, upon which State

death taxes were paid and which is included in the gross

estate under section 2103 bears to the value of the total gross

estate under section 2103. For purposes of this paragraph,

the term ‘State death taxes’ means the taxes described in

section 2011(a).’’.

(9) Section 2201 is amended—

(A) by striking ‘‘as defined in section 2011(d)’’, and

(B) by adding at the end the following new flush sentence:

‘‘For purposes of this section, the additional estate tax is the difference between the tax imposed by section 2001 or 2101 and

the amount equal to 125 percent of the maximum credit provided

by section 2011(b), as in effect before its repeal by the Economic

Growth and Tax Relief Reconciliation Act of 2001.’’.

(10) Section 2604 (relating to credit for certain State taxes)

is amended by adding at the end the following new subsection:

‘‘(c) TERMINATION.—This section shall not apply to the generation-skipping transfers after December 31, 2004.’’.

(11) Paragraph (2) of section 6511(i) is amended by striking

‘‘2011(c), 2014(b),’’ and inserting ‘‘2014(b)’’.

(12) Subsection (c) of section 6612 is amended by striking

‘‘section 2011(c) (relating to refunds due to credit for State

taxes),’’.

(13) The table of sections for part II of subchapter A of

chapter 11 is amended by striking the item relating to section

2011.

(14) The table of sections for part IV of subchapter A

of chapter 11 is amended by adding at the end the following

new item:

‘‘Sec. 2058. State death taxes.’’.

(15) The table of sections for subchapter A of chapter

13 is amended by striking the item relating to section 2604.

(d) EFFECTIVE DATE.—The amendments made by this section

shall apply to estates of decedents dying, and generation-skipping

transfers, after December 31, 2004.

Applicability.

26 USC 2011

note.

26 USC 2102.

115 STAT. 76 PUBLIC LAW 107–16—JUNE 7, 2001

Subtitle E—Carryover Basis at Death;

Other Changes Taking Effect With Repeal

SEC. 541. TERMINATION OF STEP-UP IN BASIS AT DEATH.

Section 1014 (relating to basis of property acquired from a

decedent) is amended by adding at the end the following new

subsection:

‘‘(f ) TERMINATION.—This section shall not apply with respect

to decedents dying after December 31, 2009.’’.

SEC. 542. TREATMENT OF PROPERTY ACQUIRED FROM A DECEDENT

DYING AFTER DECEMBER 31, 2009.

(a) GENERAL RULE.—Part II of subchapter O of chapter 1

(relating to basis rules of general application) is amended by

inserting after section 1021 the following new section:

‘‘SEC. 1022. TREATMENT OF PROPERTY ACQUIRED FROM A DECEDENT

DYING AFTER DECEMBER 31, 2009.

‘‘(a) IN GENERAL.—Except as otherwise provided in this

section—

‘‘(1) property acquired from a decedent dying after

December 31, 2009, shall be treated for purposes of this subtitle

as transferred by gift, and

‘‘(2) the basis of the person acquiring property from such

a decedent shall be the lesser of—

‘‘(A) the adjusted basis of the decedent, or

‘‘(B) the fair market value of the property at the date

of the decedent’s death.

‘‘(b) BASIS INCREASE FOR CERTAIN PROPERTY.—

‘‘(1) IN GENERAL.—In the case of property to which this

subsection applies, the basis of such property under subsection

(a) shall be increased by its basis increase under this subsection.

‘‘(2) BASIS INCREASE.—For purposes of this subsection—

‘‘(A) IN GENERAL.—The basis increase under this subsection for any property is the portion of the aggregate

basis increase which is allocated to the property pursuant

to this section.

‘‘(B) AGGREGATE BASIS INCREASE.—In the case of any

estate, the aggregate basis increase under this subsection

is $1,300,000.

‘‘(C) LIMIT INCREASED BY UNUSED BUILT-IN LOSSES AND

LOSS CARRYOVERS.—The limitation under subparagraph (B)

shall be increased by—

‘‘(i) the sum of the amount of any capital loss

carryover under section 1212(b), and the amount of

any net operating loss carryover under section 172,

which would (but for the decedent’s death) be carried

from the decedent’s last taxable year to a later taxable

year of the decedent, plus

‘‘(ii) the sum of the amount of any losses that

would have been allowable under section 165 if the

property acquired from the decedent had been sold

at fair market value immediately before the decedent’s

death.

26 USC 1014.

PUBLIC LAW 107–16—JUNE 7, 2001 115 STAT. 77

‘‘(3) DECEDENT NONRESIDENTS WHO ARE NOT CITIZENS OF

THE UNITED STATES.—In the case of a decedent nonresident

not a citizen of the United States—

‘‘(A) paragraph (2)(B) shall be applied by substituting

‘$60,000’ for ‘$1,300,000’, and

‘‘(B) paragraph (2)(C) shall not apply.

‘‘(c) ADDITIONAL BASIS INCREASE FOR PROPERTY ACQUIRED BY

SURVIVING SPOUSE.—

‘‘(1) IN GENERAL.—In the case of property to which this

subsection applies and which is qualified spousal property,

the basis of such property under subsection (a) (as increased

under subsection (b)) shall be increased by its spousal property

basis increase.

‘‘(2) SPOUSAL PROPERTY BASIS INCREASE.—For purposes of

this subsection—

‘‘(A) IN GENERAL.—The spousal property basis increase

for property referred to in paragraph (1) is the portion

of the aggregate spousal property basis increase which

is allocated to the property pursuant to this section.

‘‘(B) AGGREGATE SPOUSAL PROPERTY BASIS INCREASE.—

In the case of any estate, the aggregate spousal property

basis increase is $3,000,000.

‘‘(3) QUALIFIED SPOUSAL PROPERTY.—For purposes of this

subsection, the term ‘qualified spousal property’ means—

‘‘(A) outright transfer property, and

‘‘(B) qualified terminable interest property.

‘‘(4) OUTRIGHT TRANSFER PROPERTY.—For purposes of this

subsection—

‘‘(A) IN GENERAL.—The term ‘outright transfer property’ means any interest in property acquired from the

decedent by the decedent’s surviving spouse.

‘‘(B) EXCEPTION.—Subparagraph (A) shall not apply

where, on the lapse of time, on the occurrence of an event

or contingency, or on the failure of an event or contingency

to occur, an interest passing to the surviving spouse will

terminate or fail—

‘‘(i)(I) if an interest in such property passes or

has passed (for less than an adequate and full consideration in money or money’s worth) from the decedent

to any person other than such surviving spouse (or

the estate of such spouse), and

‘‘(II) if by reason of such passing such person (or

his heirs or assigns) may possess or enjoy any part

of such property after such termination or failure of

the interest so passing to the surviving spouse, or

‘‘(ii) if such interest is to be acquired for the surviving spouse, pursuant to directions of the decedent,

by his executor or by the trustee of a trust.

For purposes of this subparagraph, an interest shall not

be considered as an interest which will terminate or fail

merely because it is the ownership of a bond, note, or

similar contractual obligation, the discharge of which would

not have the effect of an annuity for life or for a term.

‘‘(C) INTEREST OF SPOUSE CONDITIONAL ON SURVIVAL

FOR LIMITED PERIOD.—For purposes of this paragraph, an

115 STAT. 78 PUBLIC LAW 107–16—JUNE 7, 2001

interest passing to the surviving spouse shall not be considered as an interest which will terminate or fail on the

death of such spouse if—

‘‘(i) such death will cause a termination or failure

of such interest only if it occurs within a period not

exceeding 6 months after the decedent’s death, or only

if it occurs as a result of a common disaster resulting

in the death of the decedent and the surviving spouse,

or only if it occurs in the case of either such event,

and

‘‘(ii) such termination or failure does not in fact

occur.

‘‘(5) QUALIFIED TERMINABLE INTEREST PROPERTY.—For purposes of this subsection—

‘‘(A) IN GENERAL.—The term ‘qualified terminable

interest property’ means property—

‘‘(i) which passes from the decedent, and

‘‘(ii) in which the surviving spouse has a qualifying

income interest for life.

‘‘(B) QUALIFYING INCOME INTEREST FOR LIFE.—The surviving spouse has a qualifying income interest for life if—

‘‘(i) the surviving spouse is entitled to all the

income from the property, payable annually or at more

frequent intervals, or has a usufruct interest for life

in the property, and

‘‘(ii) no person has a power to appoint any part

of the property to any person other than the surviving

spouse.

Clause (ii) shall not apply to a power exercisable only

at or after the death of the surviving spouse. To the extent

provided in regulations, an annuity shall be treated in

a manner similar to an income interest in property (regardless of whether the property from which the annuity is

payable can be separately identified).

‘‘(C) PROPERTY INCLUDES INTEREST THEREIN.—The term

‘property’ includes an interest in property.

‘‘(D) SPECIFIC PORTION TREATED AS SEPARATE PROPERTY.—A specific portion of property shall be treated as

separate property. For purposes of the preceding sentence,

the term ‘specific portion’ only includes a portion determined on a fractional or percentage basis.

‘‘(d) DEFINITIONS AND SPECIAL RULES FOR APPLICATION OF SUBSECTIONS (b) AND (c).—

‘‘(1) PROPERTY TO WHICH SUBSECTIONS (b) AND (c) APPLY.—

‘‘(A) IN GENERAL.—The basis of property acquired from

a decedent may be increased under subsection (b) or (c)

only if the property was owned by the decedent at the

time of death.

‘‘(B) RULES RELATING TO OWNERSHIP.—

‘‘(i) JOINTLY HELD PROPERTY.—In the case of property which was owned by the decedent and another

person as joint tenants with right of survivorship or

tenants by the entirety—

‘‘(I) if the only such other person is the surviving spouse, the decedent shall be treated as

the owner of only 50 percent of the property,

PUBLIC LAW 107–16—JUNE 7, 2001 115 STAT. 79

‘‘(II) in any case (to which subclause (I) does

not apply) in which the decedent furnished consideration for the acquisition of the property, the

decedent shall be treated as the owner to the

extent of the portion of the property which is

proportionate to such consideration, and

‘‘(III) in any case (to which subclause (I) does

not apply) in which the property has been acquired

by gift, bequest, devise, or inheritance by the

decedent and any other person as joint tenants

with right of survivorship and their interests are

not otherwise specified or fixed by law, the

decedent shall be treated as the owner to the

extent of the value of a fractional part to be determined by dividing the value of the property by

the number of joint tenants with right of survivorship.

‘‘(ii) REVOCABLE TRUSTS.—The decedent shall be

treated as owning property transferred by the decedent

during life to a qualified revocable trust (as defined

in section 645(b)(1)).

‘‘(iii) POWERS OF APPOINTMENT.—The decedent

shall not be treated as owning any property by reason

of holding a power of appointment with respect to

such property.

‘‘(iv) COMMUNITY PROPERTY.—Property which represents the surviving spouse’s one-half share of community property held by the decedent and the surviving

spouse under the community property laws of any State

or possession of the United States or any foreign

country shall be treated for purposes of this section

as owned by, and acquired from, the decedent if at

least one-half of the whole of the community interest

in such property is treated as owned by, and acquired

from, the decedent without regard to this clause.

‘‘(C) PROPERTY ACQUIRED BY DECEDENT BY GIFT WITHIN

3 YEARS OF DEATH.—

‘‘(i) IN GENERAL.—Subsections (b) and (c) shall not

apply to property acquired by the decedent by gift

or by inter vivos transfer for less than adequate and

full consideration in money or money’s worth during

the 3-year period ending on the date of the decedent’s

death.

‘‘(ii) EXCEPTION FOR CERTAIN GIFTS FROM SPOUSE.—

Clause (i) shall not apply to property acquired by the

decedent from the decedent’s spouse unless, during

such 3-year period, such spouse acquired the property

in whole or in part by gift or by inter vivos transfer

for less than adequate and full consideration in money

or money’s worth.

‘‘(D) STOCK OF CERTAIN ENTITIES.—Subsections (b) and

(c) shall not apply to—

‘‘(i) stock or securities of a foreign personal holding

company,

‘‘(ii) stock of a DISC or former DISC,

‘‘(iii) stock of a foreign investment company, or

115 STAT. 80 PUBLIC LAW 107–16—JUNE 7, 2001

‘‘(iv) stock of a passive foreign investment company

unless such company is a qualified electing fund (as

defined in section 1295) with respect to the decedent.

‘‘(2) FAIR MARKET VALUE LIMITATION.—The adjustments

under subsections (b) and (c) shall not increase the basis of

any interest in property acquired from the decedent above

its fair market value in the hands of the decedent as of the

date of the decedent’s death.

‘‘(3) ALLOCATION RULES.—

‘‘(A) IN GENERAL.—The executor shall allocate the

adjustments under subsections (b) and (c) on the return

required by section 6018.

‘‘(B) CHANGES IN ALLOCATION.—Any allocation made

pursuant to subparagraph (A) may be changed only as

provided by the Secretary.

‘‘(4) INFLATION ADJUSTMENT OF BASIS ADJUSTMENT

AMOUNTS.—

‘‘(A) IN GENERAL.—In the case of decedents dying in

a calendar year after 2010, the $1,300,000, $60,000, and

$3,000,000 dollar amounts in subsections (b) and (c)(2)(B)

shall each be increased by an amount equal to the product

of—

‘‘(i) such dollar amount, and

‘‘(ii) the cost-of-living adjustment determined

under section 1(f )(3) for such calendar year, determined by substituting ‘2009’ for ‘1992’ in subparagraph

(B) thereof.

‘‘(B) ROUNDING.—If any increase determined under

subparagraph (A) is not a multiple of—

‘‘(i) $100,000 in the case of the $1,300,000 amount,

‘‘(ii) $5,000 in the case of the $60,000 amount,

and

‘‘(iii) $250,000 in the case of the $3,000,000

amount,

such increase shall be rounded to the next lowest multiple

thereof.

‘‘(e) PROPERTY ACQUIRED FROM THE DECEDENT.—For purposes

of this section, the following property shall be considered to have

been acquired from the decedent:

‘‘(1) Property acquired by bequest, devise, or inheritance,

or by the decedent’s estate from the decedent.

‘‘(2) Property transferred by the decedent during his

lifetime—

‘‘(A) to a qualified revocable trust (as defined in section

645(b)(1)), or

‘‘(B) to any other trust with respect to which the

decedent reserved the right to make any change in the

enjoyment thereof through the exercise of a power to alter,

amend, or terminate the trust.

‘‘(3) Any other property passing from the decedent by reason of death to the extent that such property passed without

consideration.

‘‘(f ) COORDINATION WITH SECTION 691.—This section shall not

apply to property which constitutes a right to receive an item

of income in respect of a decedent under section 691.

‘‘(g) CERTAIN LIABILITIES DISREGARDED.—

PUBLIC LAW 107–16—JUNE 7, 2001 115 STAT. 81

‘‘(1) IN GENERAL.—In determining whether gain is recognized on the acquisition of property— ‘‘(A) from a decedent by a decedent’s estate or any

beneficiary other than a tax-exempt beneficiary, and ‘‘(B) from the decedent’s estate by any beneficiary other

than a tax-exempt beneficiary,

and in determining the adjusted basis of such property, liabilities in excess of basis shall be disregarded. ‘‘(2) TAX-EXEMPT BENEFICIARY.—For purposes of paragraph

(1), the term ‘tax-exempt beneficiary’ means— ‘‘(A) the United States, any State or political subdivision thereof, any possession of the United States, any

Indian tribal government (within the meaning of section

7871), or any agency or instrumentality of any of the foregoing, ‘‘(B) an organization (other than a cooperative

described in section 521) which is exempt from tax imposed

by chapter 1, ‘‘(C) any foreign person or entity (within the meaning

of section 168(h)(2)), and ‘‘(D) to the extent provided in regulations, any person

to whom property is transferred for the principal purpose

of tax avoidance. ‘‘(h) REGULATIONS.—The Secretary shall prescribe such regulations as may be necessary to carry out the purposes of this section.’’. (b) INFORMATION RETURNS, ETC.— (1) LARGE TRANSFERS AT DEATH.—So much of subpart C

of part II of subchapter A of chapter 61 as precedes section

6019 is amended to read as follows:

‘‘Subpart C—Returns Relating to Transfers

During Life or at Death

‘‘Sec. 6018. Returns relating to large transfers at death.

‘‘Sec. 6019. Gift tax returns.

‘‘SEC. 6018. RETURNS RELATING TO LARGE TRANSFERS AT DEATH.

‘‘(a) IN GENERAL.—If this section applies to property acquired

from a decedent, the executor of the estate of such decedent shall

make a return containing the information specified in subsection

(c) with respect to such property. ‘‘(b) PROPERTY TO WHICH SECTION APPLIES.— ‘‘(1) LARGE TRANSFERS.—This section shall apply to all property (other than cash) acquired from a decedent if the fair

market value of such property acquired from the decedent

exceeds the dollar amount applicable under section

1022(b)(2)(B) (without regard to section 1022(b)(2)(C)). ‘‘(2) TRANSFERS OF CERTAIN GIFTS RECEIVED BY DECEDENT

WITHIN 3 YEARS OF DEATH.—This section shall apply to any

appreciated property acquired from the decedent if— ‘‘(A) subsections (b) and (c) of section 1022 do not

apply to such property by reason of section 1022(d)(1)(C),

and ‘‘(B) such property was required to be included on

a return required to be filed under section 6019.

‘‘(3) NONRESIDENTS NOT CITIZENS OF THE UNITED STATES.— In the case of a decedent who is a nonresident not a citizen

of the United States, paragraphs (1) and (2) shall be applied—

115 STAT. 82 PUBLIC LAW 107–16—JUNE 7, 2001

‘‘(A) by taking into account only— ‘‘(i) tangible property situated in the United States,

and ‘‘(ii) other property acquired from the decedent

by a United States person, and

‘‘(B) by substituting the dollar amount applicable under

section 1022(b)(3) for the dollar amount referred to in paragraph (1).

‘‘(4) RETURNS BY TRUSTEES OR BENEFICIARIES.—If the

executor is unable to make a complete return as to any property

acquired from or passing from the decedent, the executor shall

include in the return a description of such property and the

name of every person holding a legal or beneficial interest

therein. Upon notice from the Secretary, such person shall

in like manner make a return as to such property.

‘‘(c) INFORMATION REQUIRED TO BE FURNISHED.—The information specified in this subsection with respect to any property

acquired from the decedent is— ‘‘(1) the name and TIN of the recipient of such property,

‘‘(2) an accurate description of such property,

‘‘(3) the adjusted basis of such property in the hands of

the decedent and its fair market value at the time of death, ‘‘(4) the decedent’s holding period for such property, ‘‘(5) sufficient information to determine whether any gain

on the sale of the property would be treated as ordinary income, ‘‘(6) the amount of basis increase allocated to the property

under subsection (b) or (c) of section 1022, and

‘‘(7) such other information as the Secretary may by regulations prescribe.

‘‘(d) PROPERTY ACQUIRED FROM DECEDENT.—For purposes of

this section, section 1022 shall apply for purposes of determining

the property acquired from a decedent.

‘‘(e) STATEMENTS TO BE FURNISHED TO CERTAIN PERSONS.—

Every person required to make a return under subsection (a) shall

furnish to each person whose name is required to be set forth

in such return (other than the person required to make such return)

a written statement showing—

‘‘(1) the name, address, and phone number of the person

required to make such return, and

‘‘(2) the information specified in subsection (c) with respect

to property acquired from, or passing from, the decedent to

the person required to receive such statement.

The written statement required under the preceding sentence shall

be furnished not later than 30 days after the date that the return

required by subsection (a) is filed.’’.

(2) GIFTS.—Section 6019 (relating to gift tax returns) is

amended—

(A) by striking ‘‘Any individual’’ and inserting ‘‘(a) IN

GENERAL.—Any individual’’, and

(B) by adding at the end the following new subsection:

‘‘(b) STATEMENTS TO BE FURNISHED TO CERTAIN PERSONS.— Every person required to make a return under subsection (a) shall

furnish to each person whose name is required to be set forth

in such return (other than the person required to make such return)

a written statement showing—

‘‘(1) the name, address, and phone number of the person

required to make such return, and

26 USC 6019.

Deadline.

Applicability.

PUBLIC LAW 107–16—JUNE 7, 2001 115 STAT. 83

‘‘(2) the information specified in such return with respect

to property received by the person required to receive such

statement.

The written statement required under the preceding sentence shall

be furnished not later than 30 days after the date that the return

required by subsection (a) is filed.’’.

(3) TIME FOR FILING SECTION 6018 RETURNS.—

(A) RETURNS RELATING TO LARGE TRANSFERS AT

DEATH.—Subsection (a) of section 6075 is amended to read

as follows:

‘‘(a) RETURNS RELATING TO LARGE TRANSFERS AT DEATH.—

The return required by section 6018 with respect to a decedent

shall be filed with the return of the tax imposed by chapter 1

for the decedent’s last taxable year or such later date specified

in regulations prescribed by the Secretary.’’.

(B) CONFORMING AMENDMENTS.—Paragraph (3) of section 6075(b) is amended—

(i) by striking ‘‘ESTATE TAX RETURN’’ in the heading

and inserting ‘‘SECTION 6018 RETURN’’, and

(ii) by striking ‘‘(relating to estate tax returns)’’

and inserting ‘‘(relating to returns relating to large

transfers at death)’’.

(4) PENALTIES.—Part I of subchapter B of chapter 68

(relating to assessable penalties) is amended by adding at the

end the following new section:

‘‘SEC. 6716. FAILURE TO FILE INFORMATION WITH RESPECT TO CERTAIN TRANSFERS AT DEATH AND GIFTS.

‘‘(a) INFORMATION REQUIRED TO BE FURNISHED TO THE SECRETARY.—Any person required to furnish any information under

section 6018 who fails to furnish such information on the date

prescribed therefor (determined with regard to any extension of

time for filing) shall pay a penalty of $10,000 ($500 in the case

of information required to be furnished under section 6018(b)(2))

for each such failure.

‘‘(b) INFORMATION REQUIRED TO BE FURNISHED TO BENEFICIARIES.—Any person required to furnish in writing to each person

described in section 6018(e) or 6019(b) the information required

under such section who fails to furnish such information shall

pay a penalty of $50 for each such failure.

‘‘(c) REASONABLE CAUSE EXCEPTION.—No penalty shall be

imposed under subsection (a) or (b) with respect to any failure

if it is shown that such failure is due to reasonable cause.

‘‘(d) INTENTIONAL DISREGARD.—If any failure under subsection

(a) or (b) is due to intentional disregard of the requirements under

sections 6018 and 6019(b), the penalty under such subsection shall

be 5 percent of the fair market value (as of the date of death

or, in the case of section 6019(b), the date of the gift) of the

property with respect to which the information is required.

‘‘(e) DEFICIENCY PROCEDURES NOT TO APPLY.—Subchapter B

of chapter 63 (relating to deficiency procedures for income, estate,

gift, and certain excise taxes) shall not apply in respect of the

assessment or collection of any penalty imposed by this section.’’.

(5) CLERICAL AMENDMENTS.—

26 USC 6075.

Deadline.

115 STAT. 84 PUBLIC LAW 107–16—JUNE 7, 2001

(A) The table of sections for part I of subchapter B

of chapter 68 is amended by adding at the end the following

new item:

‘‘Sec. 6716. Failure to file information with respect to certain transfers at

death and gifts.’’.

(B) The item relating to subpart C in the table of

subparts for part II of subchapter A of chapter 61 is

amended to read as follows:

‘‘Subpart C. Returns relating to transfers during life or at death.’’.

(c) EXCLUSION OF GAIN ON SALE OF PRINCIPAL RESIDENCE MADE

AVAILABLE TO HEIR OF DECEDENT IN CERTAIN CASES.—Subsection

(d) of section 121 (relating to exclusion of gain from sale of principal

residence) is amended by adding at the end the following new

paragraph:

‘‘(9) PROPERTY ACQUIRED FROM A DECEDENT.—The exclusion

under this section shall apply to property sold by—

‘‘(A) the estate of a decedent,

‘‘(B) any individual who acquired such property from

the decedent (within the meaning of section 1022), and

‘‘(C) a trust which, immediately before the death of

the decedent, was a qualified revocable trust (as defined

in section 645(b)(1)) established by the decedent,

determined by taking into account the ownership and use by

the decedent.’’.

(d) TRANSFERS OF APPRECIATED CARRYOVER BASIS PROPERTY

TO SATISFY PECUNIARY BEQUEST.—

(1) IN GENERAL.—Section 1040 (relating to transfer of certain farm, etc., real property) is amended to read as follows:

‘‘SEC. 1040. USE OF APPRECIATED CARRYOVER BASIS PROPERTY TO

SATISFY PECUNIARY BEQUEST.

‘‘(a) IN GENERAL.—If the executor of the estate of any decedent

satisfies the right of any person to receive a pecuniary bequest

with appreciated property, then gain on such exchange shall be

recognized to the estate only to the extent that, on the date of

such exchange, the fair market value of such property exceeds

such value on the date of death.

‘‘(b) SIMILAR RULE FOR CERTAIN TRUSTS.—To the extent provided in regulations prescribed by the Secretary, a rule similar

to the rule provided in subsection (a) shall apply where—

‘‘(1) by reason of the death of the decedent, a person has

a right to receive from a trust a specific dollar amount which

is the equivalent of a pecuniary bequest, and

‘‘(2) the trustee of a trust satisfies such right with property.

‘‘(c) BASIS OF PROPERTY ACQUIRED IN EXCHANGE DESCRIBED

IN SUBSECTION (a) OR (b).—The basis of property acquired in an

exchange with respect to which gain realized is not recognized

by reason of subsection (a) or (b) shall be the basis of such property

immediately before the exchange increased by the amount of the

gain recognized to the estate or trust on the exchange.’’.

(2) The item relating to section 1040 in the table of sections

for part III of subchapter O of chapter 1 is amended to read

as follows:

‘‘Sec. 1040. Use of appreciated carryover basis property to satisfy pecuniary

bequest.’’.

(e) AMENDMENTS RELATED TO CARRYOVER BASIS.—

Regulations.

26 USC 121.

PUBLIC LAW 107–16—JUNE 7, 2001 115 STAT. 85

(1) RECOGNITION OF GAIN ON TRANSFERS TO NONRESIDENTS.—

(A) Subsection (a) of section 684 is amended by

inserting ‘‘or to a nonresident alien’’ after ‘‘or trust’’.

(B) Subsection (b) of section 684 is amended to read

as follows:

‘‘(b) EXCEPTIONS.—

‘‘(1) TRANSFERS TO CERTAIN TRUSTS.—Subsection (a) shall

not apply to a transfer to a trust by a United States person

to the extent that any United States person is treated as

the owner of such trust under section 671.

‘‘(2) LIFETIME TRANSFERS TO NONRESIDENT ALIENS.—Subsection (a) shall not apply to a lifetime transfer to a nonresident

alien.’’.

(C) The section heading for section 684 is amended

by inserting ‘‘AND NONRESIDENT ALIENS’’ after ‘‘ESTATES’’.

(D) The item relating to section 684 in the table of

sections for subpart F of part I of subchapter J of chapter

1 is amended by inserting ‘‘and nonresident aliens’’ after

‘‘estates’’.

(2) CAPITAL GAIN TREATMENT FOR INHERITED ART WORK

OR SIMILAR PROPERTY.—

(A) IN GENERAL.—Subparagraph (C) of section

1221(a)(3) (defining capital asset) is amended by inserting

‘‘(other than by reason of section 1022)’’ after ‘‘is determined’’.

(B) COORDINATION WITH SECTION 170.—Paragraph (1)

of section 170(e) (relating to certain contributions of ordinary income and capital gain property) is amended by

adding at the end the following: ‘‘For purposes of this

paragraph, the determination of whether property is a

capital asset shall be made without regard to the exception

contained in section 1221(a)(3)(C) for basis determined

under section 1022.’’.

(3) DEFINITION OF EXECUTOR.—Section 7701(a) (relating

to definitions) is amended by adding at the end the following:

‘‘(47) EXECUTOR.—The term ‘executor’ means the executor

or administrator of the decedent, or, if there is no executor

or administrator appointed, qualified, and acting within the

United States, then any person in actual or constructive possession of any property of the decedent.’’.

(4) CERTAIN TRUSTS.—Subparagraph (A) of section

4947(a)(2) is amended by inserting ‘‘642(c),’’ after ‘‘170(f )(2)(B),’’.

(5) OTHER AMENDMENTS.—

(A) Section 1246 is amended by striking subsection (e).

(B) Subsection (e) of section 1291 is amended—

(i) by striking ‘‘(e),’’; and

(ii) by striking ‘‘; except that’’ and all that follows

and inserting a period.

(C) Section 1296 is amended by striking subsection (i).

26 USC 684.

115 STAT. 86 PUBLIC LAW 107–16—JUNE 7, 2001

(6) CLERICAL AMENDMENT.—The table of sections for part

II of subchapter O of chapter 1 is amended by inserting after

the item relating to section 1021 the following new item:

‘‘Sec. 1022. Treatment of property acquired from a decedent dying after

December 31, 2009.’’.

(f ) EFFECTIVE DATE.—

(1) IN GENERAL.—Except as provided in paragraph (2), the

amendments made by this section shall apply to estates of

decedents dying after December 31, 2009.

(2) TRANSFERS TO NONRESIDENTS.—The amendments made

by subsection (e)(1) shall apply to transfers after December

31, 2009.

(3) SECTION 4947.—The amendment made by subsection

(e)(4) shall apply to deductions for taxable years beginning

after December 31, 2009.

Subtitle F—Conservation Easements

SEC. 551. EXPANSION OF ESTATE TAX RULE FOR CONSERVATION EASEMENTS.

(a) REPEAL OF CERTAIN RESTRICTIONS ON WHERE LAND IS

LOCATED.—Clause (i) of section 2031(c)(8)(A) (defining land subject

to a qualified conservation easement) is amended to read as follows:

‘‘(i) which is located in the United States or any

possession of the United States,’’.

(b) CLARIFICATION OF DATE FOR DETERMINING VALUE OF LAND

AND EASEMENT.—Section 2031(c)(2) (defining applicable percentage)

is amended by adding at the end the following new sentence:

‘‘The values taken into account under the preceding sentence shall

be such values as of the date of the contribution referred to in

paragraph (8)(B).’’.

(c) EFFECTIVE DATE.—The amendments made by this section

shall apply to estates of decedents dying after December 31, 2000.

Subtitle G—Modifications of GenerationSkipping Transfer Tax

SEC. 561. DEEMED ALLOCATION OF GST EXEMPTION TO LIFETIME

TRANSFERS TO TRUSTS; RETROACTIVE ALLOCATIONS.

(a) IN GENERAL.—Section 2632 (relating to special rules for

allocation of GST exemption) is amended by redesignating subsection (c) as subsection (e) and by inserting after subsection (b)

the following new subsections:

‘‘(c) DEEMED ALLOCATION TO CERTAIN LIFETIME TRANSFERS TO

GST TRUSTS.—

‘‘(1) IN GENERAL.—If any individual makes an indirect skip

during such individual’s lifetime, any unused portion of such

individual’s GST exemption shall be allocated to the property

transferred to the extent necessary to make the inclusion ratio

for such property zero. If the amount of the indirect skip

exceeds such unused portion, the entire unused portion shall

be allocated to the property transferred.

Applicability.

26 USC 2031

note.

26 USC 2031.

Applicability.

26 USC 121 note.

PUBLIC LAW 107–16—JUNE 7, 2001 115 STAT. 87

‘‘(2) UNUSED PORTION.—For purposes of paragraph (1), the

unused portion of an individual’s GST exemption is that portion

of such exemption which has not previously been— ‘‘(A) allocated by such individual,

‘‘(B) treated as allocated under subsection (b) with

respect to a direct skip occurring during or before the

calendar year in which the indirect skip is made, or

‘‘(C) treated as allocated under paragraph (1) with

respect to a prior indirect skip.

‘‘(3) DEFINITIONS.— ‘‘(A) INDIRECT SKIP.—For purposes of this subsection,

the term ‘indirect skip’ means any transfer of property

(other than a direct skip) subject to the tax imposed by

chapter 12 made to a GST trust. ‘‘(B) GST TRUST.—The term ‘GST trust’ means a trust

that could have a generation-skipping transfer with respect

to the transferor unless— ‘‘(i) the trust instrument provides that more than

25 percent of the trust corpus must be distributed

to or may be withdrawn by one or more individuals

who are non-skip persons— ‘‘(I) before the date that the individual attains

age 46, ‘‘(II) on or before one or more dates specified

in the trust instrument that will occur before the

date that such individual attains age 46, or ‘‘(III) upon the occurrence of an event that,

in accordance with regulations prescribed by the

Secretary, may reasonably be expected to occur

before the date that such individual attains age

46,

‘‘(ii) the trust instrument provides that more than

25 percent of the trust corpus must be distributed

to or may be withdrawn by one or more individuals

who are non-skip persons and who are living on the

date of death of another person identified in the

instrument (by name or by class) who is more than

10 years older than such individuals,

‘‘(iii) the trust instrument provides that, if one

or more individuals who are non-skip persons die on

or before a date or event described in clause (i) or

(ii), more than 25 percent of the trust corpus either

must be distributed to the estate or estates of one

or more of such individuals or is subject to a general

power of appointment exercisable by one or more of

such individuals,

‘‘(iv) the trust is a trust any portion of which

would be included in the gross estate of a non-skip

person (other than the transferor) if such person died

immediately after the transfer,

‘‘(v) the trust is a charitable lead annuity trust

(within the meaning of section 2642(e)(3)(A)) or a charitable remainder annuity trust or a charitable

remainder unitrust (within the meaning of section

664(d)), or

‘‘(vi) the trust is a trust with respect to which

a deduction was allowed under section 2522 for the

115 STAT. 88 PUBLIC LAW 107–16—JUNE 7, 2001

amount of an interest in the form of the right to

receive annual payments of a fixed percentage of the

net fair market value of the trust property (determined

yearly) and which is required to pay principal to a

non-skip person if such person is alive when the yearly

payments for which the deduction was allowed terminate.

For purposes of this subparagraph, the value of transferred

property shall not be considered to be includible in the

gross estate of a non-skip person or subject to a right

of withdrawal by reason of such person holding a right

to withdraw so much of such property as does not exceed

the amount referred to in section 2503(b) with respect

to any transferor, and it shall be assumed that powers

of appointment held by non-skip persons will not be exercised.

‘‘(4) AUTOMATIC ALLOCATIONS TO CERTAIN GST TRUSTS.—

For purposes of this subsection, an indirect skip to which section

2642(f ) applies shall be deemed to have been made only at

the close of the estate tax inclusion period. The fair market

value of such transfer shall be the fair market value of the

trust property at the close of the estate tax inclusion period.

‘‘(5) APPLICABILITY AND EFFECT.—

‘‘(A) IN GENERAL.—An individual—

‘‘(i) may elect to have this subsection not apply

to—

‘‘(I) an indirect skip, or

‘‘(II) any or all transfers made by such individual to a particular trust, and

‘‘(ii) may elect to treat any trust as a GST trust

for purposes of this subsection with respect to any

or all transfers made by such individual to such trust.

‘‘(B) ELECTIONS.—

‘‘(i) ELECTIONS WITH RESPECT TO INDIRECT SKIPS.—

An election under subparagraph (A)(i)(I) shall be

deemed to be timely if filed on a timely filed gift

tax return for the calendar year in which the transfer

was made or deemed to have been made pursuant

to paragraph (4) or on such later date or dates as

may be prescribed by the Secretary.

‘‘(ii) OTHER ELECTIONS.—An election under clause

(i)(II) or (ii) of subparagraph (A) may be made on

a timely filed gift tax return for the calendar year

for which the election is to become effective.

‘‘(d) RETROACTIVE ALLOCATIONS.—

‘‘(1) IN GENERAL.—If—

‘‘(A) a non-skip person has an interest or a future

interest in a trust to which any transfer has been made,

‘‘(B) such person—

‘‘(i) is a lineal descendant of a grandparent of

the transferor or of a grandparent of the transferor’s

spouse or former spouse, and

‘‘(ii) is assigned to a generation below the generation assignment of the transferor, and

‘‘(C) such person predeceases the transferor,

PUBLIC LAW 107–16—JUNE 7, 2001 115 STAT. 89

then the transferor may make an allocation of any of such

transferor’s unused GST exemption to any previous transfer

or transfers to the trust on a chronological basis.

‘‘(2) SPECIAL RULES.—If the allocation under paragraph

(1) by the transferor is made on a gift tax return filed on

or before the date prescribed by section 6075(b) for gifts made

within the calendar year within which the non-skip person’s

death occurred—

‘‘(A) the value of such transfer or transfers for purposes

of section 2642(a) shall be determined as if such allocation

had been made on a timely filed gift tax return for each

calendar year within which each transfer was made,

‘‘(B) such allocation shall be effective immediately

before such death, and

‘‘(C) the amount of the transferor’s unused GST exemption available to be allocated shall be determined immediately before such death.

‘‘(3) FUTURE INTEREST.—For purposes of this subsection,

a person has a future interest in a trust if the trust may

permit income or corpus to be paid to such person on a date

or dates in the future.’’.

(b) CONFORMING AMENDMENT.—Paragraph (2) of section 2632(b)

is amended by striking ‘‘with respect to a prior direct skip’’ and

inserting ‘‘or subsection (c)(1)’’.

(c) EFFECTIVE DATES.—

(1) DEEMED ALLOCATION.—Section 2632(c) of the Internal

Revenue Code of 1986 (as added by subsection (a)), and the

amendment made by subsection (b), shall apply to transfers

subject to chapter 11 or 12 made after December 31, 2000,

and to estate tax inclusion periods ending after December 31,

2000.

(2) RETROACTIVE ALLOCATIONS.—Section 2632(d) of the

Internal Revenue Code of 1986 (as added by subsection (a))

shall apply to deaths of non-skip persons occurring after

December 31, 2000.

SEC. 562. SEVERING OF TRUSTS.

(a) IN GENERAL.—Subsection (a) of section 2642 (relating to

inclusion ratio) is amended by adding at the end the following

new paragraph:

‘‘(3) SEVERING OF TRUSTS.—

‘‘(A) IN GENERAL.—If a trust is severed in a qualified

severance, the trusts resulting from such severance shall

be treated as separate trusts thereafter for purposes of

this chapter.

‘‘(B) QUALIFIED SEVERANCE.—For purposes of subparagraph (A)—

‘‘(i) IN GENERAL.—The term ‘qualified severance’

means the division of a single trust and the creation

(by any means available under the governing

instrument or under local law) of two or more trusts

if—

‘‘(I) the single trust was divided on a fractional

basis, and

‘‘(II) the terms of the new trusts, in the aggregate, provide for the same succession of interests

Applicability.

26 USC 2632

note.

26 USC 2632.

115 STAT. 90 PUBLIC LAW 107–16—JUNE 7, 2001

of beneficiaries as are provided in the original

trust.

‘‘(ii) TRUSTS WITH INCLUSION RATIO GREATER THAN

ZERO.—If a trust has an inclusion ratio of greater

than zero and less than 1, a severance is a qualified

severance only if the single trust is divided into two

trusts, one of which receives a fractional share of the

total value of all trust assets equal to the applicable

fraction of the single trust immediately before the

severance. In such case, the trust receiving such fractional share shall have an inclusion ratio of zero and

the other trust shall have an inclusion ratio of 1.

‘‘(iii) REGULATIONS.—The term ‘qualified severance’

includes any other severance permitted under regulations prescribed by the Secretary.

‘‘(C) TIMING AND MANNER OF SEVERANCES.—A severance pursuant to this paragraph may be made at any

time. The Secretary shall prescribe by forms or regulations

the manner in which the qualified severance shall be

reported to the Secretary.’’.

(b) EFFECTIVE DATE.—The amendment made by this section

shall apply to severances after December 31, 2000.

SEC. 563. MODIFICATION OF CERTAIN VALUATION RULES.

(a) GIFTS FOR WHICH GIFT TAX RETURN FILED OR DEEMED

ALLOCATION MADE.—Paragraph (1) of section 2642(b) (relating to

valuation rules, etc.) is amended to read as follows:

‘‘(1) GIFTS FOR WHICH GIFT TAX RETURN FILED OR DEEMED

ALLOCATION MADE.—If the allocation of the GST exemption

to any transfers of property is made on a gift tax return

filed on or before the date prescribed by section 6075(b) for

such transfer or is deemed to be made under section 2632

(b)(1) or (c)(1)—

‘‘(A) the value of such property for purposes of subsection (a) shall be its value as finally determined for

purposes of chapter 12 (within the meaning of section

2001(f )(2)), or, in the case of an allocation deemed to have

been made at the close of an estate tax inclusion period,

its value at the time of the close of the estate tax inclusion

period, and

‘‘(B) such allocation shall be effective on and after

the date of such transfer, or, in the case of an allocation

deemed to have been made at the close of an estate tax

inclusion period, on and after the close of such estate

tax inclusion period.’’.

(b) TRANSFERS AT DEATH.—Subparagraph (A) of section

2642(b)(2) is amended to read as follows:

‘‘(A) TRANSFERS AT DEATH.—If property is transferred

as a result of the death of the transferor, the value of

such property for purposes of subsection (a) shall be its

value as finally determined for purposes of chapter 11;

except that, if the requirements prescribed by the Secretary

respecting allocation of post-death changes in value are

not met, the value of such property shall be determined

as of the time of the distribution concerned.’’.

26 USC 2642.

Applicability.

26 USC 2642

note.

Regulations.

PUBLIC LAW 107–16—JUNE 7, 2001 115 STAT. 91

(c) EFFECTIVE DATE.—The amendments made by this section

shall apply to transfers subject to chapter 11 or 12 of the Internal

Revenue Code of 1986 made after December 31, 2000.

SEC. 564. RELIEF PROVISIONS.

(a) IN GENERAL.—Section 2642 is amended by adding at the

end the following new subsection:

‘‘(g) RELIEF PROVISIONS.—

‘‘(1) RELIEF FROM LATE ELECTIONS.—

‘‘(A) IN GENERAL.—The Secretary shall by regulation

prescribe such circumstances and procedures under which

extensions of time will be granted to make—

‘‘(i) an allocation of GST exemption described in

paragraph (1) or (2) of subsection (b), and

‘‘(ii) an election under subsection (b)(3) or (c)(5)

of section 2632.

Such regulations shall include procedures for requesting

comparable relief with respect to transfers made before

the date of the enactment of this paragraph.

‘‘(B) BASIS FOR DETERMINATIONS.—In determining

whether to grant relief under this paragraph, the Secretary

shall take into account all relevant circumstances,

including evidence of intent contained in the trust

instrument or instrument of transfer and such other factors

as the Secretary deems relevant. For purposes of determining whether to grant relief under this paragraph, the

time for making the allocation (or election) shall be treated

as if not expressly prescribed by statute.

‘‘(2) SUBSTANTIAL COMPLIANCE.—An allocation of GST

exemption under section 2632 that demonstrates an intent

to have the lowest possible inclusion ratio with respect to

a transfer or a trust shall be deemed to be an allocation

of so much of the transferor’s unused GST exemption as produces the lowest possible inclusion ratio. In determining

whether there has been substantial compliance, all relevant

circumstances shall be taken into account, including evidence

of intent contained in the trust instrument or instrument of

transfer and such other factors as the Secretary deems relevant.’’.

(b) EFFECTIVE DATES.—

(1) RELIEF FROM LATE ELECTIONS.—Section 2642(g)(1) of

the Internal Revenue Code of 1986 (as added by subsection

(a)) shall apply to requests pending on, or filed after, December

31, 2000.

(2) SUBSTANTIAL COMPLIANCE.—Section 2642(g)(2) of such

Code (as so added) shall apply to transfers subject to chapter

11 or 12 of the Internal Revenue Code of 1986 made after

December 31, 2000. No implication is intended with respect

to the availability of relief from late elections or the application

of a rule of substantial compliance on or before such date.

Applicability.

26 USC 2642

note.

Regulations.

26 USC 2642.

Applicability.

26 USC 2642

note.

115 STAT. 92 PUBLIC LAW 107–16—JUNE 7, 2001

Subtitle H—Extension of Time for Payment

of Estate Tax

SEC. 571. INCREASE IN NUMBER OF ALLOWABLE PARTNERS AND

SHAREHOLDERS IN CLOSELY HELD BUSINESSES.

(a) IN GENERAL.—Paragraphs (1)(B)(ii), (1)(C)(ii), and

(9)(B)(iii)(I) of section 6166(b) (relating to definitions and special

rules) are each amended by striking ‘‘15’’ and inserting ‘‘45’’.

(b) EFFECTIVE DATE.—The amendments made by this section

shall apply to estates of decedents dying after December 31, 2001.

SEC. 572. EXPANSION OF AVAILABILITY OF INSTALLMENT PAYMENT

FOR ESTATES WITH INTERESTS QUALIFYING LENDING

AND FINANCE BUSINESSES.

(a) IN GENERAL.—Section 6166(b) (relating to definitions and

special rules) is amended by adding at the end the following new

paragraph:

‘‘(10) STOCK IN QUALIFYING LENDING AND FINANCE BUSINESS

TREATED AS STOCK IN AN ACTIVE TRADE OR BUSINESS COMPANY.—

‘‘(A) IN GENERAL.—If the executor elects the benefits

of this paragraph, then—

‘‘(i) STOCK IN QUALIFYING LENDING AND FINANCE

BUSINESS TREATED AS STOCK IN AN ACTIVE TRADE OR

BUSINESS COMPANY.—For purposes of this section, any

asset used in a qualifying lending and finance business

shall be treated as an asset which is used in carrying

on a trade or business.

‘‘(ii) 5-YEAR DEFERRAL FOR PRINCIPAL NOT TO

APPLY.—The executor shall be treated as having

selected under subsection (a)(3) the date prescribed

by section 6151(a).

‘‘(iii) 5 EQUAL INSTALLMENTS ALLOWED.—For purposes of applying subsection (a)(1), ‘5’ shall be substituted for ‘10’.

‘‘(B) DEFINITIONS.—For purposes of this paragraph—

‘‘(i) QUALIFYING LENDING AND FINANCE BUSINESS.—

The term ‘qualifying lending and finance business’

means a lending and finance business, if—

‘‘(I) based on all the facts and circumstances

immediately before the date of the decedent’s

death, there was substantial activity with respect

to the lending and finance business, or

‘‘(II) during at least 3 of the 5 taxable years

ending before the date of the decedent’s death,

such business had at least 1 full-time employee

substantially all of whose services were the active

management of such business, 10 full-time, nonowner employees substantially all of whose services were directly related to such business, and

$5,000,000 in gross receipts from activities

described in clause (ii).

‘‘(ii) LENDING AND FINANCE BUSINESS.—The term

‘lending and finance business’ means a trade or business of—

‘‘(I) making loans,

Applicability.

26 USC 6166

note.

26 USC 6166.

PUBLIC LAW 107–16—JUNE 7, 2001 115 STAT. 93

‘‘(II) purchasing or discounting accounts

receivable, notes, or installment obligations, ‘‘(III) engaging in rental and leasing of real

and tangible personal property, including entering

into leases and purchasing, servicing, and disposing of leases and leased assets,

‘‘(IV) rendering services or making facilities

available in the ordinary course of a lending or

finance business, and

‘‘(V) rendering services or making facilities

available in connection with activities described

in subclauses (I) through (IV) carried on by the

corporation rendering services or making facilities

available, or another corporation which is a

member of the same affiliated group (as defined

in section 1504 without regard to section

1504(b)(3)).

‘‘(iii) LIMITATION.—The term ‘qualifying lending

and finance business’ shall not include any interest

in an entity, if the stock or debt of such entity or

a controlled group (as defined in section 267(f )(1)) of

which such entity was a member was readily tradable

on an established securities market or secondary

market (as defined by the Secretary) at any time within

3 years before the date of the decedent’s death.’’.

(b) EFFECTIVE DATE.—The amendment made by this section

shall apply to estates of decedents dying after December 31, 2001.

SEC. 573. CLARIFICATION OF AVAILABILITY OF INSTALLMENT PAYMENT.

(a) IN GENERAL.—Subparagraph (B) of section 6166(b)(8)

(relating to all stock must be non-readily-tradable stock) is amended

to read as follows: ‘‘(B) ALL STOCK MUST BE NON-READILY-TRADABLE

STOCK.—

‘‘(i) IN GENERAL.—No stock shall be taken into

account for purposes of applying this paragraph unless

it is non-readily-tradable stock (within the meaning

of paragraph (7)(B)).

‘‘(ii) SPECIAL APPLICATION WHERE ONLY HOLDING

COMPANY STOCK IS NON-READILY-TRADABLE STOCK.—If

the requirements of clause (i) are not met, but all

of the stock of each holding company taken into account

is non-readily-tradable, then this paragraph shall

apply, but subsection (a)(1) shall be applied by substituting ‘5’ for ‘10’.’’.

(b) EFFECTIVE DATE.—The amendment made by this section

shall apply to estates of decedents dying after December 31, 2001.

Subtitle I—Other Provisions

SEC. 581. WAIVER OF STATUTE OF LIMITATION FOR TAXES ON CERTAIN

FARM VALUATIONS.

If on the date of the enactment of this Act (or at any time

within 1 year after the date of the enactment) a refund or credit

of any overpayment of tax resulting from the application of section

26 USC 2032A

note.

Applicability.

26 USC 6166

note.

26 USC 6166.

Applicability.

26 USC 6166

note.

115 STAT. 94 PUBLIC LAW 107–16—JUNE 7, 2001

2032A(c)(7)(E) of the Internal Revenue Code of 1986 is barred

by any law or rule of law, the refund or credit of such overpayment

shall, nevertheless, be made or allowed if claim therefor is filed

before the date 1 year after the date of the enactment of this

Act.

TITLE VI—PENSION AND INDIVIDUAL

RETIREMENT ARRANGEMENT PROVISIONS

Subtitle A—Individual Retirement

Accounts

SEC. 601. MODIFICATION OF IRA CONTRIBUTION LIMITS.

(a) INCREASE IN CONTRIBUTION LIMIT.— (1) IN GENERAL.—Paragraph (1)(A) of section 219(b)

(relating to maximum amount of deduction) is amended by

striking ‘‘$2,000’’ and inserting ‘‘the deductible amount’’. (2) DEDUCTIBLE AMOUNT.—Section 219(b) is amended by

adding at the end the following new paragraph: ‘‘(5) DEDUCTIBLE AMOUNT.—For purposes of paragraph

(1)(A)— ‘‘(A) IN GENERAL.—The deductible amount shall be

determined in accordance with the following table:

‘‘For taxable years The deductible

beginning in: amount is: 2002 through 2004 ..................................................................... $3,000

2005 through 2007 ..................................................................... $4,000

2008 and thereafter ................................................................... $5,000.

‘‘(B) CATCH-UP CONTRIBUTIONS FOR INDIVIDUALS 50 OR

OLDER.—

‘‘(i) IN GENERAL.—In the case of an individual who

has attained the age of 50 before the close of the

taxable year, the deductible amount for such taxable

year shall be increased by the applicable amount. ‘‘(ii) APPLICABLE AMOUNT.—For purposes of clause

(i), the applicable amount shall be the amount determined in accordance with the following table:

‘‘For taxable years The applicable

beginning in: amount is: 2002 through 2005 ..................................................................... $500

2006 and thereafter ................................................................... $1,000.

‘‘(C) COST-OF-LIVING ADJUSTMENT.—

‘‘(i) IN GENERAL.—In the case of any taxable year

beginning in a calendar year after 2008, the $5,000

amount under subparagraph (A) shall be increased

by an amount equal to—

‘‘(I) such dollar amount, multiplied by

‘‘(II) the cost-of-living adjustment determined

under section 1(f )(3) for the calendar year in which

the taxable year begins, determined by substituting ‘calendar year 2007’ for ‘calendar year

1992’ in subparagraph (B) thereof.

‘‘(ii) ROUNDING RULES.—If any amount after adjustment under clause (i) is not a multiple of $500, such

26 USC 219.

PUBLIC LAW 107–16—JUNE 7, 2001 115 STAT. 95

amount shall be rounded to the next lower multiple

of $500.’’. (b) CONFORMING AMENDMENTS.—

(1) Section 408(a)(1) is amended by striking ‘‘in excess

of $2,000 on behalf of any individual’’ and inserting ‘‘on behalf

of any individual in excess of the amount in effect for such

taxable year under section 219(b)(1)(A)’’. (2) Section 408(b)(2)(B) is amended by striking ‘‘$2,000’’ and inserting ‘‘the dollar amount in effect under section

219(b)(1)(A)’’. (3) Section 408(b) is amended by striking ‘‘$2,000’’ in the

matter following paragraph (4) and inserting ‘‘the dollar amount

in effect under section 219(b)(1)(A)’’. (4) Section 408( j) is amended by striking ‘‘$2,000’’. (5) Section 408(p)(8) is amended by striking ‘‘$2,000’’ and

inserting ‘‘the dollar amount in effect under section

219(b)(1)(A)’’. (c) EFFECTIVE DATE.—The amendments made by this section

shall apply to taxable years beginning after December 31, 2001.

SEC. 602. DEEMED IRAs UNDER EMPLOYER PLANS.

(a) IN GENERAL.—Section 408 (relating to individual retirement

accounts) is amended by redesignating subsection (q) as subsection

(r) and by inserting after subsection (p) the following new subsection:

‘‘(q) DEEMED IRAS UNDER QUALIFIED EMPLOYER PLANS.—

‘‘(1) GENERAL RULE.—If—

‘‘(A) a qualified employer plan elects to allow employees

to make voluntary employee contributions to a separate

account or annuity established under the plan, and

‘‘(B) under the terms of the qualified employer plan,

such account or annuity meets the applicable requirements

of this section or section 408A for an individual retirement

account or annuity,

then such account or annuity shall be treated for purposes

of this title in the same manner as an individual retirement

plan and not as a qualified employer plan (and contributions

to such account or annuity as contributions to an individual

retirement plan and not to the qualified employer plan). For

purposes of subparagraph (B), the requirements of subsection

(a)(5) shall not apply.

‘‘(2) SPECIAL RULES FOR QUALIFIED EMPLOYER PLANS.—For

purposes of this title, a qualified employer plan shall not fail

to meet any requirement of this title solely by reason of establishing and maintaining a program described in paragraph

(1).

‘‘(3) DEFINITIONS.—For purposes of this subsection—

‘‘(A) QUALIFIED EMPLOYER PLAN.—The term ‘qualified

employer plan’ has the meaning given such term by section

72(p)(4); except such term shall not include a government

plan which is not a qualified plan unless the plan is an

eligible deferred compensation plan (as defined in section

457(b)).

‘‘(B) VOLUNTARY EMPLOYEE CONTRIBUTION.—The term

‘voluntary employee contribution’ means any contribution

(other than a mandatory contribution within the meaning

of section 411(c)(2)(C))—

Applicability.

26 USC 219 note.

26 USC 408.

115 STAT. 96 PUBLIC LAW 107–16—JUNE 7, 2001

‘‘(i) which is made by an individual as an employee

under a qualified employer plan which allows

employees to elect to make contributions described in

paragraph (1), and

‘‘(ii) with respect to which the individual has designated the contribution as a contribution to which

this subsection applies.’’.

(b) AMENDMENT OF ERISA.— (1) IN GENERAL.—Section 4 of the Employee Retirement

Income Security Act of 1974 (29 U.S.C. 1003) is amended by

adding at the end the following new subsection:

‘‘(c) If a pension plan allows an employee to elect to make

voluntary employee contributions to accounts and annuities as provided in section 408(q) of the Internal Revenue Code of 1986,

such accounts and annuities (and contributions thereto) shall not

be treated as part of such plan (or as a separate pension plan)

for purposes of any provision of this title other than section 403(c),

404, or 405 (relating to exclusive benefit, and fiduciary and cofiduciary responsibilities).’’. (2) CONFORMING AMENDMENT.—Section 4(a) of such Act

(29 U.S.C. 1003(a)) is amended by inserting ‘‘or (c)’’ after ‘‘subsection (b)’’.

(c) EFFECTIVE DATE.—The amendments made by this section

shall apply to plan years beginning after December 31, 2002.

Subtitle B—Expanding Coverage

SEC. 611. INCREASE IN BENEFIT AND CONTRIBUTION LIMITS.

(a) DEFINED BENEFIT PLANS.—

(1) DOLLAR LIMIT.—

(A) Subparagraph (A) of section 415(b)(1) (relating to

limitation for defined benefit plans) is amended by striking

‘‘$90,000’’ and inserting ‘‘$160,000’’.

(B) Subparagraphs (C) and (D) of section 415(b)(2)

are each amended in the headings and the text, by striking

‘‘$90,000’’ and inserting ‘‘$160,000’’,

(C) Paragraph (7) of section 415(b) (relating to benefits

under certain collectively bargained plans) is amended by

striking ‘‘the greater of $68,212 or one-half the amount

otherwise applicable for such year under paragraph (1)(A)

for ‘$90,000’ ’’ and inserting ‘‘one-half the amount otherwise

applicable for such year under paragraph (1)(A) for

‘$160,000’ ’’.

(2) LIMIT REDUCED WHEN BENEFIT BEGINS BEFORE AGE 62.—

Subparagraph (C) of section 415(b)(2) is amended by striking

‘‘the social security retirement age’’ each place it appears in

the heading and text and inserting ‘‘age 62’’ and by striking

the second sentence.

(3) LIMIT INCREASED WHEN BENEFIT BEGINS AFTER AGE 65.—

Subparagraph (D) of section 415(b)(2) is amended by striking

‘‘the social security retirement age’’ each place it appears in

the heading and text and inserting ‘‘age 65’’.

(4) COST-OF-LIVING ADJUSTMENTS.—Subsection (d) of section

415 (related to cost-of-living adjustments) is amended—

(A) by striking ‘‘$90,000’’ in paragraph (1)(A) and

inserting ‘‘$160,000’’; and

26 USC 415.

Applicability.

26 USC 408 note.

PUBLIC LAW 107–16—JUNE 7, 2001 115 STAT. 97

(B) in paragraph (3)(A)—

(i) by striking ‘‘$90,000’’ in the heading and

inserting ‘‘$160,000’’; and

(ii) by striking ‘‘October 1, 1986’’ and inserting

‘‘July 1, 2001’’.

(5) CONFORMING AMENDMENTS.—

(A) Section 415(b)(2) is amended by striking subparagraph (F).

(B) Section 415(b)(9) is amended to read as follows:

‘‘(9) SPECIAL RULE FOR COMMERCIAL AIRLINE PILOTS.—

‘‘(A) IN GENERAL.—Except as provided in subparagraph

(B), in the case of any participant who is a commercial

airline pilot, if, as of the time of the participant’s retirement, regulations prescribed by the Federal Aviation

Administration require an individual to separate from

service as a commercial airline pilot after attaining any

age occurring on or after age 60 and before age 62, paragraph (2)(C) shall be applied by substituting such age for

age 62.

‘‘(B) INDIVIDUALS WHO SEPARATE FROM SERVICE BEFORE

AGE 60.—If a participant described in subparagraph (A)

separates from service before age 60, the rules of paragraph

(2)(C) shall apply.’’.

(C) Section 415(b)(10)(C)(i) is amended by striking

‘‘applied without regard to paragraph (2)(F)’’.

(b) DEFINED CONTRIBUTION PLANS.—

(1) DOLLAR LIMIT.—Subparagraph (A) of section 415(c)(1)

(relating to limitation for defined contribution plans) is

amended by striking ‘‘$30,000’’ and inserting ‘‘$40,000’’.

(2) COST-OF-LIVING ADJUSTMENTS.—Subsection (d) of section

415 (related to cost-of-living adjustments) is amended—

(A) by striking ‘‘$30,000’’ in paragraph (1)(C) and

inserting ‘‘$40,000’’; and

(B) in paragraph (3)(D)—

(i) by striking ‘‘$30,000’’ in the heading and

inserting ‘‘$40,000’’; and

(ii) by striking ‘‘October 1, 1993’’ and inserting

‘‘July 1, 2001’’.

(c) QUALIFIED TRUSTS.—

(1) COMPENSATION LIMIT.—Sections 401(a)(17), 404(l),

408(k), and 505(b)(7) are each amended by striking ‘‘$150,000’’

each place it appears and inserting ‘‘$200,000’’.

(2) BASE PERIOD AND ROUNDING OF COST-OF-LIVING ADJUSTMENT.—Subparagraph (B) of section 401(a)(17) is amended—

(A) by striking ‘‘October 1, 1993’’ and inserting ‘‘July

1, 2001’’; and

(B) by striking ‘‘$10,000’’ both places it appears and

inserting ‘‘$5,000’’.

(d) ELECTIVE DEFERRALS.—

(1) IN GENERAL.—Paragraph (1) of section 402(g) (relating

to limitation on exclusion for elective deferrals) is amended

to read as follows:

‘‘(1) IN GENERAL.—

‘‘(A) LIMITATION.—Notwithstanding subsections (e)(3)

and (h)(1)(B), the elective deferrals of any individual for

any taxable year shall be included in such individual’s

26 USC 415.

115 STAT. 98 PUBLIC LAW 107–16—JUNE 7, 2001

gross income to the extent the amount of such deferrals

for the taxable year exceeds the applicable dollar amount.

‘‘(B) APPLICABLE DOLLAR AMOUNT.—For purposes of

subparagraph (A), the applicable dollar amount shall be

the amount determined in accordance with the following

table:

‘‘For taxable years The applicable

beginning in dollar amount:

calendar year:

2002 ............................................................................................. $11,000

2003 ............................................................................................. $12,000

2004 ............................................................................................. $13,000

2005 ............................................................................................. $14,000

2006 or thereafter ...................................................................... $15,000.’’.

(2) COST-OF-LIVING ADJUSTMENT.—Paragraph (5) of section

402(g) is amended to read as follows:

‘‘(5) COST-OF-LIVING ADJUSTMENT.—In the case of taxable

years beginning after December 31, 2006, the Secretary shall

adjust the $15,000 amount under paragraph (1)(B) at the same

time and in the same manner as under section 415(d), except

that the base period shall be the calendar quarter beginning

July 1, 2005, and any increase under this paragraph which

is not a multiple of $500 shall be rounded to the next lowest

multiple of $500.’’.

(3) CONFORMING AMENDMENTS.—

(A) Section 402(g) (relating to limitation on exclusion

for elective deferrals), as amended by paragraphs (1) and

(2), is further amended by striking paragraph (4) and

redesignating paragraphs (5), (6), (7), (8), and (9) as paragraphs (4), (5), (6), (7), and (8), respectively.

(B) Paragraph (2) of section 457(c) is amended by

striking ‘‘402(g)(8)(A)(iii)’’ and inserting ‘‘402(g)(7)(A)(iii)’’.

(C) Clause (iii) of section 501(c)(18)(D) is amended

by striking ‘‘(other than paragraph (4) thereof )’’.

(e) DEFERRED COMPENSATION PLANS OF STATE AND LOCAL

GOVERNMENTS AND TAX-EXEMPT ORGANIZATIONS.—

(1) IN GENERAL.—Section 457 (relating to deferred compensation plans of State and local governments and tax-exempt

organizations) is amended—

(A) in subsections (b)(2)(A) and (c)(1) by striking

‘‘$7,500’’ each place it appears and inserting ‘‘the applicable

dollar amount’’; and

(B) in subsection (b)(3)(A) by striking ‘‘$15,000’’ and

inserting ‘‘twice the dollar amount in effect under subsection (b)(2)(A)’’.

(2) APPLICABLE DOLLAR AMOUNT; COST-OF-LIVING ADJUSTMENT.—Paragraph (15) of section 457(e) is amended to read

as follows:

‘‘(15) APPLICABLE DOLLAR AMOUNT.—

‘‘(A) IN GENERAL.—The applicable dollar amount shall

be the amount determined in accordance with the following

table:

‘‘For taxable years The applicable

beginning in dollar amount:

calendar year:

2002 ............................................................................................. $11,000

2003 ............................................................................................. $12,000

2004 ............................................................................................. $13,000

26 USC 402.

PUBLIC LAW 107–16—JUNE 7, 2001 115 STAT. 99

2005 ............................................................................................. $14,000

2006 or thereafter ...................................................................... $15,000.

‘‘(B) COST-OF-LIVING ADJUSTMENTS.—In the case of taxable years beginning after December 31, 2006, the Secretary shall adjust the $15,000 amount under subparagraph (A) at the same time and in the same manner

as under section 415(d), except that the base period shall

be the calendar quarter beginning July 1, 2005, and any

increase under this paragraph which is not a multiple

of $500 shall be rounded to the next lowest multiple of

$500.’’.

(f ) SIMPLE RETIREMENT ACCOUNTS.—

(1) LIMITATION.—Clause (ii) of section 408(p)(2)(A) (relating

to general rule for qualified salary reduction arrangement)

is amended by striking ‘‘$6,000’’ and inserting ‘‘the applicable

dollar amount’’.

(2) APPLICABLE DOLLAR AMOUNT.—Subparagraph (E) of

408(p)(2) is amended to read as follows:

‘‘(E) APPLICABLE DOLLAR AMOUNT; COST-OF-LIVING

ADJUSTMENT.—

‘‘(i) IN GENERAL.—For purposes of subparagraph

(A)(ii), the applicable dollar amount shall be the

amount determined in accordance with the following

table:

‘‘For years The applicable

beginning in dollar amount:

calendar year:

2002 ...................................................................................... $7,000

2003 ...................................................................................... $8,000

2004 ...................................................................................... $9,000

2005 or thereafter ............................................................... $10,000.

‘‘(ii) COST-OF-LIVING ADJUSTMENT.—In the case of

a year beginning after December 31, 2005, the Secretary shall adjust the $10,000 amount under clause

(i) at the same time and in the same manner as under

section 415(d), except that the base period taken into

account shall be the calendar quarter beginning July

1, 2004, and any increase under this subparagraph

which is not a multiple of $500 shall be rounded to

the next lower multiple of $500.’’.

(3) CONFORMING AMENDMENTS.—

(A) Subclause (I) of section 401(k)(11)(B)(i) is amended

by striking ‘‘$6,000’’ and inserting ‘‘the amount in effect

under section 408(p)(2)(A)(ii)’’.

(B) Section 401(k)(11) is amended by striking subparagraph (E).

(g) CERTAIN COMPENSATION LIMITS.—

(1) IN GENERAL.—Subparagraph (A) of section 401(c)(2)

(defining earned income) is amended by adding at the end

thereof the following new sentence: ‘‘For purposes of this part

only (other than sections 419 and 419A), this subparagraph

shall be applied as if the term ‘trade or business’ for purposes

of section 1402 included service described in section 1402(c)(6).’’.

(2) SIMPLE RETIREMENT ACCOUNTS.—Clause (ii) of section

408(p)(6)(A) (defining self-employed) is amended by adding at

the end the following new sentence: ‘‘The preceding sentence

shall be applied as if the term ‘trade or business’ for purposes

of section 1402 included service described in section 1402(c)(6).’’.

26 USC 408.

115 STAT. 100 PUBLIC LAW 107–16—JUNE 7, 2001

(h) ROUNDING RULE RELATING TO DEFINED BENEFIT PLANS

AND DEFINED CONTRIBUTION PLANS.—Paragraph (4) of section

415(d) is amended to read as follows: ‘‘(4) ROUNDING.— ‘‘(A) $160,000 AMOUNT.—Any increase under subparagraph (A) of paragraph (1) which is not a multiple of

$5,000 shall be rounded to the next lowest multiple of

$5,000. ‘‘(B) $40,000 AMOUNT.—Any increase under subparagraph (C) of paragraph (1) which is not a multiple of

$1,000 shall be rounded to the next lowest multiple of

$1,000.’’. (i) EFFECTIVE DATES.— (1) IN GENERAL.—The amendments made by this section

shall apply to years beginning after December 31, 2001.

(2) DEFINED BENEFIT PLANS.—The amendments made by

subsection (a) shall apply to years ending after December 31,

2001.

SEC. 612. PLAN LOANS FOR SUBCHAPTER S OWNERS, PARTNERS, AND

SOLE PROPRIETORS.

(a) IN GENERAL.—Subparagraph (B) of section 4975(f )(6)

(relating to exemptions not to apply to certain transactions) is

amended by adding at the end the following new clause: ‘‘(iii) LOAN EXCEPTION.—For purposes of subparagraph (A)(i), the term ‘owner-employee’ shall only

include a person described in subclause (II) or (III)

of clause (i).’’. (b) AMENDMENT OF ERISA.—Section 408(d)(2) of the Employee

Retirement Income Security Act of 1974 (29 U.S.C. 1108(d)(2))

is amended by adding at the end the following new subparagraph: ‘‘(C) For purposes of paragraph (1)(A), the term ‘owneremployee’ shall only include a person described in clause (ii) or

(iii) of subparagraph (A).’’. (c) EFFECTIVE DATE.—The amendment made by this section

shall apply to years beginning after December 31, 2001.

SEC. 613. MODIFICATION OF TOP-HEAVY RULES.

(a) SIMPLIFICATION OF DEFINITION OF KEY EMPLOYEE.— (1) IN GENERAL.—Section 416(i)(1)(A) (defining key

employee) is amended— (A) by striking ‘‘or any of the 4 preceding plan years’’ in the matter preceding clause (i);

(B) by striking clause (i) and inserting the following: ‘‘(i) an officer of the employer having an annual compensation greater than $130,000,’’;

(C) by striking clause (ii) and redesignating clauses

(iii) and (iv) as clauses (ii) and (iii), respectively; and

(D) by striking the second sentence in the matter following clause (iii), as redesignated by subparagraph (C),

and by inserting the following: ‘‘in the case of plan years beginning after December 31, 2002, the $130,000 amount

in clause (i) shall be adjusted at the same time and in

the same manner as under section 415(d), except that

the base period shall be the calendar quarter beginning

July 1, 2001, and any increase under this sentence which

is not a multiple of $5,000 shall be rounded to the next

lower multiple of $5,000.’’.

Applicability.

26 USC 4975

note.

Applicability.

26 USC 415 note.

26 USC 415.

PUBLIC LAW 107–16—JUNE 7, 2001 115 STAT. 101

(2) CONFORMING AMENDMENT.—Section 416(i)(1)(B)(iii) is

amended by striking ‘‘and subparagraph (A)(ii)’’.

(b) MATCHING CONTRIBUTIONS TAKEN INTO ACCOUNT FOR MINIMUM CONTRIBUTION REQUIREMENTS.—Section 416(c)(2)(A) (relating

to defined contribution plans) is amended by adding at the end

the following: ‘‘Employer matching contributions (as defined in section 401(m)(4)(A)) shall be taken into account for purposes of this

subparagraph (and any reduction under this sentence shall not

be taken into account in determining whether section 401(k)(4)(A)

applies).’’.

(c) DISTRIBUTIONS DURING LAST YEAR BEFORE DETERMINATION

DATE TAKEN INTO ACCOUNT.—

(1) IN GENERAL.—Paragraph (3) of section 416(g) is

amended to read as follows:

‘‘(3) DISTRIBUTIONS DURING LAST YEAR BEFORE DETERMINATION DATE TAKEN INTO ACCOUNT.—

‘‘(A) IN GENERAL.—For purposes of determining—

‘‘(i) the present value of the cumulative accrued

benefit for any employee, or

‘‘(ii) the amount of the account of any employee,

such present value or amount shall be increased by the

aggregate distributions made with respect to such employee

under the plan during the 1-year period ending on the

determination date. The preceding sentence shall also apply

to distributions under a terminated plan which if it had

not been terminated would have been required to be

included in an aggregation group.

‘‘(B) 5-YEAR PERIOD IN CASE OF IN-SERVICE DISTRIBUTION.—In the case of any distribution made for a reason

other than separation from service, death, or disability,

subparagraph (A) shall be applied by substituting ‘5-year

period’ for ‘1-year period’.’’.

(2) BENEFITS NOT TAKEN INTO ACCOUNT.—Subparagraph

(E) of section 416(g)(4) is amended—

(A) by striking ‘‘LAST 5 YEARS’’ in the heading and

inserting ‘‘LAST YEAR BEFORE DETERMINATION DATE’’; and

(B) by striking ‘‘5-year period’’ and inserting ‘‘1-year

period’’.

(d) DEFINITION OF TOP-HEAVY PLANS.—Paragraph (4) of section

416(g) (relating to other special rules for top-heavy plans) is

amended by adding at the end the following new subparagraph:

‘‘(H) CASH OR DEFERRED ARRANGEMENTS USING ALTERNATIVE METHODS OF MEETING NONDISCRIMINATION REQUIREMENTS.—The term ‘top-heavy plan’ shall not include a plan

which consists solely of—

‘‘(i) a cash or deferred arrangement which meets

the requirements of section 401(k)(12), and

‘‘(ii) matching contributions with respect to which

the requirements of section 401(m)(11) are met.

If, but for this subparagraph, a plan would be treated

as a top-heavy plan because it is a member of an aggregation group which is a top-heavy group, contributions under

the plan may be taken into account in determining whether

any other plan in the group meets the requirements of

subsection (c)(2).’’.

26 USC 416.

115 STAT. 102 PUBLIC LAW 107–16—JUNE 7, 2001

(e) FROZEN PLAN EXEMPT FROM MINIMUM BENEFIT REQUIRE- MENT.—Subparagraph (C) of section 416(c)(1) (relating to defined

benefit plans) is amended— (A) by striking ‘‘clause (ii)’’ in clause (i) and inserting

‘‘clause (ii) or (iii)’’; and

(B) by adding at the end the following:

‘‘(iii) EXCEPTION FOR FROZEN PLAN.—For purposes

of determining an employee’s years of service with

the employer, any service with the employer shall be

disregarded to the extent that such service occurs

during a plan year when the plan benefits (within

the meaning of section 410(b)) no key employee or

former key employee.’’. (f ) EFFECTIVE DATE.—The amendments made by this section

shall apply to years beginning after December 31, 2001.

SEC. 614. ELECTIVE DEFERRALS NOT TAKEN INTO ACCOUNT FOR PURPOSES OF DEDUCTION LIMITS.

(a) IN GENERAL.—Section 404 (relating to deduction for contributions of an employer to an employees’ trust or annuity plan

and compensation under a deferred payment plan) is amended

by adding at the end the following new subsection:

‘‘(n) ELECTIVE DEFERRALS NOT TAKEN INTO ACCOUNT FOR PURPOSES OF DEDUCTION LIMITS.—Elective deferrals (as defined in section 402(g)(3)) shall not be subject to any limitation contained

in paragraph (3), (7), or (9) of subsection (a), and such elective

deferrals shall not be taken into account in applying any such

limitation to any other contributions.’’.

(b) EFFECTIVE DATE.—The amendment made by this section

shall apply to years beginning after December 31, 2001.

SEC. 615. REPEAL OF COORDINATION REQUIREMENTS FOR DEFERRED

COMPENSATION PLANS OF STATE AND LOCAL GOVERNMENTS AND TAX-EXEMPT ORGANIZATIONS.

(a) IN GENERAL.—Subsection (c) of section 457 (relating to

deferred compensation plans of State and local governments and

tax-exempt organizations), as amended by section 611, is amended

to read as follows:

‘‘(c) LIMITATION.—The maximum amount of the compensation

of any one individual which may be deferred under subsection

(a) during any taxable year shall not exceed the amount in effect

under subsection (b)(2)(A) (as modified by any adjustment provided

under subsection (b)(3)).’’.

(b) EFFECTIVE DATE.—The amendment made by subsection (a)

shall apply to years beginning after December 31, 2001.

SEC. 616. DEDUCTION LIMITS.

(a) MODIFICATION OF LIMITS.—

(1) STOCK BONUS AND PROFIT SHARING TRUSTS.—

(A) IN GENERAL.—Subclause (I) of section 404(a)(3)(A)(i)

(relating to stock bonus and profit sharing trusts) is

amended by striking ‘‘15 percent’’ and inserting ‘‘25 percent’’.

(B) CONFORMING AMENDMENT.—Subparagraph (C) of

section 404(h)(1) is amended by striking ‘‘15 percent’’ each

place it appears and inserting ‘‘25 percent’’.

(2) DEFINED CONTRIBUTION PLANS.—

Applicability.

26 USC 457 note.

Applicability.

26 USC 404 note.

26 USC 404.

Applicability.

26 USC 416 note.

PUBLIC LAW 107–16—JUNE 7, 2001 115 STAT. 103

(A) IN GENERAL.—Clause (v) of section 404(a)(3)(A)

(relating to stock bonus and profit sharing trusts) is

amended to read as follows: ‘‘(v) DEFINED CONTRIBUTION PLANS SUBJECT TO THE

FUNDING STANDARDS.—Except as provided by the Secretary, a defined contribution plan which is subject

to the funding standards of section 412 shall be treated

in the same manner as a stock bonus or profit-sharing

plan for purposes of this subparagraph.’’. (B) CONFORMING AMENDMENTS.— (i) Section 404(a)(1)(A) is amended by inserting ‘‘(other than a trust to which paragraph (3) applies)’’ after ‘‘pension trust’’. (ii) Section 404(h)(2) is amended by striking ‘‘stock

bonus or profit-sharing trust’’ and inserting ‘‘trust subject to subsection (a)(3)(A)’’. (iii) The heading of section 404(h)(2) is amended

by striking ‘‘STOCK BONUS AND PROFIT-SHARING TRUST’’ and inserting ‘‘CERTAIN TRUSTS’’. (b) COMPENSATION.— (1) IN GENERAL.—Section 404(a) (relating to general rule)

is amended by adding at the end the following: ‘‘(12) DEFINITION OF COMPENSATION.—For purposes of paragraphs (3), (7), (8), and (9), the term ‘compensation’ shall include

amounts treated as ‘participant’s compensation’ under subparagraph (C) or (D) of section 415(c)(3).’’. (2) CONFORMING AMENDMENTS.— (A) Subparagraph (B) of section 404(a)(3) is amended

by striking the last sentence thereof.

(B) Clause (i) of section 4972(c)(6)(B) is amended by

striking ‘‘(within the meaning of section 404(a))’’ and

inserting ‘‘(within the meaning of section 404(a) and as

adjusted under section 404(a)(12))’’. (c) EFFECTIVE DATE.—The amendments made by this section

shall apply to years beginning after December 31, 2001.

SEC. 617. OPTION TO TREAT ELECTIVE DEFERRALS AS AFTER-TAX

ROTH CONTRIBUTIONS.

(a) IN GENERAL.—Subpart A of part I of subchapter D of chapter

1 (relating to deferred compensation, etc.) is amended by inserting

after section 402 the following new section:

‘‘SEC. 402A. OPTIONAL TREATMENT OF ELECTIVE DEFERRALS AS ROTH

CONTRIBUTIONS.

‘‘(a) GENERAL RULE.—If an applicable retirement plan includes

a qualified Roth contribution program— ‘‘(1) any designated Roth contribution made by an employee

pursuant to the program shall be treated as an elective deferral

for purposes of this chapter, except that such contribution shall

not be excludable from gross income, and

‘‘(2) such plan (and any arrangement which is part of

such plan) shall not be treated as failing to meet any requirement of this chapter solely by reason of including such program.

‘‘(b) QUALIFIED ROTH CONTRIBUTION PROGRAM.—For purposes

of this section—

‘‘(1) IN GENERAL.—The term ‘qualified Roth contribution

program’ means a program under which an employee may

elect to make designated Roth contributions in lieu of all or

Applicability.

26 USC 404 note.

26 USC 404.

115 STAT. 104 PUBLIC LAW 107–16—JUNE 7, 2001

a portion of elective deferrals the employee is otherwise eligible

to make under the applicable retirement plan. ‘‘(2) SEPARATE ACCOUNTING REQUIRED.—A program shall

not be treated as a qualified Roth contribution program unless

the applicable retirement plan— ‘‘(A) establishes separate accounts (‘designated Roth

accounts’) for the designated Roth contributions of each

employee and any earnings properly allocable to the contributions, and ‘‘(B) maintains separate recordkeeping with respect to

each account. ‘‘(c) DEFINITIONS AND RULES RELATING TO DESIGNATED ROTH

CONTRIBUTIONS.—For purposes of this section— ‘‘(1) DESIGNATED ROTH CONTRIBUTION.—The term ‘designated Roth contribution’ means any elective deferral which— ‘‘(A) is excludable from gross income of an employee

without regard to this section, and ‘‘(B) the employee designates (at such time and in

such manner as the Secretary may prescribe) as not being

so excludable.

‘‘(2) DESIGNATION LIMITS.—The amount of elective deferrals

which an employee may designate under paragraph (1) shall

not exceed the excess (if any) of—

‘‘(A) the maximum amount of elective deferrals excludable from gross income of the employee for the taxable

year (without regard to this section), over

‘‘(B) the aggregate amount of elective deferrals of the

employee for the taxable year which the employee does

not designate under paragraph (1).

‘‘(3) ROLLOVER CONTRIBUTIONS.—

‘‘(A) IN GENERAL.—A rollover contribution of any payment or distribution from a designated Roth account which

is otherwise allowable under this chapter may be made

only if the contribution is to—

‘‘(i) another designated Roth account of the individual from whose account the payment or distribution

was made, or

‘‘(ii) a Roth IRA of such individual.

‘‘(B) COORDINATION WITH LIMIT.—Any rollover contribution to a designated Roth account under subparagraph

(A) shall not be taken into account for purposes of paragraph (1).

‘‘(d) DISTRIBUTION RULES.—For purposes of this title—

‘‘(1) EXCLUSION.—Any qualified distribution from a designated Roth account shall not be includible in gross income.

‘‘(2) QUALIFIED DISTRIBUTION.—For purposes of this

subsection—

‘‘(A) IN GENERAL.—The term ‘qualified distribution’ has

the meaning given such term by section 408A(d)(2)(A)

(without regard to clause (iv) thereof ).

‘‘(B) DISTRIBUTIONS WITHIN NONEXCLUSION PERIOD.— A payment or distribution from a designated Roth account

shall not be treated as a qualified distribution if such

payment or distribution is made within the 5-taxable-year

period beginning with the earlier of—

‘‘(i) the first taxable year for which the individual

made a designated Roth contribution to any designated

PUBLIC LAW 107–16—JUNE 7, 2001 115 STAT. 105

Roth account established for such individual under

the same applicable retirement plan, or

‘‘(ii) if a rollover contribution was made to such

designated Roth account from a designated Roth

account previously established for such individual

under another applicable retirement plan, the first taxable year for which the individual made a designated

Roth contribution to such previously established

account.

‘‘(C) DISTRIBUTIONS OF EXCESS DEFERRALS AND CONTRIBUTIONS AND EARNINGS THEREON.—The term ‘qualified

distribution’ shall not include any distribution of any excess

deferral under section 402(g)(2) or any excess contribution

under section 401(k)(8), and any income on the excess

deferral or contribution.

‘‘(3) TREATMENT OF DISTRIBUTIONS OF CERTAIN EXCESS

DEFERRALS.—Notwithstanding section 72, if any excess deferral

under section 402(g)(2) attributable to a designated Roth contribution is not distributed on or before the 1st April 15 following the close of the taxable year in which such excess

deferral is made, the amount of such excess deferral shall—

‘‘(A) not be treated as investment in the contract, and

‘‘(B) be included in gross income for the taxable year

in which such excess is distributed.

‘‘(4) AGGREGATION RULES.—Section 72 shall be applied separately with respect to distributions and payments from a designated Roth account and other distributions and payments

from the plan.

‘‘(e) OTHER DEFINITIONS.—For purposes of this section—

‘‘(1) APPLICABLE RETIREMENT PLAN.—The term ‘applicable

retirement plan’ means—

‘‘(A) an employees’ trust described in section 401(a)

which is exempt from tax under section 501(a), and

‘‘(B) a plan under which amounts are contributed by

an individual’s employer for an annuity contract described

in section 403(b).

‘‘(2) ELECTIVE DEFERRAL.—The term ‘elective deferral’

means any elective deferral described in subparagraph (A) or

(C) of section 402(g)(3).’’.

(b) EXCESS DEFERRALS.—Section 402(g) (relating to limitation

on exclusion for elective deferrals) is amended—

(1) by adding at the end of paragraph (1)(A) (as added

by section 201(c)(1)) the following new sentence: ‘‘The preceding

sentence shall not apply the portion of such excess as does

not exceed the designated Roth contributions of the individual

for the taxable year.’’; and

(2) by inserting ‘‘(or would be included but for the last

sentence thereof )’’ after ‘‘paragraph (1)’’ in paragraph (2)(A).

(c) ROLLOVERS.—Subparagraph (B) of section 402(c)(8) is

amended by adding at the end the following:

‘‘If any portion of an eligible rollover distribution is attributable to payments or distributions from a designated Roth

account (as defined in section 402A), an eligible retirement

plan with respect to such portion shall include only another

designated Roth account and a Roth IRA.’’.

(d) REPORTING REQUIREMENTS.—

26 USC 402.

115 STAT. 106 PUBLIC LAW 107–16—JUNE 7, 2001

(1) W–2 INFORMATION.—Section 6051(a)(8) is amended by

inserting ‘‘, including the amount of designated Roth contributions (as defined in section 402A)’’ before the comma at the

end.

(2) INFORMATION.—Section 6047 is amended by redesignating subsection (f ) as subsection (g) and by inserting after

subsection (e) the following new subsection:

‘‘(f ) DESIGNATED ROTH CONTRIBUTIONS.—The Secretary shall

require the plan administrator of each applicable retirement plan

(as defined in section 402A) to make such returns and reports

regarding designated Roth contributions (as defined in section 402A)

to the Secretary, participants and beneficiaries of the plan, and

such other persons as the Secretary may prescribe.’’. (e) CONFORMING AMENDMENTS.— (1) Section 408A(e) is amended by adding after the first

sentence the following new sentence: ‘‘Such term includes a

rollover contribution described in section 402A(c)(3)(A).’’. (2) The table of sections for subpart A of part I of subchapter D of chapter 1 is amended by inserting after the item

relating to section 402 the following new item:

‘‘Sec. 402A. Optional treatment of elective deferrals as Roth contributions.’’.

(f ) EFFECTIVE DATE.—The amendments made by this section

shall apply to taxable years beginning after December 31, 2005.

SEC. 618. NONREFUNDABLE CREDIT TO CERTAIN INDIVIDUALS FOR

ELECTIVE DEFERRALS AND IRA CONTRIBUTIONS.

(a) IN GENERAL.—Subpart A of part IV of subchapter A of

chapter 1 (relating to nonrefundable personal credits) is amended

by inserting after section 25A the following new section:

‘‘SEC. 25B. ELECTIVE DEFERRALS AND IRA CONTRIBUTIONS BY CERTAIN INDIVIDUALS.

‘‘(a) ALLOWANCE OF CREDIT.—In the case of an eligible individual, there shall be allowed as a credit against the tax imposed

by this subtitle for the taxable year an amount equal to the

applicable percentage of so much of the qualified retirement savings

contributions of the eligible individual for the taxable year as do

not exceed $2,000.

‘‘(b) APPLICABLE PERCENTAGE.—For purposes of this section,

the applicable percentage is the percentage determined in accordance with the following table:

Adjusted Gross Income

Applicable percentage

Joint return Head of a household All other cases

Over Not over Over Not over Over Not over

$30,000 $22,500 $15,000 50

30,000 32,500 22,500 24,375 15,000 16,250 20

32,500 50,000 24,375 37,500 16,250 25,000 10

50,000 37,500 25,000 0

‘‘(c) ELIGIBLE INDIVIDUAL.—For purposes of this section— ‘‘(1) IN GENERAL.—The term ‘eligible individual’ means any

individual if such individual has attained the age of 18 as

of the close of the taxable year.

Applicability.

26 USC 402 note.

26 USC 6051.

PUBLIC LAW 107–16—JUNE 7, 2001 115 STAT. 107

‘‘(2) DEPENDENTS AND FULL-TIME STUDENTS NOT ELIGIBLE.— The term ‘eligible individual’ shall not include— ‘‘(A) any individual with respect to whom a deduction

under section 151 is allowed to another taxpayer for a

taxable year beginning in the calendar year in which such

individual’s taxable year begins, and

‘‘(B) any individual who is a student (as defined in

section 151(c)(4)).

‘‘(d) QUALIFIED RETIREMENT SAVINGS CONTRIBUTIONS.—For

purposes of this section— ‘‘(1) IN GENERAL.—The term ‘qualified retirement savings

contributions’ means, with respect to any taxable year, the

sum of—

‘‘(A) the amount of the qualified retirement contributions (as defined in section 219(e)) made by the eligible

individual, ‘‘(B) the amount of— ‘‘(i) any elective deferrals (as defined in section

402(g)(3)) of such individual, and ‘‘(ii) any elective deferral of compensation by such

individual under an eligible deferred compensation

plan (as defined in section 457(b)) of an eligible

employer described in section 457(e)(1)(A), and

‘‘(C) the amount of voluntary employee contributions

by such individual to any qualified retirement plan (as

defined in section 4974(c)).

‘‘(2) REDUCTION FOR CERTAIN DISTRIBUTIONS.—

‘‘(A) IN GENERAL.—The qualified retirement savings

contributions determined under paragraph (1) shall be

reduced (but not below zero) by the sum of—

‘‘(i) any distribution from a qualified retirement

plan (as defined in section 4974(c)), or from an eligible

deferred compensation plan (as defined in section

457(b)), received by the individual during the testing

period which is includible in gross income, and ‘‘(ii) any distribution from a Roth IRA or a Roth

account received by the individual during the testing

period which is not a qualified rollover contribution

(as defined in section 408A(e)) to a Roth IRA or a

rollover under section 402(c)(8)(B) to a Roth account.

‘‘(B) TESTING PERIOD.—For purposes of subparagraph

(A), the testing period, with respect to a taxable year,

is the period which includes—

‘‘(i) such taxable year,

‘‘(ii) the 2 preceding taxable years, and

‘‘(iii) the period after such taxable year and before

the due date (including extensions) for filing the return

of tax for such taxable year.

‘‘(C) EXCEPTED DISTRIBUTIONS.—There shall not be

taken into account under subparagraph (A)—

‘‘(i) any distribution referred to in section 72(p),

401(k)(8), 401(m)(6), 402(g)(2), 404(k), or 408(d)(4), and

‘‘(ii) any distribution to which section 408A(d)(3)

applies.

‘‘(D) TREATMENT OF DISTRIBUTIONS RECEIVED BY

SPOUSE OF INDIVIDUAL.—For purposes of determining distributions received by an individual under subparagraph

115 STAT. 108 PUBLIC LAW 107–16—JUNE 7, 2001

(A) for any taxable year, any distribution received by the

spouse of such individual shall be treated as received by

such individual if such individual and spouse file a joint

return for such taxable year and for the taxable year during

which the spouse receives the distribution.

‘‘(e) ADJUSTED GROSS INCOME.—For purposes of this section,

adjusted gross income shall be determined without regard to sections 911, 931, and 933.

‘‘(f ) INVESTMENT IN THE CONTRACT.—Notwithstanding any

other provision of law, a qualified retirement savings contribution

shall not fail to be included in determining the investment in

the contract for purposes of section 72 by reason of the credit

under this section.

‘‘(g) TERMINATION.—This section shall not apply to taxable years

beginning after December 31, 2006.’’.

(b) CREDIT ALLOWED AGAINST REGULAR TAX AND ALTERNATIVE

MINIMUM TAX.—

(1) IN GENERAL.—Section 25B, as added by subsection (a),

is amended by inserting after subsection (f ) the following new

subsection:

‘‘(g) LIMITATION BASED ON AMOUNT OF TAX.—The credit allowed

under subsection (a) for the taxable year shall not exceed the

excess of—

‘‘(1) the sum of the regular tax liability (as defined in

section 26(b)) plus the tax imposed by section 55, over

‘‘(2) the sum of the credits allowable under this subpart

(other than this section and section 23) and section 27 for

the taxable year.’’.

(2) CONFORMING AMENDMENTS.—

(A) Section 24(b)(3)(B), as amended by sections 201(b)

and 203(d), is amended by striking ‘‘section 23’’ and

inserting ‘‘sections 23 and 25B’’.

(B) Section 25(e)(1)(C), as amended by section 201(b),

is amended by inserting ‘‘25B,’’ after ‘‘24,’’.

(C) Section 26(a)(1), as amended by sections 201(b)

and 203, is amended by striking ‘‘and 24’’ and inserting

‘‘, 24, and 25B’’.

(D) Section 904(h), as amended by sections 201(b) and

203, is amended by striking ‘‘and 24’’ and inserting ‘‘,

24, and 25B’’.

(E) Section 1400C(d), as amended by sections 201(b)

and 203, is amended by striking ‘‘and 24’’ and inserting

‘‘, 24, and 25B’’.

(c) CONFORMING AMENDMENT.—The table of sections for subpart

A of part IV of subchapter A of chapter 1, as amended by section

432, is amended by inserting after the item relating to section

25A the following new item:

‘‘Sec. 25B. Elective deferrals and IRA contributions by certain individuals.’’.

(d) EFFECTIVE DATE.—The amendments made by this section

shall apply to taxable years beginning after December 31, 2001.

SEC. 619. CREDIT FOR PENSION PLAN STARTUP COSTS OF SMALL

EMPLOYERS.

(a) IN GENERAL.—Subpart D of part IV of subchapter A of

chapter 1 (relating to business related credits) is amended by adding

at the end the following new section:

Applicability.

26 USC 24 note.

26 USC 25B.

PUBLIC LAW 107–16—JUNE 7, 2001 115 STAT. 109

‘‘SEC. 45E. SMALL EMPLOYER PENSION PLAN STARTUP COSTS.

‘‘(a) GENERAL RULE.—For purposes of section 38, in the case

of an eligible employer, the small employer pension plan startup

cost credit determined under this section for any taxable year

is an amount equal to 50 percent of the qualified startup costs

paid or incurred by the taxpayer during the taxable year.

‘‘(b) DOLLAR LIMITATION.—The amount of the credit determined

under this section for any taxable year shall not exceed—

‘‘(1) $500 for the first credit year and each of the 2 taxable

years immediately following the first credit year, and

‘‘(2) zero for any other taxable year.

‘‘(c) ELIGIBLE EMPLOYER.—For purposes of this section—

‘‘(1) IN GENERAL.—The term ‘eligible employer’ has the

meaning given such term by section 408(p)(2)(C)(i).

‘‘(2) REQUIREMENT FOR NEW QUALIFIED EMPLOYER PLANS.—

Such term shall not include an employer if, during the 3-

taxable year period immediately preceding the 1st taxable year

for which the credit under this section is otherwise allowable

for a qualified employer plan of the employer, the employer

or any member of any controlled group including the employer

(or any predecessor of either) established or maintained a qualified employer plan with respect to which contributions were

made, or benefits were accrued, for substantially the same

employees as are in the qualified employer plan.

‘‘(d) OTHER DEFINITIONS.—For purposes of this section—

‘‘(1) QUALIFIED STARTUP COSTS.—

‘‘(A) IN GENERAL.—The term ‘qualified startup costs’

means any ordinary and necessary expenses of an eligible

employer which are paid or incurred in connection with—

‘‘(i) the establishment or administration of an

eligible employer plan, or

‘‘(ii) the retirement-related education of employees

with respect to such plan.

‘‘(B) PLAN MUST HAVE AT LEAST 1 PARTICIPANT.—Such

term shall not include any expense in connection with

a plan that does not have at least 1 employee eligible

to participate who is not a highly compensated employee.

‘‘(2) ELIGIBLE EMPLOYER PLAN.—The term ‘eligible employer

plan’ means a qualified employer plan within the meaning

of section 4972(d).

‘‘(3) FIRST CREDIT YEAR.—The term ‘first credit year’

means—

‘‘(A) the taxable year which includes the date that

the eligible employer plan to which such costs relate

becomes effective, or

‘‘(B) at the election of the eligible employer, the taxable

year preceding the taxable year referred to in subparagraph

(A).

‘‘(e) SPECIAL RULES.—For purposes of this section—

‘‘(1) AGGREGATION RULES.—All persons treated as a single

employer under subsection (a) or (b) of section 52, or subsection

(n) or (o) of section 414, shall be treated as one person. All

eligible employer plans shall be treated as 1 eligible employer

plan.

‘‘(2) DISALLOWANCE OF DEDUCTION.—No deduction shall be

allowed for that portion of the qualified startup costs paid

115 STAT. 110 PUBLIC LAW 107–16—JUNE 7, 2001

or incurred for the taxable year which is equal to the credit

determined under subsection (a).

‘‘(3) ELECTION NOT TO CLAIM CREDIT.—This section shall

not apply to a taxpayer for any taxable year if such taxpayer

elects to have this section not apply for such taxable year.’’.

(b) CREDIT ALLOWED AS PART OF GENERAL BUSINESS CREDIT.—

Section 38(b) (defining current year business credit) is amended

by striking ‘‘plus’’ at the end of paragraph (12), by striking the

period at the end of paragraph (13) and inserting ‘‘, plus’’, and

by adding at the end the following new paragraph:

‘‘(14) in the case of an eligible employer (as defined in

section 45E(c)), the small employer pension plan startup cost

credit determined under section 45E(a).’’.

(c) CONFORMING AMENDMENTS.—

(1) Section 39(d) is amended by adding at the end the

following new paragraph:

‘‘(10) NO CARRYBACK OF SMALL EMPLOYER PENSION PLAN

STARTUP COST CREDIT BEFORE JANUARY 1, 2002.—No portion

of the unused business credit for any taxable year which is

attributable to the small employer pension plan startup cost

credit determined under section 45E may be carried back to

a taxable year beginning before January 1, 2002.’’.

(2) Subsection (c) of section 196 is amended by striking

‘‘and’’ at the end of paragraph (8), by striking the period at

the end of paragraph (9) and inserting ‘‘, and’’, and by adding

at the end the following new paragraph:

‘‘(10) the small employer pension plan startup cost credit

determined under section 45E(a).’’.

(3) The table of sections for subpart D of part IV of subchapter A of chapter 1 is amended by adding at the end the

following new item:

‘‘Sec. 45E. Small employer pension plan startup costs.’’.

(d) EFFECTIVE DATE.—The amendments made by this section

shall apply to costs paid or incurred in taxable years beginning

after December 31, 2001, with respect to qualified employer plans

established after such date.

SEC. 620. ELIMINATION OF USER FEE FOR REQUESTS TO IRS

REGARDING PENSION PLANS.

(a) ELIMINATION OF CERTAIN USER FEES.—The Secretary of

the Treasury or the Secretary’s delegate shall not require payment

of user fees under the program established under section 10511

of the Revenue Act of 1987 for requests to the Internal Revenue

Service for determination letters with respect to the qualified status

of a pension benefit plan maintained solely by one or more eligible

employers or any trust which is part of the plan. The preceding

sentence shall not apply to any request—

(1) made after the later of—

(A) the fifth plan year the pension benefit plan is

in existence; or

(B) the end of any remedial amendment period with

respect to the plan beginning within the first 5 plan years;

or

(2) made by the sponsor of any prototype or similar plan

which the sponsor intends to market to participating employers.

26 USC 7801

note.

Applicability.

26 USC 38 note.

26 USC 38.

PUBLIC LAW 107–16—JUNE 7, 2001 115 STAT. 111

(b) PENSION BENEFIT PLAN.—For purposes of this section, the

term ‘‘pension benefit plan’’ means a pension, profit-sharing, stock

bonus, annuity, or employee stock ownership plan.

(c) ELIGIBLE EMPLOYER.—For purposes of this section, the term

‘‘eligible employer’’ means an eligible employer (as defined in section

408(p)(2)(C)(i)(I) of the Internal Revenue Code of 1986) which has

at least one employee who is not a highly compensated employee

(as defined in section 414(q)) and is participating in the plan.

The determination of whether an employer is an eligible employer

under this section shall be made as of the date of the request

described in subsection (a).

(d) DETERMINATION OF AVERAGE FEES CHARGED.—For purposes

of any determination of average fees charged, any request to which

subsection (a) applies shall not be taken into account.

(e) EFFECTIVE DATE.—The provisions of this section shall apply

with respect to requests made after December 31, 2001.

SEC. 621. TREATMENT OF NONRESIDENT ALIENS ENGAGED IN INTERNATIONAL TRANSPORTATION SERVICES.

(a) EXCLUSION FROM INCOME SOURCING RULES.—The second

sentence of section 861(a)(3) (relating to gross income from sources

within the United States) is amended by striking ‘‘except for purposes of sections 79 and 105 and subchapter D,’’.

(b) EFFECTIVE DATE.—The amendment made by subsection (a)

shall apply to remuneration for services performed in plan years

beginning after December 31, 2001.

Subtitle C—Enhancing Fairness for Women

SEC. 631. CATCH-UP CONTRIBUTIONS FOR INDIVIDUALS AGE 50 OR

OVER.

(a) IN GENERAL.—Section 414 (relating to definitions and special rules) is amended by adding at the end the following new

subsection:

‘‘(v) CATCH-UP CONTRIBUTIONS FOR INDIVIDUALS AGE 50 OR

OVER.—

‘‘(1) IN GENERAL.—An applicable employer plan shall not

be treated as failing to meet any requirement of this title

solely because the plan permits an eligible participant to make

additional elective deferrals in any plan year. ‘‘(2) LIMITATION ON AMOUNT OF ADDITIONAL DEFERRALS.— ‘‘(A) IN GENERAL.—A plan shall not permit additional

elective deferrals under paragraph (1) for any year in an

amount greater than the lesser of— ‘‘(i) the applicable dollar amount, or

‘‘(ii) the excess (if any) of—

‘‘(I) the participant’s compensation (as defined

in section 415(c)(3)) for the year, over

‘‘(II) any other elective deferrals of the participant for such year which are made without regard

to this subsection.

‘‘(B) APPLICABLE DOLLAR AMOUNT.—For purposes of

this paragraph—

‘‘(i) In the case of an applicable employer plan

other than a plan described in section 401(k)(11) or

Applicability.

26 USC 861 note.

26 USC 861.

Applicability.

115 STAT. 112 PUBLIC LAW 107–16—JUNE 7, 2001

408(p), the applicable dollar amount shall be determined in accordance with the following table:

‘‘For taxable years The

applicable

beginning in: dollar amount

is:

2002 ................................................................................................... $1,000

2003 ................................................................................................... $2,000

2004 ................................................................................................... $3,000

2005 ................................................................................................... $4,000

2006 and thereafter .......................................................................... $5,000.

‘‘(ii) In the case of an applicable employer plan

described in section 401(k)(11) or 408(p), the applicable

dollar amount shall be determined in accordance with

the following table:

‘‘For taxable years The

applicable

beginning in: dollar amount

is:

2002 ................................................................................................... $500

2003 ................................................................................................... $1,000

2004 ................................................................................................... $1,500

2005 ................................................................................................... $2,000

2006 and thereafter .......................................................................... $2,500.

‘‘(C) COST-OF-LIVING ADJUSTMENT.—In the case of a

year beginning after December 31, 2006, the Secretary

shall adjust annually the $5,000 amount in subparagraph

(B)(i) and the $2,500 amount in subparagraph (B)(ii) for

increases in the cost-of-living at the same time and in

the same manner as adjustments under section 415(d);

except that the base period taken into account shall be

the calendar quarter beginning July 1, 2005, and any

increase under this subparagraph which is not a multiple

of $500 shall be rounded to the next lower multiple of

$500.’’.

‘‘(3) TREATMENT OF CONTRIBUTIONS.—In the case of any

contribution to a plan under paragraph (1)—

‘‘(A) such contribution shall not, with respect to the

year in which the contribution is made—

‘‘(i) be subject to any otherwise applicable limitation contained in section 402(g), 402(h), 403(b), 404(a),

404(h), 408(k), 408(p), 415, or 457, or

‘‘(ii) be taken into account in applying such limitations to other contributions or benefits under such

plan or any other such plan, and

‘‘(B) except as provided in paragraph (4), such plan

shall not be treated as failing to meet the requirements

of section 401(a)(4), 401(a)(26), 401(k)(3), 401(k)(11),

401(k)(12), 403(b)(12), 408(k), 408(p), 408B, 410(b), or 416

by reason of the making of (or the right to make) such

contribution.

‘‘(4) APPLICATION OF NONDISCRIMINATION RULES.—

‘‘(A) IN GENERAL.—An applicable employer plan shall

be treated as failing to meet the nondiscrimination requirements under section 401(a)(4) with respect to benefits,

rights, and features unless the plan allows all eligible

participants to make the same election with respect to

the additional elective deferrals under this subsection.

PUBLIC LAW 107–16—JUNE 7, 2001 115 STAT. 113

‘‘(B) AGGREGATION.—For purposes of subparagraph (A),

all plans maintained by employers who are treated as

a single employer under subsection (b), (c), (m), or (o)

of section 414 shall be treated as 1 plan.

‘‘(5) ELIGIBLE PARTICIPANT.—For purposes of this subsection, the term ‘eligible participant’ means, with respect to

any plan year, a participant in a plan— ‘‘(A) who has attained the age of 50 before the close

of the plan year, and ‘‘(B) with respect to whom no other elective deferrals

may (without regard to this subsection) be made to the

plan for the plan year by reason of the application of

any limitation or other restriction described in paragraph

(3) or comparable limitation or restriction contained in

the terms of the plan.

‘‘(6) OTHER DEFINITIONS AND RULES.—For purposes of this

subsection—

‘‘(A) APPLICABLE EMPLOYER PLAN.—The term

‘applicable employer plan’ means—

‘‘(i) an employees’ trust described in section 401(a)

which is exempt from tax under section 501(a),

‘‘(ii) a plan under which amounts are contributed

by an individual’s employer for an annuity contract

described in section 403(b),

‘‘(iii) an eligible deferred compensation plan under

section 457 of an eligible employer described in section

457(e)(1)(A), and

‘‘(iv) an arrangement meeting the requirements

of section 408 (k) or (p).

‘‘(B) ELECTIVE DEFERRAL.—The term ‘elective deferral’

has the meaning given such term by subsection (u)(2)(C).

‘‘(C) EXCEPTION FOR SECTION 457 PLANS.—This subsection shall not apply to an applicable employer plan

described in subparagraph (A)(iii) for any year to which

section 457(b)(3) applies.’’. (b) EFFECTIVE DATE.—The amendment made by this section

shall apply to contributions in taxable years beginning after

December 31, 2001.

SEC. 632. EQUITABLE TREATMENT FOR CONTRIBUTIONS OF

EMPLOYEES TO DEFINED CONTRIBUTION PLANS.

(a) EQUITABLE TREATMENT.—

(1) IN GENERAL.—Subparagraph (B) of section 415(c)(1)

(relating to limitation for defined contribution plans) is

amended by striking ‘‘25 percent’’ and inserting ‘‘100 percent’’.

(2) APPLICATION TO SECTION 403(b).—Section 403(b) is

amended—

(A) by striking ‘‘the exclusion allowance for such taxable year’’ in paragraph (1) and inserting ‘‘the applicable

limit under section 415’’,

(B) by striking paragraph (2), and

(C) by inserting ‘‘or any amount received by a former

employee after the fifth taxable year following the taxable

year in which such employee was terminated’’ before the

period at the end of the second sentence of paragraph

(3).

(3) CONFORMING AMENDMENTS.—

26 USC 415.

Effective date.

26 USC 414 note.

115 STAT. 114 PUBLIC LAW 107–16—JUNE 7, 2001

(A) Subsection (f ) of section 72 is amended by striking ‘‘section 403(b)(2)(D)(iii))’’ and inserting ‘‘section

403(b)(2)(D)(iii), as in effect before the enactment of the

Economic Growth and Tax Relief Reconciliation Act of

2001’’.

(B) Section 404(a)(10)(B) is amended by striking ‘‘,

the exclusion allowance under section 403(b)(2),’’.

(C) Section 415(a)(2) is amended by striking ‘‘, and

the amount of the contribution for such portion shall reduce

the exclusion allowance as provided in section 403(b)(2)’’.

(D) Section 415(c)(3) is amended by adding at the end

the following new subparagraph:

‘‘(E) ANNUITY CONTRACTS.—In the case of an annuity

contract described in section 403(b), the term ‘participant’s

compensation’ means the participant’s includible compensation determined under section 403(b)(3).’’. (E) Section 415(c) is amended by striking paragraph

(4).

(F) Section 415(c)(7) is amended to read as follows: ‘‘(7) CERTAIN CONTRIBUTIONS BY CHURCH PLANS NOT

TREATED AS EXCEEDING LIMIT.—

‘‘(A) IN GENERAL.—Notwithstanding any other provision of this subsection, at the election of a participant

who is an employee of a church or a convention or association of churches, including an organization described in

section 414(e)(3)(B)(ii), contributions and other additions

for an annuity contract or retirement income account

described in section 403(b) with respect to such participant,

when expressed as an annual addition to such participant’s

account, shall be treated as not exceeding the limitation

of paragraph (1) if such annual addition is not in excess

of $10,000.

‘‘(B) $40,000 AGGREGATE LIMITATION.—The total

amount of additions with respect to any participant which

may be taken into account for purposes of this subparagraph for all years may not exceed $40,000.

‘‘(C) ANNUAL ADDITION.—For purposes of this paragraph, the term ‘annual addition’ has the meaning given

such term by paragraph (2).’’.

(G) Subparagraph (B) of section 402(g)(7) (as redesignated by section 611(c)(3)) is amended by inserting before

the period at the end the following: ‘‘(as in effect before

the enactment of the Economic Growth and Tax Relief

Reconciliation Act of 2001’’.

(H) Section 664(g) is amended—

(i) in paragraph (3)(E) by striking ‘‘limitations

under section 415(c)’’ and inserting ‘‘applicable limitation under paragraph (7)’’, and

(ii) by adding at the end the following new paragraph:

‘‘(7) APPLICABLE LIMITATION.— ‘‘(A) IN GENERAL.—For purposes of paragraph (3)(E),

the applicable limitation under this paragraph with respect

to a participant is an amount equal to the lesser of—

‘‘(i) $30,000, or

‘‘(ii) 25 percent of the participant’s compensation

(as defined in section 415(c)(3)).

26 USC 72.

PUBLIC LAW 107–16—JUNE 7, 2001 115 STAT. 115

‘‘(B) COST-OF-LIVING ADJUSTMENT.—The Secretary shall

adjust annually the $30,000 amount under subparagraph

(A)(i) at the same time and in the same manner as under

section 415(d), except that the base period shall be the

calendar quarter beginning October 1, 1993, and any

increase under this subparagraph which is not a multiple

of $5,000 shall be rounded to the next lowest multiple

of $5,000.’’.

(4) EFFECTIVE DATE.—The amendments made by this subsection shall apply to years beginning after December 31, 2001.

(b) SPECIAL RULES FOR SECTIONS 403(b) AND 408.—

(1) IN GENERAL.—Subsection (k) of section 415 is amended

by adding at the end the following new paragraph:

‘‘(4) SPECIAL RULES FOR SECTIONS 403(b) AND 408.—For purposes of this section, any annuity contract described in section

403(b) for the benefit of a participant shall be treated as a

defined contribution plan maintained by each employer with

respect to which the participant has the control required under

subsection (b) or (c) of section 414 (as modified by subsection

(h)). For purposes of this section, any contribution by an

employer to a simplified employee pension plan for an individual for a taxable year shall be treated as an employer

contribution to a defined contribution plan for such individual

for such year.’’.

(2) EFFECTIVE DATE.—

(A) IN GENERAL.—The amendment made by paragraph

(1) shall apply to limitation years beginning after December

31, 1999.

(B) EXCLUSION ALLOWANCE.—Effective for limitation

years beginning in 2000, in the case of any annuity contract

described in section 403(b) of the Internal Revenue Code

of 1986, the amount of the contribution disqualified by

reason of section 415(g) of such Code shall reduce the

exclusion allowance as provided in section 403(b)(2) of such

Code.

(3) ELECTION TO MODIFY SECTION 403(b) EXCLUSION ALLOWANCE TO CONFORM TO SECTION 415 MODIFICATION.—In the case

of taxable years beginning after December 31, 1999, and before

January 1, 2002, a plan may disregard the requirement in

the regulations regarding the exclusion allowance under section

403(b)(2) of the Internal Revenue Code of 1986 that contributions to a defined benefit pension plan be treated as previously

excluded amounts for purposes of the exclusion allowance.

(c) DEFERRED COMPENSATION PLANS OF STATE AND LOCAL

GOVERNMENTS AND TAX-EXEMPT ORGANIZATIONS.—

(1) IN GENERAL.—Subparagraph (B) of section 457(b)(2)

(relating to salary limitation on eligible deferred compensation

plans) is amended by striking ‘‘331⁄3 percent’’ and inserting

‘‘100 percent’’.

(2) EFFECTIVE DATE.—The amendment made by this subsection shall apply to years beginning after December 31, 2001.

SEC. 633. FASTER VESTING OF CERTAIN EMPLOYER MATCHING CONTRIBUTIONS.

(a) IN GENERAL.—Section 411(a) (relating to minimum vesting

standards) is amended—

Applicability.

26 USC 457 note.

26 USC 403 note.

Applicability.

26 USC 415 note.

26 USC 415.

Applicability.

26 USC 72 note.

115 STAT. 116 PUBLIC LAW 107–16—JUNE 7, 2001

(1) in paragraph (2), by striking ‘‘A plan’’ and inserting

‘‘Except as provided in paragraph (12), a plan’’; and

(2) by adding at the end the following:

‘‘(12) FASTER VESTING FOR MATCHING CONTRIBUTIONS.—In

the case of matching contributions (as defined in section

401(m)(4)(A)), paragraph (2) shall be applied—

‘‘(A) by substituting ‘3 years’ for ‘5 years’ in subparagraph (A), and

‘‘(B) by substituting the following table for the table

contained in subparagraph (B):

The nonforfeitable

‘‘Years of service: percentage is:

2 ................................................................................................... 20

3 ................................................................................................... 40

4 ................................................................................................... 60

5 ................................................................................................... 80

6 ................................................................................................... 100.’’.

(b) AMENDMENT OF ERISA.—Section 203(a) of the Employee

Retirement Income Security Act of 1974 (29 U.S.C. 1053(a)) is

amended—

(1) in paragraph (2), by striking ‘‘A plan’’ and inserting

‘‘Except as provided in paragraph (4), a plan’’, and

(2) by adding at the end the following:

‘‘(4) In the case of matching contributions (as defined in

section 401(m)(4)(A) of the Internal Revenue Code of 1986),

paragraph (2) shall be applied—

‘‘(A) by substituting ‘3 years’ for ‘5 years’ in subparagraph (A), and

‘‘(B) by substituting the following table for the table

contained in subparagraph (B):

The nonforfeitable

‘‘Years of service: percentage is:

2 ................................................................................................... 20

3 ................................................................................................... 40

4 ................................................................................................... 60

5 ................................................................................................... 80

6 ................................................................................................... 100.’’.

(c) EFFECTIVE DATES.—

(1) IN GENERAL.—Except as provided in paragraph (2), the

amendments made by this section shall apply to contributions

for plan years beginning after December 31, 2001.

(2) COLLECTIVE BARGAINING AGREEMENTS.—In the case of

a plan maintained pursuant to one or more collective bargaining

agreements between employee representatives and one or more

employers ratified by the date of the enactment of this Act,

the amendments made by this section shall not apply to contributions on behalf of employees covered by any such agreement for plan years beginning before the earlier of—

(A) the later of—

(i) the date on which the last of such collective

bargaining agreements terminates (determined without

regard to any extension thereof on or after such date

of the enactment); or

(ii) January 1, 2002; or

(B) January 1, 2006.

(3) SERVICE REQUIRED.—With respect to any plan, the

amendments made by this section shall not apply to any

employee before the date that such employee has 1 hour of

Applicability.

26 USC 411 note.

PUBLIC LAW 107–16—JUNE 7, 2001 115 STAT. 117

service under such plan in any plan year to which the amendments made by this section apply.

SEC. 634. MODIFICATION TO MINIMUM DISTRIBUTION RULES.

The Secretary of the Treasury shall modify the life expectancy

tables under the regulations relating to minimum distribution

requirements under sections 401(a)(9), 408(a)(6) and (b)(3),

403(b)(10), and 457(d)(2) of the Internal Revenue Code to reflect

current life expectancy.

SEC. 635. CLARIFICATION OF TAX TREATMENT OF DIVISION OF SECTION 457 PLAN BENEFITS UPON DIVORCE.

(a) IN GENERAL.—Section 414(p)(11) (relating to application

of rules to governmental and church plans) is amended— (1) by inserting ‘‘or an eligible deferred compensation plan

(within the meaning of section 457(b))’’ after ‘‘subsection (e))’’;

and

(2) in the heading, by striking ‘‘GOVERNMENTAL AND

CHURCH PLANS’’ and inserting ‘‘CERTAIN OTHER PLANS’’. (b) WAIVER OF CERTAIN DISTRIBUTION REQUIREMENTS.—Paragraph (10) of section 414(p) is amended by striking ‘‘and section

409(d)’’ and inserting ‘‘section 409(d), and section 457(d)’’.

(c) TAX TREATMENT OF PAYMENTS FROM A SECTION 457 PLAN.—

Subsection (p) of section 414 is amended by redesignating paragraph

(12) as paragraph (13) and inserting after paragraph (11) the following new paragraph:

‘‘(12) TAX TREATMENT OF PAYMENTS FROM A SECTION 457

PLAN.—If a distribution or payment from an eligible deferred

compensation plan described in section 457(b) is made pursuant

to a qualified domestic relations order, rules similar to the

rules of section 402(e)(1)(A) shall apply to such distribution

or payment.’’.

(d) EFFECTIVE DATE.—The amendment made by this section

shall apply to transfers, distributions, and payments made after

December 31, 2001.

SEC. 636. PROVISIONS RELATING TO HARDSHIP DISTRIBUTIONS.

(a) SAFE HARBOR RELIEF.—

(1) IN GENERAL.—The Secretary of the Treasury shall revise

the regulations relating to hardship distributions under section

401(k)(2)(B)(i)(IV) of the Internal Revenue Code of 1986 to

provide that the period an employee is prohibited from making

elective and employee contributions in order for a distribution

to be deemed necessary to satisfy financial need shall be equal

to 6 months.

(2) EFFECTIVE DATE.—The revised regulations under this

subsection shall apply to years beginning after December 31,

2001.

(b) HARDSHIP DISTRIBUTIONS NOT TREATED AS ELIGIBLE ROLLOVER DISTRIBUTIONS.—

(1) MODIFICATION OF DEFINITION OF ELIGIBLE ROLLOVER.—

Subparagraph (C) of section 402(c)(4) (relating to eligible rollover distribution) is amended to read as follows:

‘‘(C) any distribution which is made upon hardship

of the employee.’’.

(2) EFFECTIVE DATE.—The amendment made by this subsection shall apply to distributions made after December 31,

2001.

Applicability.

26 USC 402 note.

Applicability.

Applicability.

26 USC 414 note.

26 USC 414.

115 STAT. 118 PUBLIC LAW 107–16—JUNE 7, 2001

SEC. 637. WAIVER OF TAX ON NONDEDUCTIBLE CONTRIBUTIONS FOR

DOMESTIC OR SIMILAR WORKERS.

(a) IN GENERAL.—Section 4972(c)(6) (relating to exceptions to

nondeductible contributions), as amended by section 616, is

amended by striking ‘‘and’’ at the end of subparagraph (A), by

striking the period and inserting ‘‘, or’’ at the end of subparagraph

(B), and by inserting after subparagraph (B) the following new

subparagraph:

‘‘(C) so much of the contributions to a simple retirement

account (within the meaning of section 408(p)) or a simple

plan (within the meaning of section 401(k)(11)) which are

not deductible when contributed solely because such contributions are not made in connection with a trade or

business of the employer.’’.

(b) EXCLUSION OF CERTAIN CONTRIBUTIONS.—Section 4972(c)(6),

as amended by subsection (a), is amended by adding at the end

the following new sentence: ‘‘Subparagraph (C) shall not apply

to contributions made on behalf of the employer or a member

of the employer’s family (as defined in section 447(e)(1)).’’.

(c) NO INFERENCE.—Nothing in the amendments made by this

section shall be construed to infer the proper treatment of nondeductible contributions under the laws in effect before such amendments.

(d) EFFECTIVE DATE.—The amendments made by this section

shall apply to taxable years beginning after December 31, 2001.

Subtitle D—Increasing Portability for

Participants

SEC. 641. ROLLOVERS ALLOWED AMONG VARIOUS TYPES OF PLANS.

(a) ROLLOVERS FROM AND TO SECTION 457 PLANS.—

(1) ROLLOVERS FROM SECTION 457 PLANS.—

(A) IN GENERAL.—Section 457(e) (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 established and maintained by an

employer described in subsection (e)(1)(A), if—

‘‘(i) any portion of the balance to the credit of

an employee in such plan is paid to such employee

in an eligible rollover distribution (within the meaning

of section 402(c)(4)),

‘‘(ii) the employee transfers any portion of the property such employee receives in such distribution to

an eligible retirement plan described in section

402(c)(8)(B), 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.—The rules of

paragraphs (2) through (7) and (9) of section 402(c) and

Applicability.

26 USC 4972

note.

26 USC 4972

note.

26 USC 4972.

PUBLIC LAW 107–16—JUNE 7, 2001 115 STAT. 119

section 402(f ) shall apply for purposes of subparagraph

(A). ‘‘(C) REPORTING.—Rollovers under this paragraph shall

be reported to the Secretary in the same manner as rollovers from qualified retirement plans (as defined in section

4974(c)).’’. (B) DEFERRAL LIMIT DETERMINED WITHOUT REGARD TO

ROLLOVER AMOUNTS.—Section 457(b)(2) (defining eligible

deferred compensation plan) is amended by inserting

‘‘(other than rollover amounts)’’ after ‘‘taxable year’’. (C) DIRECT ROLLOVER.—Paragraph (1) of section 457(d)

is amended by striking ‘‘and’’ at the end of subparagraph

(A), by striking the period at the end of subparagraph

(B) and inserting ‘‘, and’’, and by inserting after subparagraph (B) the following: ‘‘(C) in the case of a plan maintained by an employer

described in subsection (e)(1)(A), the plan meets requirements similar to the requirements of section 401(a)(31).

Any amount transferred in a direct trustee-to-trustee transfer

in accordance with section 401(a)(31) shall not be includible

in gross income for the taxable year of transfer.’’. (D) WITHHOLDING.—

(i) Paragraph (12) of section 3401(a) is amended

by adding at the end the following:

‘‘(E) under or to an eligible deferred compensation plan

which, at the time of such payment, is a plan described

in section 457(b) which is maintained by an eligible

employer described in section 457(e)(1)(A), or’’.

(ii) Paragraph (3) of section 3405(c) is amended

to read as follows:

‘‘(3) ELIGIBLE ROLLOVER DISTRIBUTION.—For purposes of

this subsection, the term ‘eligible rollover distribution’ has the

meaning given such term by section 402(f )(2)(A).’’.

(iii) LIABILITY FOR WITHHOLDING.—Subparagraph

(B) of section 3405(d)(2) is amended by striking ‘‘or’’ at the end of clause (ii), by striking the period at

the end of clause (iii) and inserting ‘‘, or’’, and by

adding at the end the following:

‘‘(iv) section 457(b) and which is maintained by

an eligible employer described in section 457(e)(1)(A).’’.

(2) ROLLOVERS TO SECTION 457 PLANS.—

(A) IN GENERAL.—Section 402(c)(8)(B) (defining eligible

retirement plan) is amended by striking ‘‘and’’ at the end

of clause (iii), by striking the period at the end of clause

(iv) and inserting ‘‘, and’’, and by inserting after clause

(iv) the following new clause:

‘‘(v) an eligible deferred compensation plan

described in section 457(b) which is maintained by

an eligible employer described in section 457(e)(1)(A).’’.

(B) SEPARATE ACCOUNTING.—Section 402(c) is amended

by adding at the end the following new paragraph:

‘‘(10) SEPARATE ACCOUNTING.—Unless a plan described in

clause (v) of paragraph (8)(B) agrees to separately account

for amounts rolled into such plan from eligible retirement plans

not described in such clause, the plan described in such clause

may not accept transfers or rollovers from such retirement

plans.’’.

26 USC 457.

115 STAT. 120 PUBLIC LAW 107–16—JUNE 7, 2001

(C) 10 PERCENT ADDITIONAL TAX.—Subsection (t) of section 72 (relating to 10-percent additional tax on early distributions from qualified retirement plans) is amended by

adding at the end the following new paragraph:

‘‘(9) SPECIAL RULE FOR ROLLOVERS TO SECTION 457 PLANS.—

For purposes of this subsection, a distribution from an eligible

deferred compensation plan (as defined in section 457(b)) of

an eligible employer described in section 457(e)(1)(A) shall be

treated as a distribution from a qualified retirement plan

described in 4974(c)(1) to the extent that such distribution

is attributable to an amount transferred to an eligible deferred

compensation plan from a qualified retirement plan (as defined

in section 4974(c)).’’.

(b) ALLOWANCE OF ROLLOVERS FROM AND TO 403(b) PLANS.—

(1) ROLLOVERS FROM SECTION 403(b) PLANS.—Section

403(b)(8)(A)(ii) (relating to rollover amounts) is amended by

striking ‘‘such distribution’’ and all that follows and inserting

‘‘such distribution to an eligible retirement plan described in

section 402(c)(8)(B), and’’.

(2) ROLLOVERS TO SECTION 403(b) PLANS.—Section

402(c)(8)(B) (defining eligible retirement plan), as amended by

subsection (a), is amended by striking ‘‘and’’ at the end of

clause (iv), by striking the period at the end of clause (v)

and inserting ‘‘, and’’, and by inserting after clause (v) the

following new clause:

‘‘(vi) an annuity contract described in section

403(b).’’.

(c) EXPANDED EXPLANATION TO RECIPIENTS OF ROLLOVER DISTRIBUTIONS.—Paragraph (1) of section 402(f ) (relating to written

explanation to recipients of distributions eligible for rollover treatment) 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) of the provisions under which distributions from

the eligible retirement plan receiving the distribution may

be subject to restrictions and tax consequences which are

different from those applicable to distributions from the

plan making such distribution.’’.

(d) SPOUSAL ROLLOVERS.—Section 402(c)(9) (relating to rollover

where spouse receives distribution after death of employee) is

amended by striking ‘‘; except that’’ and all that follows up to

the end period.

(e) CONFORMING AMENDMENTS.—

(1) Section 72(o)(4) is amended by striking ‘‘and 408(d)(3)’’

and inserting ‘‘403(b)(8), 408(d)(3), and 457(e)(16)’’.

(2) Section 219(d)(2) is amended by striking ‘‘or 408(d)(3)’’

and inserting ‘‘408(d)(3), or 457(e)(16)’’.

(3) Section 401(a)(31)(B) is amended by striking ‘‘and

403(a)(4)’’ and inserting ‘‘, 403(a)(4), 403(b)(8), and 457(e)(16)’’.

(4) Subparagraph (A) of section 402(f )(2) is amended by

striking ‘‘or paragraph (4) of section 403(a)’’ and inserting ‘‘,

paragraph (4) of section 403(a), subparagraph (A) of section

403(b)(8), or subparagraph (A) of section 457(e)(16)’’.

(5) Paragraph (1) of section 402(f ) is amended by striking

‘‘from an eligible retirement plan’’.

26 USC 403.

PUBLIC LAW 107–16—JUNE 7, 2001 115 STAT. 121

(6) Subparagraphs (A) and (B) of section 402(f )(1) are

amended by striking ‘‘another eligible retirement plan’’ and

inserting ‘‘an eligible retirement plan’’. (7) Subparagraph (B) of section 403(b)(8) is amended to

read as follows:

‘‘(B) CERTAIN RULES MADE APPLICABLE.—The rules of

paragraphs (2) through (7) and (9) of section 402(c) and

section 402(f ) shall apply for purposes of subparagraph

(A), except that section 402(f ) shall be applied to the payor

in lieu of the plan administrator.’’. (8) Section 408(a)(1) is amended by striking ‘‘or 403(b)(8),’’ and inserting ‘‘403(b)(8), or 457(e)(16)’’. (9) Subparagraphs (A) and (B) of section 415(b)(2) are each

amended by striking ‘‘and 408(d)(3)’’ and inserting ‘‘403(b)(8),

408(d)(3), and 457(e)(16)’’. (10) Section 415(c)(2) is amended by striking ‘‘and 408(d)(3)’’ and inserting ‘‘408(d)(3), and 457(e)(16)’’. (11) Section 4973(b)(1)(A) is amended by striking ‘‘or

408(d)(3)’’ and inserting ‘‘408(d)(3), or 457(e)(16)’’. (f ) EFFECTIVE DATE; SPECIAL RULE.—

(1) EFFECTIVE DATE.—The amendments made by this section shall apply to distributions after December 31, 2001.

(2) REASONABLE NOTICE.—No penalty shall be imposed on

a plan for the failure to provide the information required by

the amendment made by subsection (c) with respect to any

distribution made before the date that is 90 days after the

date on which the Secretary of the Treasury issues a safe

harbor rollover notice after the date of the enactment of this

Act, if the administrator of such plan makes a reasonable

attempt to comply with such requirement.

(3) SPECIAL RULE.—Notwithstanding any other provision

of law, subsections (h)(3) and (h)(5) of section 1122 of the

Tax Reform Act of 1986 shall not apply to any distribution

from an eligible retirement plan (as defined in clause (iii)

or (iv) of section 402(c)(8)(B) of the Internal Revenue Code

of 1986) on behalf of an individual if there was a rollover

to such plan on behalf of such individual which is permitted

solely by reason of any amendment made by this section.

SEC. 642. ROLLOVERS OF IRAS INTO WORKPLACE RETIREMENT PLANS.

(a) IN GENERAL.—Subparagraph (A) of section 408(d)(3)

(relating to rollover amounts) is amended by adding ‘‘or’’ at the

end of clause (i), by striking clauses (ii) and (iii), and by adding

at the end the following:

‘‘(ii) the entire amount received (including money

and any other property) is paid into an eligible retirement plan for the benefit of such individual not later

than the 60th day after the date on which the payment

or distribution is received, except that the maximum

amount which may be paid into such plan may not

exceed the portion of the amount received which is

includible in gross income (determined without regard

to this paragraph).

For purposes of clause (ii), the term ‘eligible retirement

plan’ means an eligible retirement plan described in clause

(iii), (iv), (v), or (vi) of section 402(c)(8)(B).’’.

(b) CONFORMING AMENDMENTS.—

Deadline.

Applicability.

26 USC 402 note.

26 USC 402.

115 STAT. 122 PUBLIC LAW 107–16—JUNE 7, 2001

(1) Paragraph (1) of section 403(b) is amended by striking ‘‘section 408(d)(3)(A)(iii)’’ and inserting ‘‘section 408(d)(3)(A)(ii)’’. (2) Clause (i) of section 408(d)(3)(D) is amended by striking ‘‘(i), (ii), or (iii)’’ and inserting ‘‘(i) or (ii)’’.

(3) Subparagraph (G) of section 408(d)(3) is amended to

read as follows:

‘‘(G) SIMPLE RETIREMENT ACCOUNTS.—In the case of

any payment or distribution out of a simple retirement

account (as defined in subsection (p)) to which section

72(t)(6) applies, this paragraph shall not apply unless such

payment or distribution is paid into another simple retirement account.’’. (c) EFFECTIVE DATE; SPECIAL RULE.— (1) EFFECTIVE DATE.—The amendments made by this section shall apply to distributions after December 31, 2001.

(2) SPECIAL RULE.—Notwithstanding any other provision

of law, subsections (h)(3) and (h)(5) of section 1122 of the

Tax Reform Act of 1986 shall not apply to any distribution

from an eligible retirement plan (as defined in clause (iii)

or (iv) of section 402(c)(8)(B) of the Internal Revenue Code

of 1986) on behalf of an individual if there was a rollover

to such plan on behalf of such individual which is permitted

solely by reason of the amendments made by this section.

SEC. 643. ROLLOVERS OF AFTER-TAX CONTRIBUTIONS.

(a) ROLLOVERS FROM EXEMPT TRUSTS.—Paragraph (2) of section

402(c) (relating to maximum amount which may be rolled over)

is amended by adding at the end the following: ‘‘The preceding

sentence shall not apply to such distribution to the extent—

‘‘(A) such portion is transferred in a direct trusteeto-trustee transfer to a qualified trust which is part of

a plan which is a defined contribution plan and which

agrees to separately account for amounts so transferred,

including separately accounting for the portion of such

distribution which is includible in gross income and the

portion of such distribution which is not so includible,

or

‘‘(B) such portion is transferred to an eligible retirement plan described in clause (i) or (ii) of paragraph

(8)(B).’’.

(b) OPTIONAL DIRECT TRANSFER OF ELIGIBLE ROLLOVER DISTRIBUTIONS.—Subparagraph (B) of section 401(a)(31) (relating to

limitation) is amended by adding at the end the following: ‘‘The

preceding sentence shall not apply to such distribution if the plan

to which such distribution is transferred—

‘‘(i) agrees to separately account for amounts so

transferred, including separately accounting for the

portion of such distribution which is includible in gross

income and the portion of such distribution which is

not so includible, or

‘‘(ii) is an eligible retirement plan described in

clause (i) or (ii) of section 402(c)(8)(B).’’.

(c) RULES FOR APPLYING SECTION 72 TO IRAS.—Paragraph (3)

of section 408(d) (relating to special rules for applying section

72) is amended by inserting at the end the following:

‘‘(H) APPLICATION OF SECTION 72.—

‘‘(i) IN GENERAL.—If—

Applicability.

26 USC 408 note.

26 USC 403.

PUBLIC LAW 107–16—JUNE 7, 2001 115 STAT. 123

‘‘(I) a distribution is made from an individual

retirement plan, and ‘‘(II) a rollover contribution is made to an

eligible retirement plan described in section

402(c)(8)(B)(iii), (iv), (v), or (vi) with respect to

all or part of such distribution,

then, notwithstanding paragraph (2), the rules of

clause (ii) shall apply for purposes of applying section

72. ‘‘(ii) APPLICABLE RULES.—In the case of a distribution described in clause (i)— ‘‘(I) section 72 shall be applied separately to

such distribution, ‘‘(II) notwithstanding the pro rata allocation

of income on, and investment in, the contract to

distributions under section 72, the portion of such

distribution rolled over to an eligible retirement

plan described in clause (i) shall be treated as

from income on the contract (to the extent of the

aggregate income on the contract from all individual retirement plans of the distributee), and ‘‘(III) appropriate adjustments shall be made

in applying section 72 to other distributions in

such taxable year and subsequent taxable years.’’. (d) EFFECTIVE DATE.—The amendments made by this section

shall apply to distributions made after December 31, 2001.

SEC. 644. HARDSHIP EXCEPTION TO 60-DAY RULE.

(a) EXEMPT TRUSTS.—Paragraph (3) of section 402(c) (relating

to transfer must be made within 60 days of receipt) is amended

to read as follows: ‘‘(3) TRANSFER MUST BE MADE WITHIN 60 DAYS OF RECEIPT.— ‘‘(A) IN GENERAL.—Except as provided in subparagraph

(B), paragraph (1) shall not apply to any transfer of a

distribution made after the 60th day following the day

on which the distributee received the property distributed. ‘‘(B) HARDSHIP EXCEPTION.—The Secretary may waive

the 60-day requirement under subparagraph (A) where the

failure to waive such requirement would be against equity

or good conscience, including casualty, disaster, or other

events beyond the reasonable control of the individual subject to such requirement.’’. (b) IRAS.—Paragraph (3) of section 408(d) (relating to rollover

contributions), as amended by section 643, is amended by adding

after subparagraph (H) the following new subparagraph: ‘‘(I) WAIVER OF 60-DAY REQUIREMENT.—The Secretary

may waive the 60-day requirement under subparagraphs

(A) and (D) where the failure to waive such requirement

would be against equity or good conscience, including casualty, disaster, or other events beyond the reasonable control of the individual subject to such requirement.’’.

(c) EFFECTIVE DATE.—The amendments made by this section

shall apply to distributions after December 31, 2001.

SEC. 645. TREATMENT OF FORMS OF DISTRIBUTION.

(a) PLAN TRANSFERS.—

(1) AMENDMENT OF INTERNAL REVENUE CODE.—Paragraph

(6) of section 411(d) (relating to accrued benefit not to be

26 USC 402 note.

26 USC 408.

Applicability.

26 USC 401 note.

115 STAT. 124 PUBLIC LAW 107–16—JUNE 7, 2001

decreased by amendment) is amended by adding at the end

the following:

‘‘(D) PLAN TRANSFERS.—

‘‘(i) IN GENERAL.—A defined contribution plan (in

this subparagraph referred to as the ‘transferee plan’)

shall not be treated as failing to meet the requirements

of this subsection merely because the transferee plan

does not provide some or all of the forms of distribution

previously available under another defined contribution plan (in this subparagraph referred to as the

‘transferor plan’) to the extent that—

‘‘(I) the forms of distribution previously available under the transferor plan applied to the

account of a participant or beneficiary under the

transferor plan that was transferred from the

transferor plan to the transferee plan pursuant

to a direct transfer rather than pursuant to a

distribution from the transferor plan,

‘‘(II) the terms of both the transferor plan

and the transferee plan authorize the transfer

described in subclause (I),

‘‘(III) the transfer described in subclause (I)

was made pursuant to a voluntary election by

the participant or beneficiary whose account was

transferred to the transferee plan,

‘‘(IV) the election described in subclause (III)

was made after the participant or beneficiary

received a notice describing the consequences of

making the election, and

‘‘(V) the transferee plan allows the participant

or beneficiary described in subclause (III) to receive

any distribution to which the participant or beneficiary is entitled under the transferee plan in

the form of a single sum distribution.

‘‘(ii) SPECIAL RULE FOR MERGERS, ETC.—Clause (i)

shall apply to plan mergers and other transactions

having the effect of a direct transfer, including consolidations of benefits attributable to different employers

within a multiple employer plan.

‘‘(E) ELIMINATION OF FORM OF DISTRIBUTION.—Except

to the extent provided in regulations, a defined contribution

plan shall not be treated as failing to meet the requirements of this section merely because of the elimination

of a form of distribution previously available thereunder.

This subparagraph shall not apply to the elimination of

a form of distribution with respect to any participant

unless—

‘‘(i) a single sum payment is available to such

participant at the same time or times as the form

of distribution being eliminated, and

‘‘(ii) such single sum payment is based on the

same or greater portion of the participant’s account

as the form of distribution being eliminated.’’.

(2) AMENDMENT OF ERISA.—Section 204(g) of the Employee

Retirement Income Security Act of 1974 (29 U.S.C. 1054(g))

is amended by adding at the end the following:

PUBLIC LAW 107–16—JUNE 7, 2001 115 STAT. 125

‘‘(4)(A) A defined contribution plan (in this subparagraph

referred to as the ‘transferee plan’) shall not be treated as failing

to meet the requirements of this subsection merely because the

transferee plan does not provide some or all of the forms of distribution previously available under another defined contribution plan

(in this subparagraph referred to as the ‘transferor plan’) to the

extent that—

‘‘(i) the forms of distribution previously available under

the transferor plan applied to the account of a participant

or beneficiary under the transferor plan that was transferred

from the transferor plan to the transferee plan pursuant to

a direct transfer rather than pursuant to a distribution from

the transferor plan;

‘‘(ii) the terms of both the transferor plan and the transferee

plan authorize the transfer described in clause (i);

‘‘(iii) the transfer described in clause (i) was made pursuant

to a voluntary election by the participant or beneficiary whose

account was transferred to the transferee plan;

‘‘(iv) the election described in clause (iii) was made after

the participant or beneficiary received a notice describing the

consequences of making the election; and

‘‘(v) the transferee plan allows the participant or beneficiary

described in clause (iii) to receive any distribution to which

the participant or beneficiary is entitled under the transferee

plan in the form of a single sum distribution.

‘‘(B) Subparagraph (A) shall apply to plan mergers and other

transactions having the effect of a direct transfer, including consolidations of benefits attributable to different employers within a

multiple employer plan.

‘‘(5) Except to the extent provided in regulations promulgated

by the Secretary of the Treasury, a defined contribution plan shall

not be treated as failing to meet the requirements of this subsection

merely because of the elimination of a form of distribution previously available thereunder. This paragraph shall not apply to

the elimination of a form of distribution with respect to any participant unless—

‘‘(A) a single sum payment is available to such participant

at the same time or times as the form of distribution being

eliminated; and

‘‘(B) such single sum payment is based on the same or

greater portion of the participant’s account as the form of

distribution being eliminated.’’.

(3) EFFECTIVE DATE.—The amendments made by this subsection shall apply to years beginning after December 31, 2001.

(b) REGULATIONS.—

(1) AMENDMENT OF INTERNAL REVENUE CODE.—Paragraph

(6)(B) of section 411(d) (relating to accrued benefit not to be

decreased by amendment) is amended by inserting after the

second sentence the following: ‘‘The Secretary shall by regulations provide that this subparagraph shall not apply to any

plan amendment which reduces or eliminates benefits or subsidies which create significant burdens or complexities for the

plan and plan participants, unless such amendment adversely

affects the rights of any participant in a more than de minimis

manner.’’.

(2) AMENDMENT OF ERISA.—Section 204(g)(2) of the

Employee Retirement Income Security Act of 1974 (29 U.S.C.

Applicability.

26 USC 411 note.

115 STAT. 126 PUBLIC LAW 107–16—JUNE 7, 2001

1054(g)(2)) is amended by inserting after the second sentence

the following: ‘‘The Secretary of the Treasury shall by regulations provide that this paragraph shall not apply to any plan

amendment which reduces or eliminates benefits or subsidies

which create significant burdens or complexities for the plan

and plan participants, unless such amendment adversely affects

the rights of any participant in a more than de minimis

manner.’’.

(3) SECRETARY DIRECTED.—Not later than December 31,

2003, the Secretary of the Treasury is directed to issue regulations under section 411(d)(6) of the Internal Revenue Code

of 1986 and section 204(g) of the Employee Retirement Income

Security Act of 1974, including the regulations required by

the amendment made by this subsection. Such regulations shall

apply to plan years beginning after December 31, 2003, or

such earlier date as is specified by the Secretary of the

Treasury.

SEC. 646. RATIONALIZATION OF RESTRICTIONS ON DISTRIBUTIONS.

(a) MODIFICATION OF SAME DESK EXCEPTION.—

(1) SECTION 401(k).—

(A) Section 401(k)(2)(B)(i)(I) (relating to qualified cash

or deferred arrangements) is amended by striking ‘‘separation from service’’ and inserting ‘‘severance from employment’’.

(B) Subparagraph (A) of section 401(k)(10) (relating

to distributions upon termination of plan or disposition

of assets or subsidiary) is amended to read as follows:

‘‘(A) IN GENERAL.—An event described in this subparagraph is the termination of the plan without establishment

or maintenance of another defined contribution plan (other

than an employee stock ownership plan as defined in section 4975(e)(7)).’’.

(C) Section 401(k)(10) is amended—

(i) in subparagraph (B)—

(I) by striking ‘‘An event’’ in clause (i) and

inserting ‘‘A termination’’; and

(II) by striking ‘‘the event’’ in clause (i) and

inserting ‘‘the termination’’;

(ii) by striking subparagraph (C); and

(iii) by striking ‘‘OR DISPOSITION OF ASSETS OR SUBSIDIARY’’ in the heading.

(2) SECTION 403(b).—

(A) Paragraphs (7)(A)(ii) and (11)(A) of section 403(b)

are each amended by striking ‘‘separates from service’’

and inserting ‘‘has a severance from employment’’.

(B) The heading for paragraph (11) of section 403(b)

is amended by striking ‘‘SEPARATION FROM SERVICE’’ and

inserting ‘‘SEVERANCE FROM EMPLOYMENT’’.

(3) SECTION 457.—Clause (ii) of section 457(d)(1)(A) is

amended by striking ‘‘is separated from service’’ and inserting

‘‘has a severance from employment’’.

(b) EFFECTIVE DATE.—The amendments made by this section

shall apply to distributions after December 31, 2001.

26 USC 401 note.

Effective date.

Applicability.

Deadline.

26 USC 411 note.

PUBLIC LAW 107–16—JUNE 7, 2001 115 STAT. 127

SEC. 647. PURCHASE OF SERVICE CREDIT IN GOVERNMENTAL

DEFINED BENEFIT PLANS.

(a) SECTION 403(b) PLANS.—Subsection (b) of section 403 is

amended by adding at the end the following new paragraph:

‘‘(13) TRUSTEE-TO-TRUSTEE TRANSFERS TO PURCHASE

PERMISSIVE SERVICE CREDIT.—No amount shall be includible

in gross income by reason of a direct trustee-to-trustee transfer

to a defined benefit governmental plan (as defined in section

414(d)) if such transfer is—

‘‘(A) for the purchase of permissive service credit (as

defined in section 415(n)(3)(A)) under such plan, or

‘‘(B) a repayment to which section 415 does not apply

by reason of subsection (k)(3) thereof.’’.

(b) SECTION 457 PLANS.—Subsection (e) of section 457, as

amended by section 641, is amended by adding after paragraph

(16) the following new paragraph:

‘‘(17) TRUSTEE-TO-TRUSTEE TRANSFERS TO PURCHASE

PERMISSIVE SERVICE CREDIT.—No amount shall be includible

in gross income by reason of a direct trustee-to-trustee transfer

to a defined benefit governmental plan (as defined in section

414(d)) if such transfer is—

‘‘(A) for the purchase of permissive service credit (as

defined in section 415(n)(3)(A)) under such plan, or

‘‘(B) a repayment to which section 415 does not apply

by reason of subsection (k)(3) thereof.’’.

(c) EFFECTIVE DATE.—The amendments made by this section

shall apply to trustee-to-trustee transfers after December 31, 2001.

SEC. 648. EMPLOYERS MAY DISREGARD ROLLOVERS FOR PURPOSES

OF CASH-OUT AMOUNTS.

(a) QUALIFIED PLANS.—

(1) AMENDMENT OF INTERNAL REVENUE CODE.—Section

411(a)(11) (relating to restrictions on certain mandatory distributions) is amended by adding at the end the following:

‘‘(D) SPECIAL RULE FOR ROLLOVER CONTRIBUTIONS.—

A plan shall not fail to meet the requirements of this

paragraph if, under the terms of the plan, the present

value of the nonforfeitable accrued benefit is determined

without regard to that portion of such benefit which is

attributable to rollover contributions (and earnings allocable thereto). For purposes of this subparagraph, the term

‘rollover contributions’ means any rollover contribution

under sections 402(c), 403(a)(4), 403(b)(8), 408(d)(3)(A)(ii),

and 457(e)(16).’’.

(2) AMENDMENT OF ERISA.—Section 203(e) of the Employee

Retirement Income Security Act of 1974 (29 U.S.C. 1053(c))

is amended by adding at the end the following:

‘‘(4) A plan shall not fail to meet the requirements of this

subsection if, under the terms of the plan, the present value of

the nonforfeitable accrued benefit is determined without regard

to that portion of such benefit which is attributable to rollover

contributions (and earnings allocable thereto). For purposes of this

subparagraph, the term ‘rollover contributions’ means any rollover

contribution under sections 402(c), 403(a)(4), 403(b)(8),

408(d)(3)(A)(ii), and 457(e)(16) of the Internal Revenue Code of

1986.’’.

Applicability.

26 USC 403 note.

26 USC 403.

115 STAT. 128 PUBLIC LAW 107–16—JUNE 7, 2001

(b) ELIGIBLE DEFERRED COMPENSATION PLANS.—Clause (i) of

section 457(e)(9)(A) is amended by striking ‘‘such amount’’ and

inserting ‘‘the portion of such amount which is not attributable

to rollover contributions (as defined in section 411(a)(11)(D))’’.

(c) EFFECTIVE DATE.—The amendments made by this section

shall apply to distributions after December 31, 2001.

SEC. 649. MINIMUM DISTRIBUTION AND INCLUSION REQUIREMENTS

FOR SECTION 457 PLANS.

(a) MINIMUM DISTRIBUTION REQUIREMENTS.—Paragraph (2) of

section 457(d) (relating to distribution requirements) is amended

to read as follows:

‘‘(2) MINIMUM DISTRIBUTION REQUIREMENTS.—A plan meets

the minimum distribution requirements of this paragraph if

such plan meets the requirements of section 401(a)(9).’’.

(b) INCLUSION IN GROSS INCOME.—

(1) YEAR OF INCLUSION.—Subsection (a) of section 457

(relating to year of inclusion in gross income) is amended to

read as follows:

‘‘(a) YEAR OF INCLUSION IN GROSS INCOME.—

‘‘(1) IN GENERAL.—Any amount of compensation deferred

under an eligible deferred compensation plan, and any income

attributable to the amounts so deferred, shall be includible

in gross income only for the taxable year in which such compensation or other income—

‘‘(A) is paid to the participant or other beneficiary,

in the case of a plan of an eligible employer described

in subsection (e)(1)(A), and

‘‘(B) is paid or otherwise made available to the participant or other beneficiary, in the case of a plan of an

eligible employer described in subsection (e)(1)(B).

‘‘(2) SPECIAL RULE FOR ROLLOVER AMOUNTS.—To the extent

provided in section 72(t)(9), section 72(t) shall apply to any

amount includible in gross income under this subsection.’’.

(2) CONFORMING AMENDMENTS.—

(A) So much of paragraph (9) of section 457(e) as

precedes subparagraph (A) is amended to read as follows:

‘‘(9) BENEFITS OF TAX EXEMPT ORGANIZATION PLANS NOT

TREATED AS MADE AVAILABLE BY REASON OF CERTAIN ELECTIONS,

ETC.—In the case of an eligible deferred compensation plan

of an employer described in subsection (e)(1)(B)—’’.

(B) Section 457(d) is amended by adding at the end

the following new paragraph:

‘‘(3) SPECIAL RULE FOR GOVERNMENT PLAN.—An eligible

deferred compensation plan of an employer described in subsection (e)(1)(A) shall not be treated as failing to meet the

requirements of this subsection solely by reason of making

a distribution described in subsection (e)(9)(A).’’.

(c) EFFECTIVE DATE.—The amendments made by subsections

(a) and (b) shall apply to distributions after December 31, 2001.

Applicability.

26 USC 457 note.

Applicability.

26 USC 411 note.

26 USC 457.

PUBLIC LAW 107–16—JUNE 7, 2001 115 STAT. 129

Subtitle E—Strengthening Pension

Security and Enforcement

PART I—GENERAL PROVISIONS

SEC. 651. REPEAL OF 160 PERCENT OF CURRENT LIABILITY FUNDING

LIMIT.

(a) AMENDMENTS TO INTERNAL REVENUE CODE.—Section

412(c)(7) (relating to full-funding limitation) is amended—

(1) by striking ‘‘the applicable percentage’’ in subparagraph

(A)(i)(I) and inserting ‘‘in the case of plan years beginning

before January 1, 2004, the applicable percentage’’; and

(2) by amending subparagraph (F) to read as follows:

‘‘(F) APPLICABLE PERCENTAGE.—For purposes of

subparagraph (A)(i)(I), the applicable percentage shall be

determined in accordance with the following table:

‘‘In the case of any plan year The applicable

beginning in— percentage is—

2002 ............................................................................................. 165

2003 ............................................................................................. 170.’’.

(b) AMENDMENT OF ERISA.—Section 302(c)(7) of the Employee

Retirement Income Security Act of 1974 (29 U.S.C. 1082(c)(7)) is

amended—

(1) by striking ‘‘the applicable percentage’’ in subparagraph

(A)(i)(I) and inserting ‘‘in the case of plan years beginning

before January 1, 2004, the applicable percentage’’, and

(2) by amending subparagraph (F) to read as follows:

‘‘(F) APPLICABLE PERCENTAGE.—For purposes of

subparagraph (A)(i)(I), the applicable percentage shall be

determined in accordance with the following table:

‘‘In the case of any plan year The applicable

beginning in calendar year— percentage is—

2002 ............................................................................................. 165

2003 ............................................................................................. 170.’’.

(c) EFFECTIVE DATE.—The amendments made by this section

shall apply to plan years beginning after December 31, 2001.

SEC. 652. MAXIMUM CONTRIBUTION DEDUCTION RULES MODIFIED

AND APPLIED TO ALL DEFINED BENEFIT PLANS.

(a) IN GENERAL.—Subparagraph (D) of section 404(a)(1)

(relating to special rule in case of certain plans) is amended to

read as follows:

‘‘(D) SPECIAL RULE IN CASE OF CERTAIN PLANS.—

‘‘(i) IN GENERAL.—In the case of any defined benefit

plan, except as provided in regulations, the maximum

amount deductible under the limitations of this paragraph shall not be less than the unfunded current

liability determined under section 412(l).

‘‘(ii) PLANS WITH 100 OR LESS PARTICIPANTS.—For

purposes of this subparagraph, in the case of a plan

which has 100 or less participants for the plan year,

unfunded current liability shall not include the liability

attributable to benefit increases for highly compensated employees (as defined in section 414(q))

resulting from a plan amendment which is made or

Applicability.

26 USC 412 note.

26 USC 412.

115 STAT. 130 PUBLIC LAW 107–16—JUNE 7, 2001

becomes effective, whichever is later, within the last

2 years. ‘‘(iii) RULE FOR DETERMINING NUMBER OF PARTICI- PANTS.—For purposes of determining the number of

plan participants, all defined benefit plans maintained

by the same employer (or any member of such

employer’s controlled group (within the meaning of

section 412(l)(8)(C))) shall be treated as one plan, but

only employees of such member or employer shall be

taken into account. ‘‘(iv) PLANS MAINTAINED BY PROFESSIONAL SERVICE

EMPLOYERS.—In the case of a plan which, subject to

section 4041 of the Employee Retirement Income Security Act of 1974, terminates during the plan year,

clause (i) shall be applied by substituting for unfunded

current liability the amount required to make the plan

sufficient for benefit liabilities (within the meaning

of section 4041(d) of such Act).’’. (b) CONFORMING AMENDMENT.—Paragraph (6) of section

4972(c), as amended by sections 616 and 637, is amended— (1) by striking subparagraph (A) and redesignating subparagraphs (B) and (C) as subparagraphs (A) and (B), respectively,

(2) by striking the first sentence following subparagraph

(B) (as so redesignated),

(3) by striking ‘‘subparagraph (B)’’ in the next to last sentence and inserting ‘‘subparagraph (A)’’, and

(4) by striking ‘‘Subparagraph (C)’’ in the last sentence

and inserting ‘‘Subparagraph (B)’’. (c) EFFECTIVE DATE.—The amendments made by this section

shall apply to plan years beginning after December 31, 2001.

SEC. 653. EXCISE TAX RELIEF FOR SOUND PENSION FUNDING.

(a) IN GENERAL.—Subsection (c) of section 4972 (relating to

nondeductible contributions) is amended by adding at the end the

following new paragraph: ‘‘(7) DEFINED BENEFIT PLAN EXCEPTION.—In determining

the amount of nondeductible contributions for any taxable year,

an employer may elect for such year not to take into account

any contributions to a defined benefit plan except to the extent

that such contributions exceed the full-funding limitation (as

defined in section 412(c)(7), determined without regard to

subparagraph (A)(i)(I) thereof ). For purposes of this paragraph,

the deductible limits under section 404(a)(7) shall first be

applied to amounts contributed to defined contribution plans

and then to amounts described in this paragraph. If an

employer makes an election under this paragraph for a taxable

year, paragraph (6) shall not apply to such employer for such

taxable year.’’. (b) EFFECTIVE DATE.—The amendment made by this section

shall apply to years beginning after December 31, 2001.

SEC. 654. TREATMENT OF MULTIEMPLOYER PLANS UNDER SECTION

415.

(a) COMPENSATION LIMIT.—

(1) IN GENERAL.—Paragraph (11) of section 415(b) (relating

to limitation for defined benefit plans) is amended to read

as follows:

Applicability.

26 USC 4972

note.

Applicability.

26 USC 404 note.

26 USC 4972.

PUBLIC LAW 107–16—JUNE 7, 2001 115 STAT. 131

‘‘(11) SPECIAL LIMITATION RULE FOR GOVERNMENTAL AND

MULTIEMPLOYER PLANS.—In the case of a governmental plan

(as defined in section 414(d)) or a multiemployer plan (as

defined in section 414(f )), subparagraph (B) of paragraph (1)

shall not apply.’’.

(2) CONFORMING AMENDMENT.—Section 415(b)(7) (relating

to benefits under certain collectively bargained plans) is

amended by inserting ‘‘(other than a multiemployer plan)’’ after

‘‘defined benefit plan’’ in the matter preceding subparagraph

(A).

(b) COMBINING AND AGGREGATION OF PLANS.—

(1) COMBINING OF PLANS.—Subsection (f ) of section 415

(relating to combining of plans) is amended by adding at the

end the following:

‘‘(3) EXCEPTION FOR MULTIEMPLOYER PLANS.—Notwithstanding paragraph (1) and subsection (g), a multiemployer

plan (as defined in section 414(f )) shall not be combined or

aggregated—

‘‘(A) with any other plan which is not a multiemployer

plan for purposes of applying subsection (b)(1)(B) to such

other plan, or

‘‘(B) with any other multiemployer plan for purposes

of applying the limitations established in this section.’’.

(2) CONFORMING AMENDMENT FOR AGGREGATION OF

PLANS.—Subsection (g) of section 415 (relating to aggregation

of plans) is amended by striking ‘‘The Secretary’’ and inserting

‘‘Except as provided in subsection (f )(3), the Secretary’’.

(c) EFFECTIVE DATE.—The amendments made by this section

shall apply to years beginning after December 31, 2001.

SEC. 655. PROTECTION OF INVESTMENT OF EMPLOYEE CONTRIBUTIONS TO 401(k) PLANS.

(a) IN GENERAL.—Section 1524(b) of the Taxpayer Relief Act

of 1997 is amended to read as follows:

‘‘(b) EFFECTIVE DATE.—

‘‘(1) IN GENERAL.—Except as provided in paragraph (2),

the amendments made by this section shall apply to elective

deferrals for plan years beginning after December 31, 1998.

‘‘(2) NONAPPLICATION TO PREVIOUSLY ACQUIRED PROPERTY.—The amendments made by this section shall not apply

to any elective deferral which is invested in assets consisting

of qualifying employer securities, qualifying employer real property, or both, if such assets were acquired before January

1, 1999.’’.

(b) EFFECTIVE DATE.—The amendment made by this section

shall apply as if included in the provision of the Taxpayer Relief

Act of 1997 to which it relates.

SEC. 656. PROHIBITED ALLOCATIONS OF STOCK IN S CORPORATION

ESOP.

(a) IN GENERAL.—Section 409 (relating to qualifications for

tax credit employee stock ownership plans) is amended by redesignating subsection (p) as subsection (q) and by inserting after subsection (o) the following new subsection:

‘‘(p) PROHIBITED ALLOCATIONS OF SECURITIES IN AN S CORPORATION.—

29 USC 1107

note.

29 USC 1107

note.

Applicability.

26 USC 415 note.

26 USC 415.

115 STAT. 132 PUBLIC LAW 107–16—JUNE 7, 2001

‘‘(1) IN GENERAL.—An employee stock ownership plan

holding employer securities consisting of stock in an S corporation shall provide that no portion of the assets of the plan

attributable to (or allocable in lieu of ) such employer securities

may, during a nonallocation year, accrue (or be allocated

directly or indirectly under any plan of the employer meeting

the requirements of section 401(a)) for the benefit of any disqualified person. ‘‘(2) FAILURE TO MEET REQUIREMENTS.— ‘‘(A) IN GENERAL.—If a plan fails to meet the requirements of paragraph (1), the plan shall be treated as having

distributed to any disqualified person the amount allocated

to the account of such person in violation of paragraph

(1) at the time of such allocation. ‘‘(B) CROSS REFERENCE.—

‘‘For excise tax relating to violations of paragraph (1) and ownership of synthetic equity, see section 4979A.

‘‘(3) NONALLOCATION YEAR.—For purposes of this

subsection—

‘‘(A) IN GENERAL.—The term ‘nonallocation year’ means

any plan year of an employee stock ownership plan if,

at any time during such plan year— ‘‘(i) such plan holds employer securities consisting

of stock in an S corporation, and ‘‘(ii) disqualified persons own at least 50 percent

of the number of shares of stock in the S corporation.

‘‘(B) ATTRIBUTION RULES.—For purposes of subparagraph (A)—

‘‘(i) IN GENERAL.—The rules of section 318(a) shall

apply for purposes of determining ownership, except

that—

‘‘(I) in applying paragraph (1) thereof, the

members of an individual’s family shall include

members of the family described in paragraph

(4)(D), and ‘‘(II) paragraph (4) thereof shall not apply.

‘‘(ii) DEEMED-OWNED SHARES.—Notwithstanding

the employee trust exception in section 318(a)(2)(B)(i),

an individual shall be treated as owning deemed-owned

shares of the individual.

Solely for purposes of applying paragraph (5), this subparagraph shall be applied after the attribution rules of paragraph (5) have been applied.

‘‘(4) DISQUALIFIED PERSON.—For purposes of this

subsection—

‘‘(A) IN GENERAL.—The term ‘disqualified person’

means any person if—

‘‘(i) the aggregate number of deemed-owned shares

of such person and the members of such person’s family

is at least 20 percent of the number of deemed-owned

shares of stock in the S corporation, or ‘‘(ii) in the case of a person not described in clause

(i), the number of deemed-owned shares of such person

is at least 10 percent of the number of deemed-owned

shares of stock in such corporation.

‘‘(B) TREATMENT OF FAMILY MEMBERS.—In the case of

a disqualified person described in subparagraph (A)(i), any

Applicability.

PUBLIC LAW 107–16—JUNE 7, 2001 115 STAT. 133

member of such person’s family with deemed-owned shares

shall be treated as a disqualified person if not otherwise

treated as a disqualified person under subparagraph (A). ‘‘(C) DEEMED-OWNED SHARES.— ‘‘(i) IN GENERAL.—The term ‘deemed-owned shares’ means, with respect to any person— ‘‘(I) the stock in the S corporation constituting

employer securities of an employee stock ownership plan which is allocated to such person under

the plan, and ‘‘(II) such person’s share of the stock in such

corporation which is held by such plan but which

is not allocated under the plan to participants.

‘‘(ii) PERSON’S SHARE OF UNALLOCATED STOCK.— For purposes of clause (i)(II), a person’s share of

unallocated S corporation stock held by such plan is

the amount of the unallocated stock which would be

allocated to such person if the unallocated stock were

allocated to all participants in the same proportions

as the most recent stock allocation under the plan.

‘‘(D) MEMBER OF FAMILY.—For purposes of this paragraph, the term ‘member of the family’ means, with respect

to any individual—

‘‘(i) the spouse of the individual,

‘‘(ii) an ancestor or lineal descendant of the individual or the individual’s spouse,

‘‘(iii) a brother or sister of the individual or the

individual’s spouse and any lineal descendant of the

brother or sister, and

‘‘(iv) the spouse of any individual described in

clause (ii) or (iii).

A spouse of an individual who is legally separated from

such individual under a decree of divorce or separate

maintenance shall not be treated as such individual’s

spouse for purposes of this subparagraph.

‘‘(5) TREATMENT OF SYNTHETIC EQUITY.—For purposes of

paragraphs (3) and (4), in the case of a person who owns

synthetic equity in the S corporation, except to the extent

provided in regulations, the shares of stock in such corporation

on which such synthetic equity is based shall be treated as

outstanding stock in such corporation and deemed-owned shares

of such person if such treatment of synthetic equity of 1 or

more such persons results in—

‘‘(A) the treatment of any person as a disqualified

person, or

‘‘(B) the treatment of any year as a nonallocation year.

For purposes of this paragraph, synthetic equity shall be treated

as owned by a person in the same manner as stock is treated

as owned by a person under the rules of paragraphs (2) and

(3) of section 318(a). If, without regard to this paragraph,

a person is treated as a disqualified person or a year is treated

as a nonallocation year, this paragraph shall not be construed

to result in the person or year not being so treated.

‘‘(6) DEFINITIONS.—For purposes of this subsection—

‘‘(A) EMPLOYEE STOCK OWNERSHIP PLAN.—The term ‘employee stock ownership plan’ has the meaning given

such term by section 4975(e)(7).

115 STAT. 134 PUBLIC LAW 107–16—JUNE 7, 2001

‘‘(B) EMPLOYER SECURITIES.—The term ‘employer security’ has the meaning given such term by section 409(l).

‘‘(C) SYNTHETIC EQUITY.—The term ‘synthetic equity’

means any stock option, warrant, restricted stock, deferred

issuance stock right, or similar interest or right that gives

the holder the right to acquire or receive stock of the

S corporation in the future. Except to the extent provided

in regulations, synthetic equity also includes a stock appreciation right, phantom stock unit, or similar right to a

future cash payment based on the value of such stock

or appreciation in such value.

‘‘(7) REGULATIONS AND GUIDANCE.— ‘‘(A) IN GENERAL.—The Secretary shall prescribe such

regulations as may be necessary to carry out the purposes

of this subsection. ‘‘(B) AVOIDANCE OR EVASION.—The Secretary may, by

regulation or other guidance of general applicability, provide that a nonallocation year occurs in any case in which

the principal purpose of the ownership structure of an

S corporation constitutes an avoidance or evasion of this

subsection.’’. (b) COORDINATION WITH SECTION 4975(e)(7).—The last sentence

of section 4975(e)(7) (defining employee stock ownership plan) is

amended by inserting ‘‘, section 409(p),’’ after ‘‘409(n)’’.

(c) EXCISE TAX.—

(1) APPLICATION OF TAX.—Subsection (a) of section 4979A

(relating to tax on certain prohibited allocations of employer

securities) is amended—

(A) by striking ‘‘or’’ at the end of paragraph (1), and

(B) by striking all that follows paragraph (2) and

inserting the following:

‘‘(3) there is any allocation of employer securities which

violates the provisions of section 409(p), or a nonallocation

year described in subsection (e)(2)(C) with respect to an

employee stock ownership plan, or ‘‘(4) any synthetic equity is owned by a disqualified person

in any nonallocation year,

there is hereby imposed a tax on such allocation or ownership

equal to 50 percent of the amount involved.’’.

(2) LIABILITY.—Section 4979A(c) (defining liability for tax)

is amended to read as follows:

‘‘(c) LIABILITY FOR TAX.—The tax imposed by this section shall

be paid—

‘‘(1) in the case of an allocation referred to in paragraph

(1) or (2) of subsection (a), by—

‘‘(A) the employer sponsoring such plan, or

‘‘(B) the eligible worker-owned cooperative,

which made the written statement described in section

664(g)(1)(E) or in section 1042(b)(3)(B) (as the case may be),

and

‘‘(2) in the case of an allocation or ownership referred

to in paragraph (3) or (4) of subsection (a), by the S corporation

the stock in which was so allocated or owned.’’.

(3) DEFINITIONS.—Section 4979A(e) (relating to definitions)

is amended to read as follows:

‘‘(e) DEFINITIONS AND SPECIAL RULES.—For purposes of this

section—

26 USC 4975.

PUBLIC LAW 107–16—JUNE 7, 2001 115 STAT. 135

‘‘(1) DEFINITIONS.—Except as provided in paragraph (2),

terms used in this section have the same respective meanings

as when used in sections 409 and 4978.

‘‘(2) SPECIAL RULES RELATING TO TAX IMPOSED BY REASON

OF PARAGRAPH (3) OR (4) OF SUBSECTION (a).—

‘‘(A) PROHIBITED ALLOCATIONS.—The amount involved

with respect to any tax imposed by reason of subsection

(a)(3) is the amount allocated to the account of any person

in violation of section 409(p)(1).

‘‘(B) SYNTHETIC EQUITY.—The amount involved with

respect to any tax imposed by reason of subsection (a)(4)

is the value of the shares on which the synthetic equity

is based.

‘‘(C) SPECIAL RULE DURING FIRST NONALLOCATION

YEAR.—For purposes of subparagraph (A), the amount

involved for the first nonallocation year of any employee

stock ownership plan shall be determined by taking into

account the total value of all the deemed-owned shares

of all disqualified persons with respect to such plan.

‘‘(D) STATUTE OF LIMITATIONS.—The statutory period

for the assessment of any tax imposed by this section

by reason of paragraph (3) or (4) of subsection (a) shall

not expire before the date which is 3 years from the later

of—

‘‘(i) the allocation or ownership referred to in such

paragraph giving rise to such tax, or

‘‘(ii) the date on which the Secretary is notified

of such allocation or ownership.’’.

(d) EFFECTIVE DATES.—

(1) IN GENERAL.—The amendments made by this section

shall apply to plan years beginning after December 31, 2004.

(2) EXCEPTION FOR CERTAIN PLANS.—In the case of any—

(A) employee stock ownership plan established after

March 14, 2001, or

(B) employee stock ownership plan established on or

before such date if employer securities held by the plan

consist of stock in a corporation with respect to which

an election under section 1362(a) of the Internal Revenue

Code of 1986 is not in effect on such date,

the amendments made by this section shall apply to plan years

ending after March 14, 2001.

SEC. 657. AUTOMATIC ROLLOVERS OF CERTAIN MANDATORY DISTRIBUTIONS.

(a) DIRECT TRANSFERS OF MANDATORY DISTRIBUTIONS.—

(1) IN GENERAL.—Section 401(a)(31) (relating to optional

direct transfer of eligible rollover distributions), as amended

by section 643, is amended by redesignating subparagraphs

(B), (C), and (D) as subparagraphs (C), (D), and (E), respectively, and by inserting after subparagraph (A) the following

new subparagraph:

‘‘(B) CERTAIN MANDATORY DISTRIBUTIONS.—

‘‘(i) IN GENERAL.—In case of a trust which is part

of an eligible plan, such trust shall not constitute a

qualified trust under this section unless the plan of

which such trust is a part provides that if—

26 USC 401.

Applicability.

26 USC 409 note.

115 STAT. 136 PUBLIC LAW 107–16—JUNE 7, 2001

‘‘(I) a distribution described in clause (ii) in

excess of $1,000 is made, and ‘‘(II) the distributee does not make an election

under subparagraph (A) and does not elect to

receive the distribution directly,

the plan administrator shall make such transfer to

an individual retirement plan of a designated trustee

or issuer and shall notify the distributee in writing

(either separately or as part of the notice under section

402(f )) that the distribution may be transferred to

another individual retirement plan.

‘‘(ii) ELIGIBLE PLAN.—For purposes of clause (i),

the term ‘eligible plan’ means a plan which provides

that any nonforfeitable accrued benefit for which the

present value (as determined under section 411(a)(11))

does not exceed $5,000 shall be immediately distributed

to the participant.’’. (2) CONFORMING AMENDMENTS.—

(A) The heading of section 401(a)(31) is amended by

striking ‘‘OPTIONAL DIRECT’’ and inserting ‘‘DIRECT’’.

(B) Section 401(a)(31)(C), as redesignated by paragraph

(1), is amended by striking ‘‘Subparagraph (A)’’ and

inserting ‘‘Subparagraphs (A) and (B)’’.

(b) NOTICE REQUIREMENT.—Subparagraph (A) of section

402(f )(1) is amended by inserting before the comma at the end

the following: ‘‘and that the automatic distribution by direct transfer

applies to certain distributions in accordance with section

401(a)(31)(B)’’.

(c) FIDUCIARY RULES.—

(1) IN GENERAL.—Section 404(c) of the Employee Retirement Income Security Act of 1974 (29 U.S.C. 1104(c)) is

amended by adding at the end the following new paragraph:

‘‘(3) In the case of a pension plan which makes a transfer

to an individual retirement account or annuity of a designated

trustee or issuer under section 401(a)(31)(B) of the Internal

Revenue Code of 1986, the participant or beneficiary shall,

for purposes of paragraph (1), be treated as exercising control

over the assets in the account or annuity upon—

‘‘(A) the earlier of the earlier of—

‘‘(i) a rollover of all or a portion of the amount

to another individual retirement account or annuity;

or

‘‘(ii) one year after the transfer is made; or

‘‘(B) if the transfer is made in a manner consistent

with guidance provided by the Secretary.’’.

(2) REGULATIONS.—

(A) AUTOMATIC ROLLOVER SAFE HARBOR.—Not later

than 3 years after the date of enactment of this Act, the

Secretary of Labor shall prescribe regulations providing

for safe harbors under which the designation of an institution and investment of funds in accordance with section

401(a)(31)(B) of the Internal Revenue Code of 1986 is

deemed to satisfy the fiduciary requirements of section

404(a) of the Employee Retirement Income Security Act

of 1974 (29 U.S.C. 1104(a)).

(B) USE OF LOW-COST INDIVIDUAL RETIREMENT PLANS.— The Secretary of the Treasury and the Secretary of Labor

Deadline.

26 USC 401 note.

PUBLIC LAW 107–16—JUNE 7, 2001 115 STAT. 137

may provide, and shall give consideration to providing,

special relief with respect to the use of low-cost individual

retirement plans for purposes of transfers under section

401(a)(31)(B) of the Internal Revenue Code of 1986 and

for other uses that promote the preservation of assets for

retirement income purposes.

(d) EFFECTIVE DATE.—The amendments made by this section

shall apply to distributions made after final regulations implementing subsection (c)(2)(A) are prescribed.

SEC. 658. CLARIFICATION OF TREATMENT OF CONTRIBUTIONS TO

MULTIEMPLOYER PLAN.

(a) NOT CONSIDERED METHOD OF ACCOUNTING.—For purposes

of section 446 of the Internal Revenue Code of 1986, a determination

under section 404(a)(6) of such Code regarding the taxable year

with respect to which a contribution to a multiemployer pension

plan is deemed made shall not be treated as a method of accounting

of the taxpayer. No deduction shall be allowed for any taxable

year for any contribution to a multiemployer pension plan with

respect to which a deduction was previously allowed.

(b) REGULATIONS.—The Secretary of the Treasury shall promulgate such regulations as necessary to clarify that a taxpayer shall

not be allowed an aggregate amount of deductions for contributions

to a multiemployer pension plan which exceeds the amount of

such contributions made or deemed made under section 404(a)(6)

of the Internal Revenue Code of 1986 to such plan.

(c) EFFECTIVE DATE.—Subsection (a), and any regulations

promulgated under subsection (b), shall be effective for years ending

after the date of the enactment of this Act.

PART II—TREATMENT OF PLAN AMENDMENTS

REDUCING FUTURE BENEFIT ACCRUALS

SEC. 659. EXCISE TAX ON FAILURE TO PROVIDE NOTICE BY DEFINED

BENEFIT PLANS SIGNIFICANTLY REDUCING FUTURE

BENEFIT ACCRUALS.

(a) AMENDMENT OF INTERNAL REVENUE CODE.—

(1) IN GENERAL.—Chapter 43 (relating to qualified pension,

etc., plans) is amended by adding at the end the following

new section:

‘‘SEC. 4980F. FAILURE OF APPLICABLE PLANS REDUCING BENEFIT

ACCRUALS TO SATISFY NOTICE REQUIREMENTS.

‘‘(a) IMPOSITION OF TAX.—There is hereby imposed a tax on

the failure of any applicable pension plan to meet the requirements

of subsection (e) with respect to any applicable individual.

‘‘(b) AMOUNT OF TAX.—

‘‘(1) IN GENERAL.—The amount of the tax imposed by subsection (a) on any failure with respect to any applicable individual shall be $100 for each day in the noncompliance period

with respect to such failure. ‘‘(2) NONCOMPLIANCE PERIOD.—For purposes of this section,

the term ‘noncompliance period’ means, with respect to any

failure, the period beginning on the date the failure first occurs

and ending on the date the notice to which the failure relates

is provided or the failure is otherwise corrected.

‘‘(c) LIMITATIONS ON AMOUNT OF TAX.—

26 USC 404 note.

Applicability.

26 USC 401 note.

115 STAT. 138 PUBLIC LAW 107–16—JUNE 7, 2001

‘‘(1) TAX NOT TO APPLY WHERE FAILURE NOT DISCOVERED

AND REASONABLE DILIGENCE EXERCISED.—No tax shall be

imposed by subsection (a) on any failure during any period

for which it is established to the satisfaction of the Secretary

that any person subject to liability for the tax under subsection

(d) did not know that the failure existed and exercised reasonable diligence to meet the requirements of subsection (e).

‘‘(2) TAX NOT TO APPLY TO FAILURES CORRECTED WITHIN

30 DAYS.—No tax shall be imposed by subsection (a) on any

failure if—

‘‘(A) any person subject to liability for the tax under

subsection (d) exercised reasonable diligence to meet the

requirements of subsection (e), and

‘‘(B) such person provides the notice described in subsection (e) during the 30-day period beginning on the first

date such person knew, or exercising reasonable diligence

would have known, that such failure existed.

‘‘(3) OVERALL LIMITATION FOR UNINTENTIONAL FAILURES.—

‘‘(A) IN GENERAL.—If the person subject to liability

for tax under subsection (d) exercised reasonable diligence

to meet the requirements of subsection (e), the tax imposed

by subsection (a) for failures during the taxable year of

the employer (or, in the case of a multiemployer plan,

the taxable year of the trust forming part of the plan)

shall not exceed $500,000. For purposes of the preceding

sentence, all multiemployer plans of which the same trust

forms a part shall be treated as 1 plan.

‘‘(B) TAXABLE YEARS IN THE CASE OF CERTAIN CONTROLLED GROUPS.—For purposes of this paragraph, if all

persons who are treated as a single employer for purposes

of this section do not have the same taxable year, the

taxable years taken into account shall be determined under

principles similar to the principles of section 1561.

‘‘(4) WAIVER BY SECRETARY.—In the case of a failure which

is due to reasonable cause and not to willful neglect, the Secretary may waive part or all of the tax imposed by subsection

(a) to the extent that the payment of such tax would be excessive or otherwise inequitable relative to the failure involved.

‘‘(d) LIABILITY FOR TAX.—The following shall be liable for the

tax imposed by subsection (a):

‘‘(1) In the case of a plan other than a multiemployer

plan, the employer.

‘‘(2) In the case of a multiemployer plan, the plan.

‘‘(e) NOTICE REQUIREMENTS FOR PLANS SIGNIFICANTLY

REDUCING BENEFIT ACCRUALS.—

‘‘(1) IN GENERAL.—If an applicable pension plan is amended

to provide for a significant reduction in the rate of future

benefit accrual, the plan administrator shall provide written

notice to each applicable individual (and to each employee

organization representing applicable individuals).

‘‘(2) NOTICE.—The notice required by paragraph (1) shall

be written in a manner calculated to be understood by the

average plan participant and shall provide sufficient information (as determined in accordance with regulations prescribed

by the Secretary) to allow applicable individuals to understand

the effect of the plan amendment. The Secretary may provide

PUBLIC LAW 107–16—JUNE 7, 2001 115 STAT. 139

a simplified form of notice for, or exempt from any notice

requirement, a plan—

‘‘(A) which has fewer than 100 participants who have

accrued a benefit under the plan, or

‘‘(B) which offers participants the option to choose

between the new benefit formula and the old benefit formula.

‘‘(3) TIMING OF NOTICE.—Except as provided in regulations,

the notice required by paragraph (1) shall be provided within

a reasonable time before the effective date of the plan amendment.

‘‘(4) DESIGNEES.—Any notice under paragraph (1) may be

provided to a person designated, in writing, by the person

to which it would otherwise be provided.

‘‘(5) NOTICE BEFORE ADOPTION OF AMENDMENT.—A plan

shall not be treated as failing to meet the requirements of

paragraph (1) merely because notice is provided before the

adoption of the plan amendment if no material modification

of the amendment occurs before the amendment is adopted.

‘‘(f ) DEFINITIONS AND SPECIAL RULES.—For purposes of this

section—

‘‘(1) APPLICABLE INDIVIDUAL.—The term ‘applicable individual’ means, with respect to any plan amendment—

‘‘(A) each participant in the plan, and

‘‘(B) any beneficiary who is an alternate payee (within

the meaning of section 414(p)(8)) under an applicable qualified domestic relations order (within the meaning of section

414(p)(1)(A)),

whose rate of future benefit accrual under the plan may reasonably be expected to be significantly reduced by such plan

amendment.

‘‘(2) APPLICABLE PENSION PLAN.—The term ‘applicable pension plan’ means—

‘‘(A) any defined benefit plan, or

‘‘(B) an individual account plan which is subject to

the funding standards of section 412.

Such term shall not include a governmental plan (within the

meaning of section 414(d)) or a church plan (within the meaning

of section 414(e)) with respect to which the election provided

by section 410(d) has not been made.

‘‘(3) EARLY RETIREMENT.—A plan amendment which eliminates or significantly reduces any early retirement benefit or

retirement-type subsidy (within the meaning of section

411(d)(6)(B)(i)) shall be treated as having the effect of significantly reducing the rate of future benefit accrual.

‘‘(g) NEW TECHNOLOGIES.—The Secretary may by regulations

allow any notice under subsection (e) to be provided by using

new technologies.’’.

(2) CLERICAL AMENDMENT.—The table of sections for

chapter 43 is amended by adding at the end the following

new item:

‘‘Sec. 4980F. Failure of applicable plans reducing benefit accruals to satisfy

notice requirements.’’.

(b) AMENDMENT OF ERISA.—Subsection (h) of section 204 of

the Employee Retirement Income Security Act of 1974 (29 U.S.C.

1054) is amended to read as follows:

115 STAT. 140 PUBLIC LAW 107–16—JUNE 7, 2001

‘‘(h)(1) An applicable pension plan may not be amended so

as to provide for a significant reduction in the rate of future benefit

accrual unless the plan administrator provides the notice described

in paragraph (2) to each applicable individual (and to each employee

organization representing applicable individuals).

‘‘(2) The notice required by paragraph (1) shall be written

in a manner calculated to be understood by the average plan participant and shall provide sufficient information (as determined in

accordance with regulations prescribed by the Secretary of the

Treasury) to allow applicable individuals to understand the effect

of the plan amendment. The Secretary of the Treasury may provide

a simplified form of notice for, or exempt from any notice requirement, a plan—

‘‘(A) which has fewer than 100 participants who have

accrued a benefit under the plan, or

‘‘(B) which offers participants the option to choose between

the new benefit formula and the old benefit formula.

‘‘(3) Except as provided in regulations prescribed by the Secretary of the Treasury, the notice required by paragraph (1) shall

be provided within a reasonable time before the effective date

of the plan amendment.

‘‘(4) Any notice under paragraph (1) may be provided to a

person designated, in writing, by the person to which it would

otherwise be provided.

‘‘(5) A plan shall not be treated as failing to meet the requirements of paragraph (1) merely because notice is provided before

the adoption of the plan amendment if no material modification

of the amendment occurs before the amendment is adopted.

‘‘(6)(A) In the case of any egregious failure to meet any requirement of this subsection with respect to any plan amendment, the

provisions of the applicable pension plan shall be applied as if

such plan amendment entitled all applicable individuals to the

greater of—

‘‘(i) the benefits to which they would have been entitled

without regard to such amendment, or

‘‘(ii) the benefits under the plan with regard to such amendment.

‘‘(B) For purposes of subparagraph (A), there is an egregious

failure to meet the requirements of this subsection if such failure

is within the control of the plan sponsor and is—

‘‘(i) an intentional failure (including any failure to promptly

provide the required notice or information after the plan

administrator discovers an unintentional failure to meet the

requirements of this subsection),

‘‘(ii) a failure to provide most of the individuals with most

of the information they are entitled to receive under this subsection, or

‘‘(iii) a failure which is determined to be egregious under

regulations prescribed by the Secretary of the Treasury.

‘‘(7) The Secretary of the Treasury may by regulations allow

any notice under this subsection to be provided by using new

technologies.

‘‘(8) For purposes of this subsection—

‘‘(A) The term ‘applicable individual’ means, with respect

to any plan amendment—

‘‘(i) each participant in the plan; and

PUBLIC LAW 107–16—JUNE 7, 2001 115 STAT. 141

‘‘(ii) any beneficiary who is an alternate payee (within

the meaning of section 206(d)(3)(K)) under an applicable

qualified domestic relations order (within the meaning of

section 206(d)(3)(B)(i)),

whose rate of future benefit accrual under the plan may reasonably be expected to be significantly reduced by such plan

amendment.

‘‘(B) The term ‘applicable pension plan’ means—

‘‘(i) any defined benefit plan; or

‘‘(ii) an individual account plan which is subject to

the funding standards of section 412 of the Internal Revenue Code of 1986.

‘‘(9) For purposes of this subsection, a plan amendment which

eliminates or significantly reduces any early retirement benefit

or retirement-type subsidy (within the meaning of subsection

(g)(2)(A)) shall be treated as having the effect of significantly

reducing the rate of future benefit accrual.’’.

(c) EFFECTIVE DATES.—

(1) IN GENERAL.—The amendments made by this section

shall apply to plan amendments taking effect on or after the

date of the enactment of this Act.

(2) TRANSITION.—Until such time as the Secretary of the

Treasury issues regulations under sections 4980F(e)(2) and (3)

of the Internal Revenue Code of 1986, and section 204(h) of

the Employee Retirement Income Security Act of 1974, as added

by the amendments made by this section, a plan shall be

treated as meeting the requirements of such sections if it makes

a good faith effort to comply with such requirements.

(3) SPECIAL NOTICE RULE.—

(A) IN GENERAL.—The period for providing any notice

required by the amendments made by this section shall

not end before the date which is 3 months after the date

of the enactment of this Act.

(B) REASONABLE NOTICE.—The amendments made by

this section shall not apply to any plan amendment taking

effect on or after the date of the enactment of this Act

if, before April 25, 2001, notice was provided to participants

and beneficiaries adversely affected by the plan amendment

(or their representatives) which was reasonably expected

to notify them of the nature and effective date of the

plan amendment.

Subtitle F—Reducing Regulatory Burdens

SEC. 661. MODIFICATION OF TIMING OF PLAN VALUATIONS.

(a) IN GENERAL.—Paragraph (9) of section 412(c) (relating to

annual valuation) is amended to read as follows:

‘‘(9) ANNUAL VALUATION.—

‘‘(A) IN GENERAL.—For purposes of this section, a determination of experience gains and losses and a valuation

of the plan’s liability shall be made not less frequently

than once every year, except that such determination shall

be made more frequently to the extent required in particular cases under regulations prescribed by the Secretary.

‘‘(B) VALUATION DATE.—

26 USC 412.

26 USC 4980F

note.

Applicability.

115 STAT. 142 PUBLIC LAW 107–16—JUNE 7, 2001

‘‘(i) CURRENT YEAR.—Except as provided in clause

(ii), the valuation referred to in subparagraph (A) shall

be made as of a date within the plan year to which

the valuation refers or within one month prior to the

beginning of such year. ‘‘(ii) USE OF PRIOR YEAR VALUATION.—The valuation referred to in subparagraph (A) may be made

as of a date within the plan year prior to the year

to which the valuation refers if, as of such date, the

value of the assets of the plan are not less than 125

percent of the plan’s current liability (as defined in

paragraph (7)(B)). ‘‘(iii) ADJUSTMENTS.—Information under clause (ii)

shall, in accordance with regulations, be actuarially

adjusted to reflect significant differences in participants.’’. (b) AMENDMENT OF ERISA.—Paragraph (9) of section 302(c)

of the Employee Retirement Income Security Act of 1974 (29 U.S.C.

1053(c)) is amended— (1) by inserting ‘‘(A)’’ after ‘‘(9)’’, and

(2) by adding at the end the following: ‘‘(B)(i) Except as provided in clause (ii), the valuation referred

to in subparagraph (A) shall be made as of a date within the

plan year to which the valuation refers or within one month prior

to the beginning of such year. ‘‘(ii) The valuation referred to in subparagraph (A) may be

made as of a date within the plan year prior to the year to which

the valuation refers if, as of such date, the value of the assets

of the plan are not less than 125 percent of the plan’s current

liability (as defined in paragraph (7)(B)). ‘‘(iii) Information under clause (ii) shall, in accordance with

regulations, be actuarially adjusted to reflect significant differences

in participants.’’. (c) EFFECTIVE DATE.—The amendments made by this section

shall apply to plan years beginning after December 31, 2001.

SEC. 662. ESOP DIVIDENDS MAY BE REINVESTED WITHOUT LOSS OF

DIVIDEND DEDUCTION.

(a) IN GENERAL.—Section 404(k)(2)(A) (defining applicable dividends) is amended by striking ‘‘or’’ at the end of clause (ii), by

redesignating clause (iii) as clause (iv), and by inserting after clause

(ii) the following new clause: ‘‘(iii) is, at the election of such participants or

their beneficiaries— ‘‘(I) payable as provided in clause (i) or (ii),

or ‘‘(II) paid to the plan and reinvested in qualifying employer securities, or’’.

(b) STANDARDS FOR DISALLOWANCE.—Section 404(k)(5)(A)

(relating to disallowance of deduction) is amended by inserting

‘‘avoidance or’’ before ‘‘evasion’’.

(c) EFFECTIVE DATE.—The amendments made by this section

shall apply to taxable years beginning after December 31, 2001.

SEC. 663. REPEAL OF TRANSITION RULE RELATING TO CERTAIN

HIGHLY COMPENSATED EMPLOYEES.

(a) IN GENERAL.—Paragraph (4) of section 1114(c) of the Tax

26 USC 414 note. Reform Act of 1986 is hereby repealed.

Applicability.

26 USC 404 note.

Applicability.

26 USC 412 note.

29 USC 1082.

PUBLIC LAW 107–16—JUNE 7, 2001 115 STAT. 143

(b) EFFECTIVE DATE.—The repeal made by subsection (a) shall

apply to plan years beginning after December 31, 2001.

SEC. 664. EMPLOYEES OF TAX-EXEMPT ENTITIES.

(a) IN GENERAL.—The Secretary of the Treasury shall modify

Treasury Regulations section 1.410(b)–6(g) to provide that

employees of an organization described in section 403(b)(1)(A)(i)

of the Internal Revenue Code of 1986 who are eligible to make

contributions under section 403(b) of such Code pursuant to a

salary reduction agreement may be treated as excludable with

respect to a plan under section 401(k) or (m) of such Code that

is provided under the same general arrangement as a plan under

such section 401(k), if— (1) no employee of an organization described in section

403(b)(1)(A)(i) of such Code is eligible to participate in such

section 401(k) plan or section 401(m) plan; and

(2) 95 percent of the employees who are not employees

of an organization described in section 403(b)(1)(A)(i) of such

Code are eligible to participate in such plan under such section

401(k) or (m).

(b) EFFECTIVE DATE.—The modification required by subsection

(a) shall apply as of the same date set forth in section 1426(b)

of the Small Business Job Protection Act of 1996.

SEC. 665. CLARIFICATION OF TREATMENT OF EMPLOYER-PROVIDED

RETIREMENT ADVICE.

(a) IN GENERAL.—Subsection (a) of section 132 (relating to

exclusion from gross income) is amended by striking ‘‘or’’ at the

end of paragraph (5), by striking the period at the end of paragraph

(6) and inserting ‘‘, or’’, and by adding at the end the following

new paragraph:

‘‘(7) qualified retirement planning services.’’.

(b) QUALIFIED RETIREMENT PLANNING SERVICES DEFINED.—Section 132 is amended by redesignating subsection (m) as subsection

(n) and by inserting after subsection (l) the following:

‘‘(m) QUALIFIED RETIREMENT PLANNING SERVICES.— ‘‘(1) IN GENERAL.—For purposes of this section, the term ‘qualified retirement planning services’ means any retirement

planning advice or information provided to an employee and

his spouse by an employer maintaining a qualified employer

plan.‘‘(2) NONDISCRIMINATION RULE.—Subsection (a)(7) shall

apply in the case of highly compensated employees only if

such services are available on substantially the same terms

to each member of the group of employees normally provided

education and information regarding the employer’s qualified

employer plan. ‘‘(3) QUALIFIED EMPLOYER PLAN.—For purposes of this subsection, the term ‘qualified employer plan’ means a plan, contract, pension, or account described in section 219(g)(5).’’. (c) EFFECTIVE DATE.—The amendments made by this section

shall apply to years beginning after December 31, 2001.

SEC. 666. REPEAL OF THE MULTIPLE USE TEST.

(a) IN GENERAL.—Paragraph (9) of section 401(m) is amended

to read as follows:

‘‘(9) REGULATIONS.—The Secretary shall prescribe such

regulations as may be necessary to carry out the purposes

Applicability.

26 USC 132 note.

Applicability.

26 USC 414 note.

115 STAT. 144 PUBLIC LAW 107–16—JUNE 7, 2001

of this subsection and subsection (k), including regulations

permitting appropriate aggregation of plans and contributions.’’. (b) EFFECTIVE DATE.—The amendment made by this section

shall apply to years beginning after December 31, 2001.

Subtitle G—Miscellaneous Provisions

SEC. 671. TAX TREATMENT AND INFORMATION REQUIREMENTS OF

ALASKA NATIVE SETTLEMENT TRUSTS.

(a) TREATMENT OF ALASKA NATIVE SETTLEMENT TRUSTS.—Subpart A of part I of subchapter J of chapter 1 (relating to general

rules for taxation of trusts and estates) is amended by adding

at the end the following new section:

‘‘SEC. 646. TAX TREATMENT OF ELECTING ALASKA NATIVE SETTLEMENT TRUSTS.

‘‘(a) IN GENERAL.—If an election under this section is in effect

with respect to any Settlement Trust, the provisions of this section

shall apply in determining the income tax treatment of the Settlement Trust and its beneficiaries with respect to the Settlement

Trust.

‘‘(b) TAXATION OF INCOME OF TRUST.—Except as provided in

subsection (f )(1)(B)(ii)—

‘‘(1) IN GENERAL.—There is hereby imposed on the taxable

income of an electing Settlement Trust, other than its net

capital gain, a tax at the lowest rate specified in section 1(c).

‘‘(2) CAPITAL GAIN.—In the case of an electing Settlement

Trust with a net capital gain for the taxable year, a tax is

hereby imposed on such gain at the rate of tax which would

apply to such gain if the taxpayer were subject to a tax on

its other taxable income at only the lowest rate specified in

section 1(c).

Any such tax shall be in lieu of the income tax otherwise imposed

by this chapter on such income or gain. ‘‘(c) ONE-TIME ELECTION.—

‘‘(1) IN GENERAL.—A Settlement Trust may elect to have

the provisions of this section apply to the trust and its beneficiaries.

‘‘(2) TIME AND METHOD OF ELECTION.—An election under

paragraph (1) shall be made by the trustee of such trust—

‘‘(A) on or before the due date (including extensions)

for filing the Settlement Trust’s return of tax for the first

taxable year of such trust ending after the date of the

enactment of this section, and

‘‘(B) by attaching to such return of tax a statement

specifically providing for such election.

‘‘(3) PERIOD ELECTION IN EFFECT.—Except as provided in

subsection (f ), an election under this subsection—

‘‘(A) shall apply to the first taxable year described

in paragraph (2)(A) and all subsequent taxable years, and ‘‘(B) may not be revoked once it is made.

‘‘(d) CONTRIBUTIONS TO TRUST.—

‘‘(1) BENEFICIARIES OF ELECTING TRUST NOT TAXED ON CONTRIBUTIONS.—In the case of an electing Settlement Trust, no

amount shall be includible in the gross income of a beneficiary

of such trust by reason of a contribution to such trust.

Applicability.

26 USC 401 note.

PUBLIC LAW 107–16—JUNE 7, 2001 115 STAT. 145

‘‘(2) EARNINGS AND PROFITS.—The earnings and profits of

the sponsoring Native Corporation shall not be reduced on

account of any contribution to such Settlement Trust.

‘‘(e) TAX TREATMENT OF DISTRIBUTIONS TO BENEFICIARIES.—

Amounts distributed by an electing Settlement Trust during any

taxable year shall be considered as having the following characteristics in the hands of the recipient beneficiary:

‘‘(1) First, as amounts excludable from gross income for

the taxable year to the extent of the taxable income of such

trust for such taxable year (decreased by any income tax paid

by the trust with respect to the income) plus any amount

excluded from gross income of the trust under section 103.

‘‘(2) Second, as amounts excludable from gross income to

the extent of the amount described in paragraph (1) for all

taxable years for which an election is in effect under subsection

(c) with respect to the trust, and not previously taken into

account under paragraph (1).

‘‘(3) Third, as amounts distributed by the sponsoring Native

Corporation with respect to its stock (within the meaning of

section 301(a)) during such taxable year and taxable to the

recipient beneficiary as amounts described in section 301(c)(1),

to the extent of current or accumulated earnings and profits

of the sponsoring Native Corporation as of the close of such

taxable year after proper adjustment is made for all distributions made by the sponsoring Native Corporation during such

taxable year.

‘‘(4) Fourth, as amounts distributed by the trust in excess

of the distributable net income of such trust for such taxable

year.

Amounts distributed to which paragraph (3) applies shall not be

treated as a corporate distribution subject to section 311(b), and

for purposes of determining the amount of a distribution for purposes of paragraph (3) and the basis to the recipients, section

643(e) and not section 301 (b) or (d) shall apply.

‘‘(f ) SPECIAL RULES WHERE TRANSFER RESTRICTIONS MODIFIED.—

‘‘(1) TRANSFER OF BENEFICIAL INTERESTS.—If, at any time,

a beneficial interest in an electing Settlement Trust may be

disposed of to a person in a manner which would not be permitted by section 7(h) of the Alaska Native Claims Settlement

Act (43 U.S.C. 1606(h)) if such interest were Settlement

Common Stock—

‘‘(A) no election may be made under subsection (c)

with respect to such trust, and

‘‘(B) if such an election is in effect as of such time—

‘‘(i) such election shall cease to apply as of the

first day of the taxable year in which such disposition

is first permitted,

‘‘(ii) the provisions of this section shall not apply

to such trust for such taxable year and all taxable

years thereafter, and

‘‘(iii) the distributable net income of such trust

shall be increased by the current or accumulated

earnings and profits of the sponsoring Native Corporation as of the close of such taxable year after proper

adjustment is made for all distributions made by the

115 STAT. 146 PUBLIC LAW 107–16—JUNE 7, 2001

sponsoring Native Corporation during such taxable

year.

In no event shall the increase under clause (iii) exceed the

fair market value of the trust’s assets as of the date the beneficial interest of the trust first becomes so disposable. The

earnings and profits of the sponsoring Native Corporation shall

be adjusted as of the last day of such taxable year by the

amount of earnings and profits so included in the distributable

net income of the trust.

‘‘(2) STOCK IN CORPORATION.—If— ‘‘(A) stock in the sponsoring Native Corporation may

be disposed of to a person in a manner which would not

be permitted by section 7(h) of the Alaska Native Claims

Settlement Act (43 U.S.C. 1606(h)) if such stock were

Settlement Common Stock, and ‘‘(B) at any time after such disposition of stock is

first permitted, such corporation transfers assets to a

Settlement Trust,

paragraph (1)(B) shall be applied to such trust on and after

the date of the transfer in the same manner as if the trust

permitted dispositions of beneficial interests in the trust in

a manner not permitted by such section 7(h). ‘‘(3) CERTAIN DISTRIBUTIONS.—For purposes of this section,

the surrender of an interest in a Native Corporation or an

electing Settlement Trust in order to accomplish the whole

or partial redemption of the interest of a shareholder or beneficiary in such corporation or trust, or to accomplish the whole

or partial liquidation of such corporation or trust, shall be

deemed to be a transfer permitted by section 7(h) of the Alaska

Native Claims Settlement Act.

‘‘(g) TAXABLE INCOME.—For purposes of this title, the taxable

income of an electing Settlement Trust shall be determined under

section 641(b) without regard to any deduction under section 651

or 661.

‘‘(h) DEFINITIONS.—For purposes of this section— ‘‘(1) ELECTING SETTLEMENT TRUST.—The term ‘electing

Settlement Trust’ means a Settlement Trust which has made

the election, effective for a taxable year, described in subsection

(c).

‘‘(2) NATIVE CORPORATION.—The term ‘Native Corporation’

has the meaning given such term by section 3(m) of the Alaska

Native Claims Settlement Act (43 U.S.C. 1602(m)).

‘‘(3) SETTLEMENT COMMON STOCK.—The term ‘Settlement

Common Stock’ has the meaning given such term by section

3(p) of the Alaska Native Claims Settlement Act (43 U.S.C.

1602(p)).

‘‘(4) SETTLEMENT TRUST.—The term ‘Settlement Trust’

means a trust that constitutes a settlement trust under section

3(t) of the Alaska Native Claims Settlement Act (43 U.S.C.

1602(t)).

‘‘(5) SPONSORING NATIVE CORPORATION.—The term ‘sponsoring Native Corporation’ means the Native Corporation which

transfers assets to an electing Settlement Trust.

‘‘(i) SPECIAL LOSS DISALLOWANCE RULE.—Any loss that would

otherwise be recognized by a shareholder upon a disposition of

a share of stock of a sponsoring Native Corporation shall be reduced

(but not below zero) by the per share loss adjustment factor. The

PUBLIC LAW 107–16—JUNE 7, 2001 115 STAT. 147

per share loss adjustment factor shall be the aggregate of all contributions to all electing Settlement Trusts sponsored by such

Native Corporation made on or after the first day each trust is

treated as an electing Settlement Trust expressed on a per share

basis and determined as of the day of each such contribution.

‘‘( j) CROSS REFERENCE.—

‘‘For information required with respect to electing Settlement

Trusts and sponsoring Native Corporations, see section 6039H.’’.

(b) REPORTING.—Subpart A of part III of subchapter A of

chapter 61 of subtitle F (relating to information concerning persons

subject to special provisions) is amended by inserting after section

6039G the following new section:

‘‘SEC. 6039H. INFORMATION WITH RESPECT TO ALASKA NATIVE

SETTLEMENT TRUSTS AND SPONSORING NATIVE CORPORATIONS.

‘‘(a) REQUIREMENT.—The fiduciary of an electing Settlement

Trust (as defined in section 646(h)(1)) shall include with the return

of income of the trust a statement containing the information

required under subsection (c).

‘‘(b) APPLICATION WITH OTHER REQUIREMENTS.—The filing of

any statement under this section shall be in lieu of the reporting

requirements under section 6034A to furnish any statement to

a beneficiary regarding amounts distributed to such beneficiary

(and such other reporting rules as the Secretary deems appropriate).

‘‘(c) REQUIRED INFORMATION.—The information required under

this subsection shall include—

‘‘(1) the amount of distributions made during the taxable

year to each beneficiary,

‘‘(2) the treatment of such distribution under the applicable

provision of section 646, including the amount that is excludable

from the recipient beneficiary’s gross income under section 646,

and

‘‘(3) the amount (if any) of any distribution during such

year that is deemed to have been made by the sponsoring

Native Corporation (as defined in section 646(h)(5)).

‘‘(d) SPONSORING NATIVE CORPORATION.—

‘‘(1) IN GENERAL.—The electing Settlement Trust shall, on

or before the date on which the statement under subsection

(a) is required to be filed, furnish such statement to the sponsoring Native Corporation (as so defined).

‘‘(2) DISTRIBUTEES.—The sponsoring Native Corporation

shall furnish each recipient of a distribution described in section

646(e)(3) a statement containing the amount deemed to have

been distributed to such recipient by such corporation for the

taxable year.’’.

(c) CLERICAL AMENDMENT.—

(1) The table of sections for subpart A of part I of subchapter J of chapter 1 of such Code is amended by adding

at the end the following new item:

‘‘Sec. 646. Tax treatment of electing Alaska Native Settlement Trusts.’’.

(2) The table of sections for subpart A of part III of subchapter A of chapter 61 of subtitle F of such Code is amended

115 STAT. 148 PUBLIC LAW 107–16—JUNE 7, 2001

by inserting after the item relating to section 6039G the following new item:

‘‘Sec. 6039H. Information with respect to Alaska Native Settlement Trusts

and sponsoring Native Corporations.’’.

(d) EFFECTIVE DATE.—The amendments made by this section

shall apply to taxable years ending after the date of the enactment

of this Act and to contributions made to electing Settlement Trusts

for such year or any subsequent year.

TITLE VII—ALTERNATIVE MINIMUM

TAX

SEC. 701. INCREASE IN ALTERNATIVE MINIMUM TAX EXEMPTION.

(a) IN GENERAL.—

(1) Subparagraph (A) of section 55(d)(1) (relating to exemption amount for taxpayers other than corporations) is amended

by striking ‘‘$45,000’’ and inserting ‘‘$45,000 ($49,000 in the

case of taxable years beginning in 2001, 2002, 2003, and 2004)’’.

(2) Subparagraph (B) of section 55(d)(1) (relating to exemption amount for taxpayers other than corporations) is amended

by striking ‘‘$33,750’’ and inserting ‘‘$33,750 ($35,750 in the

case of taxable years beginning in 2001, 2002, 2003, and 2004)’’.

(b) CONFORMING AMENDMENTS.—

(1) Paragraph (1) of section 55(d) is amended by striking

‘‘and’’ at the end of subparagraph (B), by striking subparagraph

(C), and by inserting after subparagraph (B) the following new

subparagraphs:

‘‘(C) 50 percent of the dollar amount applicable under

paragraph (1)(A) in the case of a married individual who

files a separate return, and

‘‘(D) $22,500 in the case of an estate or trust.’’.

(2) Subparagraph (C) of section 55(d)(3) is amended by

striking ‘‘paragraph (1)(C)’’ and inserting ‘‘subparagraph (C)

or (D) of paragraph (1)’’.

(3) The last sentence of section 55(d)(3) is amended—

(A) by striking ‘‘paragraph (1)(C)(i)’’ and inserting

‘‘paragraph (1)(C)’’; and

(B) by striking ‘‘$165,000 or (ii) $22,500’’ and inserting

‘‘the minimum amount of such income (as so determined)

for which the exemption amount under paragraph (1)(C)

is zero, or (ii) such exemption amount (determined without

regard to this paragraph)’’.

(c) EFFECTIVE DATE.—The amendments made by this section

shall apply to taxable years beginning after December 31, 2000.

TITLE VIII—OTHER PROVISIONS

SEC. 801. TIME FOR PAYMENT OF CORPORATE ESTIMATED TAXES.

Notwithstanding section 6655 of the Internal Revenue Code

of 1986—

(1) 100 percent of the amount of any required installment

of corporate estimated tax which is otherwise due in September

2001 shall not be due until October 1, 2001; and

26 USC 6655

note.

Applicability.

26 USC 55 note.

Applicability.

26 USC 646 note.

PUBLIC LAW 107–16—JUNE 7, 2001 115 STAT. 149

(2) 20 percent of the amount of any required installment

of corporate estimated tax which is otherwise due in September

2004 shall not be due until October 1, 2004.

SEC. 802. EXPANSION OF AUTHORITY TO POSTPONE CERTAIN TAXRELATED DEADLINES BY REASON OF PRESIDENTIALLY

DECLARED DISASTER.

(a) IN GENERAL.—Section 7508A(a) (relating to authority to

postpone certain tax-related deadlines by reason of presidentially

declared disaster) is amended by striking ‘‘90 days’’ and inserting ‘‘120 days’’. (b) EFFECTIVE DATE.—The amendment made by this section

shall take effect on the date of enactment of this Act.

SEC. 803. NO FEDERAL INCOME TAX ON RESTITUTION RECEIVED BY

VICTIMS OF THE NAZI REGIME OR THEIR HEIRS OR

ESTATES.

(a) IN GENERAL.—For purposes of the Internal Revenue Code

of 1986, any excludable restitution payments received by an eligible

individual (or the individual’s heirs or estate) and any excludable

interest—

(1) shall not be included in gross income; and

(2) shall not be taken into account for purposes of applying

any provision of such Code which takes into account excludable

income in computing adjusted gross income, including section

86 of such Code (relating to taxation of Social Security benefits).

For purposes of such Code, the basis of any property received

by an eligible individual (or the individual’s heirs or estate) as

part of an excludable restitution payment shall be the fair market

value of such property as of the time of the receipt.

(b) ELIGIBLE INDIVIDUAL.—For purposes of this section, the

term ‘‘eligible individual’’ means a person who was persecuted on

the basis of race, religion, physical or mental disability, or sexual

orientation by Nazi Germany, any other Axis regime, or any other

Nazi-controlled or Nazi-allied country.

(c) EXCLUDABLE RESTITUTION PAYMENT.—For purposes of this

section, the term ‘‘excludable restitution payment’’ means any payment or distribution to an individual (or the individual’s heirs

or estate) which—

(1) is payable by reason of the individual’s status as an

eligible individual, including any amount payable by any foreign

country, the United States of America, or any other foreign

or domestic entity, or a fund established by any such country

or entity, any amount payable as a result of a final resolution

of a legal action, and any amount payable under a law providing

for payments or restitution of property;

(2) constitutes the direct or indirect return of, or compensation or reparation for, assets stolen or hidden from, or otherwise

lost to, the individual before, during, or immediately after World

War II by reason of the individual’s status as an eligible individual, including any proceeds of insurance under policies

issued on eligible individuals by European insurance companies

immediately before and during World War II; or

(3) consists of interest which is payable as part of any

payment or distribution described in paragraph (1) or (2).

(d) EXCLUDABLE INTEREST.—For purposes of this section, the

term ‘‘excludable interest’’ means any interest earned by—

26 USC note

prec. 101.

26 USC 7508A

note.

115 STAT. 150 PUBLIC LAW 107–16—JUNE 7, 2001

LEGISLATIVE HISTORY—H.R. 1836:

HOUSE REPORTS: No. 107–84 (Comm. of Conference).

CONGRESSIONAL RECORD, Vol. 147 (2001):

May 16, considered and passed House.

May 17, 21–23, considered and passed Senate, amended.

May 25, House agreed to conference report.

May 26, Senate agreed to conference report.

WEEKLY COMPILATION OF PRESIDENTIAL DOCUMENTS, Vol. 37 (2001):

June 7, Presidential remarks.

Æ

(1) escrow accounts or settlement funds established pursuant to the settlement of the action entitled ‘‘In re: Holocaust

Victim Assets Litigation,’’ (E.D.N.Y.) C.A. No. 96–4849,

(2) funds to benefit eligible individuals or their heirs created by the International Commission on Holocaust Insurance

Claims as a result of the Agreement between the Government

of the United States of America and the Government of the

Federal Republic of Germany concerning the Foundation

‘‘Remembrance, Responsibility, and Future,’’ dated July 17,

2000, or

(3) similar funds subject to the administration of the United

States courts created to provide excludable restitution payments

to eligible individuals (or eligible individuals’ heirs or estates).

(e) EFFECTIVE DATE.— (1) IN GENERAL.—This section shall apply to any amount

received on or after January 1, 2000.

(2) NO INFERENCE.—Nothing in this Act shall be construed

to create any inference with respect to the proper tax treatment

of any amount received before January 1, 2000.

TITLE IX—COMPLIANCE WITH

CONGRESSIONAL BUDGET ACT

SEC. 901. SUNSET OF PROVISIONS OF ACT.

(a) IN GENERAL.—All provisions of, and amendments made

by, this Act shall not apply—

(1) to taxable, plan, or limitation years beginning after

December 31, 2010, or

(2) in the case of title V, to estates of decedents dying,

gifts made, or generation skipping transfers, after December

31, 2010.

(b) APPLICATION OF CERTAIN LAWS.—The Internal Revenue

Code of 1986 and the Employee Retirement Income Security Act

of 1974 shall be applied and administered to years, estates, gifts,

and transfers described in subsection (a) as if the provisions and

amendments described in subsection (a) had never been enacted.

Approved June 7, 2001.

26 USC 1 note.