I

104TH CONGRESS

2D SESSION H. R. 3316

To amend the Internal Revenue Code of 1986 to revise the treatment of

deferred compensation plans of State and local governments, and for

other purposes.

IN THE HOUSE OF REPRESENTATIVES

APRIL 24, 1996

Mr. VENTO introduced the following bill; which was referred to the Committee

on Ways and Means

A BILL

To amend the Internal Revenue Code of 1986 to revise

the treatment of deferred compensation plans of State

and local governments, and for other purposes.

1 Be it enacted by the Senate and House of Representa2 tives of the United States of America in Congress assembled,

3 SECTION 1. SHORT TITLE.

4 This Act may be cited as the ‘‘Public Employee Re5 tirement Security Act of 1996’’.

6 SEC. 2. TREATMENT OF GOVERNMENTAL PLANS UNDER

7 SECTION 415.

8 (a) COMPENSATION LIMIT.—Subsection (b) of sec9 tion 415 of the Internal Revenue Code of 1986 is amended
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1 by adding immediately after paragraph (10) the following

2 new paragraph:

3 ‘‘(11) SPECIAL LIMITATION RULE FOR GOVERN4 MENTAL PLANS.—In the case of a governmental

5 plan (as defined in section 414(d)), subparagraph

6 (B) of paragraph (1) shall not apply.’’

7 (b) TREATMENT OF CERTAIN EXCESS BENEFIT

8 PLANS.—

9 (1) IN GENERAL.—Section 415 of such Code is

10 amended by adding at the end the following new

11 subsection:

12 ‘‘(m) TREATMENT OF QUALIFIED GOVERNMENTAL

13 EXCESS BENEFIT ARRANGEMENTS.—

14 ‘‘(1) GOVERNMENTAL PLAN NOT AFFECTED.—

15 In determining whether a governmental plan (as de16 fined in section 414(d)) meets the requirements of

17 this section, benefits provided under a qualified gov18 ernmental excess benefit arrangement shall not be

19 taken into account. Income accruing to a govern20 mental plan (or to a trust that is maintained solely

21 for the purpose of providing benefits under a quali22 fied governmental excess benefit arrangement) in re23 spect of a qualified governmental excess benefit ar24 rangement shall constitute income derived from the

25 exercise of an essential governmental function upon
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1 which such governmental plan (or trust) shall be ex2 empt from tax under section 115.

3 ‘‘(2) TAXATION OF PARTICIPANT.—For pur4 poses of this chapter—

5 ‘‘(A) the taxable year or years for which

6 amounts in respect of a qualified governmental

7 excess benefit arrangement are includible in

8 gross income by a participant, and

9 ‘‘(B) the treatment of such amounts when

10 so includible by the participant,

11 shall be determined as if such qualified govern12 mental excess benefit arrangement were treated as a

13 plan for the deferral of compensation which is main14 tained by a corporation not exempt from tax under

15 this chapter and which does not meet the require16 ments for qualification under section 401.

17 ‘‘(3) QUALIFIED GOVERNMENTAL EXCESS BEN18 EFIT ARRANGEMENT.—For purposes of this sub19 section, the term ‘qualified governmental excess ben20 efit arrangement’ means a portion of a governmental

21 plan if—

22 ‘‘(A) such portion is maintained solely for

23 the purpose of providing to participants in the

24 plan that part of the participant’s annual bene25 fit otherwise payable under the terms of the
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1 plan that exceeds the limitations on benefits im2 posed by this section,

3 ‘‘(B) under such portion no election is pro4 vided at any time to the participant (directly or

5 indirectly) to defer compensation, and

6 ‘‘(C) benefits described in subparagraph

7 (A) are not paid from a trust forming a part

8 of such governmental plan unless such trust is

9 maintained solely for the purpose of providing

10 such benefits.’’

11 (2) COORDINATION WITH SECTION 457.—Sub12 section (e) of section 457 of such Code is amended

13 by adding at the end the following new paragraph:

14 ‘‘(14) TREATMENT OF QUALIFIED GOVERN15 MENTAL EXCESS BENEFIT ARRANGEMENTS.—Sub16 sections (b)(2) and (c)(1) shall not apply to any

17 qualified governmental excess benefit arrangement

18 (as defined in section 415(m)(3)), and benefits pro19 vided under such an arrangement shall not be taken

20 into account in determining whether any other plan

21 is an eligible deferred compensation plan.’’

22 (3) CONFORMING AMENDMENT.—Paragraph (2)

23 of section 457(f) of such Code is amended by strik24 ing ‘‘and’’ at the end of subparagraph (C), by strik25 ing the period at the end of subparagraph (D) and
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1 inserting ‘‘, and’’, and by adding at the end the fol2 lowing new subparagraph:

3 ‘‘(E) a qualified governmental excess bene4 fit arrangement described in section 415(m).’’

5 (c) EXEMPTION FOR SURVIVOR AND DISABILITY

6 BENEFITS.—Paragraph (2) of section 415(b) of such

7 Code is amended by adding at the end the following new

8 subparagraph:

9 ‘‘(I) EXEMPTION FOR SURVIVOR AND DIS10 ABILITY BENEFITS PROVIDED UNDER GOVERN11 MENTAL PLANS.—Paragraph (5) and subpara12 graph (C) of this paragraph shall not apply

13 to—

14 ‘‘(i) income received from a govern15 mental plan (as defined in section 414(d))

16 as a pension, annuity, or similar allowance

17 as the result of the recipient becoming dis18 abled by reason of personal injuries or

19 sickness, or

20 ‘‘(ii) amounts received from a govern21 mental plan by the beneficiaries, survivors,

22 or the estate of an employee as the result

23 of the death of the employee.’’

24 (d) REVOCATION OF GRANDFATHER ELECTION.—
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1 (1) IN GENERAL.—Subparagraph (C) of section

2 415(b)(10) of such Code is amended by adding at

3 the end the following new clause:

4 ‘‘(ii) REVOCATION OF ELECTION.—An

5 election under clause (i) may be revoked

6 not later than the last day of the third

7 plan year beginning after the date of the

8 enactment of this clause. The revocation

9 shall apply to all plan years to which the

10 election applied and to all subsequent plan

11 years. Any amount paid by a plan in a tax12 able year ending after the revocation shall

13 be includible in income in such taxable

14 year under the rules of this chapter in ef15 fect for such taxable year, except that, for

16 purposes of applying the limitations im17 posed by this section, any portion of such

18 amount which is attributable to any tax19 able year during which the election was in

20 effect shall be treated as received in such

21 taxable year.’’

22 (2) CONFORMING AMENDMENT.—Subparagraph

23 (C) of section 415(b)(10) of such Code is amended

24 by striking ‘‘This’’ and inserting:

25 ‘‘(i) IN GENERAL.—This’’.
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1 (e) COMPENSATION.—Subsection (k) of section 415

2 of such Code is amended by adding at the end the follow3 ing new paragraph:

4 ‘‘(3) DEFINITION OF COMPENSATION FOR GOV5 ERNMENT PLANS.—For purposes of this section, in

6 the case of a governmental plan (as defined in sec7 tion 414(d)), the term ‘compensation’ includes, in

8 addition to the amounts described in subsection

9 (c)(3)—

10 ‘‘(A) any elective deferral (as defined in

11 section 402(g)(3)), and

12 ‘‘(B) any amount which is contributed by

13 the employer at the election of the employee

14 and which is not includible in the gross income

15 of the employee under section 125 or 457.’’

16 (f) EFFECTIVE DATE.—

17 (1) IN GENERAL.—The amendments made by

18 subsections (a), (b), (c), and (e) shall apply to years

19 beginning after the date of the enactment of this

20 Act. The amendments made by subsection (d) shall

21 apply with respect to revocations adopted after the

22 date of the enactment of this Act.

23 (2) TREATMENT FOR YEARS BEGINNING BE24 FORE DATE OF ENACTMENT.—Nothing in the

25 amendments made by this section shall be construed
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1 to infer that a governmental plan (as defined in sec2 tion 414(d) of the Internal Revenue Code of 1986)

3 fails to satisfy the requirements of section 415 of

4 such Code for any taxable year beginning before the

5 date of the enactment of this Act.

6 SEC. 3. TREATMENT OF DEFERRED COMPENSATION PLANS

7 OF STATE AND LOCAL GOVERNMENTS AND

8 TAX-EXEMPT ORGANIZATIONS.

9 (a) SPECIAL RULES FOR PLAN DISTRIBUTIONS.—

10 Paragraph (9) of section 457(e) of the Internal Revenue

11 Code of 1986 (relating to other definitions and special

12 rules) is amended to read as follows:

13 ‘‘(9) BENEFITS NOT TREATED AS MADE AVAIL14 ABLE BY REASON OF CERTAIN ELECTIONS, ETC.—

15 ‘‘(A) TOTAL AMOUNT PAYABLE IS $3,500

16 OR LESS.—The total amount payable to a par17 ticipant under the plan shall not be treated as

18 made available merely because the participant

19 may elect to receive such amount (or the plan

20 may distribute such amount without the partici21 pant’s consent) if—

22 ‘‘(i) such amount does not exceed

23 $3,500, and

24 ‘‘(ii) such amount may be distributed

25 only if—
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1 ‘‘(I) no amount has been deferred

2 under the plan with respect to such

3 participant during the 2-year period

4 ending on the date of the distribution,

5 and

6 ‘‘(II) there has been no prior dis7 tribution under the plan to such par8 ticipant to which this subparagraph

9 applied.

10 A plan shall not be treated as failing to meet

11 the distribution requirements of subsection (d)

12 by reason of a distribution to which this sub13 paragraph applies.

14 ‘‘(B) ELECTION TO DEFER COMMENCE15 MENT OF DISTRIBUTIONS.—The total amount

16 payable to a participant under the plan shall

17 not be treated as made available merely because

18 the participant may elect to defer commence19 ment of distributions under the plan if—

20 ‘‘(i) such election is made after

21 amounts may be available under the plan

22 in accordance with subsection (d)(1)(A)

23 and before commencement of such dis24 tributions, and
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1 ‘‘(ii) the participant may make only 1

2 such election.’’.

3 (b) COST-OF-LIVING ADJUSTMENT OF MAXIMUM DE4 FERRAL AMOUNT.—Subsection (e) of section 457 of such

5 Code, as amended by section 2(b)(2) (relating to govern6 mental plans), is amended by adding at the end the follow7 ing new paragraph:

8 ‘‘(15) COST-OF-LIVING ADJUSTMENT OF MAXI9 MUM DEFERRAL AMOUNT.—The Secretary shall ad10 just the $7,500 amount specified in subsections

11 (b)(2) and (c)(1) at the same time and in the same

12 manner as under section 415(d), except that the

13 base period shall be the calendar quarter ending

14 September 30, 1995, and any increase under this

15 paragraph which is not a multiple of $500 shall be

16 rounded to the next lowest multiple of $500.’’.

17 (c) EFFECTIVE DATE.—The amendments made by

18 this section shall apply to taxable years beginning after

19 the date of the enactment of this Act.

20 SEC. 4. TRUST REQUIREMENT FOR DEFERRED COMPENSA21 TION PLANS OF STATE AND LOCAL GOVERN22 MENTS.

23 (a) IN GENERAL.—Section 457 of the Internal Reve24 nue Code of 1986 is amended by adding at the end the

25 following new subsection:
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1 ‘‘(g) GOVERNMENTAL PLANS MUST MAINTAIN SET

2 ASIDES FOR EXCLUSIVE BENEFIT OF PARTICIPANTS.—

3 ‘‘(1) IN GENERAL.—A plan maintained by an

4 eligible employer described in subsection (e)(1)(A)

5 shall not be treated as an eligible deferred com6 pensation plan unless all assets and income of the

7 plan described in subsection (b)(6) are held in trust

8 for the exclusive benefit of participants and their

9 beneficiaries.

10 ‘‘(2) TAXABILITY OF TRUSTS AND PARTICI11 PANTS.—For purposes of this title—

12 ‘‘(A) a trust described in paragraph (1)

13 shall be treated as an organization exempt from

14 taxation under section 501(a), and

15 ‘‘(B) notwithstanding any other provision

16 of this title, amounts in the trust shall be in17 cludible in the gross income of participants and

18 beneficiaries only to the extent, and at the time,

19 provided in this section.

20 ‘‘(3) CUSTODIAL ACCOUNTS AND CONTRACTS.—

21 For purposes of this subsection, custodial accounts

22 and contracts described in section 401(f) shall be

23 treated as trusts under rules similar to the rules

24 under section 401(f).’’
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1 (b) CONFORMING AMENDMENT.—Paragraph (6) of

2 section 457(b) of such Code is amended by inserting ‘‘ex3 cept as provided in subsection (g),’’ before ‘‘which provides

4 that’’.

5 (c) EFFECTIVE DATES.—

6 (1) IN GENERAL.—Except as provided in para7 graph (2), the amendments made by this section

8 shall apply to assets and income described in section

9 457(b)(6) of such Code held by a plan on and after

10 the date of the enactment of this Act.

11 (2) TRANSITION RULE.—In the case of assets

12 and income described in paragraph (1) held by a

13 plan before the first day of the first calendar quarter

14 beginning after the close of the first regular session

15 of the State legislature of the State in which the

16 governmental entity maintaining the plan is located

17 beginning after the date of the enactment of this

18 Act, a trust need not be established by reason of the

19 amendments made by this section before such first

20 day. For purposes of the preceding sentence, in the

21 case of a State that has a 2-year legislative session,

22 each year of such session shall be deemed to be a

23 separate regular session of the State legislature.

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