II

104TH CONGRESS

2D SESSION S. 1685

To provide income and economic security to the American family, and for

other purposes.

IN THE SENATE OF THE UNITED STATES

APRIL 18, 1996

Mr. KERRY introduced the following bill; which was read twice and referred

to the Committee on Finance

A BILL

To provide income and economic security to the American

family, 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; AMENDMENT OF 1986 CODE;

4 TABLE OF CONTENTS.

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

6 ‘‘American Family Income and Economic Security Act of

7 1996’’.

8 (b) AMENDMENT OF 1986 CODE.—Except as other9 wise expressly provided, whenever in this Act an amend10 ment or repeal is expressed in terms of an amendment
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1 to, or repeal of, a section or other provision, the reference

2 shall be considered to be made to a section or other provi3 sion of the Internal Revenue Code of 1986.

4 (c) TABLE OF CONTENTS.—

Sec. 1. Short title; amendment of 1986 Code; table of contents.

TITLE I—AMERICAN FAMILY ECONOMIC SECURITY

Subtitle A—Wage Security

Sec. 101. Increase in the minimum wage rate.

Subtitle B—Retirement Security

PART I—IRA DEDUCTION

Sec. 111. Increase in income limitations.

Sec. 112. Inflation adjustment for deductible amount and income limitations.

Sec. 113. Coordination of IRA deduction limit with elective deferral limit.

PART II—NONDEDUCTIBLE TAX-FREE IRAS

Sec. 116. Establishment of nondeductible tax-free individual retirement accounts.

PART III—PENALTY-FREE DISTRIBUTIONS

Sec. 121. Distributions from certain plans may be used without penalty to purchase first homes, to pay higher education or financially devastating medical expenses, or by the unemployed.

Sec. 122. Contributions must be held at least 5 years in certain cases.

PART IV—PLAN LOANS

Sec. 126. Loan requirements for defined contribution plans.

Subtitle C—Health Security

PART I—DEFINITIONS

Sec. 131. Definitions.

PART II—HEALTH CARE ACCESS, PORTABILITY, AND RENEWABILITY

SUBPART A—GROUP MARKET RULES

Sec. 135. Guaranteed availability of health coverage.

Sec. 136. Guaranteed renewability of health coverage.

Sec. 137. Portability of health coverage and limitation on preexisting condition

exclusions.

Sec. 138. Special enrollment periods.

Sec. 139. Disclosure of information.
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SUBPART B—INDIVIDUAL MARKET RULES

Sec. 141. Individual health plan portability.

Sec. 142. Guaranteed renewability of individual health coverage.

Sec. 143. State flexibility in individual market reforms.

Sec. 144. Definition.

SUBPART C—COBRA CLARIFICATIONS

Sec. 151. COBRA clarifications.

SUBPART D—PRIVATE HEALTH PLAN PURCHASING COOPERATIVES

Sec. 161. Private health plan purchasing cooperatives.

PART II—APPLICATION AND ENFORCEMENT OF STANDARDS

Sec. 171. Applicability.

Sec. 172. Enforcement of standards.

PART III—MISCELLANEOUS PROVISIONS

Sec. 181. HMOs allowed to offer plans with deductibles to individuals with

medical savings accounts.

Sec. 182. Health coverage availability study.

Sec. 183. Sense of the committee concerning medicare.

Sec. 184. Effective date.

Sec. 185. Severability.

Subtitle D—Employee Security

Sec. 191. Allowance of credit for employer expenses for certain on-site day-care

facilities.

Sec. 192. Exclusion for group legal services made permanent.

Sec. 193. One-time exclusion of gain from sale of principal residence if individual or spouse is terminally ill.

TITLE II—INCENTIVES FOR LIFELONG LEARNING

Sec. 201. Credit for employee training.

Sec. 202. Permanent extension of educational assistance exclusion.

Sec. 203. Deduction for higher education expenses.

TITLE III—HIGH-WAGE JOBS FOR AMERICAN FAMILIES

Subtitle A—Business Incentives

Sec. 301. Exclusion for gain from small business stock.

Sec. 302. Permanent extension of research credit.

Subtitle B—Preservation of American Jobs

Sec. 311. Taxation of income of controlled foreign corporations attributable to

imported property.

Sec. 312. Debarment of Federal contractors not in compliance with Immigration and Nationality Act employment provisions.

Sec. 313. Sense of Congress relating to stock options for employees who are

laid off.

Subtitle C—Promotion of Long-Term Investments in American Businesses
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PART I—LONG-TERM INVESTMENT, COMPETITIVENESS, PENSION

PROTECTION, AND CORPORATE TAKEOVER REFORM

Sec. 321. Findings.

Sec. 322. Long-term investments and pension protection.

Sec. 323. Protection of workers.

Sec. 324. Williams Act reforms.

Sec. 325. Anti-greenmail/short-swing profits.

Sec. 326. Additional reserve requirements.

Sec. 327. Leveraged buyout and going private transactions.

Sec. 328. Firm financing and financing disclosures.

Sec. 329. Role of State law.

PART II—RESTRICTIONS ON HARMFUL TAKEOVERS

Sec. 331. Disallowance of deduction for merger and acquisition expenses.

PART III—OTHER PROVISIONS

Sec. 341. $1,000,000 compensation deduction limit extended to all employers of

all corporations.

Sec. 342. Level of participation in guaranteed loans under export working capital program.

TITLE IV—MISCELLANEOUS PROVISIONS

Sec. 401. Deduction for local sewer and water fees.

1 TITLE I—AMERICAN FAMILY

2 ECONOMIC SECURITY

3 Subtitle A—Wage Security

4 SEC. 101. INCREASE IN THE MINIMUM WAGE RATE.

5 Section 6(a)(1) of the Fair Labor Standards Act of

6 1938 (29 U.S.C. 206(a)(1)) is amended to read as follows:

7 ‘‘(1) except as otherwise provided in this sec8 tion, not less than $4.25 an hour during the period

9 ending July 3, 1995, not less than $4.70 an hour

10 during the year beginning July 4, 1995, and not less

11 than $5.15 an hour after July 3, 1996;’’.
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1 Subtitle B—Retirement Security

2 PART I—IRA DEDUCTION

3 SEC. 111. INCREASE IN INCOME LIMITATIONS.

4 (a) IN GENERAL.—Subparagraph (B) of section

5 219(g)(3) is amended—

6 (1) by striking ‘‘$40,000’’ in clause (i) and in7 serting ‘‘$80,000’’, and

8 (2) by striking ‘‘$25,000’’ in clause (ii) and in9 serting ‘‘$50,000’’.

10 (b) PHASE-OUT OF LIMITATIONS.—Clause (ii) of sec11 tion 219(g)(2)(A) is amended by striking ‘‘$10,000’’ and

12 inserting ‘‘an amount equal to 10 times the dollar amount

13 applicable for the taxable year under subsection

14 (b)(1)(A)’’.

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

16 this section shall apply to taxable years beginning after

17 December 31, 1995.

18 SEC. 112. INFLATION ADJUSTMENT FOR DEDUCTIBLE

19 AMOUNT AND INCOME LIMITATIONS.

20 (a) IN GENERAL.—Section 219 is amended by redes21 ignating subsection (h) as subsection (i) and by inserting

22 after subsection (g) the following new subsection:

23 ‘‘(h) COST-OF-LIVING ADJUSTMENTS.—

24 ‘‘(1) IN GENERAL.—In the case of any taxable

25 year beginning in a calendar year after 1996, each
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1 dollar amount to which this subsection applies shall

2 be increased by an amount equal to—

3 ‘‘(A) such dollar amount, multiplied by

4 ‘‘(B) the cost-of-living adjustment deter5 mined under section 1(f)(3) for the calendar

6 year in which the taxable year begins, deter7 mined by substituting ‘calendar year 1995’ for

8 ‘calendar year 1992’ in subparagraph (B)

9 thereof.

10 ‘‘(2) DOLLAR AMOUNTS TO WHICH SUBSECTION

11 APPLIES.—This subsection shall apply to—

12 ‘‘(A) the $2,000 amounts under subsection

13 (b)(1)(A) and (c), and

14 ‘‘(B) the applicable dollar amounts under

15 subsection (g)(3)(B).

16 ‘‘(3) ROUNDING RULES.—

17 ‘‘(A) DEDUCTION AMOUNTS.—If any

18 amount referred to in paragraph (2)(A) as ad19 justed under paragraph (1) is not a multiple of

20 $500, such amount shall be rounded to the next

21 lowest multiple of $500.

22 ‘‘(B) APPLICABLE DOLLAR AMOUNTS.—If

23 any amount referred to in paragraph (2)(B) as

24 adjusted under paragraph (1) is not a multiple
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1 of $5,000, such amount shall be rounded to the

2 next lowest multiple of $5,000.’’

3 (b) CONFORMING AMENDMENTS.—

4 (1) Clause (i) of section 219(c)(2)(A) is amend5 ed to read as follows:

6 ‘‘(i) the sum of $250 and the dollar

7 amount in effect for the taxable year under

8 subsection (b)(1)(A), or’’.

9 (2) Section 408(a)(1) is amended by striking

10 ‘‘in excess of $2,000 on behalf of any individual’’

11 and inserting ‘‘on behalf of any individual in excess

12 of the amount in effect for such taxable year under

13 section 219(b)(1)(A)’’.

14 (3) Section 408(b)(2)(B) is amended by strik15 ing ‘‘$2,000’’ and inserting ‘‘the dollar amount in

16 effect under section 219(b)(1)(A)’’.

17 (4) Subparagraph (A) of section 408(d)(5) is

18 amended by striking ‘‘$2,250’’ and inserting ‘‘the

19 dollar amount in effect for the taxable year under

20 section 219(c)(2)(A)(i)’’.

21 (5) Section 408(j) is amended by striking

22 ‘‘$2,000’’.

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

24 this section shall apply to taxable years beginning after

25 December 31, 1995.
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1 SEC. 113. COORDINATION OF IRA DEDUCTION LIMIT WITH

2 ELECTIVE DEFERRAL LIMIT.

3 (a) IN GENERAL.—Section 219(b) (relating to maxi4 mum amount of deduction) is amended by adding at the

5 end the following new paragraph:

6 ‘‘(4) COORDINATION WITH ELECTIVE DEFER7 RAL LIMIT.—The amount determined under para8 graph (1) or subsection (c)(2) with respect to any

9 individual for any taxable year shall not exceed the

10 excess (if any) of—

11 ‘‘(A) the limitation applicable for the tax12 able year under section 402(g)(1), over

13 ‘‘(B) the elective deferrals (as defined in

14 section 402(g)(3)) of such individual for such

15 taxable year.’’

16 (b) CONFORMING AMENDMENT.—Section 219(c) is

17 amended by adding at the end the following new para18 graph:

19 ‘‘(3) CROSS REFERENCE.—

‘‘For reduction in paragraph (2) amount, see subsection (b)(4).’’

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

21 this section shall apply to taxable years beginning after

22 December 31, 1995.
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1 PART II—NONDEDUCTIBLE TAX-FREE IRAs

2 SEC. 116. ESTABLISHMENT OF NONDEDUCTIBLE TAX-FREE

3 INDIVIDUAL RETIREMENT ACCOUNTS.

4 (a) IN GENERAL.—Subpart A of part I of subchapter

5 D of chapter 1 (relating to pension, profit-sharing, stock

6 bonus plans, etc.) is amended by inserting after section

7 408 the following new section:

8 ‘‘SEC. 408A. SPECIAL INDIVIDUAL RETIREMENT ACCOUNTS.

9 ‘‘(a) GENERAL RULE.—Except as provided in this

10 chapter, a special individual retirement account shall be

11 treated for purposes of this title in the same manner as

12 an individual retirement plan.

13 ‘‘(b) SPECIAL INDIVIDUAL RETIREMENT AC14 COUNT.—For purposes of this title, the term ‘special indi15 vidual retirement account’ means an individual retirement

16 plan which is designated at the time of establishment of

17 the plan as a special individual retirement account.

18 ‘‘(c) TREATMENT OF CONTRIBUTIONS.—

19 ‘‘(1) NO DEDUCTION ALLOWED.—No deduction

20 shall be allowed under section 219 for a contribution

21 to a special individual retirement account.

22 ‘‘(2) CONTRIBUTION LIMIT.—The aggregate

23 amount of contributions for any taxable year to all

24 special individual retirement accounts maintained for

25 the benefit of an individual shall not exceed the ex26 cess (if any) of—
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1 ‘‘(A) the maximum amount allowable as a

2 deduction under section 219 with respect to

3 such individual for such taxable year, over

4 ‘‘(B) the amount so allowed.

5 ‘‘(3) SPECIAL RULES FOR QUALIFIED TRANS6 FERS.—

7 ‘‘(A) IN GENERAL.—No rollover contribu8 tion may be made to a special individual retire9 ment account unless it is a qualified transfer.

10 ‘‘(B) LIMIT NOT TO APPLY.—The limita11 tion under paragraph (2) shall not apply to a

12 qualified transfer to a special individual retire13 ment account.

14 ‘‘(d) TAX TREATMENT OF DISTRIBUTIONS.—

15 ‘‘(1) IN GENERAL.—Except as provided in this

16 subsection, any amount paid or distributed out of a

17 special individual retirement account shall not be in18 cluded in the gross income of the distributee.

19 ‘‘(2) EXCEPTION FOR EARNINGS ON CONTRIBU20 TIONS HELD LESS THAN 5 YEARS.—

21 ‘‘(A) IN GENERAL.—Any amount distrib22 uted out of a special individual retirement ac23 count which consists of earnings allocable to

24 contributions made to the account during the 5-

25 year period ending on the day before such dis-
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1 tribution shall be included in the gross income

2 of the distributee for the taxable year in which

3 the distribution occurs.

4 ‘‘(B) ORDERING RULE.—

5 ‘‘(i) FIRST-IN, FIRST-OUT RULE.—

6 Distributions from a special individual re7 tirement account shall be treated as having

8 been made—

9 ‘‘(I) first from the earliest con10 tribution (and earnings allocable

11 thereto) remaining in the account at

12 the time of the distribution, and

13 ‘‘(II) then from other contribu14 tions (and earnings allocable thereto)

15 in the order in which made.

16 ‘‘(ii) ALLOCATIONS BETWEEN CON17 TRIBUTIONS AND EARNINGS.—Any portion

18 of a distribution allocated to a contribution

19 (and earnings allocable thereto) shall be

20 treated as allocated first to the earnings

21 and then to the contribution.

22 ‘‘(iii) ALLOCATION OF EARNINGS.—

23 Earnings shall be allocated to a contribu24 tion in such manner as the Secretary may

25 by regulations prescribe.
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1 ‘‘(iv) CONTRIBUTIONS IN SAME

2 YEAR.—Except as provided in regulations,

3 all contributions made during the same

4 taxable year may be treated as 1 contribu5 tion for purposes of this subparagraph.

6 ‘‘(C) CROSS REFERENCE.—

‘‘For additional tax for early withdrawal, see section 72(t).

7 ‘‘(3) QUALIFIED TRANSFER.—

8 ‘‘(A) IN GENERAL.—Paragraph (2) shall

9 not apply to any distribution which is trans10 ferred in a qualified transfer to another special

11 individual retirement account.

12 ‘‘(B) CONTRIBUTION PERIOD.—For pur13 poses of paragraph (2), the special individual

14 retirement account to which any contributions

15 are transferred shall be treated as having held

16 such contributions during any period such con17 tributions were held (or are treated as held

18 under this subparagraph) by the special individ19 ual retirement account from which transferred.

20 ‘‘(4) SPECIAL RULES RELATING TO CERTAIN

21 TRANSFERS.—

22 ‘‘(A) IN GENERAL.—Notwithstanding any

23 other provision of law, in the case of a qualified

24 transfer to a special individual retirement ac-
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1 count from an individual retirement plan which

2 is not a special individual retirement account—

3 ‘‘(i) there shall be included in gross

4 income any amount which, but for the

5 qualified transfer, would be includible in

6 gross income, but

7 ‘‘(ii) section 72(t) shall not apply to

8 such amount.

9 ‘‘(B) TIME FOR INCLUSION.—In the case

10 of any qualified transfer which occurs before

11 January 1, 1997, any amount includible in

12 gross income under subparagraph (A) with re13 spect to such contribution shall be includible

14 ratably over the 4-taxable year period beginning

15 in the taxable year in which the amount was

16 paid or distributed out of the individual retire17 ment plan.

18 ‘‘(e) QUALIFIED TRANSFER.—

19 ‘‘(1) IN GENERAL.—The term ‘qualified trans20 fer’ means a transfer to a special individual retire21 ment account from another such account or from an

22 individual retirement plan but only if such transfer

23 meets the requirements of section 408(d)(3).

24 ‘‘(2) LIMITATION.—A transfer otherwise de25 scribed in paragraph (1) shall not be treated as a
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1 qualified transfer if the taxpayer’s adjusted gross in2 come for the taxable year of the transfer exceeds the

3 sum of—

4 ‘‘(A) the applicable dollar amount, plus

5 ‘‘(B) the dollar amount applicable for the

6 taxable year under section 219(g)(2)(A)(ii).

7 This paragraph shall not apply to a transfer from a

8 special individual retirement account to another spe9 cial individual retirement account.

10 ‘‘(3) DEFINITIONS.—For purposes of this sub11 section, the terms ‘adjusted gross income’ and ‘ap12 plicable dollar amount’ have the meanings given

13 such terms by section 219(g)(3), except subpara14 graph (A)(ii) thereof shall be applied without regard

15 to the phrase ‘or the deduction allowable under this

16 section’.’’

17 (b) EARLY WITHDRAWAL PENALTY.—Section 72(t)

18 is amended by adding at the end the following new para19 graph:

20 ‘‘(6) RULES RELATING TO SPECIAL INDIVIDUAL

21 RETIREMENT ACCOUNTS.—In the case of a special

22 individual retirement account under section 408A—

23 ‘‘(A) this subsection shall only apply to

24 distributions out of such account which consist

25 of earnings allocable to contributions made to
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1 the account during the 5-year period ending on

2 the day before such distribution, and

3 ‘‘(B) paragraph (2)(A)(i) shall not apply to

4 any distribution described in subparagraph

5 (A).’’

6 (c) EXCESS CONTRIBUTIONS.—Section 4973(b) is

7 amended by adding at the end the following new sentence:

8 ‘‘For purposes of paragraphs (1)(B) and (2)(C), the

9 amount allowable as a deduction under section 219 shall

10 be computed without regard to section 408A.’’

11 (d) CONFORMING AMENDMENT.—The table of sec12 tions for subpart A of part I of subchapter D of chapter

13 1 is amended by inserting after the item relating to section

14 408 the following new item:

‘‘Sec. 408A. Special individual retirement accounts.’’

15 (e) EFFECTIVE DATE.—The amendments made by

16 this section shall apply to taxable years beginning after

17 December 31, 1995.

18 PART III—PENALTY-FREE DISTRIBUTIONS

19 SEC. 121. DISTRIBUTIONS FROM CERTAIN PLANS MAY BE

20 USED WITHOUT PENALTY TO PURCHASE

21 FIRST HOMES, TO PAY HIGHER EDUCATION

22 OR FINANCIALLY DEVASTATING MEDICAL EX23 PENSES, OR BY THE UNEMPLOYED.

24 (a) IN GENERAL.—Paragraph (2) of section 72(t)

25 (relating to exceptions to 10-percent additional tax on
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1 early distributions from qualified retirement plans) is

2 amended by adding at the end the following new subpara3 graph:

4 ‘‘(D) DISTRIBUTIONS FROM CERTAIN

5 PLANS FOR FIRST HOME PURCHASES OR EDU6 CATIONAL EXPENSES.—Distributions to an in7 dividual from an individual retirement plan—

8 ‘‘(i) which are qualified first-time

9 homebuyer distributions (as defined in

10 paragraph (7)); or

11 ‘‘(ii) to the extent such distributions

12 do not exceed the qualified higher edu13 cation expenses (as defined in paragraph

14 (8)) of the taxpayer for the taxable year.’’

15 (b) FINANCIALLY DEVASTATING MEDICAL EX16 PENSES.—

17 (1) IN GENERAL.—Section 72(t)(3)(A) is

18 amended by striking ‘‘(B),’’.

19 (2) CERTAIN LINEAL DESCENDANTS AND AN20 CESTORS TREATED AS DEPENDENTS AND LONG21 TERM CARE SERVICES TREATED AS MEDICAL

22 CARE.—Subparagraph (B) of section 72(t)(2) is

23 amended by striking ‘‘medical care’’ and all that fol24 lows and inserting ‘‘medical care determined—
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1 ‘‘(i) without regard to whether the

2 employee itemizes deductions for such tax3 able year, and

4 ‘‘(ii) in the case of an individual re5 tirement plan—

6 ‘‘(I) by treating such employee’s

7 dependents as including all children,

8 grandchildren and ancestors of the

9 employee or such employee’s spouse

10 and

11 ‘‘(II) by treating qualified long12 term care services (as defined in para13 graph (9)) as medical care for pur14 poses of this subparagraph (B).’’

15 (3) CONFORMING AMENDMENT.—Subparagraph

16 (B) of section 72(t)(2) is amended by striking ‘‘or

17 (C)’’ and inserting ‘‘, (C) or (D)’’.

18 (c) DEFINITIONS.—Section 72(t), as amended by this

19 Act, is amended by adding at the end the following new

20 paragraphs:

21 ‘‘(7) QUALIFIED FIRST-TIME HOMEBUYER DIS22 TRIBUTIONS.—For purposes of paragraph (2)(D)(i):

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

24 first-time homebuyer distribution’ means any

25 payment or distribution received by an individ-
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1 ual to the extent such payment or distribution

2 is used by the individual before the close of the

3 60th day after the day on which such payment

4 or distribution is received to pay qualified ac5 quisition costs with respect to a principal resi6 dence of a first-time homebuyer who is such in7 dividual or the spouse, child (as defined in sec8 tion 151(c)(3)), or grandchild of such individ9 ual.

10 ‘‘(B) QUALIFIED ACQUISITION COSTS.—

11 For purposes of this paragraph, the term

12 ‘qualified acquisition costs’ means the costs of

13 acquiring, constructing, or reconstructing a res14 idence. Such term includes any usual or reason15 able settlement, financing, or other closing

16 costs.

17 ‘‘(C) FIRST-TIME HOMEBUYER; OTHER

18 DEFINITIONS.—For purposes of this paragraph:

19 ‘‘(i) FIRST-TIME HOMEBUYER.—The

20 term ‘first-time homebuyer’ means any in21 dividual if—

22 ‘‘(I) such individual (and if mar23 ried, such individual’s spouse) had no

24 present ownership interest in a prin25 cipal residence during the 3-year pe-
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1 riod ending on the date of acquisition

2 of the principal residence to which

3 this paragraph applies, and

4 ‘‘(II) subsection (h) or (k) of sec5 tion 1034 did not suspend the run6 ning of any period of time specified in

7 section 1034 with respect to such in8 dividual on the day before the date

9 the distribution is applied pursuant to

10 subparagraph (A).

11 In the case of an individual described in

12 section 143(i)(1)(C) for any year, an own13 ership interest shall not include any inter14 est under a contract of deed described in

15 such section. An individual who loses an

16 ownership interest in a principal residence

17 incident to a divorce or legal separation is

18 deemed for purposes of this subparagraph

19 to have had no ownership interest in such

20 principal residence within the period re21 ferred to in subparagraph (A)(II).

22 ‘‘(ii) PRINCIPAL RESIDENCE.—The

23 term ‘principal residence’ has the same

24 meaning as when used in section 1034.
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1 ‘‘(iii) DATE OF ACQUISITION.—The

2 term ‘date of acquisition’ means the date—

3 ‘‘(I) on which a binding contract

4 to acquire the principal residence to

5 which subparagraph (A) applies is en6 tered into, or

7 ‘‘(II) on which construction or re8 construction of such a principal resi9 dence is commenced.

10 ‘‘(D) SPECIAL RULE WHERE DELAY IN AC11 QUISITION.—If any distribution from any indi12 vidual retirement plan fails to meet the require13 ments of subparagraph (A) solely by reason of

14 a delay or cancellation of the purchase or con15 struction of the residence, the amount of the

16 distribution may be contributed to an individual

17 retirement plan as provided in section

18 408(d)(3)(A)(i) (determined by substituting

19 ‘120 days’ for ‘60 days’ in such section), except

20 that—

21 ‘‘(i) section 408(d)(3)(B) shall not be

22 applied to such contribution, and

23 ‘‘(ii) such amount shall not be taken

24 into account in determining whether sec-
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1 tion 408(d)(3)(A)(i) applies to any other

2 amount.

3 ‘‘(8) QUALIFIED HIGHER EDUCATION EX4 PENSES.—For purposes of paragraph (2)(D)(ii)—

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

6 higher education expenses’ means tuition and

7 fees required for the enrollment or attendance

8 of—

9 ‘‘(i) the taxpayer,

10 ‘‘(ii) the taxpayer’s spouse,

11 ‘‘(iii) a dependent of the taxpayer

12 with respect to whom the taxpayer is al13 lowed a deduction under section 151, or

14 ‘‘(iv) the taxpayer’s child (as defined

15 in section 151(c)(3)) or grandchild,

16 as an eligible student at an institution of higher

17 education (as defined in paragraphs (1)(D) and

18 (2) of section 220(c)).

19 ‘‘(B) EXCEPTIONS.—The term ‘qualified

20 higher education expenses’ does not include ex21 penses described in subparagraphs (B) and (C)

22 of section 220(c)(1).

23 ‘‘(C) COORDINATION WITH SAVINGS BOND

24 PROVISIONS.—The amount of qualified higher

25 education expenses for any taxable year shall be
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1 reduced by any amount excludable from gross

2 income under section 135.

3 ‘‘(9) QUALIFIED LONG-TERM CARE SERVICES.—

4 For purposes of paragraph (2)(B):

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

6 long-term care services’ means necessary diag7 nostic, curing, mitigating, treating, preventive,

8 therapeutic, and rehabilitative services, and

9 maintenance and personal care services (wheth10 er performed in a residential or nonresidential

11 setting) which—

12 ‘‘(i) are required by an individual dur13 ing any period the individual is an inca14 pacitated individual (as defined in subpara15 graph (B)),

16 ‘‘(ii) have as their primary purpose—

17 ‘‘(I) the provision of needed as18 sistance with 1 or more activities of

19 daily living (as defined in subpara20 graph (C)), or

21 ‘‘(II) protection from threats to

22 health and safety due to severe cog23 nitive impairment, and

24 ‘‘(iii) are provided pursuant to a con25 tinuing plan of care prescribed by a li-
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1 censed professional (as defined in subpara2 graph (D)).

3 ‘‘(B) INCAPACITATED INDIVIDUAL.—The

4 term ‘incapacitated individual’ means any indi5 vidual who—

6 ‘‘(i) is unable to perform, without sub7 stantial assistance from another individual

8 (including assistance involving cueing or

9 substantial supervision), at least 2 activi10 ties of daily living as defined in subpara11 graph (C), or

12 ‘‘(ii) has severe cognitive impairment

13 as defined by the Secretary in consultation

14 with the Secretary of Health and Human

15 Services.

16 Such term shall not include any individual oth17 erwise meeting the requirements of the preced18 ing sentence unless a licensed professional with19 in the preceding 12-month period has certified

20 that such individual meets such requirements.

21 ‘‘(C) ACTIVITIES OF DAILY LIVING.—Each

22 of the following is an activity of daily living:

23 ‘‘(i) Eating.

24 ‘‘(ii) Toileting.

25 ‘‘(iii) Transferring.
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1 ‘‘(iv) Bathing.

2 ‘‘(v) Dressing.

3 ‘‘(D) LICENSED PROFESSIONAL.—The

4 term ‘licensed professional’ means—

5 ‘‘(i) a physician or registered profes6 sional nurse, or

7 ‘‘(ii) any other individual who meets

8 such requirements as may be prescribed by

9 the Secretary after consultation with the

10 Secretary of Health and Human Services.

11 ‘‘(E) CERTAIN SERVICES NOT IN12 CLUDED.—The term ‘qualified long-term care

13 services’ shall not include any services provided

14 to an individual—

15 ‘‘(i) by a relative (directly or through

16 a partnership, corporation, or other entity)

17 unless the relative is a licensed professional

18 with respect to such services, or

19 ‘‘(ii) by a corporation or partnership

20 which is related (within the meaning of

21 section 267(b) or 707(b)) to the individual.

22 For purposes of this subparagraph, the term

23 ‘relative’ means an individual bearing a rela24 tionship to the individual which is described in

25 paragraphs (1) through (8) of section 152(a).’’
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1 (d) PENALTY-FREE DISTRIBUTIONS FOR CERTAIN

2 UNEMPLOYED INDIVIDUALS.—Paragraph (2) of section

3 72(t) is amended by adding at the end the following new

4 subparagraph:

5 ‘‘(E) DISTRIBUTIONS TO UNEMPLOYED IN6 DIVIDUALS.—A distribution from an individual

7 retirement plan to an individual after separa8 tion from employment, if—

9 ‘‘(i) such individual has received un10 employment compensation for 12 consecu11 tive weeks under any Federal or State un12 employment compensation law by reason of

13 such separation, and

14 ‘‘(ii) such distributions are made dur15 ing any taxable year during which such un16 employment compensation is paid or the

17 succeeding taxable year.’’

18 (e) EFFECTIVE DATE.—The amendments made by

19 this section shall apply to payments and distributions after

20 December 31, 1995.

21 SEC. 122. CONTRIBUTIONS MUST BE HELD AT LEAST 5

22 YEARS IN CERTAIN CASES.

23 (a) IN GENERAL.—Section 72(t), as amended by this

24 Act, is amended by adding at the end the following new

25 paragraph:
26

•S 1685 IS

1 ‘‘(10) CERTAIN CONTRIBUTIONS MUST BE HELD

2 5 YEARS.—

3 ‘‘(A) IN GENERAL.—Paragraph (2)(A)(i)

4 shall not apply to any amount distributed out

5 of an individual retirement plan (other than a

6 special individual retirement account) which is

7 allocable to contributions made to the plan dur8 ing the 5-year period ending on the date of

9 such distribution (and earnings on such con10 tributions).

11 ‘‘(B) ORDERING RULE.—For purposes of

12 this paragraph, distributions shall be treated as

13 having been made—

14 ‘‘(i) first from the earliest contribu15 tion (and earnings allocable thereto) re16 maining in the account at the time of the

17 distribution, and

18 ‘‘(ii) then from other contributions

19 (and earnings allocable thereto) in the

20 order in which made.

21 Earnings shall be allocated to contributions in

22 such manner as the Secretary may prescribe.

23 ‘‘(C) SPECIAL RULE FOR ROLLOVERS.—

24 ‘‘(i) PENSION PLANS.—Subparagraph

25 (A) shall not apply to distributions out of
27

•S 1685 IS

1 an individual retirement plan which are al2 locable to rollover contributions to which

3 section 402(c), 403(a)(4), or 403(b)(8) ap4 plied.

5 ‘‘(ii) CONTRIBUTION PERIOD.—For

6 purposes of subparagraph (A), amounts

7 shall be treated as having been held by a

8 plan during any period such contributions

9 were held (or are treated as held under

10 this clause) by any individual retirement

11 plan from which transferred.

12 ‘‘(D) SPECIAL ACCOUNTS.—For rules ap13 plicable to special individual retirement ac14 counts under section 408A, see paragraph (8).’’

15 (b) EFFECTIVE DATE.—The amendment made by

16 this section shall apply to contributions (and earnings allo17 cable thereto) which are made after December 31, 1995.

18 PART IV—PLAN LOANS

19 SEC. 126. LOAN REQUIREMENTS FOR DEFINED CONTRIBU20 TION PLANS.

21 (a) IN GENERAL.—Section 401(a) is amended by in22 serting after paragraph (34) the following new paragraph:

23 ‘‘(35) LOAN REQUIREMENTS FOR DEFINED

24 CONTRIBUTION PLANS.—A trust which is part of a

25 defined contribution plan shall not constitute a
28

•S 1685 IS

1 qualified trust under this section unless the plan

2 provides that a participant may, subject to the provi3 sions of section 72(p), obtain a loan from the plan

4 for the purpose of—

5 ‘‘(A) purchasing a principal residence,

6 ‘‘(B) paying qualified higher education ex7 penses (as defined in section 72(t)(8)),

8 ‘‘(C) paying for medical expenses described

9 in section 72(t)(2)(B), or

10 ‘‘(D) alleviating financial hardship.

11 In no event shall a plan be required to make a loan

12 to a participant under this paragraph in an amount

13 in excess of the nonforfeitable balance to the credit

14 of the participant under the plan.’’

15 (b) EFFECTIVE DATE.—The amendment made by

16 this section shall apply to years beginning after December

17 31, 1996, except that any plan amendment by reason of

18 such amendment shall not required to be made before Jan19 uary 1, 1998, if the plan is operated in accordance with

20 such amendment for years beginning in 1997.

21 Subtitle C—Health Security

22 PART I—DEFINITIONS

23 SEC. 131. DEFINITIONS.

24 As used in this subtitle:
29

•S 1685 IS

1 (1) BENEFICIARY.—The term ‘‘beneficiary’’ has

2 the meaning given such term under section 3(8) of

3 the Employee Retirement Income Security Act of

4 1974 (29 U.S.C. 1002(8)).

5 (2) EMPLOYEE.—The term ‘‘employee’’ has the

6 meaning given such term under section 3(6) of the

7 Employee Retirement Income Security Act of 1974

8 (29 U.S.C. 1002(6)).

9 (3) EMPLOYER.—The term ‘‘employer’’ has the

10 meaning given such term under section 3(5) of the

11 Employee Retirement Income Security Act of 1974

12 (29 U.S.C. 1002(5)), except that such term shall in13 clude only employers of two or more employees.

14 (4) EMPLOYEE HEALTH BENEFIT PLAN.—

15 (A) IN GENERAL.—The term ‘‘employee

16 health benefit plan’’ means any employee wel17 fare benefit plan, governmental plan, or church

18 plan (as defined under paragraphs (1), (32),

19 and (33) of section 3 of the Employee Retire20 ment Income Security Act of 1974 (29 U.S.C.

21 1002 (1), (32), and (33))) that provides or pays

22 for health benefits (such as provider and hos23 pital benefits) for participants and beneficiaries

24 whether—

25 (i) directly;
30

•S 1685 IS

1 (ii) through a group health plan of2 fered by a health plan issuer as defined in

3 paragraph (8); or

4 (iii) otherwise.

5 (B) RULE OF CONSTRUCTION.—An em6 ployee health benefit plan shall not be con7 strued to be a group health plan, an individual

8 health plan, or a health plan issuer.

9 (C) ARRANGEMENTS NOT INCLUDED.—

10 Such term does not include the following, or

11 any combination thereof:

12 (i) Coverage only for accident, or dis13 ability income insurance, or any combina14 tion thereof.

15 (ii) Medicare supplemental health in16 surance (as defined under section

17 1882(g)(1) of the Social Security Act).

18 (iii) Coverage issued as a supplement

19 to liability insurance.

20 (iv) Liability insurance, including gen21 eral liability insurance and automobile li22 ability insurance.

23 (v) Workers compensation or similar

24 insurance.
31

•S 1685 IS

1 (vi) Automobile medical payment in2 surance.

3 (vii) Coverage for a specified disease

4 or illness.

5 (viii) Hospital or fixed indemnity in6 surance.

7 (ix) Short-term limited duration in8 surance.

9 (x) Credit-only, dental-only, or vision10 only insurance.

11 (xi) A health insurance policy provid12 ing benefits only for long-term care, nurs13 ing home care, home health care, commu14 nity-based care, or any combination there15 of.

16 (5) FAMILY.—

17 (A) IN GENERAL.—The term ‘‘family’’

18 means an individual, the individual’s spouse,

19 and the child of the individual (if any).

20 (B) CHILD.—For purposes of subpara21 graph (A), the term ‘‘child’’ means any individ22 ual who is a child within the meaning of section

23 151(c)(3) of the Internal Revenue Code of

24 1986.

25 (6) GROUP HEALTH PLAN.—
32

•S 1685 IS

1 (A) IN GENERAL.—The term ‘‘group

2 health plan’’ means any contract, policy, certifi3 cate or other arrangement offered by a health

4 plan issuer to a group purchaser that provides

5 or pays for health benefits (such as provider

6 and hospital benefits) in connection with an em7 ployee health benefit plan.

8 (B) ARRANGEMENTS NOT INCLUDED.—

9 Such term does not include the following, or

10 any combination thereof:

11 (i) Coverage only for accident, or dis12 ability income insurance, or any combina13 tion thereof.

14 (ii) Medicare supplemental health in15 surance (as defined under section

16 1882(g)(1) of the Social Security Act).

17 (iii) Coverage issued as a supplement

18 to liability insurance.

19 (iv) Liability insurance, including gen20 eral liability insurance and automobile li21 ability insurance.

22 (v) Workers compensation or similar

23 insurance.

24 (vi) Automobile medical payment in25 surance.
33

•S 1685 IS

1 (vii) Coverage for a specified disease

2 or illness.

3 (viii) Hospital or fixed indemnity in4 surance.

5 (ix) Short-term limited duration in6 surance.

7 (x) Credit-only, dental-only, or vision8 only insurance.

9 (xi) A health insurance policy provid10 ing benefits only for long-term care, nurs11 ing home care, home health care, commu12 nity-based care, or any combination there13 of.

14 (7) GROUP PURCHASER.—The term ‘‘group

15 purchaser’’ means any person (as defined under

16 paragraph (9) of section 3 of the Employee Retire17 ment Income Security Act of 1974 (29 U.S.C.

18 1002(9)) or entity that purchases or pays for health

19 benefits (such as provider or hospital benefits) on

20 behalf of two or more participants or beneficiaries in

21 connection with an employee health benefit plan. A

22 health plan purchasing cooperative established under

23 section 131 shall not be considered to be a group

24 purchaser.
34

•S 1685 IS

1 (8) HEALTH PLAN ISSUER.—The term ‘‘health

2 plan issuer’’ means any entity that is licensed (prior

3 to or after the date of enactment of this Act) by a

4 State to offer a group health plan or an individual

5 health plan.

6 (9) PARTICIPANT.—The term ‘‘participant’’ has

7 the meaning given such term under section 3(7) of

8 the Employee Retirement Income Security Act of

9 1974 (29 U.S.C. 1002(7)).

10 (10) PLAN SPONSOR.—The term ‘‘plan spon11 sor’’ has the meaning given such term under section

12 3(16)(B) of the Employee Retirement Income Secu13 rity Act of 1974 (29 U.S.C. 1002(16)(B)).

14 (11) SECRETARY.—The term ‘‘Secretary’’, un15 less specifically provided otherwise, means the Sec16 retary of Labor.

17 (12) STATE.—The term ‘‘State’’ means each of

18 the several States, the District of Columbia, Puerto

19 Rico, the United States Virgin Islands, Guam,

20 American Samoa, and the Commonwealth of the

21 Northern Mariana Islands.
35

•S 1685 IS

1 PART II—HEALTH CARE ACCESS, PORTABILITY,

2 AND RENEWABILITY

3 Subpart A—Group Market Rules

4 SEC. 135. GUARANTEED AVAILABILITY OF HEALTH COV5 ERAGE.

6 (a) IN GENERAL.—

7 (1) NONDISCRIMINATION.—Except as provided

8 in subsection (b), sections 136 and 137—

9 (A) a health plan issuer offering a group

10 health plan may not decline to offer whole

11 group coverage to a group purchaser desiring to

12 purchase such coverage; and

13 (B) an employee health benefit plan or a

14 health plan issuer offering a group health plan

15 may establish eligibility, continuation of eligi16 bility, enrollment, or premium contribution re17 quirements under the terms of such plan, ex18 cept that such requirements shall not be based

19 on health status, medical condition, claims ex20 perience, receipt of health care, medical history,

21 evidence of insurability, or disability.

22 (2) HEALTH PROMOTION AND DISEASE PRE23 VENTION.—Nothing in this subsection shall prevent

24 an employee health benefit plan or a health plan is25 suer from establishing premium discounts or modify26 ing otherwise applicable copayments or deductibles
36

•S 1685 IS

1 in return for adherence to programs of health pro2 motion and disease prevention.

3 (b) APPLICATION OF CAPACITY LIMITS.—

4 (1) IN GENERAL.—Subject to paragraph (2), a

5 health plan issuer offering a group health plan may

6 cease offering coverage to group purchasers under

7 the plan if—

8 (A) the health plan issuer ceases to offer

9 coverage to any additional group purchasers;

10 and

11 (B) the health plan issuer can demonstrate

12 to the applicable certifying authority (as defined

13 in section 172(d)), if required, that its financial

14 or provider capacity to serve previously covered

15 participants and beneficiaries (and additional

16 participants and beneficiaries who will be ex17 pected to enroll because of their affiliation with

18 a group purchaser or such previously covered

19 participants or beneficiaries) will be impaired if

20 the health plan issuer is required to offer cov21 erage to additional group purchasers.

22 Such health plan issuer shall be prohibited from of23 fering coverage after a cessation in offering coverage

24 under this paragraph for a 6-month period or until

25 the health plan issuer can demonstrate to the appli-
37

•S 1685 IS

1 cable certifying authority (as defined in section

2 172(d)) that the health plan issuer has adequate ca3 pacity, whichever is later.

4 (2) FIRST-COME-FIRST-SERVED.—A health plan

5 issuer offering a group health plan is only eligible to

6 exercise the limitations provided for in paragraph

7 (1) if the health plan issuer offers coverage to group

8 purchasers under such plan on a first-come-first9 served basis or other basis established by a State to

10 ensure a fair opportunity to enroll in the plan and

11 avoid risk selection.

12 (c) CONSTRUCTION.—

13 (1) MARKETING OF GROUP HEALTH PLANS.—

14 Nothing in this section shall be construed to prevent

15 a State from requiring health plan issuers offering

16 group health plans to actively market such plans.

17 (2) INVOLUNTARY OFFERING OF GROUP

18 HEALTH PLANS.—Nothing in this section shall be

19 construed to require a health plan issuer to involun20 tarily offer group health plans in a particular mar21 ket. For the purposes of this paragraph, the term

22 ‘‘market’’ means either the large employer market or

23 the small employer market (as defined under appli24 cable State law, or if not so defined, an employer

25 with not more than 50 employees).
38

•S 1685 IS

1 SEC. 136. GUARANTEED RENEWABILITY OF HEALTH COV2 ERAGE.

3 (a) IN GENERAL.—

4 (1) GROUP PURCHASER.—Subject to sub5 sections (b) and (c), a group health plan shall be re6 newed or continued in force by a health plan issuer

7 at the option of the group purchaser, except that the

8 requirement of this subparagraph shall not apply in

9 the case of—

10 (A) the nonpayment of premiums or con11 tributions by the group purchaser in accordance

12 with the terms of the group health plan or

13 where the health plan issuer has not received

14 timely premium payments;

15 (B) fraud or misrepresentation of material

16 fact on the part of the group purchaser;

17 (C) the termination of the group health

18 plan in accordance with subsection (b); or

19 (D) the failure of the group purchaser to

20 meet contribution or participation requirements

21 in accordance with paragraph (3).

22 (2) PARTICIPANT.—Subject to subsections (b)

23 and (c), coverage under an employee health benefit

24 plan or group health plan shall be renewed or con25 tinued in force, if the group purchaser elects to con26 tinue to provide coverage under such plan, at the op-
39

•S 1685 IS

1 tion of the participant (or beneficiary where such

2 right exists under the terms of the plan or under ap3 plicable law), except that the requirement of this

4 paragraph shall not apply in the case of—

5 (A) the nonpayment of premiums or con6 tributions by the participant or beneficiary in

7 accordance with the terms of the employee

8 health benefit plan or group health plan or

9 where such plan has not received timely pre10 mium payments;

11 (B) fraud or misrepresentation of material

12 fact on the part of the participant or bene13 ficiary relating to an application for coverage or

14 claim for benefits;

15 (C) the termination of the employee health

16 benefit plan or group health plan;

17 (D) loss of eligibility for continuation cov18 erage as described in part 6 of subtitle B of

19 title I of the Employee Retirement Income Se20 curity Act of 1974 (29 U.S.C. 1161 et seq.); or

21 (E) failure of a participant or beneficiary

22 to meet requirements for eligibility for coverage

23 under an employee health benefit plan or group

24 health plan that are not prohibited by this Act.
40

•S 1685 IS

1 (3) RULES OF CONSTRUCTION.—Nothing in

2 this subsection, nor in section 135(a), shall be con3 strued to—

4 (A) preclude a health plan issuer from es5 tablishing employer contribution rules or group

6 participation rules for group health plans as al7 lowed under applicable State law;

8 (B) preclude a plan defined in section

9 3(37) of the Employee Retirement Income Se10 curity Act of 1974 (29 U.S.C. 1102(37)) from

11 establishing employer contribution rules or

12 group participation rules; or

13 (C) permit individuals to decline coverage

14 under an employee health benefit plan if such

15 right is not otherwise available under such plan.

16 (b) TERMINATION OF GROUP HEALTH PLANS.—

17 (1) PARTICULAR TYPE OF GROUP HEALTH

18 PLAN NOT OFFERED.—In any case in which a health

19 plan issuer decides to discontinue offering a particu20 lar type of group health plan, a group health plan

21 of such type may be discontinued by the health plan

22 issuer only if—

23 (A) the health plan issuer provides notice

24 to each group purchaser covered under a group

25 health plan of this type (and participants and
41

•S 1685 IS

1 beneficiaries covered under such group health

2 plan) of such discontinuation at least 90 days

3 prior to the date of the discontinuation of such

4 plan;

5 (B) the health plan issuer offers to each

6 group purchaser covered under a group health

7 plan of this type, the option to purchase any

8 other group health plan currently being offered

9 by the health plan issuer; and

10 (C) in exercising the option to discontinue

11 a group health plan of this type and in offering

12 one or more replacement plans, the health plan

13 issuer acts uniformly without regard to the

14 health status or insurability of participants or

15 beneficiaries covered under the group health

16 plan, or new participants or beneficiaries who

17 may become eligible for coverage under the

18 group health plan.

19 (2) DISCONTINUANCE OF ALL GROUP HEALTH

20 PLANS.—

21 (A) IN GENERAL.—In any case in which a

22 health plan issuer elects to discontinue offering

23 all group health plans in a State, a group

24 health plan may be discontinued by the health

25 plan issuer only if—
42

•S 1685 IS

1 (i) the health plan issuer provides no2 tice to the applicable certifying authority

3 (as defined in section 172(d)) and to each

4 group purchaser (and participants and

5 beneficiaries covered under such group

6 health plan) of such discontinuation at

7 least 180 days prior to the date of the ex8 piration of such plan; and

9 (ii) all group health plans issued or

10 delivered for issuance in the State are dis11 continued and coverage under such plans is

12 not renewed.

13 (B) APPLICATION OF PROVISIONS.—The

14 provisions of this paragraph and paragraph (3)

15 may be applied separately by a health plan is16 suer—

17 (i) to all group health plans offered to

18 small employers (as defined under applica19 ble State law, or if not so defined, an em20 ployer with not more than 50 employees);

21 or

22 (ii) to all other group health plans of23 fered by the health plan issuer in the

24 State.
43

•S 1685 IS

1 (3) PROHIBITION ON MARKET REENTRY.—In

2 the case of a discontinuation under paragraph (2),

3 the health plan issuer may not provide for the issu4 ance of any group health plan in the market sector

5 (as described in paragraph (2)(B)) in which issuance

6 of such group health plan was discontinued in the

7 State involved during the 5-year period beginning on

8 the date of the discontinuation of the last group

9 health plan not so renewed.

10 (c) TREATMENT OF NETWORK PLANS.—

11 (1) GEOGRAPHIC LIMITATIONS.—A network

12 plan (as defined in paragraph (2)) may deny contin13 ued participation under such plan to participants or

14 beneficiaries who neither live, reside, nor work in an

15 area in which such network plan is offered, but only

16 if such denial is applied uniformly, without regard to

17 health status or the insurability of particular partici18 pants or beneficiaries.

19 (2) NETWORK PLAN.—As used in paragraph

20 (1), the term ‘‘network plan’’ means an employee

21 health benefit plan or a group health plan that ar22 ranges for the financing and delivery of health care

23 services to participants or beneficiaries covered

24 under such plan, in whole or in part, through ar25 rangements with providers.
44

•S 1685 IS

1 (d) COBRA COVERAGE.—Nothing in subsection

2 (a)(2)(E) or subsection (c) shall be construed to affect any

3 right to COBRA continuation coverage as described in

4 part 6 of subtitle B of title I of the Employee Retirement

5 Income Security Act of 1974 (29 U.S.C. 1161 et seq.).

6 SEC. 137. PORTABILITY OF HEALTH COVERAGE AND LIMI7 TATION ON PREEXISTING CONDITION EXCLU8 SIONS.

9 (a) IN GENERAL.—An employee health benefit plan

10 or a health plan issuer offering a group health plan may

11 impose a limitation or exclusion of benefits relating to

12 treatment of a preexisting condition based on the fact that

13 the condition existed prior to the coverage of the partici14 pant or beneficiary under the plan only if—

15 (1) the limitation or exclusion extends for a pe16 riod of not more than 12 months after the date of

17 enrollment in the plan;

18 (2) the limitation or exclusion does not apply to

19 an individual who, within 30 days of the date of

20 birth or placement for adoption (as determined

21 under section 609(c)(3)(B) of the Employee Retire22 ment Income Security Act of 1974 (29 U.S.C.

23 1169(c)(3)(B)), was covered under the plan; and

24 (3) the limitation or exclusion does not apply to

25 a pregnancy.
45

•S 1685 IS

1 (b) CREDITING OF PREVIOUS QUALIFYING COV2 ERAGE.—

3 (1) IN GENERAL.—Subject to paragraph (4), an

4 employee health benefit plan or a health plan issuer

5 offering a group health plan shall provide that if a

6 participant or beneficiary is in a period of previous

7 qualifying coverage as of the date of enrollment

8 under such plan, any period of exclusion or limita9 tion of coverage with respect to a preexisting condi10 tion shall be reduced by 1 month for each month in

11 which the participant or beneficiary was in the pe12 riod of previous qualifying coverage. With respect to

13 an individual described in subsection (a)(2) who

14 maintains continuous coverage, no limitation or ex15 clusion of benefits relating to treatment of a pre16 existing condition may be applied to a child within

17 the child’s first 12 months of life or within 12

18 months after the placement of a child for adoption.

19 (2) DISCHARGE OF DUTY.—An employee health

20 benefit plan shall provide documentation of coverage

21 to participants and beneficiaries whose coverage is

22 terminated under the plan. Pursuant to regulations

23 promulgated by the Secretary, the duty of an em24 ployee health benefit plan to verify previous qualify25 ing coverage with respect to a participant or bene-
46

•S 1685 IS

1 ficiary is effectively discharged when such employee

2 health benefit plan provides documentation to a par3 ticipant or beneficiary that includes the following in4 formation:

5 (A) the dates that the participant or bene6 ficiary was covered under the plan; and

7 (B) the benefits and cost-sharing arrange8 ment available to the participant or beneficiary

9 under such plan.

10 An employee health benefit plan shall retain the doc11 umentation provided to a participant or beneficiary

12 under subparagraphs (A) and (B) for at least the

13 12-month period following the date on which the

14 participant or beneficiary ceases to be covered under

15 the plan. Upon request, an employee health benefit

16 plan shall provide a second copy of such documenta17 tion to such participant or beneficiary within the 12-

18 month period following the date of such ineligibility.

19 (3) DEFINITIONS.—As used in this section:

20 (A) PREVIOUS QUALIFYING COVERAGE.—

21 The term ‘‘previous qualifying coverage’’ means

22 the period beginning on the date—

23 (i) a participant or beneficiary is en24 rolled under an employee health benefit

25 plan or a group health plan, and ending on
47

•S 1685 IS

1 the date the participant or beneficiary is

2 not so enrolled; or

3 (ii) an individual is enrolled under an

4 individual health plan (as defined in sec5 tion 144) or under a public or private

6 health plan established under Federal or

7 State law, and ending on the date the indi8 vidual is not so enrolled;

9 for a continuous period of more than 30 days

10 (without regard to any waiting period).

11 (B) LIMITATION OR EXCLUSION OF BENE12 FITS RELATING TO TREATMENT OF A PRE13 EXISTING CONDITION.—The term ‘‘limitation or

14 exclusion of benefits relating to treatment of a

15 preexisting condition’’ means a limitation or ex16 clusion of benefits imposed on an individual

17 based on a preexisting condition of such individ18 ual.

19 (4) EFFECT OF PREVIOUS COVERAGE.—An em20 ployee health benefit plan or a health plan issuer of21 fering a group health plan may impose a limitation

22 or exclusion of benefits relating to the treatment of

23 a preexisting condition, subject to the limits in sub24 section (a)(1), only to the extent that such service

25 or benefit was not previously covered under the
48

•S 1685 IS

1 group health plan, employee health benefit plan, or

2 individual health plan in which the participant or

3 beneficiary was enrolled immediately prior to enroll4 ment in the plan involved.

5 (c) LATE ENROLLEES.—Except as provided in sec6 tion 138, with respect to a participant or beneficiary en7 rolling in an employee health benefit plan or a group

8 health plan during a time that is other than the first op9 portunity to enroll during an enrollment period of at least

10 30 days, coverage with respect to benefits or services relat11 ing to the treatment of a preexisting condition in accord12 ance with subsections (a) and (b) may be excluded, except

13 the period of such exclusion may not exceed 18 months

14 beginning on the date of coverage under the plan.

15 (d) AFFILIATION PERIODS.—With respect to a par16 ticipant or beneficiary who would otherwise be eligible to

17 receive benefits under an employee health benefit plan or

18 a group health plan but for the operation of a preexisting

19 condition limitation or exclusion, if such plan does not uti20 lize a limitation or exclusion of benefits relating to the

21 treatment of a preexisting condition, such plan may im22 pose an affiliation period on such participant or bene23 ficiary not to exceed 60 days (or in the case of a late par24 ticipant or beneficiary described in subsection (c), 90

25 days) from the date on which the participant or bene-
49

•S 1685 IS

1 ficiary would otherwise be eligible to receive benefits under

2 the plan. An employee health benefit plan or a health plan

3 issuer offering a group health plan may also use alter4 native methods to address adverse selection as approved

5 by the applicable certifying authority (as defined in section

6 172(d)). During such an affiliation period, the plan may

7 not be required to provide health care services or benefits

8 and no premium shall be charged to the participant or

9 beneficiary.

10 (e) PREEXISTING CONDITION.—For purposes of this

11 section, the term ‘‘preexisting condition’’ means a condi12 tion, regardless of the cause of the condition, for which

13 medical advice, diagnosis, care, or treatment was rec14 ommended or received within the 6-month period ending

15 on the day before the effective date of the coverage (with16 out regard to any waiting period).

17 (f) STATE FLEXIBILITY.—Nothing in this section

18 shall be construed to preempt State laws that—

19 (1) require health plan issuers to impose a limi20 tation or exclusion of benefits relating to the treat21 ment of a preexisting condition for periods that are

22 shorter than those provided for under this section;

23 or

24 (2) allow individuals, participants, and bene25 ficiaries to be considered to be in a period of pre-
50

•S 1685 IS

1 vious qualifying coverage if such individual, partici2 pant, or beneficiary experiences a lapse in coverage

3 that is greater than the 30-day period provided for

4 under subsection (b)(3);

5 unless such laws are preempted by section 514 of the Em6 ployee Retirement Income Security Act of 1974 (29

7 U.S.C. 1144).

8 SEC. 138. SPECIAL ENROLLMENT PERIODS.

9 In the case of a participant, beneficiary or family

10 member who—

11 (1) through marriage, separation, divorce,

12 death, birth or placement of a child for adoption, ex13 periences a change in family composition affecting

14 eligibility under a group health plan, individual

15 health plan, or employee health benefit plan;

16 (2) experiences a change in employment status,

17 as described in section 603(2) of the Employee Re18 tirement Income Security Act of 1974 (29 U.S.C.

19 1163(2)), that causes the loss of eligibility for cov20 erage, other than COBRA continuation coverage

21 under a group health plan, individual health plan,

22 or employee health benefit plan; or

23 (3) experiences a loss of eligibility under a

24 group health plan, individual health plan, or em-
51

•S 1685 IS

1 ployee health benefit plan because of a change in the

2 employment status of a family member;

3 each employee health benefit plan and each group health

4 plan shall provide for a special enrollment period extend5 ing for a reasonable time after such event that would per6 mit the participant to change the individual or family basis

7 of coverage or to enroll in the plan if coverage would have

8 been available to such individual, participant, or bene9 ficiary but for failure to enroll during a previous enroll10 ment period. Such a special enrollment period shall ensure

11 that a child born or placed for adoption shall be deemed

12 to be covered under the plan as of the date of such birth

13 or placement for adoption if such child is enrolled within

14 30 days of the date of such birth or placement for adop15 tion.

16 SEC. 139. DISCLOSURE OF INFORMATION.

17 (a) DISCLOSURE OF INFORMATION BY HEALTH PLAN

18 ISSUERS.—

19 (1) IN GENERAL.—In connection with the offer20 ing of any group health plan to a small employer (as

21 defined under applicable State law, or if not so de22 fined, an employer with not more than 50 employ23 ees), a health plan issuer shall make a reasonable

24 disclosure to such employer, as part of its solicita25 tion and sales materials, of—
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1 (A) the provisions of such group health

2 plan concerning the health plan issuer’s right to

3 change premium rates and the factors that may

4 affect changes in premium rates;

5 (B) the provisions of such group health

6 plan relating to renewability of coverage;

7 (C) the provisions of such group health

8 plan relating to any preexisting condition provi9 sion; and

10 (D) descriptive information about the ben11 efits and premiums available under all group

12 health plans for which the employer is qualified.

13 Information shall be provided to small employers

14 under this paragraph in a manner determined to be

15 understandable by the average small employer, and

16 shall be sufficiently accurate and comprehensive to

17 reasonably inform small employers, participants and

18 beneficiaries of their rights and obligations under

19 the group health plan.

20 (2) EXCEPTION.—With respect to the require21 ment of paragraph (1), any information that is pro22 prietary and trade secret information under applica23 ble law shall not be subject to the disclosure require24 ments of such paragraph.
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1 (3) CONSTRUCTION.—Nothing in this sub2 section shall be construed to preempt State report3 ing and disclosure requirements to the extent that

4 such requirements are not preempted under section

5 514 of the Employee Retirement Income Security

6 Act of 1974 (29 U.S.C. 1144).

7 (b) DISCLOSURE OF INFORMATION TO PARTICIPANTS

8 AND BENEFICIARIES.—

9 (1) IN GENERAL.—Section 104(b)(1) of the

10 Employee Retirement Income Security Act of 1974

11 (29 U.S.C. 1024(b)(1)) is amended in the matter

12 following subparagraph (B)—

13 (A) by striking ‘‘102(a)(1),’’ and inserting

14 ‘‘102(a)(1) that is not a material reduction in

15 covered services or benefits provided,’’; and

16 (B) by adding at the end thereof the fol17 lowing new sentences: ‘‘If there is a modifica18 tion or change described in section 102(a)(1)

19 that is a material reduction in covered services

20 or benefits provided, a summary description of

21 such modification or change shall be furnished

22 to participants not later than 60 days after the

23 date of the adoption of the modification or

24 change. In the alternative, the plan sponsors

25 may provide such description at regular inter-
54

•S 1685 IS

1 vals of not more than 90 days. The Secretary

2 shall issue regulations within 180 days after the

3 date of enactment of the American Family In4 come and Economic Security Act of 1996, pro5 viding alternative mechanisms to delivery by

6 mail through which employee health benefit

7 plans may notify participants of material reduc8 tions in covered services or benefits.’’

9 (2) PLAN DESCRIPTION AND SUMMARY.—Sec10 tion 102(b) of the Employee Retirement Income Se11 curity Act of 1974 (29 U.S.C. 1022(b)) is amend12 ed—

13 (A) by inserting ‘‘including the office or

14 title of the individual who is responsible for ap15 proving or denying claims for coverage of bene16 fits’’ after ‘‘type of administration of the plan’’;

17 (B) by inserting ‘‘including the name of

18 the organization responsible for financing

19 claims’’ after ‘‘source of financing of the plan’’;

20 and

21 (C) by inserting ‘‘including the office, con22 tact, or title of the individual at the Depart23 ment of Labor through which participants may

24 seek assistance or information regarding their

25 rights under this Act and subtitle C of title I
55

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1 of the American Family Income and Economic

2 Security Act of 1996 with respect to health

3 benefits that are not offered through a group

4 health plan.’’ after ‘‘benefits under the plan’’.

5 Subpart B—Individual Market Rules

6 SEC. 141. INDIVIDUAL HEALTH PLAN PORTABILITY.

7 (a) LIMITATION ON REQUIREMENTS.—

8 (1) IN GENERAL.—With respect to an individ9 ual desiring to enroll in an individual health plan, if

10 such individual is in a period of previous qualifying

11 coverage (as defined in section 137(b)(3)(A)(i))

12 under one or more group health plans or employee

13 health benefit plans that commenced 18 or more

14 months prior to the date on which such individual

15 desires to enroll in the individual plan, a health plan

16 issuer described in paragraph (3) may not decline to

17 offer coverage to such individual, or deny enrollment

18 to such individual based on the health status, medi19 cal condition, claims experience, receipt of health

20 care, medical history, evidence of insurability, or dis21 ability of the individual, except as described in sub22 sections (b) and (c).

23 (2) HEALTH PROMOTION AND DISEASE PRE24 VENTION.—Nothing in this subsection shall be con25 strued to prevent a health plan issuer offering an in-
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1 dividual health plan from establishing premium dis2 counts or modifying otherwise applicable copayments

3 or deductibles in return for adherence to programs

4 of health promotion or disease prevention.

5 (3) HEALTH PLAN ISSUER.—A health plan is6 suer described in this paragraph is a health plan is7 suer that issues or renews individual health plans.

8 (4) PREMIUMS.—Nothing in this subsection

9 shall be construed to affect the determination of a

10 health plan issuer as to the amount of the premium

11 payable under an individual health plan under appli12 cable State law.

13 (b) ELIGIBILITY FOR OTHER GROUP COVERAGE.—

14 The provisions of subsection (a) shall not apply to an indi15 vidual who is eligible for coverage under a group health

16 plan or an employee health benefit plan, or who has had

17 coverage terminated under a group health plan or em18 ployee health benefit plan for failure to make required pre19 mium payments or contributions, or for fraud or misrepre20 sentation of material fact, or who is otherwise eligible for

21 continuation coverage as described in part 6 of subtitle

22 B of title I of the Employee Retirement Income Security

23 Act of 1974 (29 U.S.C. 1161 et seq.) or under an equiva24 lent State program.

25 (c) APPLICATION OF CAPACITY LIMITS.—
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1 (1) IN GENERAL.—Subject to paragraph (2), a

2 health plan issuer offering coverage to individuals

3 under an individual health plan may cease enrolling

4 individuals under the plan if—

5 (A) the health plan issuer ceases to enroll

6 any new individuals; and

7 (B) the health plan issuer can demonstrate

8 to the applicable certifying authority (as defined

9 in section 172(d)), if required, that its financial

10 or provider capacity to serve previously covered

11 individuals will be impaired if the health plan

12 issuer is required to enroll additional individ13 uals.

14 Such a health plan issuer shall be prohibited from

15 offering coverage after a cessation in offering cov16 erage under this paragraph for a 6-month period or

17 until the health plan issuer can demonstrate to the

18 applicable certifying authority (as defined in section

19 172(d)) that the health plan issuer has adequate ca20 pacity, whichever is later.

21 (2) FIRST-COME-FIRST-SERVED.—A health plan

22 issuer offering coverage to individuals under an indi23 vidual health plan is only eligible to exercise the lim24 itations provided for in paragraph (1) if the health

25 plan issuer provides for enrollment of individuals
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•S 1685 IS

1 under such plan on a first-come-first-served basis or

2 other basis established by a State to ensure a fair

3 opportunity to enroll in the plan and avoid risk se4 lection.

5 (d) MARKET REQUIREMENTS.—

6 (1) IN GENERAL.—The provisions of subsection

7 (a) shall not be construed to require that a health

8 plan issuer offering group health plans to group pur9 chasers offer individual health plans to individuals.

10 (2) CONVERSION POLICIES.—A health plan is11 suer offering group health plans to group purchasers

12 under this Act shall not be deemed to be a health

13 plan issuer offering an individual health plan solely

14 because such health plan issuer offers a conversion

15 policy.

16 (3) MARKETING OF PLANS.—Nothing in this

17 section shall be construed to prevent a State from

18 requiring health plan issuers offering coverage to in19 dividuals under an individual health plan to actively

20 market such plan.

21 SEC. 142. GUARANTEED RENEWABILITY OF INDIVIDUAL

22 HEALTH COVERAGE.

23 (a) IN GENERAL.—Subject to subsections (b) and (c),

24 coverage for individuals under an individual health plan

25 shall be renewed or continued in force by a health plan
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•S 1685 IS

1 issuer at the option of the individual, except that the re2 quirement of this subsection shall not apply in the case

3 of—

4 (1) the nonpayment of premiums or contribu5 tions by the individual in accordance with the terms

6 of the individual health plan or where the health

7 plan issuer has not received timely premium pay8 ments;

9 (2) fraud or misrepresentation of material fact

10 on the part of the individual; or

11 (3) the termination of the individual health plan

12 in accordance with subsection (b).

13 (b) TERMINATION OF INDIVIDUAL HEALTH

14 PLANS.—

15 (1) PARTICULAR TYPE OF INDIVIDUAL HEALTH

16 PLAN NOT OFFERED.—In any case in which a health

17 plan issuer decides to discontinue offering a particu18 lar type of individual health plan to individuals, an

19 individual health plan may be discontinued by the

20 health plan issuer only if—

21 (A) the health plan issuer provides notice

22 to each individual covered under the plan of

23 such discontinuation at least 90 days prior to

24 the date of the expiration of the plan;
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•S 1685 IS

1 (B) the health plan issuer offers to each

2 individual covered under the plan the option to

3 purchase any other individual health plan cur4 rently being offered by the health plan issuer to

5 individuals; and

6 (C) in exercising the option to discontinue

7 the individual health plan and in offering one or

8 more replacement plans, the health plan issuer

9 acts uniformly without regard to the health sta10 tus or insurability of particular individuals.

11 (2) DISCONTINUANCE OF ALL INDIVIDUAL

12 HEALTH PLANS.—In any case in which a health plan

13 issuer elects to discontinue all individual health

14 plans in a State, an individual health plan may be

15 discontinued by the health plan issuer only if—

16 (A) the health plan issuer provides notice

17 to the applicable certifying authority (as defined

18 in section 172(d)) and to each individual cov19 ered under the plan of such discontinuation at

20 least 180 days prior to the date of the dis21 continuation of the plan; and

22 (B) all individual health plans issued or

23 delivered for issuance in the State are discon24 tinued and coverage under such plans is not re25 newed.
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1 (3) PROHIBITION ON MARKET REENTRY.—In

2 the case of a discontinuation under paragraph (2),

3 the health plan issuer may not provide for the issu4 ance of any individual health plan in the State in5 volved during the 5-year period beginning on the

6 date of the discontinuation of the last plan not so

7 renewed.

8 (c) TREATMENT OF NETWORK PLANS.—

9 (1) GEOGRAPHIC LIMITATIONS.—A health plan

10 issuer which offers a network plan (as defined in

11 paragraph (2)) may deny continued participation

12 under the plan to individuals who neither live, re13 side, nor work in an area in which the individual

14 health plan is offered, but only if such denial is ap15 plied uniformly, without regard to health status or

16 the insurability of particular individuals.

17 (2) NETWORK PLAN.—As used in paragraph

18 (1), the term ‘‘network plan’’ means an individual

19 health plan that arranges for the financing and de20 livery of health care services to individuals covered

21 under such health plan, in whole or in part, through

22 arrangements with providers.
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1 SEC. 143. STATE FLEXIBILITY IN INDIVIDUAL MARKET RE2 FORMS.

3 (a) IN GENERAL.—With respect to any State law

4 with respect to which the Governor of the State notifies

5 the Secretary of Health and Human Services that such

6 State law will achieve the goals of sections 141 and 142,

7 and that is in effect on, or enacted after, the date of enact8 ment of this Act (such as laws providing for guaranteed

9 issue, open enrollment by one or more health plan issuers,

10 high-risk pools, or mandatory conversion policies), such

11 State law shall apply in lieu of the standards described

12 in sections 141 and 142 unless the Secretary of Health

13 and Human Services determines, after considering the cri14 teria described in subsection (b)(1), in consultation with

15 the Governor and Insurance Commissioner or chief insur16 ance regulatory official of the State, that such State law

17 does not achieve the goals of providing access to affordable

18 health care coverage for those individuals described in sec19 tions 141 and 142.

20 (b) DETERMINATION.—

21 (1) IN GENERAL.—In making a determination

22 under subsection (a), the Secretary of Health and

23 Human Services shall only—

24 (A) evaluate whether the State law or pro25 gram provides guaranteed access to affordable
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1 coverage to individuals described in sections

2 141 and 142;

3 (B) evaluate whether the State law or pro4 gram provides coverage for preexisting condi5 tions (as defined in section 137(e)) that were

6 covered under the individuals’ previous group

7 health plan or employee health benefit plan for

8 individuals described in sections 141 and 142;

9 (C) evaluate whether the State law or pro10 gram provides individuals described in sections

11 141 and 142 with a choice of health plans or

12 a health plan providing comprehensive coverage;

13 and

14 (D) evaluate whether the application of the

15 standards described in sections 141 and 142

16 will have an adverse impact on the number of

17 individuals in such State having access to af18 fordable coverage.

19 (2) NOTICE OF INTENT.—If, within 6 months

20 after the date of enactment of this Act, the Governor

21 of a State notifies the Secretary of Health and

22 Human Services that the State intends to enact a

23 law, or modify an existing law, described in sub24 section (a), the Secretary of Health and Human

25 Services may not make a determination under such
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1 subsection until the expiration of the 12-month pe2 riod beginning on the date on which such notifica3 tion is made, or until January 1, 1997, whichever is

4 later. With respect to a State that provides notice

5 under this paragraph and that has a legislature that

6 does not meet within the 12-month period beginning

7 on the date of enactment of this Act, the Secretary

8 shall not make a determination under subsection (a)

9 prior to January 1, 1998.

10 (3) NOTICE TO STATE.—If the Secretary of

11 Health and Human Services determines that a State

12 law or program does not achieve the goals described

13 in subsection (a), the Secretary of Health and

14 Human Services shall provide the State with ade15 quate notice and reasonable opportunity to modify

16 such law or program to achieve such goals prior to

17 making a final determination under subsection (a).

18 (c) ADOPTION OF NAIC MODEL.—If, not later than

19 9 months after the date of enactment of this Act—

20 (1) the National Association of Insurance Com21 missioners (hereafter referred to as the ‘‘NAIC’’),

22 through a process which the Secretary of Health and

23 Human Services determines has included consulta24 tion with representatives of the insurance industry

25 and consumer groups, adopts a model standard or
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1 standards for reform of the individual health insur2 ance market; and

3 (2) the Secretary of Health and Human Serv4 ices determines, within 30 days of the adoption of

5 such NAIC standard or standards, that such stand6 ards comply with the goals of sections 141 and 142;

7 a State that elects to adopt such model standards or sub8 stantially adopt such model standards shall be deemed to

9 have met the requirements of sections 141 and 142 and

10 shall not be subject to a determination under subsection

11 (a).

12 SEC. 144. DEFINITION.

13 (a) IN GENERAL.—As used in this part, the term ‘‘in14 dividual health plan’’ means any contract, policy, certifi15 cate or other arrangement offered to individuals by a

16 health plan issuer that provides or pays for health benefits

17 (such as provider and hospital benefits) and that is not

18 a group health plan under section 131(6).

19 (b) ARRANGEMENTS NOT INCLUDED.—Such term

20 does not include the following, or any combination thereof:

21 (1) Coverage only for accident, or disability in22 come insurance, or any combination thereof.

23 (2) Medicare supplemental health insurance (as

24 defined under section 1882(g)(1) of the Social Secu25 rity Act).
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1 (3) Coverage issued as a supplement to liability

2 insurance.

3 (4) Liability insurance, including general liabil4 ity insurance and automobile liability insurance.

5 (5) Workers’ compensation or similar insurance.

6 (6) Automobile medical payment insurance.

7 (7) Coverage for a specified disease or illness.

8 (8) Hospital or fixed indemnity insurance.

9 (9) Short-term limited duration insurance.

10 (10) Credit-only, dental-only, or vision-only in11 surance.

12 (11) A health insurance policy providing bene13 fits only for long-term care, nursing home care,

14 home health care, community-based care, or any

15 combination thereof.

16 Subpart C—COBRA Clarifications

17 SEC. 151. COBRA CLARIFICATIONS.

18 (a) PUBLIC HEALTH SERVICE ACT.—

19 (1) PERIOD OF COVERAGE.—Section 2202(2) of

20 the Public Health Service Act (42 U.S.C. 300bb–

21 2(2)) is amended—

22 (A) in subparagraph (A)—

23 (i) by transferring the sentence imme24 diately preceding clause (iv) so as to ap-
67

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1 pear immediately following such clause

2 (iv); and

3 (ii) in the last sentence (as so trans4 ferred)—

5 (I) by inserting ‘‘, or a bene6 ficiary-family member of the individ7 ual,’’ after ‘‘an individual’’; and

8 (II) by striking ‘‘at the time of a

9 qualifying event described in section

10 2203(2)’’ and inserting ‘‘at any time

11 during the initial 18-month period of

12 continuing coverage under this title’’;

13 (B) in subparagraph (D)(i), by inserting

14 before ‘‘, or’’ the following: ‘‘, except that the

15 exclusion or limitation contained in this clause

16 shall not be considered to apply to a plan under

17 which a preexisting condition or exclusion does

18 not apply to an individual otherwise eligible for

19 continuation coverage under this section be20 cause of the provision of subtitle C of title I of

21 the American Family Income and Economic Se22 curity Act of 1996’’; and

23 (C) in subparagraph (E), by striking ‘‘at

24 the time of a qualifying event described in sec25 tion 2203(2)’’ and inserting ‘‘at any time dur-
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1 ing the initial 18-month period of continuing

2 coverage under this title’’.

3 (2) ELECTION.—Section 2205(1)(C) of the

4 Public Health Service Act (42 U.S.C. 300bb–

5 5(1)(C)) is amended—

6 (A) in clause (i), by striking ‘‘or’’ at the

7 end thereof;

8 (B) in clause (ii), by striking the period

9 and inserting ‘‘, or’’; and

10 (C) by adding at the end thereof the fol11 lowing new clause:

12 ‘‘(iii) in the case of an individual de13 scribed in the last sentence of section

14 2202(2)(A), or a beneficiary-family mem15 ber of the individual, the date such individ16 ual is determined to have been disabled.’’

17 (3) NOTICES.—Section 2206(3) of the Public

18 Health Service Act (42 U.S.C. 300bb–6(3)) is

19 amended by striking ‘‘at the time of a qualifying

20 event described in section 2203(2)’’ and inserting

21 ‘‘at any time during the initial 18-month period of

22 continuing coverage under this title’’.

23 (4) BIRTH OR ADOPTION OF A CHILD.—Section

24 2208(3)(A) of the Public Health Service Act (42
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1 U.S.C. 300bb–8(3)(A)) is amended by adding at the

2 end thereof the following new flush sentence:

3 ‘‘Such term shall also include a child who is born to

4 or placed for adoption with the covered employee

5 during the period of continued coverage under this

6 title.’’

7 (b) EMPLOYEE RETIREMENT INCOME SECURITY ACT

8 OF 1974.—

9 (1) PERIOD OF COVERAGE.—Section 602(2) of

10 the Employee Retirement Income Security Act of

11 1974 (29 U.S.C. 1162(2)) is amended—

12 (A) in the last sentence of subparagraph

13 (A)—

14 (i) by inserting ‘‘, or a beneficiary15 family member of the individual,’’ after

16 ‘‘an individual’’; and

17 (ii) by striking ‘‘at the time of a

18 qualifying event described in section

19 603(2)’’ and inserting ‘‘at any time during

20 the initial 18-month period of continuing

21 coverage under this part’’;

22 (B) in subparagraph (D)(i), by inserting

23 before ‘‘, or’’ the following: ‘‘, except that the

24 exclusion or limitation contained in this clause

25 shall not be considered to apply to a plan under
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•S 1685 IS

1 which a preexisting condition or exclusion does

2 not apply to an individual otherwise eligible for

3 continuation coverage under this section be4 cause of the provision of subtitle C of title I of

5 the American Family Income and Economic Se6 curity Act of 1996’’; and

7 (C) in subparagraph (E), by striking ‘‘at

8 the time of a qualifying event described in sec9 tion 603(2)’’ and inserting ‘‘at any time during

10 the initial 18-month period of continuing cov11 erage under this part’’.

12 (2) ELECTION.—Section 605(1)(C) of the Em13 ployee Retirement Income Security Act of 1974 (29

14 U.S.C. 1165(1)(C)) is amended—

15 (A) in clause (i), by striking ‘‘or’’ at the

16 end thereof;

17 (B) in clause (ii), by striking the period

18 and inserting ‘‘, or’’; and

19 (C) by adding at the end thereof the fol20 lowing new clause:

21 ‘‘(iii) in the case of an individual de22 scribed in the last sentence of section

23 602(2)(A), or a beneficiary-family member

24 of the individual, the date such individual

25 is determined to have been disabled.’’
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1 (3) NOTICES.—Section 606(3) of the Employee

2 Retirement Income Security Act of 1974 (29 U.S.C.

3 1166(3)) is amended by striking ‘‘at the time of a

4 qualifying event described in section 603(2)’’ and in5 serting ‘‘at any time during the initial 18-month pe6 riod of continuing coverage under this part’’.

7 (4) BIRTH OR ADOPTION OF A CHILD.—Section

8 607(3)(A) of the Employee Retirement Income Secu9 rity Act of 1974 (29 U.S.C. 1167(3)) is amended by

10 adding at the end thereof the following new flush

11 sentence:

12 ‘‘Such term shall also include a child who is born to

13 or placed for adoption with the covered employee

14 during the period of continued coverage under this

15 part.’’

16 (c) INTERNAL REVENUE CODE OF 1986.—

17 (1) PERIOD OF COVERAGE.—Section

18 4980B(f)(2)(B) of the Internal Revenue Code of

19 1986 is amended—

20 (A) in the last sentence of clause (i) by

21 striking ‘‘at the time of a qualifying event de22 scribed in paragraph (3)(B)’’ and inserting ‘‘at

23 any time during the initial 18-month period of

24 continuing coverage under this section’’;
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1 (B) in clause (iv)(I), by inserting before ‘‘,

2 or’’ the following: ‘‘, except that the exclusion

3 or limitation contained in this subclause shall

4 not be considered to apply to a plan under

5 which a preexisting condition or exclusion does

6 not apply to an individual otherwise eligible for

7 continuation coverage under this subsection be8 cause of the provision of subtitle C of title I of

9 the American Family Income and Economic Se10 curity Act of 1996’’; and

11 (C) in clause (v), by striking ‘‘at the time

12 of a qualifying event described in paragraph

13 (3)(B)’’ and inserting ‘‘at any time during the

14 initial 18-month period of continuing coverage

15 under this section’’.

16 (2) ELECTION.—Section 4980B(f)(5)(A)(iii) of

17 the Internal Revenue Code of 1986 is amended—

18 (A) in subclause (I), by striking ‘‘or’’ at

19 the end thereof;

20 (B) in subclause (II), by striking the pe21 riod and inserting ‘‘, or’’; and

22 (C) by adding at the end thereof the fol23 lowing new subclause:

24 ‘‘(III) in the case of an qualified

25 beneficiary described in the last sen-
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1 tence of paragraph (2)(B)(i), the date

2 such individual is determined to have

3 been disabled.’’

4 (3) NOTICES.—Section 4980B(f)(6)(C) of the

5 Internal Revenue Code of 1986 is amended by strik6 ing ‘‘at the time of a qualifying event described in

7 paragraph (3)(B)’’ and inserting ‘‘at any time dur8 ing the initial 18-month period of continuing cov9 erage under this section’’.

10 (4) BIRTH OR ADOPTION OF A CHILD.—Section

11 4980B(g)(1)(A) of the Internal Revenue Code of

12 1986 is amended by adding at the end thereof the

13 following new flush sentence:

14 ‘‘Such term shall also include a child who

15 is born to or placed for adoption with the

16 covered employee during the period of con17 tinued coverage under this section.’’

18 (d) EFFECTIVE DATE.—The amendments made by

19 this section shall apply to qualifying events occurring on

20 or after the date of the enactment of this Act for plan

21 years beginning after December 31, 1996.

22 (e) NOTIFICATION OF CHANGES.—Not later than 60

23 days prior to the date on which this section becomes effec24 tive, each group health plan (covered under title XXII of

25 the Public Health Service Act, part 6 of subtitle B of title
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•S 1685 IS

1 I of the Employee Retirement Income Security Act of

2 1974, and section 4980B(f) of the Internal Revenue Code

3 of 1986) shall notify each qualified beneficiary who has

4 elected continuation coverage under such title, part or sec5 tion of the amendments made by this section.

6 Subpart D—Private Health Plan Purchasing

7 Cooperatives

8 SEC. 161. PRIVATE HEALTH PLAN PURCHASING COOPERA9 TIVES.

10 (a) DEFINITION.—As used in this subtitle, the term

11 ‘‘health plan purchasing cooperative’’ means a group of

12 individuals or employers that, on a voluntary basis and

13 in accordance with this section, form a cooperative for the

14 purpose of purchasing individual health plans or group

15 health plans offered by health plan issuers. A health plan

16 issuer, agent, broker or any other individual or entity en17 gaged in the sale of insurance may not underwrite a coop18 erative.

19 (b) CERTIFICATION.—

20 (1) IN GENERAL.—If a group described in sub21 section (a) desires to form a health plan purchasing

22 cooperative in accordance with this section and such

23 group appropriately notifies the State and the Sec24 retary of such desire, the State, upon a determina25 tion that such group meets the requirements of this
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1 section, shall certify the group as a health plan pur2 chasing cooperative. The State shall make a deter3 mination of whether such group meets the require4 ments of this section in a timely fashion. Each such

5 cooperative shall also be registered with the Sec6 retary.

7 (2) STATE REFUSAL TO CERTIFY.—If a State

8 fails to implement a program for certifying health

9 plan purchasing cooperatives in accordance with the

10 standards under this subtitle, the Secretary shall

11 certify and oversee the operations of such coopera12 tives in such State.

13 (3) INTERSTATE COOPERATIVES.—For purposes

14 of this section, a health plan purchasing cooperative

15 operating in more than one State shall be certified

16 by the State in which the cooperative is domiciled.

17 States may enter into cooperative agreements for the

18 purpose of certifying and overseeing the operation of

19 such cooperatives. For purposes of this subsection, a

20 cooperative shall be considered to be domiciled in the

21 State in which most of the members of the coopera22 tive reside.

23 (c) BOARD OF DIRECTORS.—

24 (1) IN GENERAL.—Each health plan purchasing

25 cooperative shall be governed by a Board of Direc-
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1 tors that shall be responsible for ensuring the per2 formance of the duties of the cooperative under this

3 section. The Board shall be composed of a broad

4 cross-section of representatives of employers, em5 ployees, and individuals participating in the coopera6 tive. A health plan issuer, agent, broker, or any

7 other individual or entity engaged in the sale of indi8 vidual health plans or group health plans may not

9 hold or control any right to vote with respect to a

10 cooperative.

11 (2) LIMITATION ON COMPENSATION.—A health

12 plan purchasing cooperative may not provide com13 pensation to members of the Board of Directors.

14 The cooperative may provide reimbursements to

15 such members for the reasonable and necessary ex16 penses incurred by the members in the performance

17 of their duties as members of the Board.

18 (3) CONFLICT OF INTEREST.—No member of

19 the Board of Directors (or family members of such

20 members) nor any management personnel of the co21 operative may be employed by, be a consultant for,

22 be a member of the board of directors of, be affili23 ated with an agent of, or otherwise be a representa24 tive of any health plan issuer, health care provider,

25 or agent or broker. Nothing in the preceding sen-
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•S 1685 IS

1 tence shall limit a member of the Board from pur2 chasing coverage offered through the cooperative.

3 (d) MEMBERSHIP AND MARKETING AREA.—

4 (1) MEMBERSHIP.—A health plan purchasing

5 cooperative may establish limits on the maximum

6 size of employers who may become members of the

7 cooperative, and may determine whether to permit

8 individuals to become members. Upon the establish9 ment of such membership requirements, the coopera10 tive shall, except as provided in paragraph (2), ac11 cept all employers (or individuals) residing within

12 the area served by the cooperative who meet such re13 quirements as members on a first-come, first-served

14 basis, or on another basis established by the State

15 to ensure equitable access to the cooperative.

16 (2) MARKETING AREA.—A State may establish

17 rules regarding the geographic area that must be

18 served by a health plan purchasing cooperative. With

19 respect to a State that has not established such

20 rules, a health plan purchasing cooperative operating

21 in the State shall define the boundaries of the area

22 to be served by the cooperative, except that such

23 boundaries may not be established on the basis of

24 health status or insurability of the populations that

25 reside in the area.
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•S 1685 IS

1 (e) DUTIES AND RESPONSIBILITIES.—

2 (1) IN GENERAL.—A health plan purchasing co3 operative shall—

4 (A) enter into agreements with multiple,

5 unaffiliated health plan issuers, except that the

6 requirement of this subparagraph shall not

7 apply in regions (such as remote or frontier

8 areas) in which compliance with such require9 ment is not possible;

10 (B) enter into agreements with employers

11 and individuals who become members of the co12 operative;

13 (C) participate in any program of risk-ad14 justment or reinsurance, or any similar pro15 gram, that is established by the State;

16 (D) prepare and disseminate comparative

17 health plan materials (including information

18 about cost, quality, benefits, and other informa19 tion concerning group health plans and individ20 ual health plans offered through the coopera21 tive);

22 (E) actively market to all eligible employ23 ers and individuals residing within the service

24 area; and
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•S 1685 IS

1 (F) act as an ombudsman for group health

2 plan or individual health plan enrollees.

3 (2) PERMISSIBLE ACTIVITIES.—A health plan

4 purchasing cooperative may perform such other

5 functions as necessary to further the purposes of

6 this subtitle, including—

7 (A) collecting and distributing premiums

8 and performing other administrative functions;

9 (B) collecting and analyzing surveys of en10 rollee satisfaction;

11 (C) charging membership fee to enrollees

12 (such fees may not be based on health status)

13 and charging participation fees to health plan

14 issuers;

15 (D) cooperating with (or accepting as

16 members) employers who provide health bene17 fits directly to participants and beneficiaries

18 only for the purpose of negotiating with provid19 ers; and

20 (E) negotiating with health care providers

21 and health plan issuers.

22 (f) LIMITATIONS ON COOPERATIVE ACTIVITIES.—A

23 health plan purchasing cooperative shall not—

24 (1) perform any activity relating to the licens25 ing of health plan issuers;
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•S 1685 IS

1 (2) assume financial risk directly or indirectly

2 on behalf of members of a health plan purchasing

3 cooperative relating to any group health plan or in4 dividual health plan;

5 (3) establish eligibility, continuation of eligi6 bility, enrollment, or premium contribution require7 ments for participants, beneficiaries, or individuals

8 based on health status, medical condition, claims ex9 perience, receipt of health care, medical history, evi10 dence of insurability, or disability;

11 (4) operate on a for-profit or other basis where

12 the legal structure of the cooperative permits profits

13 to be made and not returned to the members of the

14 cooperative, except that a for-profit health plan pur15 chasing cooperative may be formed by a nonprofit

16 organization—

17 (A) in which membership in such organiza18 tion is not based on health status, medical con19 dition, claims experience, receipt of health care,

20 medical history, evidence of insurability, or dis21 ability; and

22 (B) that accepts as members all employers

23 or individuals on a first-come, first-served basis,

24 subject to any established limit on the maxi-
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•S 1685 IS

1 mum size of an employer that may become a

2 member; or

3 (5) perform any other activities that conflict or

4 are inconsistent with the performance of its duties

5 under this subtitle.

6 (g) LIMITED PREEMPTION OF CERTAIN STATE

7 LAWS.—

8 (1) IN GENERAL.—With respect to a health

9 plan purchasing cooperative that meets the require10 ments of this section, State fictitious group laws

11 shall be preempted.

12 (2) HEALTH PLAN ISSUERS.—

13 (A) RATING.—With respect to a health

14 plan issuer offering a group health plan or indi15 vidual health plan through a health plan pur16 chasing cooperative that meets the requirements

17 of this section, State premium rating require18 ment laws, except to the extent provided under

19 subparagraph (B), shall be preempted unless

20 such laws permit premium rates negotiated by

21 the cooperative to be less than rates that would

22 otherwise be permitted under State law, if such

23 rating differential is not based on differences in

24 health status or demographic factors.
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•S 1685 IS

1 (B) EXCEPTION.—State laws referred to in

2 subparagraph (A) shall not be preempted if

3 such laws—

4 (i) prohibit the variance of premium

5 rates among employers, plan sponsors, or

6 individuals that are members of a health

7 plan purchasing cooperative in excess of

8 the amount of such variations that would

9 be permitted under such State rating laws

10 among employers, plan sponsors, and indi11 viduals that are not members of the coop12 erative; and

13 (ii) prohibit a percentage increase in

14 premium rates for a new rating period that

15 is in excess of that which would be per16 mitted under State rating laws.

17 (C) BENEFITS.—Except as provided in

18 subparagraph (D), a health plan issuer offering

19 a group health plan or individual health plan

20 through a health plan purchasing cooperative

21 shall comply with all State mandated benefit

22 laws that require the offering of any services,

23 category or care, or services of any class or type

24 of provider.
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•S 1685 IS

1 (D) EXCEPTION.—In those States that

2 have enacted laws authorizing the issuance of

3 alternative benefit plans to small employers,

4 health plan issuers may offer such alternative

5 benefit plans through a health plan purchasing

6 cooperative that meets the requirements of this

7 section.

8 (h) RULES OF CONSTRUCTION.—Nothing in this sec9 tion shall be construed to—

10 (1) require that a State organize, operate, or

11 otherwise create health plan purchasing cooperatives;

12 (2) otherwise require the establishment of

13 health plan purchasing cooperatives;

14 (3) require individuals, plan sponsors, or em15 ployers to purchase group health plans or individual

16 health plans through a health plan purchasing coop17 erative;

18 (4) require that a health plan purchasing coop19 erative be the only type of purchasing arrangement

20 permitted to operate in a State;

21 (5) confer authority upon a State that the State

22 would not otherwise have to regulate health plan is23 suers or employee health benefits plans; or

24 (6) confer authority upon a State (or the Fed25 eral Government) that the State (or Federal Govern-
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•S 1685 IS

1 ment) would not otherwise have to regulate group

2 purchasing arrangements, coalitions, or other similar

3 entities that do not desire to become a health plan

4 purchasing cooperative in accordance with this sec5 tion.

6 (i) APPLICATION OF ERISA.—For purposes of en7 forcement only, the requirements of parts 4 and 5 of sub8 title B of title I of the Employee Retirement Income Secu9 rity Act of 1974 (29 U.S.C. 1101) shall apply to a health

10 plan purchasing cooperative as if such plan were an em11 ployee welfare benefit plan.

12 PART II—APPLICATION AND ENFORCEMENT OF

13 STANDARDS

14 SEC. 171. APPLICABILITY.

15 (a) CONSTRUCTION.—

16 (1) ENFORCEMENT.—

17 (A) IN GENERAL.—A requirement or

18 standard imposed under this subtitle on a

19 group health plan or individual health plan of20 fered by a health plan issuer shall be deemed to

21 be a requirement or standard imposed on the

22 health plan issuer. Such requirements or stand23 ards shall be enforced by the State insurance

24 commissioner for the State involved or the offi25 cial or officials designated by the State to en-
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•S 1685 IS

1 force the requirements of this subtitle. In the

2 case of a group health plan offered by a health

3 plan issuer in connection with an employee

4 health benefit plan, the requirements or stand5 ards imposed under this subtitle shall be en6 forced with respect to the health plan issuer by

7 the State insurance commissioner for the State

8 involved or the official or officials designated by

9 the State to enforce the requirements of this

10 subtitle.

11 (B) LIMITATION.—Except as provided in

12 subsection (c), the Secretary shall not enforce

13 the requirements or standards of this subtitle

14 as they relate to health plan issuers, group

15 health plans, or individual health plans. In no

16 case shall a State enforce the requirements or

17 standards of this subtitle as they relate to em18 ployee health benefit plans.

19 (2) PREEMPTION OF STATE LAW.—Nothing in

20 this subtitle shall be construed to prevent a State

21 from establishing, implementing, or continuing in ef22 fect standards and requirements—

23 (A) not prescribed in this subtitle; or

24 (B) related to the issuance, renewal, or

25 portability of health insurance or the establish-
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•S 1685 IS

1 ment or operation of group purchasing arrange2 ments, that are consistent with, and are not in

3 direct conflict with, this subtitle and provide

4 greater protection or benefit to participants,

5 beneficiaries or individuals.

6 (b) RULE OF CONSTRUCTION.—Nothing in this sub7 title shall be construed to affect or modify the provisions

8 of section 514 of the Employee Retirement Income Secu9 rity Act of 1974 (29 U.S.C. 1144).

10 (c) CONTINUATION.—Nothing in this subtitle shall be

11 construed as requiring a group health plan or an employee

12 health benefit plan to provide benefits to a particular par13 ticipant or beneficiary in excess of those provided under

14 the terms of such plan.

15 SEC. 172. ENFORCEMENT OF STANDARDS.

16 (a) HEALTH PLAN ISSUERS.—Each State shall re17 quire that each group health plan and individual health

18 plan issued, sold, renewed, offered for sale or operated in

19 such State by a health plan issuer meet the standards es20 tablished under this subtitle pursuant to an enforcement

21 plan filed by the State with the Secretary. A State shall

22 submit such information as required by the Secretary

23 demonstrating effective implementation of the State en24 forcement plan.
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•S 1685 IS

1 (b) EMPLOYEE HEALTH BENEFIT PLANS.—With re2 spect to employee health benefit plans, the Secretary shall

3 enforce the reform standards established under this sub4 title in the same manner as provided for under sections

5 502, 504, 506, and 510 of the Employee Retirement In6 come Security Act of 1974 (29 U.S.C. 1132, 1134, 1136,

7 and 1140). The civil penalties contained in paragraphs (1)

8 and (2) of section 502(c) of such Act (29 U.S.C.

9 1132(c)(1) and (2)) shall apply to any information re10 quired by the Secretary to be disclosed and reported under

11 this section.

12 (c) FAILURE TO IMPLEMENT PLAN.—In the case of

13 the failure of a State to substantially enforce the stand14 ards and requirements set forth in this subtitle with re15 spect to group health plans and individual health plans

16 as provided for under the State enforcement plan filed

17 under subsection (a), the Secretary, in consultation with

18 the Secretary of Health and Human Services, shall imple19 ment an enforcement plan meeting the standards of this

20 subtitle in such State. In the case of a State that fails

21 to substantially enforce the standards and requirements

22 set forth in this subtitle, each health plan issuer operating

23 in such State shall be subject to civil enforcement as pro24 vided for under sections 502, 504, 506, and 510 of the

25 Employee Retirement Income Security Act of 1974 (29
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•S 1685 IS

1 U.S.C. 1132, 1134, 1136, and 1140). The civil penalties

2 contained in paragraphs (1) and (2) of section 502(c) of

3 such Act (29 U.S.C. 1132(c)(1) and (2)) shall apply to

4 any information required by the Secretary to be disclosed

5 and reported under this section.

6 (d) APPLICABLE CERTIFYING AUTHORITY.—As used

7 in this part, the term ‘‘applicable certifying authority’’

8 means, with respect to—

9 (1) health plan issuers, the State insurance

10 commissioner or official or officials designated by

11 the State to enforce the requirements of this subtitle

12 for the State involved; and

13 (2) an employee health benefit plan, the Sec14 retary.

15 (e) REGULATIONS.—The Secretary may promulgate

16 such regulations as may be necessary or appropriate to

17 carry out this subtitle.

18 (f) TECHNICAL AMENDMENT.—Section 508 of the

19 Employee Retirement Income Security Act of 1974 (29

20 U.S.C. 1138) is amended by inserting ‘‘and under subtitle

21 C of title I of the American Family Income and Economic

22 Security Act of 1996’’ before the period.
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•S 1685 IS

1 PART III—MISCELLANEOUS PROVISIONS

2 SEC. 181. HMOS ALLOWED TO OFFER PLANS WITH

3 DEDUCTIBLES TO INDIVIDUALS WITH MEDI4 CAL SAVINGS ACCOUNTS.

5 (a) IN GENERAL.—Section 1301(b) of the Public

6 Health Service Act (42 U.S.C. 300e(b)) is amended by

7 adding at the end the following new paragraph:

8 ‘‘(6)(A) If a member certifies that a medical

9 savings account has been established for the benefit

10 of such member, a health maintenance organization

11 may, at the request of such member reduce the basic

12 health services payment otherwise determined under

13 paragraph (1) by requiring the payment of a deduct14 ible by the member for basic health services.

15 ‘‘(B) For purposes of this paragraph, the term

16 ‘medical savings account’ means an account which,

17 by its terms, allows the deposit of funds and the use

18 of such funds and income derived from the invest19 ment of such funds for the payment of the deduct20 ible described in subparagraph (A).’’

21 (b) MEDICAL SAVINGS ACCOUNTS.—It is the sense

22 of the Committee on Labor and Human Resources of the

23 Senate that the establishment of medical savings accounts,

24 including those defined in section 1301(b)(6)(B) of the

25 Public Health Service Act (42 U.S.C. 300e(b)(6)(B)),

26 should be encouraged as part of any health insurance re-
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•S 1685 IS

1 form legislation passed by the Senate through the use of

2 tax incentives relating to contributions to, the income

3 growth of, and the qualified use of, such accounts.

4 (c) SENSE OF THE SENATE.—It is the sense of the

5 Senate that the Congress should take measures to further

6 the purposes of this Act, including any necessary changes

7 to the Internal Revenue Code of 1986 to encourage groups

8 and individuals to obtain health coverage, and to promote

9 access, equity, portability, affordability, and security of

10 health benefits.

11 SEC. 182. HEALTH COVERAGE AVAILABILITY STUDY.

12 (a) IN GENERAL.—The Secretary of Health and

13 Human Services, in consultation with the Secretary, rep14 resentatives of State officials, consumers, and other rep15 resentatives of individuals and entities that have expertise

16 in health insurance and employee benefits, shall conduct

17 a two-part study, and prepare and submit reports, in ac18 cordance with this section.

19 (b) EVALUATION OF AVAILABILITY.—Not later than

20 January 1, 1997, the Secretary of Health and Human

21 Services shall prepare and submit to the appropriate com22 mittees of Congress a report, concerning—

23 (1) an evaluation, based on the experience of

24 States, expert opinions, and such additional data as

25 may be available, of the various mechanisms used to
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•S 1685 IS

1 ensure the availability of reasonably priced health

2 coverage to employers purchasing group coverage

3 and to individuals purchasing coverage on a non4 group basis; and

5 (2) whether standards that limit the variation

6 in premiums will further the purposes of this sub7 title.

8 (c) EVALUATION OF EFFECTIVENESS.—Not later

9 than January 1, 1998, the Secretary of Health and

10 Human Services shall prepare and submit to the appro11 priate committees of Congress a report, concerning the ef12 fectiveness of the provisions of this subtitle and the var13 ious State laws, in ensuring the availability of reasonably

14 priced health coverage to employers purchasing group cov15 erage and individuals purchasing coverage on a non-group

16 basis.

17 SEC. 183. SENSE OF THE COMMITTEE CONCERNING MEDI18 CARE.

19 (a) FINDINGS.—The Committee on Labor and

20 Human Resources of the Senate finds that the Public

21 Trustees of Medicare concluded in their 1995 Annual Re22 port that—

23 (1) the medicare program is clearly

24 unsustainable in its present form;
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•S 1685 IS

1 (2) ‘‘the Hospital Insurance Trust Fund, which

2 pays inpatient hospital expenses, will be able to pay

3 benefits for only about 7 years and is severely out

4 of financial balance in the long range’’; and

5 (3) the Public Trustees ‘‘strongly recommend

6 that the crisis presented by the financial condition of

7 the Medicare trust fund be urgently addressed on a

8 comprehensive basis, including a review of the

9 programs’s financing methods, benefit provisions,

10 and delivery mechanisms’’.

11 (b) SENSE OF THE COMMITTEE.—It is the Sense of

12 the Committee on Labor and Human Resources of the

13 Senate that the Senate should take measures necessary

14 to reform the Medicare program, to provide increased

15 choice for seniors, and to respond to the findings of the

16 Public Trustees by protecting the short-term solvency and

17 long-term sustainability of the Medicare program.

18 SEC. 184. EFFECTIVE DATE.

19 Except as otherwise provided for in this subtitle, the

20 provisions of this subtitle shall apply as follows:

21 (1) With respect to group health plans and in22 dividual health plans, such provisions shall apply to

23 plans offered, sold, issued, renewed, in effect, or op24 erated on or after January 1, 1996.
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•S 1685 IS

1 (2) With respect to employee health benefit

2 plans, on the first day of the first plan year begin3 ning on or after January 1, 1996.

4 SEC. 185. SEVERABILITY.

5 If any provision of this subtitle or the application of

6 such provision to any person or circumstance is held to

7 be unconstitutional, the remainder of this subtitle and the

8 application of the provisions of such to any person or cir9 cumstance shall not be affected thereby.

10 Subtitle D—Employee Security

11 SEC. 191. ALLOWANCE OF CREDIT FOR EMPLOYER EX12 PENSES FOR CERTAIN ON-SITE DAY-CARE FA13 CILITIES.

14 (a) IN GENERAL.—Subpart D of part IV of sub15 chapter A of chapter 1 (relating to business related cred16 its) is amended by adding at the end thereof the following

17 new section:

18 ‘‘SEC. 45C. EMPLOYER ON-SITE DAY-CARE FACILITY CRED19 IT.

20 ‘‘(a) IN GENERAL.—For purposes of section 38, the

21 employer on-site day-care facility credit determined under

22 this section for the taxable year is an amount equal to

23 50 percent of the qualified investment in property placed

24 in service during such taxable year as part of a qualified

25 day-care facility.
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•S 1685 IS

1 ‘‘(b) LIMITATION.—The credit allowable under sub2 section (a) with respect to any qualified day-care facility

3 shall not exceed $150,000.

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

5 ‘‘(1) QUALIFIED INVESTMENT.—The term

6 ‘qualified investment’ means the amount paid or in7 curred to acquire, construct, rehabilitate, or expand

8 property—

9 ‘‘(A) which is to be used as part of a quali10 fied day-care facility, and

11 ‘‘(B) with respect to which a deduction for

12 depreciation (or amortization in lieu of depre13 ciation) is allowable.

14 Such term includes only amounts properly charge15 able to capital account.

16 ‘‘(2) QUALIFIED DAY-CARE FACILITY.—

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

18 day-care facility’ means a facility—

19 ‘‘(i) operated by an employer to pro20 vide dependent care assistance for enroll21 ees, at least 30 percent of whom are de22 pendents of employees of employers to

23 which a credit under subsection (a) with

24 respect to the facility is allowable,
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•S 1685 IS

1 ‘‘(ii) the principal use of which is to

2 provide dependent care assistance de3 scribed in clause (i),

4 ‘‘(iii) located on the premises of such

5 employer,

6 ‘‘(iv) which meets the requirements of

7 all applicable laws and regulations of the

8 State or local government in which it is lo9 cated, including, but not limited to, the li10 censing of the facility as a day-care facil11 ity, and

12 ‘‘(v) the use of which (or the eligibility

13 to use) does not discriminate in favor of

14 employees who are highly compensated em15 ployees (within the meaning of section

16 414(q)).

17 ‘‘(B) MULTIPLE EMPLOYERS.—With re18 spect to a facility jointly operated by more than

19 1 employer, the term ‘qualified day-care facility’

20 shall include any facility located on the prem21 ises of 1 employer and within a reasonable dis22 tance from the premises of the other employers.

23 ‘‘(d) RECAPTURE OF CREDIT.—

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

25 taxable year, there is a recapture event with respect
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•S 1685 IS

1 to any qualified day-care facility, then the tax of the

2 taxpayer under this chapter for such taxable year

3 shall be increased by an amount equal to the prod4 uct of—

5 ‘‘(A) the applicable recapture percentage,

6 and

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

8 allowed under section 38 for all prior taxable

9 years which would have resulted if the qualified

10 on-site day-care expenses of the taxpayer with

11 respect to such facility had been zero.

12 ‘‘(2) APPLICABLE RECAPTURE PERCENTAGE.—

13 ‘‘(A) IN GENERAL.—For purposes of this

14 subsection, the applicable recapture percentage

15 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.

16 ‘‘(B) YEARS.—For purposes of subpara17 graph (A), year 1 shall begin on the first day

18 of the taxable year in which the qualified day19 care facility is placed in service by the taxpayer.
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•S 1685 IS

1 ‘‘(3) RECAPTURE EVENT DEFINED.—For pur2 poses of this subsection, the term ‘recapture event’

3 means—

4 ‘‘(A) CESSATION OF OPERATION.—The

5 cessation of the operation of the facility as a

6 qualified day-care facility.

7 ‘‘(B) CHANGE IN OWNERSHIP.—

8 ‘‘(i) IN GENERAL.—Except as pro9 vided in clause (ii), the disposition of a

10 taxpayer’s interest in a qualified day-care

11 facility with respect to which the credit de12 scribed in subsection (a) was allowable.

13 ‘‘(ii) AGREEMENT TO ASSUME RECAP14 TURE LIABILITY.—Clause (i) shall not

15 apply if the person acquiring such interest

16 in the facility agrees in writing to assume

17 the recapture liability of the person dispos18 ing of such interest in effect immediately

19 before such disposition. In the event of

20 such an assumption, the person acquiring

21 the interest in the facility shall be treated

22 as the taxpayer for purposes of assessing

23 any recapture liability (computed as if

24 there had been no change in ownership).

25 ‘‘(4) SPECIAL RULES.—
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•S 1685 IS

1 ‘‘(A) TAX BENEFIT RULE.—The tax for

2 the taxable year shall be increased under para3 graph (1) only with respect to credits allowed

4 by reason of this section which were used to re5 duce tax liability. In the case of credits not so

6 used to reduce tax liability, the carryforwards

7 and carrybacks under section 39 shall be appro8 priately adjusted.

9 ‘‘(B) NO CREDITS AGAINST TAX.—Any in10 crease in tax under this subsection shall not be

11 treated as a tax imposed by this chapter for

12 purposes of determining the amount of any

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

14 ‘‘(C) NO RECAPTURE BY REASON OF CAS15 UALTY LOSS.—The increase in tax under this

16 subsection shall not apply to a cessation of op17 eration of the facility as a qualified day-care fa18 cility by reason of a casualty loss to the extent

19 such loss is restored by reconstruction or re20 placement within a reasonable period estab21 lished by the Secretary.

22 ‘‘(e) SPECIAL ALLOCATION RULES.—For purposes of

23 this section—

24 ‘‘(1) ALLOCATION IN CASE OF MULTIPLE EM25 PLOYERS.—In the case of multiple employers jointly
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•S 1685 IS

1 operating a qualified day-care facility, the credit al2 lowable by this section to each such employer shall

3 be its proportionate share of the qualified on-site

4 day-care expenses giving rise to the credit.

5 ‘‘(2) PASS-THRU IN THE CASE OF ESTATES AND

6 TRUSTS.—Under regulations prescribed by the Sec7 retary, rules similar to the rules of subsection (d) of

8 section 52 shall apply.

9 ‘‘(3) ALLOCATION IN THE CASE OF PARTNER10 SHIPS.—In the case of partnerships, the credit shall

11 be allocated among partners under regulations pre12 scribed by the Secretary.

13 ‘‘(f) NO DOUBLE BENEFIT.—

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

15 this subtitle—

16 ‘‘(A) IN GENERAL.—If a credit is deter17 mined under this section with respect to any

18 property, the basis of such property shall be re19 duced by the amount of the credit so deter20 mined.

21 ‘‘(B) CERTAIN DISPOSITIONS.—If during

22 any taxable year there is a recapture amount

23 determined with respect to any property the

24 basis of which was reduced under paragraph

25 (1), the basis of such property (immediately be-
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1 fore the event resulting in such recapture) shall

2 be increased by an amount equal to such recap3 ture amount. For purposes of the preceding

4 sentence, the term ‘recapture amount’ means

5 any increase in tax (or adjustment in

6 carrybacks or carryovers) determined under

7 subsection (d).

8 ‘‘(2) OTHER DEDUCTIONS AND CREDITS.—No

9 deduction or credit shall be allowed under any other

10 provision of this chapter with respect to the amount

11 of the credit determined under this section.’’

12 (b) CONFORMING AMENDMENTS.—

13 (1) Section 38(b) is amended—

14 (A) by striking ‘‘plus’’ at the end of para15 graph (10),

16 (B) by striking the period at the end of

17 paragraph (11), and inserting a comma and

18 ‘‘plus’’, and

19 (C) by adding at the end the following new

20 paragraph:

21 ‘‘(12) the employer on-site day-care facility

22 credit determined under section 45A.’’

23 (2) The table of sections for subpart D of part

24 IV of subchapter A of chapter 1 is amended by add25 ing at the end the following new item:

‘‘Sec. 45C. Employer on-site day-care facility credit.’’
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1 (c) EFFECTIVE DATE.—The amendments made by

2 this section shall apply to taxable years beginning after

3 December 31, 1995.

4 SEC. 192. EXCLUSION FOR GROUP LEGAL SERVICES MADE

5 PERMANENT.

6 (a) GENERAL RULE.—Section 120 of the Internal

7 Revenue Code of 1986 (relating to amounts received under

8 qualified group legal services plans) is amended by strik9 ing subsection (e) and by redesignating subsection (f) as

10 subsection (e).

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

12 subsection (a) shall apply to taxable years beginning after

13 December 31, 1995.

14 SEC. 193. ONE-TIME EXCLUSION OF GAIN FROM SALE OF

15 PRINCIPAL RESIDENCE IF INDIVIDUAL OR

16 SPOUSE IS TERMINALLY ILL.

17 (a) IN GENERAL.—Paragraph (1) of section 121(a)

18 (relating to one-time exclusion of gain from sale of prin19 cipal residence by individual who has attained age 55) is

20 amended to read as follows:

21 ‘‘(1)(A) the taxpayer has attained the age of 55

22 years before the date of such sale or exchange, or

23 ‘‘(B) the individual, or the individual’s spouse,

24 is terminally ill on the date of the sale or exchange,

25 and’’.
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1 (b) DEFINITION OF TERMINALLY ILL.—Subsection

2 (d) of section 121 is amended by adding at the end the

3 following new paragraph:

4 ‘‘(10) TERMINALLY ILL.—

5 ‘‘(A) IN GENERAL.—Subject to subpara6 graph (B), an individual shall be treated as ter7 minally ill for purposes of subsection (a) if such

8 individual has an illness or physical condition

9 which can reasonably be expected to result in

10 death in 24 months or less.

11 ‘‘(B) PROOF REQUIREMENTS.—No individ12 ual shall be treated as terminally ill for pur13 poses of subsection (a) unless proof that the in14 dividual is terminally ill is furnished to the Sec15 retary at such time and in such manner as the

16 Secretary may prescribe.’’

17 (c) CLERICAL AND CONFORMING AMENDMENTS.—

18 (1) The heading of section 121 is amended to

19 read as follows:
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1 ‘‘SEC. 121. ONE-TIME EXCLUSION OF GAIN FROM SALE OF

2 PRINCIPAL RESIDENCE BY INDIVIDUAL WHO

3 HAS ATTAINED AGE 55 OR IS TERMINALLY

4 ILL.’’

5 (2) The table of sections for part III of sub6 chapter B of chapter 1 is amended by amending the

7 item relating to section 121 to read as follows:

‘‘Sec. 121. One-time exclusion of gain from sale of principal residence by individual who has attained age 55 or is

terminally ill.’’

8 (d) EFFECTIVE DATE.—The amendments made by

9 this section shall apply to sales and exchanges occurring

10 after the date of the enactment of this Act.

11 TITLE II—INCENTIVES FOR

12 LIFELONG LEARNING

13 SEC. 201. CREDIT FOR EMPLOYEE TRAINING.

14 (a) IN GENERAL.—Subpart D of part IV of sub15 chapter A of chapter 1 (relating to business related cred16 its), as amended by section 191, is amended by adding

17 at the end the following new section:

18 ‘‘SEC. 45D. EMPLOYEE TRAINING CREDIT.

19 ‘‘(a) IN GENERAL.—For purposes of section 38, the

20 amount of the employee training credit determined under

21 this section for any taxable year shall be an amount equal

22 to 50 percent of the qualified training expenses of the tax23 payer for such taxable year.
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1 ‘‘(b) QUALIFIED TRAINING EXPENSES.—For pur2 poses of this section—

3 ‘‘(1) IN GENERAL.—The term ‘qualified train4 ing expenses’ means the aggregate amount of ex5 penses paid or incurred by the taxpayer during the

6 taxable year in connection with the training of em7 ployees under any approved training program.

8 ‘‘(2) ONLY FIRST $2,500 OF QUALIFIED TRAIN9 ING EXPENSES TAKEN INTO ACCOUNT.—The amount

10 of the qualified training expenses which may be

11 taken into account with respect to any employee

12 shall not exceed $2,500.

13 ‘‘(3) APPROVED TRAINING PROGRAMS.—The

14 term ‘approved training program’ means—

15 ‘‘(A) any apprenticeship program reg16 istered with or approved by any Federal or

17 State agency or department,

18 ‘‘(B) any employer-designed or employer19 sponsored program which meets such minimum

20 requirements with respect to supervised on-the21 job experience and classroom instruction as the

22 Secretary of Labor shall prescribe by regula23 tions,

24 ‘‘(C) any cooperative education (within the

25 meaning given to such term by section 521(8)
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•S 1685 IS

1 of the Carl D. Perkins Vocational Education

2 Act),

3 ‘‘(D) any training program designated by

4 the Secretary of Labor which is carried out

5 under the supervision of an institution of higher

6 education (within the meaning given to such

7 term by section 1201(a) of the Higher Edu8 cation Act of 1965), or

9 ‘‘(E) any other program for improving job

10 skills directly related to employment which the

11 Secretary of Labor may approve under regula12 tions prescribed by such Secretary.

13 ‘‘(c) SPECIAL RULES.—For purposes of this sec14 tion—

15 ‘‘(1) AGGREGATION OF QUALIFIED TRAINING

16 EXPENSES.—

17 ‘‘(A) CONTROLLED GROUP OF CORPORA18 TIONS.—

19 ‘‘(i) IN GENERAL.—In determining

20 the amount of the credit under this sec21 tion—

22 ‘‘(I) all members of the same

23 controlled group of corporations shall

24 be treated as a single taxpayer, and
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1 ‘‘(II) the credit (if any) allowable

2 by this section to each such member

3 shall be its proportionate share of the

4 qualified training expenses giving rise

5 to the credit.

6 ‘‘(ii) CONTROLLED GROUP OF COR7 PORATIONS DEFINED.—The term ‘con8 trolled group of corporations’ has the same

9 meaning given to such term by section

10 1563(a), except that—

11 ‘‘(I) ‘more than 50 percent’ shall

12 be substituted for ‘at least 80 percent’

13 each place it appears in section

14 1563(a)(1), and

15 ‘‘(II) the determination shall be

16 made without regard to subsections

17 (a)(4) and (e)(3)(C) of section 1563.

18 ‘‘(B) COMMON CONTROL.—Under regula19 tions prescribed by the Secretary, in determin20 ing the amount of the credit under this sec21 tion—

22 ‘‘(i) all trades or businesses (whether

23 or not incorporated) which are under com24 mon control shall be treated as a single

25 taxpayer, and
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1 ‘‘(ii) the credit (if any) allowable by

2 this section to each such trade or business

3 shall be its proportionate share of the

4 qualified training expenses giving rise to

5 the credit.

6 The regulations prescribed under this subpara7 graph shall be based on principles similar to the

8 principles which apply in the case of subpara9 graph (A).

10 ‘‘(2) ALLOCATIONS.—

11 ‘‘(A) PASS-THRU IN THE CASE OF ES12 TATES AND TRUSTS.—Under regulations pre13 scribed by the Secretary, rules similar to the

14 rules of subsection (d) of section 52 shall apply.

15 ‘‘(B) ALLOCATION IN THE CASE OF PART16 NERSHIPS.—In the case of partnerships, the

17 credit shall be allocated among partners under

18 regulations prescribed by the Secretary.

19 ‘‘(d) ADDITIONAL BENEFIT.—The credit allowable

20 under this section with respect to qualified training ex21 penses of the taxpayer shall be in addition to any deduc22 tion or credit allowed the taxpayer under any other provi23 sion of this chapter with respect to such expenses.’’

24 (b) EMPLOYEE TRAINING CREDIT TREATED AS

25 OTHER BUSINESS CREDITS.—Section 38(b) of the Inter-
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1 nal Revenue Code of 1986 (defining current year business

2 credit) is amended by striking ‘‘plus’’ at the end of para3 graph (11), by striking the period at the end of paragraph

4 (12) and inserting ‘‘, plus’’, and by adding at the end the

5 following new paragraph:

6 ‘‘(13) the employee training credit determined

7 under section 45C(a).’’

8 (c) CLERICAL AMENDMENT.—The table of sections

9 for subpart A of part IV of subchapter A of chapter 1

10 of the Internal Revenue Code of 1986 is amended by add11 ing at the end the following new item:

‘‘Sec. 45D. Employee training credit.’’

12 (d) EFFECTIVE DATE.—The amendments made by

13 this section shall apply to taxable years beginning after

14 December 31, 1995.

15 SEC. 202. PERMANENT EXTENSION OF EDUCATIONAL AS16 SISTANCE EXCLUSION.

17 (a) IN GENERAL.—Section 127 (relating to exclusion

18 for educational assistance programs) is amended by strik19 ing subsection (d) and by redesignating subsection (e) as

20 subsection (d).

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

22 this section shall apply to taxable years beginning after

23 December 31, 1994.
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1 SEC. 203. DEDUCTION FOR HIGHER EDUCATION EXPENSES.

2 (a) DEDUCTION ALLOWED.—Part VII of subchapter

3 B of chapter 1 (relating to additional itemized deductions

4 for individuals) is amended by redesignating section 220

5 as section 221 and by inserting after section 219 the fol6 lowing new section:

7 ‘‘SEC. 220. HIGHER EDUCATION TUITION AND FEES; INTER8 EST ON STUDENT LOANS.

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

10 individual, there shall be allowed as a deduction an

11 amount equal to the sum of—

12 ‘‘(1) the qualified higher education expenses,

13 plus

14 ‘‘(2) interest on qualified higher education

15 loans, paid by the taxpayer during the taxable year.

16 ‘‘(b) QUALIFIED HIGHER EDUCATION EXPENSES.—

17 For purposes of this section—

18 ‘‘(1) QUALIFIED HIGHER EDUCATION EX19 PENSES.—

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

21 higher education expenses’ means tuition and

22 fees required for the enrollment or attendance

23 of—

24 ‘‘(i) the taxpayer,

25 ‘‘(ii) the taxpayer’s spouse, or
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1 ‘‘(iii) any dependent of the taxpayer

2 with respect to whom the taxpayer is al3 lowed a deduction under section 151, as an

4 eligible student at an institution of higher

5 education.

6 ‘‘(B) EXCEPTION FOR EDUCATION INVOLV7 ING SPORTS, ETC.—Such term does not include

8 expenses with respect to any course or other

9 education involving sports, games, or hobbies

10 unless such expenses—

11 ‘‘(I) are part of a degree program, or

12 ‘‘(II) are deductible under this chap13 ter without regard to this section.

14 ‘‘(C) EXCEPTION FOR NONACADEMIC

15 FEES.—Such term does not include any student

16 activity fees, athletic fees, insurance expenses,

17 or other expenses unrelated to a student’s aca18 demic course of instruction.

19 ‘‘(D) ELIGIBLE STUDENT.—For purposes

20 of subparagraph (A), the term ‘eligible student’

21 means a student who meets the requirements of

22 section 484(a)(1) of the Higher Education Act

23 of 1965 (20 U.S.C. 1091(a)(1)).

24 ‘‘(2) DOLLAR LIMITATION.—
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1 ‘‘(A) IN GENERAL.—The amount taken

2 into account under paragraph (1) for any tax3 able year shall not exceed $10,000.

4 ‘‘(B) PHASE-IN.—In the case of taxable

5 years beginning in 1996, 1997, 1998, and

6 1999, the following amounts shall be sub7 stituted for ‘$10,000’ in subparagraph (A):

‘‘For taxable years The substitute

beginning in: amount is:

1996 ......................................................................................... $2,000

1997 ......................................................................................... 4,000

1998 ......................................................................................... 6,000

1999 ......................................................................................... 8,000.

8 ‘‘(3) LIMITATION BASED ON MODIFIED AD9 JUSTED GROSS INCOME.—

10 ‘‘(A) IN GENERAL.—If the modified ad11 justed gross income of the taxpayer for the tax12 able year exceeds $70,000 ($100,000 in the

13 case of a joint return), the amount which would

14 (but for this paragraph) be taken into account

15 under paragraph (1) shall be reduced (but not

16 below zero) by the amount which bears the

17 same ratio to the amount which would be taken

18 into account as such excess bears to $20,000.

19 ‘‘(B) INFLATION ADJUSTMENT.—In the

20 case of any taxable year beginning in a calendar

21 year after 1996, the $70,000 and $100,000
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1 amounts contained in subparagraph (A) shall

2 be increased by an amount equal to—

3 ‘‘(i) such dollar amount, multiplied by

4 ‘‘(ii) the cost-of-living adjustment

5 under section 1(f)(3) for the calendar year

6 in which the taxable year begins, except

7 that section 1(f)(3)(B) shall be applied by

8 substituting ‘1995’ for ‘1992’.

9 ‘‘(C) ROUNDING.—If any amount as ad10 justed under subparagraph (B) is not a mul11 tiple of $50, such amount shall be rounded to

12 the nearest multiple of $50 (or if such amount

13 is a multiple of $25, such amount shall be

14 rounded to the next highest multiple of $50).

15 ‘‘(D) MODIFIED ADJUSTED GROSS IN16 COME.—The term ‘modified adjusted gross in17 come’ means the adjusted gross income of the

18 taxpayer for the taxable year determined—

19 ‘‘(i) without regard to this section and

20 sections 911, 931, and 933, and

21 ‘‘(ii) after the application of sections

22 86, 135, 219, and 469.

23 ‘‘(4) INSTITUTION OF HIGHER EDUCATION.—

24 The term ‘institution of higher education’ means an

25 institution which—
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1 ‘‘(A) is described in section 481 of the

2 Higher Education Act of 1965 (20 U.S.C.

3 1088), and

4 ‘‘(B) is eligible to participate in programs

5 under title IV of such Act.

6 ‘‘(c) QUALIFIED HIGHER EDUCATION LOAN.—For

7 purposes of this section—

8 ‘‘(1) IN GENERAL.—The term ‘qualified higher

9 education loan’ means a loan to a student which is—

10 ‘‘(A) made, insured, or guaranteed by the

11 Federal Government,

12 ‘‘(B) made by a State or a political sub13 division of a State,

14 ‘‘(C) made from the proceeds of a qualified

15 student loan bond under section 144(b), or

16 ‘‘(D) made by an institution of higher edu17 cation (as defined in section 1201(a) of the

18 Higher Education Act of 1965 (20 U.S.C.

19 1141(a))).

20 ‘‘(2) LIMITATION.—

21 ‘‘(A) IN GENERAL.—The amount of inter22 est on a qualified higher education loan which

23 is taken into account under subsection (a)(2)

24 shall be reduced by the amount which bears the

25 same ratio to such amount of interest as—
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1 ‘‘(i) the proceeds from such loan used

2 for qualified higher education expenses,

3 bears to

4 ‘‘(ii) the total proceeds from such

5 loan.

6 ‘‘(B) QUALIFIED HIGHER EDUCATION EX7 PENSES.—For purposes of subparagraph (A),

8 the term ‘qualified higher education expenses’

9 has the meaning given such term by subsection

10 (b), except that—

11 ‘‘(i) such term shall include reason12 able living expenses while away from home,

13 and

14 ‘‘(ii) the limitations of paragraphs (2)

15 and (3) of subsection (b) shall not apply.

16 ‘‘(d) COORDINATION WITH OTHER PROVISIONS.—

17 ‘‘(1) NO DOUBLE BENEFIT.—

18 ‘‘(A) IN GENERAL.—No deduction shall be

19 allowed under subsection (a) for qualified high20 er education expenses or interest on qualified

21 higher education loans with respect to which a

22 deduction is allowed under any other provision

23 of this chapter.

24 ‘‘(B) SAVINGS BOND EXCLUSION.—A de25 duction shall be allowed under subsection (a)(1)
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1 for qualified higher education expenses only to

2 the extent the amount of such expenses exceeds

3 the amount excludable under section 135 for

4 the taxable year.

5 ‘‘(2) QUALIFIED RESIDENCE INTEREST.—If a

6 deduction is allowed under subsection (a)(2) for in7 terest which is also qualified residence interest under

8 section 163(h), such interest shall not be taken into

9 account under section 163(h).

10 ‘‘(e) SPECIAL RULES.—

11 ‘‘(1) ELECTION.—If a deduction is allowable

12 under more than one provision of this chapter with

13 respect to qualified higher education expenses, the

14 taxpayer may elect the provision under which the de15 duction is allowed.

16 ‘‘(2) LIMITATION ON TAXABLE YEAR OF DE17 DUCTION.—

18 ‘‘(A) IN GENERAL.—A deduction shall be

19 allowed under subsection (a)(1) for any taxable

20 year only to the extent the qualified higher edu21 cation expenses are in connection with attend22 ance at an institution of higher education dur23 ing the taxable year.

24 ‘‘(B) CERTAIN PREPAYMENTS ALLOWED.—

25 Subparagraph (A) shall not apply to qualified
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1 higher education expenses paid during a taxable

2 year which are in connection with attendance at

3 an institution of higher education which begins

4 during the first 2 months of the following tax5 able year.

6 ‘‘(3) ADJUSTMENT FOR CERTAIN SCHOLAR7 SHIPS AND VETERANS’ BENEFITS.—The amount of

8 qualified higher education expenses otherwise taken

9 into account under subsection (a)(1) with respect to

10 the education of an individual shall be reduced (be11 fore the application of subsection (b)) by the sum of

12 the amounts received with respect to such individual

13 for the taxable year as—

14 ‘‘(A) a qualified scholarship which under

15 section 117 is not includable in gross income,

16 ‘‘(B) an educational assistance allowance

17 under chapter 30, 31, 32, 34, or 35 of title 38,

18 United States Code, or

19 ‘‘(C) a payment (other than a gift, be20 quest, devise, or inheritance within the meaning

21 of section 102(a)) for educational expenses, or

22 attributable to attendance at an eligible edu23 cational institution, which is exempt from in24 come taxation by any law of the United States.
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1 ‘‘(4) NO DEDUCTION FOR MARRIED INDIVID2 UALS FILING SEPARATE RETURNS.—If the taxpayer

3 is a married individual (within the meaning of sec4 tion 7703), this section shall apply only if the tax5 payer and his spouse file a joint return for the tax6 able year.

7 ‘‘(5) REGULATIONS.—The Secretary may pre8 scribe such regulations as may be necessary or ap9 propriate to carry out this section, including regula10 tions requiring recordkeeping and information re11 porting.’’

12 (b) DEDUCTION ALLOWED IN COMPUTING AD13 JUSTED GROSS INCOME.—Section 62(a) is amended by in14 serting after paragraph (15) the following new paragraph:

15 ‘‘(16) HIGHER EDUCATION TUITION AND

16 FEES.—The deduction allowed by section 219.’’

17 (c) CONFORMING AMENDMENT.—The table of sec18 tions for part VII of subchapter B of chapter 1 is amended

19 by striking the item relating to section 220 and inserting:

‘‘Sec. 220. Higher education tuition and fees.

‘‘Sec. 221. Cross reference.’’

20 (d) EFFECTIVE DATE.—The amendments made by

21 this section shall apply to taxable years beginning after

22 December 31, 1995.
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1 TITLE III—HIGH-WAGE JOBS FOR

2 AMERICAN FAMILIES

3 Subtitle A—Business Incentives

4 SEC. 301. EXCLUSION FOR GAIN FROM SMALL BUSINESS

5 STOCK.

6 (a) INCREASE IN EXCLUSION FOR CRITICAL TECH7 NOLOGIES SMALL BUSINESS STOCK HELD MORE THAN

8 TEN YEARS.—

9 (1) IN GENERAL.—Subsection (a) of section

10 1202 (relating to exclusion for gain from certain

11 small business stock) is amended to read as follows:

12 ‘‘(a) EXCLUSION.—In the case of a taxpayer other

13 than a corporation, gross income shall not include the sum

14 of—

15 ‘‘(1) 50 percent of any gain from the sale or ex16 change of qualified small business stock which is

17 held for more than 5 years and to which paragraph

18 (2) does not apply, plus

19 ‘‘(2) 100 percent of any gain from the sale or

20 exchange of qualified small business stock—

21 ‘‘(A) which is held for more than 10 years,

22 and

23 ‘‘(B) substantially all of the active business

24 activities of which during substantially all of the

25 taxpayer’s holding period for such stock are in
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1 connection with critical technologies (as defined

2 in section 2491(6) of title 10, United States

3 Code) or with environmental technologies for

4 pollution minimization, remediation, or waste

5 management.’’

6 (2) CONFORMING AMENDMENTS.—Each of the

7 following provisions are amended by striking ‘‘50-

8 Percent’’:

9 (A) The heading for section 1202.

10 (B) The heading for section 1202(a).

11 (C) The item relating to section 1202 in

12 the table of sections for part I of subchapter P

13 of chapter 1.

14 (b) EXCLUSION LIMITED TO STOCK IN COMPANIES

15 CREATING AMERICAN JOBS.—Section 1202(c) (defining

16 qualified small business stock) is amended by adding at

17 the end the following new paragraph:

18 ‘‘(4) UNITED STATES JOB REQUIREMENT.—

19 Stock in a corporation shall not be treated as quali20 fied small business stock unless, during substantially

21 all of the taxpayer’s holding period after December

22 31, 1996, at least 75 percent of employees hired

23 after such date perform substantially all of their

24 services for the corporation within the United

25 States.’’
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1 (c) EFFECTIVE DATE.—The amendments made by

2 this section apply to sales or exchanges after December

3 31, 1995, in taxable years ending after such date.

4 SEC. 302. PERMANENT EXTENSION OF RESEARCH CREDIT.

5 (a) IN GENERAL.—Section 41 of the Internal Reve6 nue Code of 1986 (relating to credit for research activi7 ties) is amended by striking subsection (h).

8 (b) CONFORMING AMENDMENT.—Section 28(b)(1) of

9 the Internal Revenue Code of 1986 is amended by striking

10 subparagraph (D).

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

12 this section shall apply to taxable years ending after June

13 30, 1995.

14 Subtitle B—Preservation of

15 American Jobs

16 SEC. 311. TAXATION OF INCOME OF CONTROLLED FOREIGN

17 CORPORATIONS ATTRIBUTABLE TO IM18 PORTED PROPERTY.

19 (a) GENERAL RULE.—Subsection (a) of section 954

20 (defining foreign base company income) is amended by

21 striking ‘‘and’’ at the end of paragraph (4), by striking

22 the period at the end of paragraph (5) and inserting ‘‘,

23 and’’, and by adding at the end the following new para24 graph:
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1 ‘‘(6) imported property income for the taxable

2 year (determined under subsection (h) and reduced

3 as provided in subsection (b)(5)).’’

4 (b) DEFINITION OF IMPORTED PROPERTY IN5 COME.—Section 954 is amended by adding at the end the

6 following new subsection:

7 ‘‘(h) IMPORTED PROPERTY INCOME.—

8 ‘‘(1) IN GENERAL.—For purposes of subsection

9 (a)(6), the term ‘imported property income’ means

10 income (whether in the form of profits, commissions,

11 fees, or otherwise) derived in connection with—

12 ‘‘(A) manufacturing, producing, growing,

13 or extracting imported property,

14 ‘‘(B) the sale, exchange, or other disposi15 tion of imported property, or

16 ‘‘(C) the lease, rental, or licensing of im17 ported property.

18 Such term shall not include any foreign oil and gas

19 extraction income (within the meaning of section

20 907(c)) or any foreign oil related income (within the

21 meaning of section 907(c)).

22 ‘‘(2) IMPORTED PROPERTY.—For purposes of

23 this subsection—

24 ‘‘(A) IN GENERAL.—Except as otherwise

25 provided in this paragraph, the term ‘imported
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1 property’ means property which is imported

2 into the United States by the controlled foreign

3 corporation or a related person.

4 ‘‘(B) IMPORTED PROPERTY INCLUDES CER5 TAIN PROPERTY IMPORTED BY UNRELATED

6 PERSONS.—The term ‘imported property’ in7 cludes any property imported into the United

8 States by an unrelated person if, when such

9 property was sold to the unrelated person by

10 the controlled foreign corporation (or a related

11 person), it was reasonable to expect that—

12 ‘‘(i) such property would be imported

13 into the United States, or

14 ‘‘(ii) such property would be used as

15 a component in other property which would

16 be imported into the United States.

17 ‘‘(C) EXCEPTION FOR PROPERTY SUBSE18 QUENTLY EXPORTED.—The term ‘imported

19 property’ does not include any property which is

20 imported into the United States and which—

21 ‘‘(i) before substantial use in the

22 United States, is sold, leased, or rented by

23 the controlled foreign corporation or a re24 lated person for direct use, consumption,

25 or disposition outside the United States, or
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1 ‘‘(ii) is used by the controlled foreign

2 corporation or a related person as a com3 ponent in other property which is so sold,

4 leased, or rented.

5 ‘‘(3) DEFINITIONS AND SPECIAL RULES.—

6 ‘‘(A) IMPORT.—For purposes of this sub7 section, the term ‘import’ means entering, or

8 withdrawal from warehouse, for consumption or

9 use. Such term includes any grant of the right

10 to use an intangible (as defined in section

11 936(b)(3)(B)) in the United States.

12 ‘‘(B) UNRELATED PERSON.—For purposes

13 of this subsection, the term ‘unrelated person’

14 means any person who is not a related person

15 with respect to the controlled foreign corpora16 tion.

17 ‘‘(C) COORDINATION WITH FOREIGN BASE

18 COMPANY SALES INCOME.—For purposes of this

19 section, the term ‘foreign base company sales

20 income’ shall not include any imported property

21 income.’’

22 (c) SEPARATE APPLICATION OF LIMITATIONS ON

23 FOREIGN TAX CREDIT FOR IMPORTED PROPERTY IN24 COME.—
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1 (1) IN GENERAL.—Paragraph (1) of section

2 904(d) (relating to separate application of section

3 with respect to certain categories of income) is

4 amended by striking ‘‘and’’ at the end of subpara5 graph (H), by redesignating subparagraph (I) as

6 subparagraph (J), and by inserting after subpara7 graph (H) the following new subparagraph:

8 ‘‘(I) imported property income, and’’.

9 (2) IMPORTED PROPERTY INCOME DEFINED.—

10 Paragraph (2) of section 904(d) is amended by re11 designating subparagraphs (H) and (I) as subpara12 graphs (I) and (J), respectively, and by inserting

13 after subparagraph (G) the following new subpara14 graph:

15 ‘‘(H) IMPORTED PROPERTY INCOME.—The

16 term ‘imported property income’ means any in17 come received or accrued by any person which

18 is of a kind which would be imported property

19 income (as defined in section 954(h)).’’

20 (3) LOOK-THRU RULES TO APPLY.—Clause (i)

21 of section 904(d)(3)(F) is amended by striking ‘‘or

22 (E)’’ and inserting ‘‘(E), or (H)’’.

23 (d) TECHNICAL AMENDMENTS.—

24 (1) Clause (iii) of section 952(c)(1)(B) (relating

25 to certain prior year deficits may be taken into ac-
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1 count) is amended by inserting the following sub2 clause after subclause (II) (and by redesignating the

3 following subclauses accordingly):

4 ‘‘(III) imported property in5 come,’’.

6 (2) Paragraph (5) of section 954(b) of such

7 Code (relating to deductions to be taken into ac8 count) is amended by striking ‘‘and the foreign base

9 company oil related income’’ and inserting ‘‘the for10 eign base company oil related income, and the im11 ported property income’’.

12 (e) EFFECTIVE DATE.—

13 (1) IN GENERAL.—Except as provided in para14 graph (2), the amendments made by this section

15 shall apply to taxable years of foreign corporations

16 beginning after December 31, 1994, and to taxable

17 years of United States shareholders within which or

18 with which such taxable years of such foreign cor19 porations end.

20 (2) SUBSECTION (c).—The amendments made

21 by subsection (c) shall apply to taxable years begin22 ning after December 31, 1994.
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1 SEC. 312. DEBARMENT OF FEDERAL CONTRACTORS NOT IN

2 COMPLIANCE WITH IMMIGRATION AND NA3 TIONALITY ACT EMPLOYMENT PROVISIONS.

4 (a) POLICY.—It is the policy of the United States

5 that—

6 (1) the heads of executive agencies in procuring

7 goods and services should not contract with an em8 ployer that has not complied with paragraphs (1)(A)

9 and (2) of section 274A(a) of the Immigration and

10 Nationality Act (8 U.S.C. 1324a(a)) (hereafter in

11 this section referred to as the ‘‘INA employment

12 provisions’’), which prohibit unlawful employment of

13 aliens; and

14 (2) the Attorney General should fully and ag15 gressively enforce the antidiscrimination provisions

16 of the Immigration and Nationality Act.

17 (b) ENFORCEMENT.—

18 (1) AUTHORITY.—

19 (A) IN GENERAL.— Using the procedures

20 established pursuant to section 274A(e) of the

21 Immigration and Nationality Act (8 U.S.C.

22 1324a(e)), the Attorney General may conduct

23 such investigations as are necessary to deter24 mine whether a contractor or an organizational

25 unit of a contractor is not complying with the

26 INA employment provisions.
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1 (B) COMPLAINTS AND HEARINGS.—The

2 Attorney General—

3 (i) shall receive and may investigate

4 any complaint by an employee of any such

5 entity that alleges noncompliance by such

6 entity with the INA employment provi7 sions; and

8 (ii) in conducting the investigation,

9 shall hold such hearings as are necessary

10 to determine whether that entity is not in

11 compliance with the INA employment pro12 visions.

13 (2) ACTIONS ON DETERMINATIONS OF NON14 COMPLIANCE.—

15 (A) ATTORNEY GENERAL.—Whenever the

16 Attorney General determines that a contractor

17 or an organizational unit of a contractor is not

18 in compliance with the INA employment provi19 sions, the Attorney General shall transmit that

20 determination to the head of each executive

21 agency that contracts with the contractor and

22 the heads of other executive agencies that the

23 Attorney General determines it appropriate to

24 notify.
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1 (B) HEAD OF CONTRACTING AGENCY.—

2 Upon receipt of the determination, the head of

3 a contracting executive agency shall consider

4 the contractor or an organizational unit of the

5 contractor for debarment, and shall take such

6 other action as may be appropriate, in accord7 ance with applicable procedures and standards

8 set forth in the Federal Acquisition Regulation.

9 (C) NONREVIEWABILITY OF DETERMINA10 TION.—The Attorney General’s determination is

11 not reviewable in debarment proceedings.

12 (c) DEBARMENT.—

13 (1) AUTHORITY.—The head of an executive

14 agency may debar a contractor or an organizational

15 unit of a contractor on the basis of a determination

16 of the Attorney General that it is not in compliance

17 with the INA employment provisions.

18 (2) SCOPE.—The scope of the debarment gen19 erally should be limited to those organizational units

20 of a contractor that the Attorney General determines

21 are not in compliance with the INA employment pro22 visions.

23 (3) PERIOD.—The period of a debarment under

24 this subsection shall be one year, except that the

25 head of the executive agency may extend the debar-
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1 ment for additional periods of one year each if,

2 using the procedures established pursuant to section

3 274A(e) of the Immigration and Nationality Act (8

4 U.S.C. 1324a(e)), the Attorney General determines

5 that the organizational unit of the contractor con6 cerned continues not to comply with the INA em7 ployment provisions.

8 (4) LISTING.—The Administrator of General

9 Services shall list each debarred contractor and each

10 debarred organizational unit of a contractor on the

11 List of Parties Excluded from Federal Procurement

12 and Nonprocurement Programs that is maintained

13 by the Administrator. No debarred contractor and

14 no debarred organizational unit of a contractor shall

15 be eligible to participate in any procurement, nor in

16 any nonprocurement activities, of the Federal Gov17 ernment.

18 (d) REGULATIONS AND ORDERS.—

19 (1) ATTORNEY GENERAL.—

20 (A) AUTHORITY.—The Attorney General

21 may prescribe such regulations and issue such

22 orders as the Attorney General considers nec23 essary to carry out the responsibilities of the

24 Attorney General under this section.
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1 (B) CONSULTATION.—In proposing regula2 tions or orders that affect the executive agen3 cies, the Attorney General shall consult with the

4 Secretary of Defense, the Secretary of Labor,

5 the Administrator of General Services, the Ad6 ministrator of the National Aeronautics and

7 Space Administration, the Administrator for

8 Federal Procurement Policy, and the heads of

9 any other executive agencies that the Attorney

10 General considers appropriate.

11 (2) FEDERAL ACQUISITION REGULATION.—The

12 Federal Acquisition Regulatory Council shall amend

13 the Federal Acquisition Regulation to the extent

14 necessary to provide for implementation of the de15 barment responsibility and other related responsibil16 ities assigned to heads of executive agencies under

17 this section.

18 (e) INTERAGENCY COOPERATION.—The head of each

19 executive agency shall cooperate with, and provide such

20 information and assistance to, the Attorney General as is

21 necessary for the Attorney General to perform the duties

22 of the Attorney General under this section.

23 (f) DELEGATION.—The Attorney General, the Sec24 retary of Defense, the Administrator of General Services,

25 the Administrator of the National Aeronautics and Space
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1 Administration, and the head of any other executive agen2 cy may delegate the performance of any of the functions

3 or duties of that official under this section to any officer

4 or employee of the executive agency under the jurisdiction

5 of that official.

6 (g) IMPLEMENTATION NOT TO BURDEN PROCURE7 MENT PROCESS EXCESSIVELY.—This section shall be im8 plemented in a manner that least burdens the procure9 ment process of the Federal Government.

10 (h) CONSTRUCTION.—

11 (1) ANTIDISCRIMINATION.—Nothing in this sec12 tion relieves employers of the obligation to avoid un13 fair immigration-related employment practices as re14 quired by—

15 (A) the antidiscrimination provisions of

16 section 274B of the Immigration and National17 ity Act (8 U.S.C. 1324b), including the provi18 sions of subsection (a)(6) of that section con19 cerning the treatment of certain documentary

20 practices as unfair immigration-related employ21 ment practices; and

22 (B) all other antidiscrimination require23 ments of applicable law.

24 (2) CONTRACT TERMS.—This section neither

25 authorizes nor requires any additional certification
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1 provision, clause, or requirement to be included in

2 any contract or contract solicitation.

3 (3) NO NEW RIGHTS AND BENEFITS.—This sec4 tion may not be construed to create any right or

5 benefit, substantive or procedural, enforceable at law

6 by a party against the United States, including any

7 department or agency, officer, or employee of the

8 United States.

9 (4) JUDICIAL REVIEW.—This section does not

10 preclude judicial review of a final agency decision in

11 accordance with chapter 7 of title 5, United States

12 Code.

13 (i) DEFINITIONS.—In this section:

14 (1) EXECUTIVE AGENCY.—The term ‘‘executive

15 agency’’ has the meaning given that term in section

16 4 of the Office of Federal Procurement Policy Act

17 (41 U.S.C. 403).

18 (2) CONTRACTOR.—The term ‘‘contractor’’

19 means any individual or other legal entity that—

20 (A) directly or indirectly (through an affili21 ate or otherwise), submits offers for or is

22 awarded, or reasonably may be expected to sub23 mit offers for or be awarded, a Federal Govern24 ment contract, including a contract for carriage

25 under Federal Government or commercial bills
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•S 1685 IS

1 of lading, or a subcontract under a Federal

2 Government contract; or

3 (B) conducts business, or reasonably may

4 be expected to conduct business, with the Fed5 eral Government as an agent or representative

6 of another contractor.

7 SEC. 313. SENSE OF CONGRESS RELATING TO STOCK OP8 TIONS FOR EMPLOYEES WHO ARE LAID OFF.

9 (a) FINDINGS.—The Congress finds that—

10 (1) the rationale behind many corporate

11 downsizings is to increase earnings and thereby in12 crease the value of the stock of the corporation,

13 (2) corporate managers have ample experience

14 in granting stock incentives to themselves, and

15 (3) employees who are laid off in the corporate

16 downsizings should benefit from the increase in

17 value of corporate stock attributable to their losing

18 their jobs.

19 (b) SENSE OF CONGRESS.—It is the sense of the

20 Congress that employees who are laid off in a corporate

21 downsizing should be given stock options at the time of

22 their termination which may be exercised at a price equal

23 to the value of the stock on the day before the downsizing

24 is announced.
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1 Subtitle C—Promotion of Long2 Term Investments in American

3 Businesses

4 PART I—LONG-TERM INVESTMENT, COMPETI5 TIVENESS, PENSION PROTECTION, AND COR6 PORATE TAKEOVER REFORM

7 SEC. 321. FINDINGS.

8 The Congress makes the following findings:

9 (1) Managers of American corporations have

10 been criticized for their short-term focus, leading to

11 a lack of investment in research and development,

12 and plants and equipment that are necessary to

13 maintain our competitive position worldwide.

14 (2) The short-term horizon of our corporate

15 managers can be traced, in part, to changes in the

16 capital markets away from ownership by individuals

17 to ownership by large pension funds and institu18 tional investors, and in part to threats of hostile

19 takeovers.

20 (3) Pension funds, with assets of almost

21 $2,000,000,000,000, and institutional investors are

22 playing an ever increasing role in the country’s eco23 nomic system, with estimates that by the year 2000,

24 as much as two-thirds of all corporate equities will

25 be held by pension funds. The pressure on such pen-
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•S 1685 IS

1 sion fund managers and other institutional investors

2 to perform better than the market and the high

3 turnover rate in some pension funds has raised con4 cerns that the accumulation of large blocks of stock

5 in fewer hands may be contributing to the number

6 of mergers and acquisitions and to a shorter term

7 focus on the part of management.

8 (4) The surplus assets in many company pen9 sion plans have too often become tools in the financ10 ing of takeovers and leveraged buy outs, a practice

11 which placed the pensions of workers at an unac12 ceptable risk.

13 (5) Too little emphasis has been placed on en14 suring the fair treatment and job security of workers

15 following a takeover or leveraged buy out.

16 (6) On an aggregate basis, corporate takeovers

17 and leveraged buy outs have been a factor in an

18 enormous increase in corporate debt. Debt for non19 financial businesses rose from $500,000,000,000 in

20 1970 to $3,100,000,000,000 by the end of the third

21 quarter of 1988, a more than sixfold increase. In ad22 dition, for the period 1984 through the third quarter

23 of 1988, a total of $794,000,000,000 of corporate

24 debt has been added, while a total of
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•S 1685 IS

1 $422,300,000,000 of corporate equity has been with2 drawn.

3 (7) The large amount of debt incurred by cor4 porations either as a result of, or to stave off, take5 overs or leveraged buy outs has resulted in a de6 crease in research and development budgets and

7 needed investments in plant improvements and

8 equipment at a time when United States industry is

9 struggling to maintain its international competitive10 ness.

11 (8) Long-term investment and planning are es12 sential to sustained economic growth, yet numerous

13 economic factors are pushing corporate managers

14 and investors to take an increasingly short-term

15 view.

16 (9) The integrity of our financial markets and

17 the confidence of the public in them have been un18 dermined by the conduct of parties in tenders offers

19 and leveraged buy outs.

20 (10) Therefore, in order to protect the public

21 interest, it is necessary to correct inadequacies in,

22 and curb abuses of, our existing securities laws.
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1 SEC. 322. LONG-TERM INVESTMENTS AND PENSION PRO2 TECTION.

3 (a) ANTICHURNING RULE.—Section 406(a)(1) of the

4 Employee Retirement Income Security Act of 1974 (29

5 U.S.C. 1106(a)(1)) is amended—

6 (1) by striking ‘‘or’’ at the end of subparagraph

7 (D),

8 (2) by striking the period at the end of sub9 paragraph (E) and inserting a semicolon, and

10 (3) by adding at the end the following new sub11 paragraph:

12 ‘‘(F) sale or disposition of—

13 ‘‘(i) stock or securities (as defined in

14 section 29(a)(36) of the Investment Com15 pany Act of 1940), or

16 ‘‘(ii) options, futures, or forward con17 tracts, which were held for less than 3

18 months unless less than 30 percent of such

19 plan’s gross income for the fiscal year is

20 derived from such sale or disposition.’’

21 (b) ERISA AMENDMENTS.—

22 (1) Section 404 of the Employee Retirement In23 come Security Act of 1974 (29 U.S.C. 1104) is

24 amended by adding at the end the following:

25 ‘‘(d) In voting on a merger, combination, or sale of

26 substantially all the assets of, or in tendering or refraining
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•S 1685 IS

1 from tendering securities in a tender offer for, a publicly

2 owned business the securities of which constitute assets

3 of a plan, a fiduciary shall take into consideration the

4 long-term as well as the short-term interests of the partici5 pants and beneficiaries of the plan and shall not be

6 deemed to have violated this part solely because the fidu7 ciary takes such interests into consideration.’’

8 (2) Section 4044 of such Act (29 U.S.C. 1344)

9 is amended by adding at the end the following new

10 subsection:

11 ‘‘(e)(1) Notwithstanding subsection (d)(1), a dis12 tribution otherwise permitted pursuant to such subsection

13 shall be prohibited for a period of 5 years following:

14 ‘‘(A) any acquisition of the securities of the em15 ployer pursuant to a tender offer subject to section

16 14(d) of the Securities Exchange Act of 1934 (15

17 U.S.C. 78n(d)) by any person, or

18 ‘‘(B) any acquisition of the securities of the em19 ployer in a transaction to which section 13(e) of

20 such Act (15 U.S.C. 78m(e)) applies;

21 ‘‘(2) Notwithstanding subsection (d)(1) and subject

22 to paragraph (3), a distribution otherwise permitted pur23 suant to such subsection shall be prohibited if any part

24 of the residual assets of the plan are used to finance, di25 rectly or indirectly—
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•S 1685 IS

1 ‘‘(A) any acquisition of the securities of the em2 ployer pursuant to a tender offer subject to section

3 14(d) of the Securities Exchange Act of 1934 (15

4 U.S.C. 78n(d)) by any person, or

5 ‘‘(B) any acquisition of the securities of the em6 ployer in a transaction to which section 123(e) of

7 such Act (15 U.S.C. 78m(e)) applies,

8 including the repayment, redemption, or refinancing of

9 any indebtedness incurred by such person in connection

10 with any such acquisitions.

11 ‘‘(3) Paragraph (1) does not apply to a transaction

12 described in section 4980(c)(3) of the International Reve13 nue Code of 1986 (as in effect on the date of enactment

14 of this subsection) if—

15 ‘‘(A) the transfer of assets to the plan is ap16 proved by a majority vote of all participants of the

17 employer plan;

18 ‘‘(B) prior to the vote, there is disclosure to the

19 participants of all material facts concerning the

20 transfer of assets to the plan and the acquisition of

21 employer securities by the plan, including—

22 ‘‘(i) the terms of the employee stock own23 ership plan,

24 ‘‘(ii) the terms of the plan from which the

25 assets are being transferred, and
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•S 1685 IS

1 ‘‘(iii) whether or not a new plan will be es2 tablished in place of the plan from which the

3 assets are being transferred; and

4 ‘‘(C) the vote by the participants is confidential,

5 and takes place within a reasonable period of time

6 following the disclosure required under subpara7 graph (B).

8 SEC. 323. PROTECTION OF WORKERS.

9 Section 14(d) of the Securities Exchange Act of 1934

10 (15 U.S.C. 78n(d)) is amended by adding at the end the

11 following:

12 ‘‘( )(A) Any person who acquires ownership or

13 control of any plant, facility, or other property of an

14 issuer, either directly in his own name or indirectly,

15 through a transaction in response, or otherwise re16 lated, to the filing of a statement under section

17 13(d) of this title announcing an intent to seek a

18 change in control of the issuer or a statement under

19 this section announcing a tender offer for the issu20 er’s securities shall have the following minimum

21 statutory obligations to the employees of the plant,

22 facility or property who are, at the time the trans23 action is consummated, covered by a collective bar24 gaining agreement (the ‘preacquisition agreement’):
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•S 1685 IS

1 ‘‘(i) If the acquiring person uses the plant,

2 facility, or property in a manner which is not

3 fundamentally different from its preacquisition

4 use, the person—

5 ‘‘(I) shall abide by the terms of the

6 preacquisition agreement, regardless of its

7 expiration date, for a period of 180 days

8 after the date the acquirer commences op9 erations at the plant, facility or property;

10 and

11 ‘‘(II) shall, if the preacquisition agree12 ment was not due to expire within one year

13 of the date of the consummation of the ac14 quisition transaction, negotiate in good

15 faith with the employees’ exclusive bargain16 ing representative for a collective bargain17 ing agreement covering the unexpired term

18 of the preacquisition agreement and shall

19 submit to binding arbitration on all unre20 solved issues if the parties are unable,

21 within 120 days of the acquisition, to nego22 tiate a new agreement.

23 ‘‘(ii) If the acquiring person uses the plant,

24 facility or property in a manner which is fun25 damentally different from its preacquisition use,
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•S 1685 IS

1 the acquirer shall provide to any employee, who

2 was covered by the preacquisition agreement

3 and whose employment is involuntarily termi4 nated by reason of the acquisition transaction,

5 severance pay in an amount equal to six times

6 his monthly compensation at the time of termi7 nation.

8 ‘‘(B) In the event of arbitration of unresolved

9 issues pursuant to subparagraph (A)(i)(II), the par10 ties shall select an arbitrator from a special roster

11 of arbitrators prepared by an appropriate agency of

12 the Federal Government which engages in the medi13 ation and conciliation of labor-management disputes

14 in the industry designated by the Secretary of Labor

15 and the arbitrator shall within the 180-day period

16 stated in subparagraph (a)(i)(I) issue a final and

17 binding award on all unresolved issues, based upon

18 the acquiring person’s experience under the terms of

19 the preacquisition agreement and on collective bar20 gaining agreements covering comparable plants, fa21 cilities and properties.

22 ‘‘(C) For purposes of this paragraph—

23 ‘‘(i) the property of an issuer includes

24 property owned by an entity controlled by the

25 issuer;
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•S 1685 IS

1 ‘‘(ii) the obligations created herein apply to

2 each succeeding transferee of the issuer’s prop3 erty in the same manner as to the original

4 acquirer of the property by reason of a trans5 action covered by subparagraph (A); and

6 ‘‘(iii) any condition, stipulation, or provi7 sion in any contract purporting to waive the

8 rights and obligations created in this section

9 shall be void.

10 ‘‘(D) Any person seeking to enforce the rights

11 and obligations created by this section may sue at

12 law or in equity in any court of competent jurisdic13 tion. In any suit under this subsection, the court

14 may, in its discretion, assess reasonable costs, in15 cluding attorneys’ fees in favor of the prevailing

16 party.’’

17 SEC. 324. WILLIAMS ACT REFORMS.

18 (a) 10-DAY WINDOW.—Section 13(d)(1) of the Secu19 rities Exchange Act of 1934 (15 U.S.C. 78m(d)(1)) is

20 amended—

21 (1) by striking ‘‘shall, within ten days after

22 such acquisition’’ and inserting ‘‘shall, within 5 days

23 after such acquisition’’;
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•S 1685 IS

1 (2) by inserting after ‘‘send to each exchange’’

2 the following: ‘‘and registered national securities as3 sociation’’; and

4 (3) by adding at the end the following: ‘‘Any

5 person required to send and file such a statement

6 may not acquire or agree to acquire, directly or indi7 rectly, the beneficial ownership of any additional

8 amount of such equity securities after the trans9 action that required such person to send and file

10 such statement until after such statement has been

11 filed with the Commission.’’

12 (b) TENDER OFFERS.—Section 14(d) of the Securi13 ties Exchange Act of 1934 (15 U.S.C. 78n(d)) is amend14 ed—

15 (1) by redesignating paragraphs (2) through

16 (8) as paragraphs (6) through (12), and

17 (2) by inserting after paragraph (1) the follow18 ing new paragraphs:

19 ‘‘(2) Any person making a tender offer for or a re20 quest or invitation for tender offers of any class of any

21 such equity security shall hold such offer, request, or invi22 tation open for a period of at least forty-five business days

23 from the date on which such offer, request, or invitation

24 is first published, sent, or given to security holders, or
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•S 1685 IS

1 such longer period as the Commission may, by rule, pre2 scribe.

3 ‘‘(3) In the case of a well-financed offer, the preced4 ing sentence shall be applied by substituting ‘thirty’ for

5 ‘forty-five’. For the purpose of the preceding sentence, a

6 well-financed offer is an offer that would not, if con7 summated, constitute a highly leveraged transaction as de8 fined by the appropriate regulatory agencies (other than

9 the Commission).

10 ‘‘(4)(A) If, during the forty-five-day period described

11 in paragraph (2), a qualified employee stock ownership

12 plan notifies the offeror, the issuer, or the Commission,

13 of the plan’s intent to acquire additional securities of the

14 issuer on terms which are substantially equivalent to other

15 offers, paragraph (2) shall be applied by substituting

16 ‘ninety-five’ for ‘forty-five’.

17 ‘‘(B) For purposes of this subsection, the term ‘quali18 fied employee stock ownership plan’ means an employee

19 stock ownership plan defined in section 4975(e)(7) of the

20 Internal Revenue Code of 1986 which—

21 ‘‘(i) is sponsored by the issuer (or a member of

22 the controlled group) of the equity securities to

23 which the request or invitation for tenders described

24 in paragraph (1) is made,
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•S 1685 IS

1 ‘‘(ii) meets the requirements of section 410(b)

2 of the Internal Revenue Code of 1986, and

3 ‘‘(iii) owns securities of the issuer representing

4 at least 5 per centum of the outstanding voting se5 curities (of the issuer) on the day on which the

6 forty-five-day period begins to run and has held such

7 5 per centum for a period beginning at least six

8 months before such forty-five-day period begins to

9 run.

10 ‘‘(C) The provisions of this paragraph shall not apply

11 to any acquisition or proposed acquisition of a security

12 if—

13 ‘‘(i) the acquisition of such security, together

14 with all other acquisitions by the same person of se15 curities of the same class during the preceding 12

16 months, would not exceed 2 per centum of that

17 class;

18 ‘‘(ii) a block of 10 per centum or more of the

19 outstanding shares is acquired and such shares were

20 held by the seller for at least 2 years prior to the

21 sale;

22 ‘‘(iii) such acquisition is from one family mem23 ber to another;
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•S 1685 IS

1 ‘‘(iv) such acquisition is made by a person who

2 owned more than 50 per centum of the outstanding

3 shares prior to such purchase; or

4 ‘‘(v) the Commission, by rule or regulation, or

5 by order, has exempted such acquisition from the

6 provisions of this subsection as it determines to be

7 necessary or appropriate and consistent with the

8 public interest, the protection of investors, and the

9 purposes of this paragraph.’’

10 (c) CONFORMING AMENDMENT.—Section 14 of the

11 Securities Exchange Act of 1934 (15 U.S.C. 78n) is

12 amended by striking the heading of such section and in13 serting the following:

14 ‘‘PROXIES AND TENDER OFFERS’’.

15 SEC. 325. ANTI-GREENMAIL/SHORT-SWING PROFITS.

16 Section 16 of the Securities Exchange Act of 1934

17 (15 U.S.C. 78p) is amended—

18 (1) in the caption, by striking ‘‘AND PRIN19 CIPAL STOCKHOLDERS’’ and inserting ‘‘PRIN20 CIPAL STOCKHOLDERS AND HOLDERS OF

21 MORE THAN 5 PER CENTUM’’;

22 (2) in subsection (b)—

23 (A) by inserting ‘‘(1)(A)’’ after ‘‘(b)’’; and

24 (B) by striking ‘‘Suit’’ and all that follows

25 through the end period and inserting the follow26 ing:
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1 ‘‘(B) For the purpose of discouraging manipulative

2 tender offer practices, any profit realized by any person

3 from any disposition, directly or indirectly, of equity secu4 rities described in section 13(d)(1), shall inure to and be

5 recoverable by the issuer of such securities, if such person,

6 (i) was the beneficial owner, at the time of such disposi7 tion, of more than 5 per centum of the class of securities

8 so disposed of, (ii) made a tender offer for such securities

9 within 6 months preceding the disposition, and (iii) had

10 held any or all of such securities for less than six months

11 prior to the disposition thereof. The preceding sentence

12 does not apply if (I) such disposition was a purchase by

13 the issuer of the securities and has been approved by the

14 affirmative vote of a majority of the aggregate outstanding

15 voting securities of the issuer, or (II) the same offer to

16 purchase is made available to all shareholders.

17 ‘‘(2) Suit to recover such profit may be instituted at

18 law or in equity in any court of competent jurisdiction by

19 the issuer, or by the owner of any security of the issuer

20 in the name and in behalf of the issuer if the issuer shall

21 fail or refuse to bring such suit within 60 days after re22 quest or shall fail diligently to prosecute the same there23 after; but no such suit shall be brought more than 2 years

24 after the date such profit was realized. This subsection

25 shall not be construed to cover any transaction where such
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•S 1685 IS

1 beneficial owner was not such both at the time of the pur2 chase and sale, or the sale and purchase, of the security

3 involved, or any transaction or transactions which the

4 Commission by rules and regulations may exempt as not

5 comprehended within the purpose of this subsection.

6 ‘‘(3) The Commission shall, by rule, regulation, or by

7 order upon application, conditionally or unconditionally

8 exempt any person, security, or transaction from any or

9 all of the provisions of paragraph (1)(B) as it determines

10 to be necessary or appropriate and consistent with the

11 public interest, the protection of investors, and the pur12 poses of this subsection.’’

13 SEC. 326. ADDITIONAL RESERVE REQUIREMENTS.

14 (a) IN GENERAL.—Each appropriate Federal bank15 ing agency shall review the exposure to risk of United

16 States depository institutions arising from the medium17 and long-term loans made by such institutions that are

18 outstanding in connection with highly leveraged trans19 actions, as defined by the appropriate Federal banking

20 agency. Each agency shall provide directions to such insti21 tutions regarding additions to general reserves, if the

22 agency determines that such additions to general reserves

23 are necessary to protect the safety and soundness of the

24 institution, based on a determination by the agency that
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•S 1685 IS

1 such institution’s loans with respect to highly leveraged

2 transactions are unduly concentrated.

3 (b) DETERMINATION OF INSTITUTIONAL EXPOSURE

4 TO RISK.—In determining the exposure of an institution

5 to risk for purposes of subsection (a), the appropriate Fed6 eral banking agency—

7 (1) may exempt, in full or in part, from reserve

8 requirements established pursuant to subsection (a),

9 any loan that is secured, in whole or in part, by ap10 propriate collateral for payment of interest or prin11 cipal; and

12 (2) take into account any other factors which

13 bear on such exposure and the particular cir14 cumstances of the institution.

15 (c) TIMING AND REPORT.—

16 (1) DETERMINED BY AGENCY.—Except as pro17 vided in paragraph (3), each appropriate Federal

18 banking agency shall determine the timing of any

19 addition to reserves required by subsection (a).

20 (2) REPORT.—Each appropriate Federal bank21 ing agency shall transmit to the Congress not later

22 than December 1 of each year a report on the ac23 tions taken pursuant to this section.

24 (3) DEADLINE.—Each Federal agency required

25 to undertake a review described in subsection (a)
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•S 1685 IS

1 shall complete the review not later than December

2 31, 1990.

3 (d) DEFINITION.—As used in this section, the term

4 ‘‘appropriate Federal banking agency’’ means the Comp5 troller of the Currency, the Office of Thrift Supervision,

6 the Federal Deposit Insurance Corporation, and the

7 Board of Governors of the Federal Reserve System.

8 SEC. 327. LEVERAGED BUYOUT AND GOING PRIVATE

9 TRANSACTIONS.

10 Section 14 of the Securities Exchange Act of 1934

11 (15 U.S.C. 78n) is amended by adding at the end thereof

12 the following new subsection:

13 ‘‘(h)(1) It shall be unlawful for one or more officers,

14 directors, employees, or affiliates of an issuer of any secu15 rity which is registered pursuant to section 12 of this title,

16 or which would have been required to be so registered ex17 cept for the exemption contained in section 12(g)(2)(G)

18 of this title, or of any closed-end investment company reg19 istered under the Investment Company Act of 1940, to

20 acquire all or substantially all of the shares of a class of

21 such issuer’s or such company’s equity securities unless—

22 ‘‘(A) at least forty-five days have elapsed be23 tween the day on which the proposed acquisition is

24 publicly announced and the day on which the acqui25 sition occurs;
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•S 1685 IS

1 ‘‘(B) such issuer or company has obtained a re2 port by an independent appraiser, as provided in

3 paragraph (2), on the proposed acquisition; and

4 ‘‘(C) the report is made available to all share5 holders and all members of the board of directors of

6 the issuer in accordance with such rules as the Com7 mission may prescribe, but not later than twenty

8 days before the day on which the acquisition occurs.

9 ‘‘(2) For the purpose of paragraph (1)(B), any offi10 cers, directors, employees, or affiliates intending to pur11 chase all or substantially all of the shares of a class of

12 such issuer’s or such company’s equity securities shall ob13 tain an independent appraisal of such issuer from a na14 tionally accredited accounting firm which has no financial

15 interest in the outcome of such restructuring transaction

16 and whose fees for performing such appraisal are not re17 lated to the outcome of such restructuring transaction.

18 Any firm preparing an appraisal pursuant to this subpara19 graph shall be given access by the issuer to any and all

20 of the issuer’s books, records and premises.

21 ‘‘(3) For the purpose of this subsection, the term ‘af22 filiate’ means any person who becomes affiliated with one

23 or more of the officers, directors or employees of the issuer

24 in a transaction in which such officer, director or employee

25 will own, in the aggregate, directly or indirectly, within
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1 3 years of such purchase of such equity security, 5 per

2 centum or more of the equity of the surviving corporation

3 or continuing business.’’

4 SEC. 328. FIRM FINANCING AND FINANCING DISCLOSURES.

5 (a) FINANCING OF TAKEOVERS.—Section 14 of the

6 Securities Exchange Act of 1934 (15 U.S.C. 78n), as

7 amended by section 327, is amended by adding at the end

8 thereof the following new subsection:

9 ‘‘(i)(1) It shall be unlawful for any person, directly

10 or indirectly, by use of the mails or by any means or in11 strumentality of interstate commerce or of any facility of

12 a national securities exchange or otherwise, to make a ten13 der offer for, or a request or invitation for tenders of, any

14 equity security of a class described in subsection (d)(1)

15 of this section unless 50 per centum or more of the consid16 eration to be offered consists of cash. For purposes of the

17 preceding sentence, 50 per centum or more of the consid18 eration shall qualify as cash, if—

19 ‘‘(A) such cash is at the time of announcement

20 of the tender offer on deposit in an account of the

21 tendering person at a bank or trust company orga22 nized under the laws of the United States, or the

23 District of Columbia; or

24 ‘‘(B) the offering person has entered into a le25 gally enforceable, unconditional, and irrevocable
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1 commitment (not subject to execution of a further

2 definitive agreement) to provide such cash from such

3 bank or trust company, which commitment is not

4 contingent in any manner upon the success or fail5 ure of such tender offer or request or invitation for

6 tenders.

7 ‘‘(2) The provisions of paragraph (1) shall not apply

8 to a tender offer for, or a request or invitation for

9 tenders—

10 ‘‘(A) of equity securities of the tendering per11 son,

12 ‘‘(B) of equity securities of a class the total

13 value of which is less than $100,000,000, or

14 ‘‘(C) in connection with borrowings or the in15 currence of debt or the issuance of bonds, notes, de16 bentures, participations, other debt securities, or

17 other obligations to pay money (or money’s worth in

18 one or more other forms) to provide for the purchase

19 of ‘qualifying employee security’ purchased or ac20 quired by an ‘employer stock ownership plan’ (as de21 fined in section 4975(e)(7) of the Internal Revenue

22 Code of 1986).

23 ‘‘(3) The Board of Governors of the Federal Reserve

24 System, in consultation with the Commission, shall pre25 scribe rules and regulations to effectuate the purpose of
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1 this subsection. The Board of Governors is empowered to

2 grant exceptions to the provisions of this subsection by

3 order. In acting on an application for an exception, the

4 Board of Governors shall consider the positive economic

5 aspects of the transaction, the fairness of the transaction

6 to shareholders, debtholders, and creditors of both the ac7 quired and acquiring corporation, and the economic dis8 location, including unemployment risks, likely to be caused

9 by consummation of the transaction. The Board of Gov10 ernors shall respond affirmatively or negatively within 20

11 business days after receiving an application for an excep12 tion. Decisions of the Board of Governors denying such

13 exceptions shall not be reviewable in any court, nor shall

14 they be considered by any court by reason of any extraor15 dinary writ or remedy.

16 ‘‘(4)(A) Any person that violates or conspires to vio17 late paragraph (1) of this subsection shall be subject to

18 a civil penalty of not less than 5 per centum of the borrow19 ings such person has publicly represented it would need

20 to fund the entire proposed transaction.

21 ‘‘(B) On application by any person, any United

22 States district court may issue an injunction or other

23 order to prevent a violation of this subsection.’’

24 (b) FINANCING DISCLOSURES.—Section 13(d)(1)(B)

25 of the Securities Exchange Act of 1934 (15 U.S.C.
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1 78m(d)(1)(B)) is amended by striking out ‘‘security, a de2 scription of the transaction and the names of the parties

3 thereto, except that where a source of funds is a loan made

4 in the ordinary course of business by a bank, as defined

5 in section 3(a)(6) of this title, if the person filing such

6 statement so requests, the name of the bank shall not be

7 made available to the public’’ and inserting in lieu thereof

8 the following: ‘‘security—

9 ‘‘(i) a summary of each agreement or ar10 rangement relating to the extension of credit,

11 the issuance of securities for cash, or the other

12 acquisition of such funds, including the identity

13 of the parties, the term, the collateral, the stat14 ed and effective interest rates, all fees to be

15 paid in connection with the agreement or ar16 rangement to any person providing or arrang17 ing for the provision of such funds or other con18 sideration, and all other material terms or con19 ditions relative to such loan agreement or ar20 rangement; and

21 ‘‘(ii) any plans or arrangements to finance

22 or repay any amount of such funds representing

23 indebtedness incurred or to be incurred, or if no

24 such plans or arrangements have been made, a

25 statement to that effect.’’
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1 (c) ITEMIZED STATEMENT OF EXPENSES.—Section

2 13(d)(1) of the Securities Exchange Act of 1934 (15

3 U.S.C. 78m(d)(1)) is amended—

4 (1) by striking ‘‘and’’ at the end of subpara5 graph (D);

6 (2) by striking the period at the end of sub7 paragraph (E) and inserting ‘‘; and’’; and

8 (3) by inserting after subparagraph (E) the fol9 lowing:

10 ‘‘( ) a reasonably itemized statement of all

11 expenses incurred or estimated to be incurred in

12 connection with the acquisition of such beneficial

13 ownership, including expenses for legal, accounting,

14 financing, and investment banking services, filing

15 fees, and all other similar fees and expenses, indicat16 ing whether or not such person has paid or will be

17 responsible for paying any or all such expenses.’’

18 (d) DISCLOSURE OF EXPENSES.—Section

19 14(d)( ) of the Securities Exchange Act of 1934 (15

20 U.S.C. 78n(d)(8)) is amended by adding at the end the

21 following: ‘‘Such rules and regulations shall require appro22 priate disclosures by officers or directors of the issuer of

23 all expenses incurred or estimated to be incurred in con24 nection with the tender offer or request or invitation for

25 tenders, including expenses for legal, accounting, financial,
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1 and investment banking services, filing fees, and all other

2 similar fees and expenses, indicating whether or not such

3 person has paid or will be responsible for paying any or

4 all such expenses.’’

5 SEC. 329. ROLE OF STATE LAW.

6 The Securities Exchange Act of 1934 (15 U.S.C. 78a

7 et seq.) is amended by adding at the end thereof the fol8 lowing:

9 ‘‘ROLE OF STATE LAW

10 ‘‘SEC. 36. The Congress declares that the internal af11 fairs or governance of corporations shall be subject to reg12 ulation by the laws of the State under which such corpora13 tion is organized. Nothing contained in section 13 or 14

14 of this title or any rules or regulations thereunder shall

15 be construed to invalidate, impair, or supersede any law

16 enacted by any State regulating the internal affairs or

17 governance or contests for control of any corporation orga18 nized under its laws, except where compliance with such

19 law would preclude compliance with the filing, disclosure,

20 procedural, or antifraud requirements of sections 13 and

21 14 of this title.’’
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1 PART II—RESTRICTIONS ON HARMFUL

2 TAKEOVERS

3 SEC. 331. DISALLOWANCE OF DEDUCTION FOR MERGER

4 AND ACQUISITION EXPENSES.

5 (a) DEDUCTION DISALLOWED.—Part IX of sub6 chapter B of chapter 1 of subtitle A (relating to items

7 not deductible) is amended by adding at the end the fol8 lowing new section:

9 ‘‘SEC. 280I. DISALLOWANCE OF DEDUCTION FOR MERGER

10 AND ACQUISITION EXPENSES.

11 ‘‘(a) IN GENERAL.—No deduction otherwise allow12 able under this chapter shall be allowed for any amount

13 paid or incurred in connection with an applicable acquisi14 tion.

15 ‘‘(b) APPLICABLE ACQUISITION.—For purposes of

16 this section—

17 ‘‘(1) IN GENERAL.—The term ‘applicable acqui18 sition’ means the acquisition by a person of owner19 ship interests in, or assets used in the active conduct

20 of a trade or business by, an entity if—

21 ‘‘(A) such acquisition occurs during the 3-

22 year period ending on the date the person ac23 quires control of the entity or the person ac24 quires more than one-half of the assets used in

25 the trade or business, and
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1 ‘‘(B) there is a 15 percent or greater re2 duction in employees of such entity or trade or

3 business in connection with such acquisition.

4 ‘‘(2) EXCEPTIONS.—The term ‘applicable acqui5 sition’ shall not include—

6 ‘‘(A) except as provided in paragraph (3),

7 any acquisition by a person from an entity

8 which it controls (or which controlled it) imme9 diately before the acquisition, or

10 ‘‘(B) any acquisition described in clause

11 (i), (ii), or (iii) of section 382(l)(3)(B).

12 ‘‘(3) RELATED TRANSACTIONS.—The term ‘ap13 plicable acquisition’ shall include any acquisition

14 after the acquisition described in paragraph (1)(A)

15 if such acquisitions are part of a series of related

16 transactions.

17 ‘‘(c) OTHER DEFINITIONS AND RULES.—For pur18 poses of this section:

19 ‘‘(1) CONTROL.—A person shall be treated as

20 in control of another entity if—

21 ‘‘(A) in the case of a corporation, it pos22 sesses more than 50 per centum of the stock of

23 the corporation (by vote or value), or

24 ‘‘(B) in the case of any other entity, it pos25 sesses ownership interests representing more
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1 than 50 per centum of the capital or profits in2 terest in the entity.

3 ‘‘(2) CONSTRUCTIVE OWNERSHIP RULES.—

4 ‘‘(A) IN GENERAL.—For purposes of para5 graph (1), the following rules shall apply:

6 ‘‘(i) in the case of a corporation, the

7 rules of section 267(c);

8 ‘‘(ii) in the case of a partnership, the

9 rules of section 707(b); and

10 ‘‘(iii) in the case of any other entity,

11 rules prescribed by the Secretary based on

12 the principles of the rules described in

13 clauses (i) and (ii).

14 ‘‘(B) OPTIONS.—Except as provided in

15 regulations, a person shall be treated as pos16 sessing stock or assets if the person has an op17 tion to acquire the stock or assets.

18 ‘‘(3) RELATED PARTIES.—All persons treated

19 as the employer under subsection (a) or (b) of sec20 tion 52 shall be treated as 1 person for purposes of

21 this section.’’

22 (b) CLERICAL AMENDMENT.—The table of sections

23 for such part IX is amended by adding after the item re24 lating to section 280H the following new item:

‘‘Sec. 280I. Disallowance of deduction for merger and acquisition

expenses.’’
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1 (c) EFFECTIVE DATE.—The amendments made by

2 this section shall apply to amounts paid or incurred after

3 December 31, 1996, for taxable years ending after such

4 date.

5 PART III—OTHER PROVISIONS

6 SEC. 341. $1,000,000 COMPENSATION DEDUCTION LIMIT EX7 TENDED TO ALL EMPLOYERS OF ALL COR8 PORATIONS.

9 (a) IN GENERAL.—Section 162(m) is amended—

10 (1) by striking ‘‘publicly held corporation’’ in

11 paragraph (1) and inserting ‘‘taxpayer (other than

12 personal service corporations)’’,

13 (2) by striking ‘‘covered employee’’ each place it

14 appears in paragraphs (1) and (4) and inserting

15 ‘‘employee’’, and

16 (3) by striking paragraphs (2) and (3) and re17 designating paragraph (4) as paragraph (2).

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

19 this section shall apply to taxable years beginning after

20 December 31, 1995, except that there shall not be taken

21 into account with respect to any employee to whom section

22 162(m) of the Internal Revenue Code of 1986 applies sole23 ly by reason of such amendments remuneration payable

24 under a written binding contract which was in effect on
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1 October 25, 1995, and which was not modified thereafter

2 in any material respect before such remuneration is paid.

3 SEC. 342. LEVEL OF PARTICIPATION IN GUARANTEED

4 LOANS UNDER EXPORT WORKING CAPITAL

5 PROGRAM.

6 Section 7(a)(2) of the Small Business Act (15 U.S.C.

7 636(a)(2)) is amended by adding at the end the following

8 new subparagraph:

9 ‘‘(D) PARTICIPATION UNDER EXPORT

10 WORKING CAPITAL PROGRAM.—Notwithstanding

11 subparagraph (A), in an agreement to partici12 pate in a loan on a deferred basis under the

13 Export Working Capital Program established

14 pursuant to paragraph (14)(A), such participa15 tion by the Administration shall be equal to the

16 rate specified under this paragraph as in effect

17 on the day before the date of the enactment of

18 this subparagraph.’’

19 TITLE IV—MISCELLANEOUS

20 PROVISIONS

21 SEC. 401. DEDUCTION FOR LOCAL SEWER AND WATER

22 FEES.

23 (a) IN GENERAL.—Subsection (b) of section 164 is

24 amended by redesignating paragraphs (3) and (4) as para-
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1 graphs (4) and (5), respectively, and by inserting after

2 paragraph (2) the following new paragraph:

3 ‘‘(3) DEDUCTION ALLOWED FOR LOCAL SEWER

4 AND WATER FEES.—

5 ‘‘(A) IN GENERAL.—To the extent that the

6 amount of local sewer and water fees paid or

7 accrued during any taxable year exceeds 1 per8 cent of adjusted gross income, such fees shall

9 be allowed as a deduction under subsection (a)

10 in the same manner as local real property taxes.

11 ‘‘(B) DEFINITION.—For purposes of sub12 paragraph (A), the term ‘local sewer and water

13 fees’ means any amount imposed by a local gov14 ernment, State government (or any agency or

15 instrumentality thereof), or by the District of

16 Columbia as a charge for sewer or water serv17 ice. Such term shall not include any amount al18 lowable as a deduction without regard to this

19 paragraph.’’

20 (b) EFFECTIVE DATE.—The amendment made by

21 subsection (a) shall apply to taxable years beginning after

22 December 31, 1995.

Æ