II

104TH CONGRESS

2D SESSION S. 1821

To amend the Internal Revenue Code of 1986 to provide for retirement

savings and security.

IN THE SENATE OF THE UNITED STATES

MAY 23, 1996

Mr. DASCHLE (by request) (for himself, Mr. BRYAN, Mr. DODD, Mr. KENNEDY, Mr. LEAHY, Ms. MIKULSKI, Ms. MOSELEY-BRAUN, Mr. ROCKEFELLER, and Mr. SIMON) introduced the following bill; which was read

twice and referred to the Committee on Finance

A BILL

To amend the Internal Revenue Code of 1986 to provide

for retirement savings and security.

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

3 TITLE I—SHORT TITLE; TABLE

4 OF CONTENTS

5 SEC. 100. SHORT TITLE; TABLE OF CONTENTS.

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

7 ‘‘Retirement Savings and Security Act’’.

8 (b) TABLE OF CONTENTS.—

TITLE I—SHORT TITLE; TABLE OF CONTENTS
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Sec. 100. Short title; table of contents.

TITLE II—REVENUE PROVISIONS

Sec. 1100. Amendment of 1986 Code.

Subtitle A—Expanded Pension Coverage and Simplification

CHAPTER 1—THE NEST AND OTHER COVERAGE EXPANSION

Sec. 1101. Establishment of national employee savings trusts for employees of

small employers.

Sec. 1102. Tax-exempt organizations eligible under section 401(k).

Sec. 1103. Nondiscrimination rules for qualified cash or deferred arrangements

and matching contributions.

Sec. 1104. Repeal of family aggregation.

Sec. 1105. Definition of highly compensated employees.

Sec. 1106. Repeal of limitation in case of defined benefit plan and defined contribution plan for same employee.

Sec. 1107. Contributions on behalf of disabled employees.

Sec. 1108. Plans covering self-employed individuals.

Sec. 1109. Trust requirement for deferred compensation plans of State and

local governments.

CHAPTER 2—SIMPLIFICATION AND COST SAVINGS

Sec. 1201. Treatment of governmental and multiemployer plans under section

415 and treatment of excess benefit plans.

Sec. 1202. Definition of compensation for section 415 purposes.

Sec. 1203. Assumptions for adjusting certain benefits of defined benefit plans

for early retirees.

Sec. 1204. Treatment of deferred compensation plans of State and local governments and tax-exempt organizations.

Sec. 1205. No required distributions for active employees.

Sec. 1206. Simplified method for taxing annuity distributions under certain employer plans.

Sec. 1207. Repeal of 5-year income averaging for lump-sum distributions.

Sec. 1208. Elimination of half-year requirements.

Sec. 1209. Distributions under rural cooperative plans.

Sec. 1210. Modification of additional participation requirements.

Sec. 1211. Uniform retirement age.

Sec. 1212. Treatment of leased employees.

Sec. 1213. Full funding limitation for multiemployer plans.

Sec. 1214. Elimination of partial termination rules for multiemployer plans.

Sec. 1215. Elective deferrals under section 403(b).

Sec. 1216. Uniform penalty provisions to apply to certain pension reporting requirements.

Sec. 1217. Tax on prohibited transactions.

Sec. 1218. Date for adoption of plan amendments.

Subtitle B—Expanded Individual Retirement Accounts to Increase Coverage

and Portability

CHAPTER 1—RETIREMENT SAVINGS INCENTIVES

SUBCHAPTER A—IRA DEDUCTION

Sec. 1301. Increase in income limitations.
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Sec. 1302. Inflation adjustment for deductible amount and income limitations.

Sec. 1303. Coordination of IRA deduction limit with elective deferral limit.

SUBCHAPTER B—NONDEDUCTIBLE TAX-FREE IRAS

Sec. 1311. Establishment of nondeductible tax-free individual retirement accounts.

CHAPTER 2—DISTRIBUTIONS AND INVESTMENTS

Sec. 1321. Distributions from IRAs may be used without additional tax to purchase first homes, to pay higher education or financially devastating medical expenses, or by the unemployed.

Sec. 1322. Contributions must be held at least 5 years in certain cases.

Sec. 1323. Investments in qualified State prepaid tuition programs.

CHAPTER 3—TERMINATION OF CERTAIN PROVISIONS

Sec. 1331. Termination of certain provisions

Subtitle C—Other Expansions of Pension Portability

Sec. 1401. Alternative nondiscrimination rules for certain plans that provide for

early participation.

Sec. 1402. Treatment of certain veterans’ reemployment rights.

Sec. 1403. Elimination of special vesting rule for multiemployer plans.

Subtitle D—Conforming Amendments

Sec. 1501. Conforming amendment relating to missing participants.

Sec. 1502. Conforming amendments relating to ERISA enforcement.

1 TITLE II—REVENUE PROVISIONS

2 SEC. 1100. AMENDMENT OF 1986 CODE.

3 Except as otherwise expressly provided, whenever in

4 this title an amendment or repeal is expressed in terms

5 of an amendment to, or repeal of, a section or other provi6 sion, the reference shall be considered to be made to a

7 section or other provision of the Internal Revenue Code

8 of 1986.
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1 Subtitle A—Expanded Pension

2 Coverage and Simplification

3 CHAPTER 1—THE NEST AND OTHER

4 COVERAGE EXPANSION

5 SEC. 1101. ESTABLISHMENT OF NATIONAL EMPLOYEE SAV6 INGS TRUSTS FOR EMPLOYEES OF SMALL EM7 PLOYERS.

8 (a) IN GENERAL.—Section 408 (relating to individual

9 retirement accounts) is amended by redesignating sub10 section (p) as subsection (q) and by inserting after sub11 section (o) the following new subsection:

12 ‘‘(p) NESTS.—

13 ‘‘(1) IN GENERAL.—For purposes of this title,

14 the term ‘NEST’ means an individual retirement ac15 count or annuity established under a written plan of

16 an eligible employer—

17 ‘‘(A) which meets the requirements of

18 paragraphs (4), (5), (6), (7), and (8), and

19 ‘‘(B) under which contributions are made

20 to NESTs solely in accordance with a qualified

21 formula.

22 ‘‘(2) QUALIFIED FORMULA.—For purposes of

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

2 formula’ means a contribution formula which

3 meets the requirements for—

4 ‘‘(i) a 3-percent formula under sub5 paragraph (B), or

6 ‘‘(ii) a matching-contribution formula

7 under subparagraph (C).

8 ‘‘(B) 3-PERCENT FORMULA.—

9 ‘‘(i) NONELECTIVE CONTRIBU10 TIONS.—The requirements of the 3-percent

11 formula are met if, pursuant to the terms

12 of the plan, the employer makes nonelec13 tive contributions of 3 percent of com14 pensation for each eligible employee who

15 has at least $5,000 of compensation from

16 the employer for the year.

17 ‘‘(ii) ELECTIVE CONTRIBUTIONS.—A

18 plan shall not fail to meet the require19 ments of this subparagraph merely be20 cause, pursuant to the terms of the plan,

21 an eligible employee may elect to have the

22 employer make payments—

23 ‘‘(I) as elective contributions to

24 the NEST on behalf of the employee,

25 or
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1 ‘‘(II) to the employee directly in

2 cash.

3 ‘‘(C) MATCHING-CONTRIBUTION FOR4 MULA.—The requirements of the matching-con5 tribution formula are met if, pursuant to the

6 terms of the plan—

7 ‘‘(i) the employer makes nonelective

8 contributions of 1 percent of compensation

9 for each eligible employee who has at least

10 $5,000 of compensation from the employer

11 for the year,

12 ‘‘(ii) an eligible employee may elect to

13 have the employer make payments—

14 ‘‘(I) as elective contributions to

15 the NEST on behalf of the employee,

16 or

17 ‘‘(II) to the employee directly in

18 cash, and

19 ‘‘(iii) the employer makes matching

20 contributions on behalf of each eligible em21 ployee in an amount equal to—

22 ‘‘(I) 100 percent of the elective

23 contributions of the employee to the

24 extent such elective contributions do
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1 not exceed 3 percent of the employee’s

2 compensation, and

3 ‘‘(II) a uniform percentage

4 (which is at least 50 percent but not

5 more than 100 percent) of the elective

6 contributions of the employee to the

7 extent that such elective contributions

8 exceed 3 percent but do not exceed 5

9 percent of the employee’s compensa10 tion.

11 ‘‘(D) DISCRETIONARY CONTRIBUTIONS.—A

12 plan shall not be treated as failing to meet the

13 requirements of this paragraph merely because,

14 pursuant to the terms of the plan, an employer

15 makes nonelective contributions under subpara16 graph (B)(i) or (C)(i) in excess of 3 percent or

17 1 percent of compensation, respectively, but

18 only if all such contributions bear a uniform re19 lationship to the compensation of each eligible

20 employee and do not exceed 5 percent of com21 pensation for any eligible employee.

22 ‘‘(E) LIMITATION ON ELECTIVE CONTRIBU23 TIONS.—Elective contributions to a NEST

24 under subparagraph (B)(ii) or (C)(ii) shall not

25 be treated as made pursuant to a qualified for-
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1 mula if such contributions on behalf of any em2 ployee for a year exceed the greater of $5,000

3 or one-half of the limitation applicable for the

4 year to elective deferrals under section 402(g).

5 ‘‘(F) COMPENSATION LIMIT.—Contribu6 tions to a NEST shall not be treated as made

7 pursuant to a qualified formula if the annual

8 compensation taken into account for any em9 ployee under the formula exceeds the limitation

10 imposed by section 401(a)(17).

11 ‘‘(G) LOWER COMPENSATION THRESHOLD

12 PERMITTED.—A plan shall not be treated as

13 failing to meet the requirements of this para14 graph merely because, pursuant to the terms of

15 the plan, an employer makes nonelective con16 tributions under subparagraph (B)(i) or (C)(i)

17 to each eligible employee who has compensation

18 from the employer for the year in excess of a

19 uniform compensation threshold which is less

20 than $5,000.

21 ‘‘(H) For purposes of this paragraph—

22 ‘‘(i) IN GENERAL.—The term ‘com23 pensation’ has the meaning given such

24 term by section 414(q)(3).
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1 ‘‘(ii) SELF-EMPLOYED INDIVID2 UALS.—Notwithstanding clause (i), in the

3 case of an employee within the meaning of

4 section 401(c)(1), compensation under sec5 tion 414(q)(3) shall be determined without

6 regard to paragraph (2)(A) (v) and (vi) of

7 section 401(c).

8 ‘‘(3) DEFINITIONS.—For purposes of this sub9 section—

10 ‘‘(A) ELIGIBLE EMPLOYER.—

11 ‘‘(i) IN GENERAL.—The term ‘eligible

12 employer’ means, with respect to any year,

13 an employer which had no more than 100

14 employees who received at least $5,000 of

15 compensation from the employer for the

16 preceding year.

17 ‘‘(ii) 2-YEAR GRACE PERIOD.—An eli18 gible employer who establishes and main19 tains a plan under this subsection for 1 or

20 more years and who fails to be an eligible

21 employer for any subsequent year shall be

22 treated as an eligible employer for the 2

23 years following the last year the employer

24 was an eligible employer. If such failure is

25 due to any acquisition, disposition, or simi-
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1 lar transaction involving an eligible em2 ployer, the preceding sentence shall apply

3 only in accordance with rules similar to the

4 rules of section 410(b)(6)(C)(i).

5 ‘‘(B) EMPLOYEE.—The term ‘employee’ in6 cludes an employee as defined in section

7 401(c)(1).

8 ‘‘(C) ELIGIBLE EMPLOYEE.—

9 ‘‘(i) IN GENERAL.—The term ‘eligible

10 employee’ means, with respect to any year,

11 any employee who, prior to such year—

12 ‘‘(I) completed 2 consecutive

13 years of service with the employer,

14 and

15 ‘‘(II) attained 21 years of age.

16 A plan may provide a uniform shorter pe17 riod of service or lower age to apply in lieu

18 of those under the preceding sentence.

19 ‘‘(ii) EXCLUDABLE EMPLOYEES.—An

20 employer may elect not to treat employees

21 described in section 410(b)(3) as eligible

22 employees.

23 ‘‘(iii) YEAR OF SERVICE.—For pur24 poses of this paragraph, an employee shall

25 be treated as completing a year of service
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1 for each year for which the employee re2 ceives at least $5,000 of compensation

3 from the employer.

4 ‘‘(D) COMPENSATION.—For purposes of

5 this paragraph, the term ‘compensation’ means

6 wages within the meaning of section 3401(a)

7 and all other payments of compensation to an

8 employee by the employer with respect to which

9 the employer is required to furnish the em10 ployee a written statement under sections

11 6041(d), 6051(a)(3), and 6052. In the case of

12 an employee (within the meaning of section

13 401(c)(1)), such term means earned income

14 within the meaning of section 401(c)(2).

15 ‘‘(E) YEAR.—The term ‘year’ means the

16 calendar year.

17 ‘‘(4) VESTING REQUIREMENTS.—A plan meets

18 the requirements of this paragraph only if the em19 ployee’s rights to the employee’s account balance

20 under the NEST are nonforfeitable. Except as pro21 vided in paragraph (5), the rules of subsection

22 (k)(4) shall apply for purposes of this paragraph.

23 ‘‘(5) TWO-YEAR HOLDING PERIOD.—A plan

24 meets the requirements of this paragraph only if the

25 plan, and each NEST under the plan, prohibits the
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1 withdrawal of contributions made for a year (and

2 any earnings allocable thereto) during the 2-year pe3 riod beginning on the first day of such year.

4 ‘‘(6) TIME CONTRIBUTIONS REQUIRED TO BE

5 MADE.—

6 ‘‘(A) ELECTIVE CONTRIBUTIONS.—A plan

7 meets the requirements of this paragraph only

8 if, under the terms of the plan, the employer

9 must make all elective contributions to a NEST

10 not later than the date on which such contribu11 tions would otherwise be required to be made

12 under title I of the Employee Retirement In13 come Security Act of 1974 if such contributions

14 were elective contributions under a qualified

15 cash or deferred arrangement under section

16 401(k).

17 ‘‘(B) NONELECTIVE AND MATCHING CON18 TRIBUTIONS.—

19 ‘‘(i) IN GENERAL.—A plan meets the

20 requirements of this paragraph only if,

21 under the terms of the plan, the employer

22 must make all nonelective and matching

23 contributions not later than the close of

24 the 45-day period following the last day of
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1 the calendar quarter for which the con2 tributions are to be made.

3 ‘‘(ii) COMPENSATION EXCEPTION.—If

4 an employer does not make nonelective

5 contributions to a NEST for employees

6 whose compensation from the employer for

7 the year is less than the threshold amount

8 of $5,000 (or such lower amount permitted

9 under paragraph (2)(G)), then clause (i)

10 shall apply with respect to nonelective con11 tributions only for employees who received

12 at least the threshold amount of compensa13 tion as of the end of the applicable quar14 ter. In the case of an employee who

15 reaches the threshold amount in a calendar

16 quarter other than the first calendar quar17 ter, the employer shall make nonelective

18 contributions for that calendar quarter and

19 all preceding calendar quarters not later

20 than the date prescribed for that quarter.

21 ‘‘(C) CONTRIBUTIONS AFTER YEAR-END.—

22 For purposes of this subsection, a contribution

23 on account of a year which is made within 45

24 days (or within a period prescribed by the Sec25 retary) after the close of the year shall be
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1 deemed to have been made on the last day of

2 such year.

3 ‘‘(7) EMPLOYEE ELECTIONS.—A plan meets the

4 requirements of this paragraph only if, under the

5 terms of the plan—

6 ‘‘(A) an employee may elect to terminate

7 elective contributions (described in subpara8 graphs (B)(ii) and (C)(ii) of paragraph (2)) at

9 any time during the year, except that, if the

10 employer so elects, the employee may not

11 resume participation until the first day of the

12 next year (or such earlier time as provided by

13 the plan), and

14 ‘‘(B) each employee eligible to partici15 pate—

16 ‘‘(i) may elect, during the 60-day pe17 riod before the beginning of any year, to

18 make elective contributions, or to modify

19 the amount of elective contributions, for

20 such year, and

21 ‘‘(ii) may elect, within 30 days of be22 coming eligible to participate in the plan,

23 to make elective contributions for the year.

24 ‘‘(8) OTHER PLANS OF THE EMPLOYER.—
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1 ‘‘(A) PROHIBITION ON OTHER PLANS WITH

2 ELECTIVE OR MATCHING CONTRIBUTIONS.—A

3 plan shall not meet the requirements of this

4 paragraph for a year if the employer maintain5 ing the plan maintains—

6 ‘‘(i) a plan providing for elective de7 ferrals described in section 402(g)(3), or

8 ‘‘(ii) any plan described in section

9 401(a) which provides for matching con10 tributions (within the meaning of section

11 401(m)(4)(A)).

12 For purposes of this subparagraph, an employer

13 shall not be treated as maintaining a plan for

14 a year if, under the plan, no contributions or

15 benefit accruals may occur for such year.

16 ‘‘(B) COORDINATION WITH OTHER

17 PLANS.—

18 ‘‘(i) OTHER PLANS DISREGARDED.—If

19 an employer maintaining a plan to which

20 this subsection applies also maintains 1 or

21 more plans described in section 401(a),

22 403(a), or 408(k) (other than a plan de23 scribed in subparagraph (A)), the deter24 mination of whether such plan satisfies the
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1 requirements of this subsection shall be

2 made without regard to such other plans.

3 ‘‘(ii) NEST DISREGARDED.—Except

4 as provided in sections 404(m) and

5 415(a)(2), a plan to which this subsection

6 applies shall not be taken into account in

7 applying this title to any other plan de8 scribed in clause (i).

9 ‘‘(9) EMPLOYER OPTIONS.—

10 ‘‘(A) USE OF DESIGNATED FINANCIAL IN11 STITUTION.—A plan shall not be treated as fail12 ing to satisfy the requirements of this sub13 section or any other provision of this title mere14 ly because the employer makes all contributions

15 to the individual retirement accounts or annu16 ities of a designated trustee or issuer. The pre17 ceding sentence shall not apply unless each

18 NEST plan participant is notified in writing

19 (either separately or as part of the notice under

20 subsection (l)(2)(C)) that the participant’s bal21 ance may be transferred without cost or penalty

22 to another individual account or annuity in ac23 cordance with section 408(d)(3)(G).

24 ‘‘(B) SUSPENSION OF PLAN.—Except as

25 provided by the Secretary, a plan shall not be
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1 treated as failing to meet the requirements of

2 this subsection if, under the plan, the employer

3 may suspend all elective, matching, and non4 elective contributions under the plan after noti5 fying eligible employees of such suspension in

6 writing at least 30 days in advance. Such sus7 pension shall apply to contributions with re8 spect to compensation earned after the effective

9 date of the suspension. Only 1 suspension

10 under this subparagraph may take effect during

11 any year.

12 ‘‘(10) MODEL FORM TO BE PROVIDED.—The

13 Secretary shall issue a model form that may be used

14 by an eligible employer to establish a plan that satis15 fies all requirements of this subsection.’’

16 (b) TAX TREATMENT OF NESTS.—

17 (1) DEDUCTIBILITY OF CONTRIBUTIONS.—

18 (A) Section 219(b) (relating to maximum

19 amount of deduction) is amended by adding at

20 the end the following new paragraph:

21 ‘‘(4) SPECIAL RULE FOR NESTS.—This section

22 shall not apply with respect to any amount contrib23 uted to a NEST established under section 408(p).’’

24 (B) Section 219(g)(5)(A) (defining active

25 participant) is amended by striking ‘‘or’’ at the
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1 end of clause (iv) and by adding at the end the

2 following new clause:

3 ‘‘(vi) any NEST (with the meaning of

4 section 408(p)), or’’.

5 (C) Section 404 (relating to deductions for

6 contributions of an employer) is amended by

7 adding at the end the following new subsection:

8 ‘‘(m) SPECIAL RULES FOR NESTS.—

9 ‘‘(1) IN GENERAL.—Employer contributions to

10 a NEST (within the meaning of section 408(p))

11 shall be treated as if they are made to a plan subject

12 to the requirements of this section. Employer deduc13 tions for such contributions shall be subject to the

14 following limitations:

15 ‘‘(A) Contributions made for a calendar

16 year are deductible for the taxable year of the

17 employer with or within which the calendar year

18 ends.

19 ‘‘(B) Contributions shall be treated for

20 purposes of this subsection as if they were

21 made for a calendar year if such contributions

22 are made on account of such calendar year and

23 are made not later than the time prescribed in

24 section 408(p)(6).
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1 ‘‘(C) The amount deductible in a taxable

2 year for a NEST shall not exceed the amount

3 contributed pursuant to a qualified formula

4 (within the meaning of section 408(p)(2)), and

5 shall be deductible without regard to the

6 amount contributed under any other plan sub7 ject to this section.

8 ‘‘(2) EFFECT ON STOCK BONUS AND PROFIT9 SHARING TRUST.—For any taxable year for which

10 the employer has a deduction under paragraph (1),

11 the otherwise applicable limitations in subsection

12 (a)(3)(A) with respect to a stock bonus or profit13 sharing trust maintained by the same employer shall

14 be reduced by the amount of the allowable deduction

15 under paragraph (1).

16 ‘‘(3) COORDINATION WITH SUBSECTION

17 (a)(7).—For purposes of applying the limitation of

18 subsection (a)(7) with respect to a plan to which this

19 section applies (other than a plan to which section

20 408(p) applies), a plan to which section 408(p) ap21 plies shall be treated as if it were a separate stock

22 bonus or profit-sharing trust of the employer main23 taining the plan.

24 ‘‘(4) COORDINATION WITH SUBSECTION (h).—

25 For any taxable year for which the employer has a
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1 deduction under paragraph (1), the otherwise appli2 cable limitations in subsection (h) with respect to a

3 simplified employee pension maintained by the same

4 employer shall be reduced by the amount of the de5 duction allowable under paragraph (1).’’

6 (2) CONTRIBUTIONS AND DISTRIBUTIONS.—

7 (A) Section 402 (relating to taxability of

8 beneficiary of employees’ trust) is amended by

9 adding at the end the following new subsection:

10 ‘‘(k) TREATMENT OF NESTS.—The rules of para11 graphs (1) and (3) of subsection (h) shall apply to con12 tributions and distributions with respect to a NEST under

13 section 408(p).’’

14 (B) Section 408(d)(3) is amended by add15 ing at the end the following new subparagraph:

16 ‘‘(G) NESTS.—This paragraph shall apply

17 to an amount distributed to an individual with

18 respect to a NEST only to the extent such

19 amount is paid directly to an individual retire20 ment account or annuity for the benefit of such

21 individual in a direct transfer and, if applicable,

22 such amount continues to be subject to the 2-

23 year holding period described in subsection

24 (p)(5).’’
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1 (C) Clause (i) of section 457(c)(2)(B) is

2 amended by striking ‘‘section 402(h)(1)(B)’’

3 and inserting ‘‘section 402 (h)(1)(B) or (k)’’.

4 (c) REPORTING REQUIREMENTS.—

5 (1) IN GENERAL.—

6 (A) SUMMARY DESCRIPTIONS AND EM7 PLOYEE NOTIFICATION.—Section 408(l) is

8 amended by adding at the end the following

9 new paragraph:

10 ‘‘(2) NESTS.—

11 ‘‘(A) NO EMPLOYER REPORTS.—Except as

12 provided in this paragraph, no report shall be

13 required under this section by an employer

14 maintaining a NEST under subsection (p).

15 ‘‘(B) SUMMARY DESCRIPTION.—The trust16 ee or issuer of any individual retirement ac17 count or annuity under a NEST described in

18 subsection (p) shall prepare, and provide to the

19 employer maintaining the arrangement, each

20 year a description containing the following in21 formation:

22 ‘‘(i) The name and address of the em23 ployer and the trustee or issuer.

24 ‘‘(ii) The requirements for eligibility

25 for participation.
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1 ‘‘(iii) The benefits provided with re2 spect to the NEST.

3 ‘‘(iv) The time and method of making

4 elections with respect to the NEST.

5 ‘‘(v) The procedures for, and effects

6 of, distributions (including rollovers) from

7 the arrangement.

8 ‘‘(C) EMPLOYEE NOTIFICATION.—The em9 ployer shall notify each employee immediately

10 before the period for which an election de11 scribed in subsection (p)(7)(B) may be made of

12 the employee’s opportunity to make such elec13 tion. Such notice shall include a copy of the de14 scription described in subparagraph (B) and

15 shall indicate whether matching contributions

16 will be made with respect to the employee’s

17 elective contributions, and the level of employer

18 matching and nonelective contributions which

19 will be made, for the year for which the election

20 may be made.’’

21 (B) CONFORMING AMENDMENT.—Section

22 408(l) is amended by striking ‘‘an employer’’

23 and inserting—

24 ‘‘(1) IN GENERAL.—An employer’’.
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1 (2) TRUSTEE AND ISSUER REPORTS.—Section

2 408(i) (relating to reports of trustees or issuers) is

3 amended by adding at the end thereof the following

4 new flush sentence:

5 ‘‘In the case of an individual retirement account or annu6 ity maintained in connection with a NEST described in

7 subsection (p), only 1 report under this subsection shall

8 be required to be submitted each calendar year to the Sec9 retary (at the time provided under paragraph (2)) but, in

10 addition to the report under this subsection, there shall

11 be furnished, within 30 days after each calendar quarter,

12 to the individual on whose behalf the account is main13 tained a statement with respect to the account balance as

14 of the close of, and the account activity during, such cal15 endar quarter.’’

16 (3) PENALTIES FOR FAILURE TO REPORT.—

17 Section 6693 is amended by redesignating sub18 section (c) as subsection (d) and by inserting after

19 subsection (b) the following new subsection:

20 ‘‘(c) PENALTIES RELATING TO NESTS.—

21 ‘‘(1) EMPLOYER PENALTIES.—An employer who

22 fails to provide 1 or more notices required by section

23 408(l)(2)(C) shall pay a penalty of $50 for each day

24 on which such failures continue.
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1 ‘‘(2) TRUSTEE PENALTIES.—A trustee who

2 fails—

3 ‘‘(A) to provide 1 or more statements re4 quired by the last sentence of section 408(i)

5 shall pay a penalty of $50 for each day on

6 which such failures continue, or

7 ‘‘(B) to provide 1 or more summary de8 scriptions required by section 408(l)(2)(B) shall

9 pay a penalty of $50 for each day on which

10 such failures continue.

11 ‘‘(3) REASONABLE CAUSE EXCEPTION.—No

12 penalty shall be imposed under this subsection with

13 respect to any failure which the taxpayer shows was

14 due to reasonable cause.’’

15 (d) CONFORMING AMENDMENTS.—

16 (1) Section 280G(b)(6) is amended by striking

17 the ‘‘or’’ at the end of subparagraph (B), by striking

18 the period at the end of subparagraph (C) and in19 serting ‘‘, or’’, and by adding after subparagraph

20 (C) the following new subparagraph:

21 ‘‘(D) a NEST described in section

22 408(p).’’

23 (2) Section 402(g)(3) is amended by striking

24 ‘‘and’’ at the end of subparagraph (B), by striking

25 the period at the end of subparagraph (C) and in-
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1 serting ‘‘, and’’, and by adding after subparagraph

2 (C) the following new subparagraph:

3 ‘‘(D) any elective contribution under sec4 tion 408(p)(2)(B)(ii) or (C)(ii).’’

5 (3) Subsections (b), (c), (m)(4)(B), and

6 (n)(3)(B) of section 414 are each amended by in7 serting ‘‘408(p),’’ after ‘‘408(k),’’.

8 (4) Section 415(a)(2) is amended by adding at

9 the end the following new flush sentence:

10 ‘‘A plan described in section 408(p) shall not be subject

11 to this section, except that if an employer that maintains

12 such plan also maintains 1 or more plans, annuities, or

13 accounts subject to this section, such plan shall be taken

14 into account in determining whether any such other plans,

15 annuities, or accounts satisfy the requirements of this sec16 tion.’’

17 (5) Section 4972(d)(1)(A) is amended by strik18 ing ‘‘and’’ at the end of clause (ii), by striking the

19 period at the end of clause (iii) and inserting ‘‘,

20 and’’, and by adding after clause (iii) the following

21 new clause:

22 ‘‘(iv) any NEST (within the meaning

23 of section 408(p)).’’

24 (6)(A) Paragraph (5) of section 3121(a) is

25 amended by striking ‘‘or’’ at the end of subpara-
26

•S 1821 IS

1 graph (F), by inserting ‘‘or’’ at the end of subpara2 graph (G), and by adding at the end the following

3 new subparagraph:

4 ‘‘(H) under a plan to which section 408(p)

5 applies, other than any elective contributions

6 under subparagraphs (B)(ii) and (C)(ii) of sec7 tion 408(p)(2),’’.

8 (B) Section 209(a)(4) of the Social Security

9 Act is amended by inserting ‘‘, or (J) under a plan

10 to which section 408(p) of such Code applies, other

11 than any elective contributions under subparagraphs

12 (B)(ii) and (C)(ii) of section 408(p)(2) of such

13 Code’’ before the semicolon at the end thereof.

14 (C) Paragraph (5) of section 3306(b) is amend15 ed by striking ‘‘or’’ at the end of subparagraph (F),

16 by inserting ‘‘or’’ at the end of subparagraph (G),

17 and by adding at the end the following new subpara18 graph:

19 ‘‘(H) under a plan to which section 408(p)

20 applies, other than any elective contributions

21 under subparagraphs (B)(ii) and (C)(ii) of sec22 tion 408(p)(2),’’.

23 (D) Paragraph (12) of section 3401(a) is

24 amended by adding the following new subparagraph:
27

•S 1821 IS

1 ‘‘(D) under or to a NEST described in sec2 tion 408(p); or’’.

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

4 this section shall apply to years beginning after December

5 31, 1996.

6 SEC. 1102. TAX-EXEMPT ORGANIZATIONS ELIGIBLE UNDER

7 SECTION 401(k).

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

9 401(k)(4) is amended to read as follows:

10 ‘‘(B) ELIGIBILITY OF STATE AND LOCAL

11 GOVERNMENTS AND TAX-EXEMPT ORGANIZA12 TIONS.—

13 ‘‘(i) TAX-EXEMPTS ELIGIBLE.—Ex14 cept as provided in clause (ii), any organi15 zation exempt from tax under this subtitle

16 may include a qualified cash or deferred

17 arrangement as part of a plan maintained

18 by it.

19 ‘‘(ii) GOVERNMENTS INELIGIBLE.—A

20 cash or deferred arrangement shall not be

21 treated as a qualified cash or deferred ar22 rangement if it is part of a plan main23 tained by a State or local government or

24 political subdivision thereof, or any agency

25 or instrumentality thereof. This clause
28

•S 1821 IS

1 shall not apply to a rural cooperative plan

2 or to a plan of an employer described in

3 clause (iii).

4 ‘‘(iii) TREATMENT OF INDIAN TRIBAL

5 GOVERNMENTS.—An employer which is an

6 Indian tribal government (as defined in

7 section 7701(a)(40)), a subdivision of an

8 Indian tribal government (determined in

9 accordance with section 7871(d)), or an

10 agency or instrumentality of an Indian

11 tribal government or subdivision thereof

12 may include a qualified cash or deferred

13 arrangement as part of a plan maintained

14 by it.’’

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

16 this section shall apply to plan years beginning after De17 cember 31, 1996, but shall not apply to any cash or de18 ferred arrangement to which clause (i) of section

19 1116(f)(2)(B) of the Tax Reform Act of 1986 applies.

20 SEC. 1103. NONDISCRIMINATION RULES FOR QUALIFIED

21 CASH OR DEFERRED ARRANGEMENTS AND

22 MATCHING CONTRIBUTIONS.

23 (a) ALTERNATIVE METHODS OF SATISFYING SEC24 TION 401(k) NONDISCRIMINATION TESTS.—Section

25 401(k) (relating to cash or deferred arrangements) is
29

•S 1821 IS

1 amended by adding at the end the following new para2 graph:

3 ‘‘(11) ALTERNATIVE METHODS OF MEETING

4 NONDISCRIMINATION REQUIREMENTS.—

5 ‘‘(A) IN GENERAL.—A cash or deferred ar6 rangement shall be treated as meeting the re7 quirements of paragraph (3)(A)(ii) if such ar8 rangement—

9 ‘‘(i) meets the contribution require10 ments of subparagraph (B) or (C), and

11 ‘‘(ii) meets the notice requirements of

12 subparagraph (D).

13 ‘‘(B) NONELECTIVE AND MATCHING CON14 TRIBUTIONS.—

15 ‘‘(i) IN GENERAL.—The requirements

16 of this subparagraph are met if the re17 quirements of clauses (ii) and (iii) are met.

18 ‘‘(ii) NONELECTIVE CONTRIBU19 TIONS.—The requirements of this clause

20 are met if, under the arrangement, the em21 ployer is required, without regard to

22 whether the employee makes an elective

23 contribution or employee contribution, to

24 make a contribution to a defined contribu25 tion plan on behalf of each employee who
30

•S 1821 IS

1 is not a highly compensated employee and

2 who is eligible to participate in the ar3 rangement in an amount equal to at least

4 1 percent of the employee’s compensation.

5 ‘‘(iii) MATCHING CONTRIBUTIONS.—

6 The requirements of this clause are met if,

7 under the arrangement, the employer

8 makes matching contributions on behalf of

9 each employee who is not a highly com10 pensated employee in an amount equal

11 to—

12 ‘‘(I) 100 percent of the elective

13 contributions of the employee to the

14 extent such elective contributions do

15 not exceed 3 percent of the employee’s

16 compensation, and

17 ‘‘(II) 50 percent of the elective

18 contributions of the employee to the

19 extent that such elective contributions

20 exceed 3 percent but do not exceed 5

21 percent of the employee’s compensa22 tion.

23 ‘‘(iv) RATE FOR HIGHLY COM24 PENSATED EMPLOYEES.—The require25 ments of clause (iii) are not met if, under
31

•S 1821 IS

1 the arrangement, the rate of matching con2 tribution with respect to any rate of elec3 tive contribution of a highly compensated

4 employee is greater than that with respect

5 to an employee who is not a highly com6 pensated employee. For purposes of this

7 clause, to the extent provided in regula8 tions, the last sentences of paragraph

9 (3)(A) and subsection (m)(2)(B) shall not

10 apply.

11 ‘‘(v) ALTERNATIVE PLAN DESIGNS.—

12 If the rate of matching contribution with

13 respect to any rate of elective contribution

14 is not equal to the percentage required

15 under clause (iii), an arrangement shall

16 not be treated as failing to meet the re17 quirements of clause (iii) if—

18 ‘‘(I) the rate of an employer’s

19 matching contribution does not in20 crease as an employee’s rate of elec21 tive contribution increase, and

22 ‘‘(II) the aggregate amount of

23 matching contributions at such rate of

24 elective contribution is at least equal

25 to the aggregate amount of matching
32

•S 1821 IS

1 contributions which would be made if

2 matching contributions were made on

3 the basis of the percentages described

4 in clause (iii).

5 ‘‘(C) NONELECTIVE CONTRIBUTIONS.—

6 The requirements of this subparagraph are met

7 if, under the arrangement, the employer is re8 quired, without regard to whether the employee

9 makes an elective contribution or employee con10 tribution, to make a contribution to a defined

11 contribution plan on behalf of each employee

12 who is not a highly compensated employee and

13 who is eligible to participate in the arrangement

14 in an amount equal to at least 3 percent of the

15 employee’s compensation.

16 ‘‘(D) NOTICE REQUIREMENT.—An ar17 rangement meets the requirements of this para18 graph if, under the arrangement, each employee

19 eligible to participate is, within a reasonable pe20 riod before any year, given written notice of the

21 employee’s rights and obligations under the ar22 rangement which—

23 ‘‘(i) is sufficiently accurate and com24 prehensive to reasonably apprise the em25 ployee of such rights and obligations, and
33

•S 1821 IS

1 ‘‘(ii) is written in a manner calculated

2 to be understood by the average employee

3 eligible to participate.

4 ‘‘(E) OTHER REQUIREMENTS.—

5 ‘‘(i) WITHDRAWAL AND VESTING RE6 STRICTIONS.—An arrangement shall not be

7 treated as meeting the requirements of

8 subparagraph (B) or (C) of this paragraph

9 unless the requirements of subparagraphs

10 (B) and (C) of paragraph (2) are met with

11 respect to all employer contributions (in12 cluding matching contributions) taken into

13 account in determining whether the re14 quirements of subparagraphs (B) and (C)

15 of this paragraph are met.

16 ‘‘(ii) SOCIAL SECURITY AND SIMILAR

17 CONTRIBUTIONS NOT TAKEN INTO AC18 COUNT.—An arrangement shall not be

19 treated as meeting the requirements of

20 subparagraph (B) or (C) unless such re21 quirements are met without regard to sub22 section (l), and, for purposes of subsection

23 (l), employer contributions under subpara24 graph (B) or (C) shall not be taken into

25 account.
34

•S 1821 IS

1 ‘‘(F) OTHER PLANS.—An arrangement

2 shall be treated as meeting the requirements

3 under subparagraph (A)(i) if any other plan

4 maintained by the employer meets such require5 ments with respect to employees eligible under

6 the arrangement.’’

7 (b) ALTERNATIVE METHODS OF SATISFYING SEC8 TION 401(m) NONDISCRIMINATION TESTS.—Section

9 401(m) (relating to nondiscrimination test for matching

10 contributions and employee contributions) is amended by

11 redesignating paragraph (10) as paragraph (11) and by

12 adding after paragraph (9) the following new paragraph:

13 ‘‘(10) ALTERNATIVE METHOD OF SATISFYING

14 TESTS.—

15 ‘‘(A) IN GENERAL.—A defined contribution

16 plan shall be treated as meeting the require17 ments of paragraph (2) with respect to match18 ing contributions if the plan—

19 ‘‘(i) meets the contribution require20 ments of subparagraph (B) or (C) of sub21 section (k)(11),

22 ‘‘(ii) meets the notice requirements of

23 subsection (k)(11)(D), and

24 ‘‘(iii) meets the requirements of sub25 paragraphs (B) and (C).
35

•S 1821 IS

1 ‘‘(B) LIMITATION ON MATCHING CON2 TRIBUTIONS.—The requirements of this sub3 paragraph are met if—

4 ‘‘(i) matching contributions on behalf

5 of any employee may not be made with re6 spect to an employee’s contributions or

7 elective deferrals in excess of 6 percent of

8 the employee’s compensation,

9 ‘‘(ii) the rate of an employer’s match10 ing contribution does not increase as the

11 rate of an employee’s contributions or elec12 tive deferrals increase, and

13 ‘‘(iii) the matching contribution with

14 respect to any highly compensated em15 ployee at any rate of an employee contribu16 tion or rate of elective deferral is not

17 greater than that with respect to an em18 ployee who is not a highly compensated

19 employee.

20 To the extent provided in regulations, the last

21 sentences of paragraph (2)(B) and subsection

22 (k)(3)(A) shall not apply for purposes of clause

23 (iii).

24 ‘‘(C) TEST MUST BE MET SEPARATELY.—

25 If this paragraph applies to any matching con-
36

•S 1821 IS

1 tributions, such contributions shall not be taken

2 into account in determining whether employee

3 contributions satisfy the requirements of this

4 subsection.’’

5 (c) YEAR FOR COMPUTING NONHIGHLY COM6 PENSATED EMPLOYEE PERCENTAGE.—

7 (1) CASH OR DEFERRED ARRANGEMENTS.—

8 Clause (ii) of section 401(k)(3)(A) is amended—

9 (A) by striking ‘‘such year’’ and inserting

10 ‘‘the plan year’’,

11 (B) by striking ‘‘for such plan year’’ and

12 inserting ‘‘for the preceding plan year’’, and

13 (C) by adding at the end the following new

14 sentence: ‘‘An arrangement may apply this

15 clause by using the plan year rather than the

16 preceding plan year if the employer so elects,

17 except that if such an election is made, it may

18 not be changed except as provided by the Sec19 retary.’’

20 (2) MATCHING AND EMPLOYEE CONTRIBU21 TIONS.—Section 401(m)(2)(A) is amended—

22 (A) by inserting ‘‘for such plan year’’ after

23 ‘‘highly compensated employees’’,
37

•S 1821 IS

1 (B) by inserting ‘‘for the preceding plan

2 year’’ after ‘‘eligible employees’’ each place it

3 appears in clause (i) and clause (ii), and

4 (C) by adding at the end the following

5 flush sentence: ‘‘This subparagraph may be ap6 plied by using the plan year rather than the

7 preceding plan year if the employer so elects,

8 except that if such an election is made, it may

9 not be changed except as provided the Sec10 retary.’’

11 (d) SPECIAL RULE FOR DETERMINING AVERAGE DE12 FERRAL PERCENTAGE FOR FIRST PLAN YEAR, ETC.—

13 (1) Paragraph (3) of section 401(k) is amended

14 by adding at the end the following new subpara15 graph:

16 ‘‘(E) For purposes of this paragraph, in

17 the case of the first plan year of any plan, the

18 amount taken into account as the actual defer19 ral percentage of nonhighly compensated em20 ployees for the preceding plan year shall be—

21 ‘‘(i) 3 percent, or

22 ‘‘(ii) the actual deferral percentage of

23 nonhighly compensated employees deter24 mined for such first plan year in the case

25 of—
38

•S 1821 IS

1 ‘‘(I) an employer who elects to

2 have this clause apply, or

3 ‘‘(II) except to the extent pro4 vided by the Secretary, a successor

5 plan.’’

6 (2) Paragraph (3) of section 401(m) is amend7 ed by adding at the end the following: ‘‘Rules similar

8 to the rules of subsection (k)(3)(E) shall apply for

9 purposes of this subsection.’’

10 (e) DISTRIBUTION OF EXCESS CONTRIBUTIONS AND

11 EXCESS AGGREGATE CONTRIBUTIONS.—

12 (1) Subparagraph (C) of section 401(k)(8) (re13 lating to arrangement not disqualified if excess con14 tributions distributed) is amended by striking ‘‘on

15 the basis of the respective portions of the excess con16 tributions attributable to each of such employees’’

17 and inserting ‘‘on the basis of the amount of con18 tributions by, or on behalf of, each of such employ19 ees’’.

20 (2) Subparagraph (C) of section 401(m)(6) (re21 lating to method of distributing excess aggregate

22 contributions) is amended by striking ‘‘on the basis

23 of the respective portions of such amounts attrib24 utable to each of such employees’’ and inserting ‘‘on
39

•S 1821 IS

1 the basis of the amount of contributions on behalf

2 of, or by, each such employee’’.

3 (f) EFFECTIVE DATES.—

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

5 this section shall apply to plan years beginning after

6 December 31, 1998.

7 (2) SUBSECTIONS (c), (d), AND (e).—The

8 amendments made by subsections (c), (d), and (e)

9 shall apply to plan years beginning after December

10 31, 1996.

11 SEC. 1104. REPEAL OF FAMILY AGGREGATION.

12 (a) REPEAL OF FAMILY AGGREGATION RULES.—

13 (1) IN GENERAL.—Paragraph (6) of section

14 414(q) is hereby repealed.

15 (2) COMPENSATION LIMIT.—Paragraph (17)(A)

16 of section 401(a) is amended by striking the last

17 sentence.

18 (3) DEDUCTION.—Subsection (l) of section 404

19 is amended by striking the last sentence.

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

21 this section shall apply to years beginning after December

22 31, 1996.
40

•S 1821 IS

1 SEC. 1105. DEFINITION OF HIGHLY COMPENSATED EM2 PLOYEES.

3 (a) IN GENERAL.—Paragraph (1) of section 414(q)

4 (defining highly compensated employee) is amended to

5 read as follows:

6 ‘‘(1) IN GENERAL.—The term ‘highly com7 pensated employee’ means any employee who—

8 ‘‘(A) was a 5-percent owner at any time

9 during the year or the preceding year, or

10 ‘‘(B) for the preceding year had compensa11 tion from the employer in excess of $80,000.

12 The Secretary shall adjust the $80,000 amount

13 under subparagraph (B) at the same time and in the

14 same manner as under section 415(d), except that

15 the base period shall be the calendar quarter ending

16 September 30, 1996.’’

17 (b) CONFORMING AMENDMENTS.—

18 (1)(A) Subsection (q) of section 414 is amended

19 by striking paragraphs (2), (4), (5), (8), (10), and

20 (12) and by redesignating paragraphs (3), (7), (9),

21 and (11) as paragraphs (2) through (5), respec22 tively.

23 (B) Sections 129(d)(8)(B), 401(a)(5)(D)(ii),

24 408(k)(2)(C), and 416(i)(1)(D) are each amended

25 by striking ‘‘section 414(q)(7)’’ and inserting ‘‘sec26 tion 414(q)(3)’’.
41

•S 1821 IS

1 (C) Section 416(i)(1)(A) is amended by striking

2 ‘‘section 414(q)(8)’’ and inserting ‘‘section

3 414(r)(9)’’.

4 (2)(A) Section 414(r) is amended by adding at

5 the end the following new paragraph:

6 ‘‘(9) EXCLUDED EMPLOYEES.—For purposes of

7 paragraph (2)(A), the following employees shall be

8 excluded:

9 ‘‘(A) Employees who have not completed 6

10 months of service.

11 ‘‘(B) Employees who normally work less

than 171 12 ⁄2 hours per week.

13 ‘‘(C) Employees who normally work not

14 more than 6 months during any year.

15 ‘‘(D) Employees who have not attained the

16 age of 21.

17 ‘‘(E) Except to the extent provided in reg18 ulations, employees who are included in a unit

19 of employees covered by an agreement which

20 the Secretary of Labor finds to be a collective

21 bargaining agreement between employee rep22 resentatives and the employer.’’

23 (B) Subparagraph (A) of section 414(r)(2) is

24 amended by striking ‘‘subsection (q)(8)’’ and insert25 ing ‘‘paragraph (9)’’.
42

•S 1821 IS

1 (3) Section 1114(c)(4) of the Tax Reform Act

2 of 1986 is amended by adding at the end the follow3 ing new sentence: ‘‘Any reference in this paragraph

4 to section 414(q) shall be treated as a reference to

5 such section as in effect on the day before the date

6 of the enactment of the Retirement Savings and Se7 curity Act.’’.

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

9 this section shall apply to years beginning after December

10 31, 1996, except that in determining whether an employee

11 is a highly compensated employee for years beginning in

12 1997, such amendments shall be treated as having been

13 in effect for years beginning in 1996.

14 SEC. 1106. REPEAL OF LIMITATION IN CASE OF DEFINED

15 BENEFIT PLAN AND DEFINED CONTRIBUTION

16 PLAN FOR SAME EMPLOYEE.

17 (a) IN GENERAL.—Section 415(e) is repealed.

18 (b) CONFORMING AMENDMENTS.—

19 (1) Paragraph (1) of section 415(a) is amend20 ed—

21 (A) by adding ‘‘or’’ at the end of subpara22 graph (A),

23 (B) by striking ‘‘, or’’ at the end of sub24 paragraph (B) and inserting a period, and

25 (C) by striking subparagraph (C).
43

•S 1821 IS

1 (2) Subparagraph (B) of section 415(b)(5) is

2 amended by striking ‘‘and subsection (e)’’.

3 (3) Paragraph (1) of section 415(f) is amended

4 by striking ‘‘subsections (b), (c), and (e)’’ and in5 serting ‘‘subsections (b) and (c)’’.

6 (4) Subsection (g) of section 415 is amended by

7 striking ‘‘subsections (e) and (f)’’ in the last sen8 tence and inserting ‘‘subsection (f)’’.

9 (5) Clause (i) of section 415(k)(2)(A) is amend10 ed to read as follows:

11 ‘‘(i) any contribution made directly by

12 an employee under such an arrangement

13 shall not be treated as an annual addition

14 for purposes of subsection (c), and’’.

15 (6) Clause (ii) of section 415(k)(2)(A) is

16 amended by striking ‘‘subsections (c) and (e)’’ and

17 inserting ‘‘subsection (c)’’.

18 (7) Section 416 is amended by striking sub19 section (h).

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

21 this section shall apply to years beginning after December

22 31, 1998.
44

•S 1821 IS

1 SEC. 1107. CONTRIBUTIONS ON BEHALF OF DISABLED EM2 PLOYEES.

3 (a) ALL DISABLED PARTICIPANTS RECEIVING CON4 TRIBUTIONS.—Section 415(c)(3)(C) is amended by adding

5 at the end the following: ‘‘If a defined contribution plan

6 provides for the continuation of contributions on behalf

7 of all participants described in clause (i) for a fixed or

8 determinable period, this subparagraph shall be applied

9 without regard to clauses (ii) and (iii).’’

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

11 this section shall apply to years beginning after December

12 31, 1996.

13 SEC. 1108. PLANS COVERING SELF-EMPLOYED INDIVID14 UALS.

15 (a) AGGREGATION RULES.—Section 401(d) (relating

16 to additional requirements for qualification of trusts and

17 plans benefiting owner-employees) is amended to read as

18 follows:

19 ‘‘(d) CONTRIBUTION LIMIT ON OWNER-EMPLOY20 EES.—A trust forming part of a pension or profit-sharing

21 plan which provides contributions or benefits for employ22 ees some or all of whom are owner-employees shall con23 stitute a qualified trust under this section only if, in addi24 tion to meeting the requirements of subsection (a), the

25 plan provides that contributions on behalf of any owner26 employee may be made only with respect to the earned
45

•S 1821 IS

1 income of such owner-employee which is derived from the

2 trade or business with respect to which such plan is estab3 lished.’’

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

5 this section shall apply to plan years beginning after De6 cember 31, 1996.

7 SEC. 1109. TRUST REQUIREMENT FOR DEFERRED COM8 PENSATION PLANS OF STATE AND LOCAL

9 GOVERNMENTS.

10 (a) IN GENERAL.—Section 457 is amended by adding

11 at the end the following new subsection:

12 ‘‘(g) GOVERNMENTAL PLANS MUST MAINTAIN SET13 ASIDES FOR EXCLUSIVE BENEFIT OF PARTICIPANTS.—

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

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

16 shall not be treated as an eligible deferred com17 pensation plan unless all amounts, property and

18 rights, and income of the plan described in subpara19 graphs (A), (B), and (C) of subsection (b)(6) are

20 held in trust for the exclusive benefit of participants

21 and their beneficiaries.

22 ‘‘(2) TAXABILITY OF TRUSTS AND PARTICI23 PANTS.—For purposes of this title—
46

•S 1821 IS

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

2 shall be treated as an organization exempt from

3 taxation under section 501(a), and

4 ‘‘(B) notwithstanding any other provision

5 of this title, amounts in the trust shall be in6 cludible in the gross income of participants and

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

8 provided in this section.

9 ‘‘(3) CUSTODIAL ACCOUNT AND CONTRACTS.—

10 For purposes of this subsection, custodial accounts

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

12 treated as trusts under rules similar to the rules

13 under section 401(f).’’

14 (b) CONFORMING AMENDMENT.—Paragraph (6) of

15 section 457(b) is amended by inserting ‘‘except as pro16 vided in subsection (g),’’ before ‘‘which provides that’’.

17 (c) EFFECTIVE DATES.—

18 (1) IN GENERAL.—Except as provided in para19 graph (2), the amendments made by this section

20 shall apply to amounts, property and rights, and in21 come described in subparagraphs (A), (B), and (C)

22 of section 457(b)(6) of the Internal Revenue Code of

23 1986 held by a plan on and after the date of the en24 actment of this Act.
47

•S 1821 IS

1 (2) TRANSITION RULE.—In the case of

2 amounts, property and rights, and income described

3 in paragraph (1) under a plan before the last day

4 of the first calendar quarter beginning after the

5 close of the first regular session (beginning after the

6 date of the enactment of this Act) of the State legis7 lature of the State in which the governmental entity

8 maintaining the plan is located, a trust need not be

9 established by reason of the amendments made by

10 this section before such last day. For purposes of

11 the preceding sentence, in the case of a State that

12 has a 2-year legislative session, each year of such

13 session shall be deemed to be a separate regular ses14 sion of the State legislature.

15 CHAPTER 2—SIMPLIFICATION AND COST

16 SAVINGS

17 SEC. 1201. TREATMENT OF GOVERNMENTAL AND MULTIEM18 PLOYER PLANS UNDER SECTION 415 AND

19 TREATMENT OF EXCESS BENEFIT PLANS.

20 (a) COMPENSATION LIMIT.—Subsection (b) of sec21 tion 415 is amended by adding immediately after para22 graph (10) the following new paragraph:

23 ‘‘(11) SPECIAL LIMITATION RULE FOR GOVERN24 MENTAL AND MULTIEMPLOYER PLANS.—In the case

25 of a governmental plan (as defined in section
48

•S 1821 IS

1 414(d)) or a multiemployer plan (as defined in sec2 tion 414(f)), subparagraph (B) of paragraph (1)

3 shall not apply.’’

4 (b) TREATMENT OF CERTAIN EXCESS BENEFIT

5 PLANS.—

6 (1) IN GENERAL.—Section 415 is amended by

7 adding at the end the following new subsection:

8 ‘‘(m) TREATMENT OF QUALIFIED GOVERNMENTAL

9 EXCESS BENEFIT ARRANGEMENTS.—

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

11 In determining whether a governmental plan (as de12 fined in section 414(d)) meets the requirements of

13 this section, benefits provided under a qualified gov14 ernmental excess benefit arrangement shall not be

15 taken into account. Income accruing to a govern16 mental plan (or to a trust that is maintained solely

17 for the purpose of providing benefits under a quali18 fied governmental excess benefit arrangement) in re19 spect of a qualified governmental excess benefit ar20 rangement shall constitute income derived from the

21 exercise of an essential governmental function upon

22 which such governmental plan (or trust) shall be ex23 empt from tax under section 115.

24 ‘‘(2) TAXATION OF PARTICIPANT.—For pur25 poses of this chapter—
49

•S 1821 IS

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

2 amounts in respect of a qualified governmental

3 excess benefit arrangement are includible in

4 gross income by a participant, and

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

6 so includible by the participant,

7 shall be determined as if such qualified govern8 mental excess benefit arrangement were treated as a

9 plan for the deferral of compensation which is main10 tained by a corporation not exempt from tax under

11 this chapter and which does not meet the require12 ments for qualification under section 401.

13 ‘‘(3) QUALIFIED GOVERNMENTAL EXCESS BEN14 EFIT ARRANGEMENT.—For purposes of this sub15 section, the term ‘qualified governmental excess ben16 efit arrangement’ means a portion of a governmental

17 plan if—

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

19 the purpose of providing to participants in the

20 plan that part of the participant’s annual bene21 fit otherwise payable under the terms of the

22 plan that exceeds the limitations on benefits im23 posed by this section,
50

•S 1821 IS

1 ‘‘(B) under such portion no election is pro2 vided at any time to the participant (directly or

3 indirectly) to defer compensation, and

4 ‘‘(C) benefits described in subparagraph

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

6 of such governmental plan unless such trust is

7 maintained solely for the purpose of providing

8 such benefits.’’

9 (2) RULES RELATING TO EXCESS BENEFIT AR10 RANGEMENT.—

11 (A) APPLICATION OF SECTION 457.—Sub12 section (e) of section 457 is amended by adding

13 at the end the following new paragraph:

14 ‘‘(14) TREATMENT OF EXCESS BENEFIT AR15 RANGEMENTS.—

16 ‘‘(A) IN GENERAL.—Subsections (b)(2)

17 and (c)(1) shall not apply to any excess benefit

18 arrangement and benefits provided under such

19 an arrangement shall not be taken into account

20 in determining whether any other plan is an eli21 gible deferred compensation plan.

22 ‘‘(B) EXCESS BENEFIT ARRANGEMENT DE23 FINED.—For purposes of this section, the term

24 ‘excess benefit arrangement’ means a plan

25 which is maintained by an eligible employer
51

•S 1821 IS

1 solely for purposes of providing benefits for cer2 tain employees in excess of the limits on con3 tributions and benefits imposed by section 415.

4 Such term includes a qualified governmental ex5 cess benefit arrangement (as defined in section

6 415(m)(3)).’’

7 (B) CONFORMING AMENDMENT.—Para8 graph (2) of section 457(f) is amended by strik9 ing ‘‘and’’ at the end of subparagraph (C), by

10 striking the period at the end of subparagraph

11 (D) and inserting ‘‘, and’’, and by inserting im12 mediately thereafter the following new subpara13 graph:

14 ‘‘(E) an excess benefit arrangement (as de15 fined in subsection (e)(14)(B)).’’

16 (c) EXEMPTION FOR SURVIVOR AND DISABILITY

17 BENEFITS.—Paragraph (2) of section 415(b) is amended

18 by adding at the end the following new subparagraph:

19 ‘‘(I) EXEMPTION FOR SURVIVOR AND DIS20 ABILITY BENEFITS PROVIDED UNDER GOVERN21 MENTAL AND MULTIEMPLOYER PLANS.—Sub22 paragraph (C) of this paragraph and paragraph

23 (5) shall not apply to—

24 ‘‘(i) income received from a govern25 mental plan (as defined in section 414(d))
52

•S 1821 IS

1 or a multiemployer plan (as defined in sec2 tion 414(f)) as a pension, annuity, or simi3 lar allowance as the result of the recipient

4 becoming disabled by reason of personal

5 injuries or sickness, or

6 ‘‘(ii) amounts received from a govern7 mental or multiemployer plan by the bene8 ficiaries, survivors, or the estate of an em9 ployee as the result of the death of the em10 ployee.’’

11 (d) REVOCATION OF GRANDFATHER ELECTION.—

12 (1) IN GENERAL.—Subparagraph (C) of section

13 415(b)(10) is amended by adding at the end the fol14 lowing new clause:

15 ‘‘(ii) REVOCATION OF ELECTION.—An

16 election under clause (i) may be revoked

17 not later than the last day of the third

18 plan year beginning after the date of the

19 enactment of this clause. The revocation

20 shall apply to all plan years to which the

21 election applied and to all subsequent plan

22 years. Any amount paid by a plan in a tax23 able year ending after the revocation shall

24 be includible in income in such taxable

25 year under the rules of this chapter in ef-
53

•S 1821 IS

1 fect for such taxable year, except that, for

2 purposes of applying the limitations im3 posed by this section, any portion of such

4 amount which is attributable to any tax5 able year during which the election was in

6 effect shall be treated as received in such

7 taxable year.’’

8 (2) CONFORMING AMENDMENT.—Subparagraph

9 (C) of section 415(b)(10) is amended by striking

10 ‘‘This’’ and inserting:

11 ‘‘(i) IN GENERAL.—This’’.

12 (e) EFFECTIVE DATE.—

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

14 subsections (a), (b), and (c) shall apply to years be15 ginning after December 31, 1996.

16 (2) SPECIAL RULES FOR GOVERNMENTAL

17 PLANS.—

18 (A) IN GENERAL.—In the case of a govern19 mental plan, the amendments made by sub20 sections (a), (b), and (c) shall apply to years

21 beginning after December 31, 1995.

22 (B) REVOCATIONS.—The amendments

23 made by subsection (d) shall apply with respect

24 to revocations adopted after the date of the en25 actment of this Act.
54

•S 1821 IS

1 (C) TREATMENT FOR YEARS BEGINNING

2 BEFORE JANUARY 1, 1996.—Nothing in the

3 amendments made by this section shall be con4 strued to imply that a governmental plan (as

5 defined in section 414(d) of the Internal Reve6 nue Code of 1986) fails to satisfy the require7 ments of section 415 of such Code for any year

8 beginning before January 1, 1996.

9 SEC. 1202. DEFINITION OF COMPENSATION FOR SECTION

10 415 PURPOSES.

11 (a) GENERAL RULE.—Section 415(c)(3) (defining

12 participant’s compensation) is amended by adding at the

13 end the following new subparagraph:

14 ‘‘(D) CERTAIN DEFERRALS INCLUDED.—

15 The term ‘participant’s compensation’ shall in16 clude—

17 ‘‘(i) any elective deferral (as defined

18 in section 402(g)(3)),

19 ‘‘(ii) any amount which is contributed

20 by the employer at the election of the em21 ployee and which is not includible in the

22 gross income of the employee pursuant to

23 section 125, and

24 ‘‘(iii) any amount which is deferred at

25 the election of the employee and which is
55

•S 1821 IS

1 not includible in the gross income of the

2 employee pursuant to section 457.’’

3 (b) CONFORMING AMENDMENTS.—

4 (1) Section 414(q)(3), as redesignated by sec5 tion 1105, is amended to read as follows:

6 ‘‘(3) COMPENSATION.—For purposes of this

7 subsection, the term ‘compensation’ has the meaning

8 given such term by section 415(c)(3).’’

9 (2) Section 414(s)(2) is amended by inserting

10 ‘‘not’’ after ‘‘elect’’ in the text and heading thereof.

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

12 this section shall apply to years beginning after December

13 31, 1996.

14 SEC. 1203. ASSUMPTIONS FOR ADJUSTING CERTAIN BENE15 FITS OF DEFINED BENEFIT PLANS FOR

16 EARLY RETIREES.

17 (a) IN GENERAL.—Subparagraph (E) of section

18 415(b)(2) (relating to limitation on certain assumptions)

19 is amended—

20 (1) by striking ‘‘Except as provided in clause

21 (ii), for purposes of adjusting any benefit or limita22 tion under subparagraph (B) or (C),’’ in clause (i)

23 and inserting ‘‘For purposes of adjusting any limita24 tion under subparagraph (C) and, except as provided
56

•S 1821 IS

1 in clause (ii), for purposes of adjusting any benefit

2 under subparagraph (B),’’, and

3 (2) by striking ‘‘For purposes of adjusting the

4 benefit or limitation of any form of benefit subject

5 to section 417(e)(3),’’ in clause (ii) and inserting

6 ‘‘For purposes of adjusting any benefit under sub7 paragraph (B) for any form of benefit subject to sec8 tion 417(e)(3),’’.

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

10 this section shall take effect as if included in the provisions

11 of section 767 of the Uruguay Round Agreements Act.

12 SEC. 1204. TREATMENT OF DEFERRED COMPENSATION

13 PLANS OF STATE AND LOCAL GOVERNMENTS

14 AND TAX-EXEMPT ORGANIZATIONS.

15 (a) SPECIAL RULES FOR PLAN DISTRIBUTIONS.—

16 Paragraph (9) of section 457(e) (relating to other defini17 tions and special rules) is amended to read as follows:

18 ‘‘(9) BENEFITS NOT TREATED AS MADE AVAIL19 ABLE BY REASON OF CERTAIN ELECTIONS, ETC.—

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

21 OR LESS.—The total amount payable to a par22 ticipant under the plan shall not be treated as

23 made available merely because the participant

24 may elect to receive such amount (or the plan
57

•S 1821 IS

1 may distribute such amount without the partici2 pant’s consent) if—

3 ‘‘(i) such amount does not exceed

4 $3,500, and

5 ‘‘(ii) such amount may be distributed

6 only if—

7 ‘‘(I) no amount has been deferred

8 under the plan with respect to such

9 participant during the 2-year period

10 ending on the date of the distribution,

11 and

12 ‘‘(II) there has been no prior dis13 tribution under the plan to such par14 ticipant to which this subparagraph

15 applied.

16 A plan shall not be treated as failing to meet

17 the distribution requirements of subsection (d)

18 by reason of a distribution to which this sub19 paragraph applies.

20 ‘‘(B) ELECTION TO DEFER COMMENCE21 MENT OF DISTRIBUTIONS.—The total amount

22 payable to a participant under the plan shall

23 not be treated as made available merely because

24 the participant may elect to defer commence25 ment of distributions under the plan if—
58

•S 1821 IS

1 ‘‘(i) such election is made after

2 amounts may be available under the plan

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

4 and before commencement of such dis5 tributions, and

6 ‘‘(ii) the participant may make only 1

7 such election.’’

8 (b) COST-OF-LIVING ADJUSTMENT OF MAXIMUM DE9 FERRAL AMOUNT.—Subsection (e) of section 457, as

10 amended by section 1201(b)(2) (relating to governmental

11 plans), is amended by adding at the end the following new

12 paragraph:

13 ‘‘(15) COST-OF-LIVING ADJUSTMENT OF MAXI14 MUM DEFERRAL AMOUNT.—The Secretary shall ad15 just the $7,500 amount specified in subsections

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

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

18 base period shall be the calendar quarter ending

19 September 30, 1994, and any increase under this

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

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

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

23 this section shall apply to taxable years beginning after

24 December 31, 1996.
59

•S 1821 IS

1 SEC. 1205. NO REQUIRED DISTRIBUTIONS FOR ACTIVE EM2 PLOYEES.

3 (a) IN GENERAL.—Section 401(a)(9)(C) (defining re4 quired beginning date) is amended to read as follows:

5 ‘‘(C) REQUIRED BEGINNING DATE.—For

6 purposes of this paragraph—

7 ‘‘(i) IN GENERAL.—The term ‘re8 quired beginning date’ means April 1 of

9 the calendar year following the later of—

10 ‘‘(I) the calendar year in which

the employee attains age 701 11 ⁄2, or

12 ‘‘(II) the calendar year in which

13 the employee retires.

14 ‘‘(ii) EXCEPTION.—Subclause (II) of

15 clause (i) shall not apply—

16 ‘‘(I) except as provided in section

17 409(d), in the case of an employee

18 who is a 5-percent owner (as defined

19 in section 416) with respect to the

20 plan year ending in the calendar year

21 in which the employee attains age

701 22 ⁄2, or

23 ‘‘(II) for purposes of section 408

24 (a)(6) or (b)(3).

25 ‘‘(iii) ACTUARIAL ADJUSTMENT.—In

26 the case of an employee to whom clause
60

•S 1821 IS

1 (i)(II) applies who retires in a calendar

2 year after the calendar year in which the

employee attains age 701 3 ⁄2, the employee’s

4 accrued benefit shall be actuarially in5 creased to take into account the period

after age 701 6 ⁄2 in which the employee was

7 not receiving any benefits under the plan.

8 ‘‘(iv) EXCEPTION FOR GOVERN9 MENTAL AND CHURCH PLANS.—Clauses

10 (ii) and (iii) shall not apply in the case of

11 a governmental plan or church plan. For

12 purposes of this clause, the term ‘church

13 plan’ means a plan maintained by a church

14 for church employees, and the term

15 ‘church’ means any church (as defined in

16 section 3121(w)(3)(A)) or qualified church17 controlled organization (as defined in sec18 tion 3121(w)(3)(B)).’’

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

20 subsection (a) shall apply to years beginning after Decem21 ber 31, 1996.
61

•S 1821 IS

1 SEC. 1206. SIMPLIFIED METHOD FOR TAXING ANNUITY DIS2 TRIBUTIONS UNDER CERTAIN EMPLOYER

3 PLANS.

4 (a) GENERAL RULE.—Subsection (d) of section 72

5 (relating to annuities; certain proceeds of endowment and

6 life insurance contracts) is amended to read as follows:

7 ‘‘(d) SPECIAL RULES FOR QUALIFIED EMPLOYER

8 RETIREMENT PLANS.—

9 ‘‘(1) SIMPLIFIED METHOD OF TAXING ANNUITY

10 PAYMENTS.—

11 ‘‘(A) IN GENERAL.—In the case of any

12 amount received as an annuity under a quali13 fied employer retirement plan—

14 ‘‘(i) subsection (b) shall not apply,

15 and

16 ‘‘(ii) the investment in the contract

17 shall be recovered as provided in this para18 graph.

19 ‘‘(B) METHOD OF RECOVERING INVEST20 MENT IN CONTRACT.—

21 ‘‘(i) IN GENERAL.—Gross income

22 shall not include so much of any monthly

23 annuity payment under a qualified em24 ployer retirement plan as does not exceed

25 the amount obtained by dividing—
62

•S 1821 IS

1 ‘‘(I) the investment in the con2 tract (as of the annuity starting date),

3 by

4 ‘‘(II) the number of anticipated

5 payments determined under the table

6 contained in clause (iii) (or, in the

7 case of a contract to which subsection

8 (c)(3)(B) applies, the number of

9 monthly annuity payments under such

10 contract).

11 ‘‘(ii) CERTAIN RULES MADE APPLICA12 BLE.—Rules similar to the rules of para13 graphs (2) and (3) of subsection (b) shall

14 apply for purposes of this paragraph.

15 ‘‘(iii) NUMBER OF ANTICIPATED PAY16 MENTS.—

‘‘If the age of the

primary annuitant on The number

the annuity starting of anticipated

date is: payments is:

Not more than 55 ................................ 360

More than 55 but not more than 60 ... 310

More than 60 but not more than 65 ... 260

More than 65 but not more than 70 ... 210

More than 70 ....................................... 160.

17 ‘‘(C) ADJUSTMENT FOR REFUND FEATURE

18 NOT APPLICABLE.—For purposes of this para19 graph, investment in the contract shall be de-
63

•S 1821 IS

1 termined under subsection (c)(1) without re2 gard to subsection (c)(2).

3 ‘‘(D) SPECIAL RULE WHERE LUMP SUM

4 PAID IN CONNECTION WITH COMMENCEMENT

5 OF ANNUITY PAYMENTS.—If, in connection with

6 the commencement of annuity payments under

7 any qualified employer retirement plan, the tax8 payer receives a lump sum payment—

9 ‘‘(i) such payment shall be taxable

10 under subsection (e) as if received before

11 the annuity starting date, and

12 ‘‘(ii) the investment in the contract

13 for purposes of this paragraph shall be de14 termined as if such payment had been so

15 received.

16 ‘‘(E) EXCEPTION.—This paragraph shall

17 not apply in any case where the primary annu18 itant has attained age 75 on the annuity start19 ing date unless there are fewer than 5 years of

20 guaranteed payments under the annuity.

21 ‘‘(F) ADJUSTMENT WHERE ANNUITY PAY22 MENTS NOT ON MONTHLY BASIS.—In any case

23 where the annuity payments are not made on a

24 monthly basis, appropriate adjustments in the

25 application of this paragraph shall be made to
64

•S 1821 IS

1 take into account the period on the basis of

2 which such payments are made.

3 ‘‘(G) QUALIFIED EMPLOYER RETIREMENT

4 PLAN.—For purposes of this paragraph, the

5 term ‘qualified employer retirement plan’ means

6 any plan or contract described in paragraph

7 (1), (2), or (3) of section 4974(c).

8 ‘‘(2) TREATMENT OF EMPLOYEE CONTRIBU9 TIONS UNDER DEFINED CONTRIBUTION PLANS.—

10 For purposes of this section, employee contributions

11 (and any income allocable thereto) under a defined

12 contribution plan may be treated as a separate con13 tract.’’

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

15 this section shall apply in cases where the annuity starting

16 date is after December 31, 1996.

17 SEC. 1207. REPEAL OF 5-YEAR INCOME AVERAGING FOR

18 LUMP-SUM DISTRIBUTIONS.

19 (a) IN GENERAL.—Subsection (d) of section 402 (re20 lating to taxability of beneficiary of employees’ trust) is

21 amended to read as follows:

22 ‘‘(d) TAXABILITY OF BENEFICIARY OF CERTAIN

23 FOREIGN SITUS TRUSTS.—For purposes of subsections

24 (a), (b), and (c), a stock bonus, pension, or profit-sharing

25 trust which would qualify for exemption from tax under
65

•S 1821 IS

1 section 501(a) except for the fact that it is a trust created

2 or organized outside the United States shall be treated

3 as if it were a trust exempt from tax under section

4 501(a).’’

5 (b) CONFORMING AMENDMENTS.—

6 (1) Subparagraph (D) of section 402(e)(4) (re7 lating to other rules applicable to exempt trusts) is

8 amended to read as follows:

9 ‘‘(D) LUMP-SUM DISTRIBUTION.—For pur10 poses of this paragraph—

11 ‘‘(i) IN GENERAL.—The term ‘lump

12 sum distribution’ means the distribution or

13 payment within one taxable year of the re14 cipient of the balance to the credit of an

15 employee which becomes payable to the re16 cipient—

17 ‘‘(I) on account of the employee’s

18 death,

19 ‘‘(II) after the employee attains

age 591 20 ⁄2,

21 ‘‘(III) on account of the employ22 ee’s separation from service, or

23 ‘‘(IV) after the employee has be24 come disabled (within the meaning of

25 section 72(m)(7)),
66

•S 1821 IS

1 from a trust which forms a part of a plan

2 described in section 401(a) and which is

3 exempt from tax under section 501 or from

4 a plan described in section 403(a). Sub5 clause (III) of this clause shall be applied

6 only with respect to an individual who is

7 an employee without regard to section

8 401(c)(1), and subclause (IV) shall be ap9 plied only with respect to an employee

10 within the meaning of section 401(c)(1).

11 For purposes of this clause, a distribution

12 to two or more trusts shall be treated as

13 a distribution to one recipient. For pur14 poses of this paragraph, the balance to the

15 credit of the employee does not include the

16 accumulated deductible employee contribu17 tions under the plan (within the meaning

18 of section 72(o)(5)).

19 ‘‘(ii) AGGREGATION OF CERTAIN

20 TRUSTS AND PLANS.—For purposes of de21 termining the balance to the credit of an

22 employee under clause (i)—

23 ‘‘(I) all trusts which are part of

24 a plan shall be treated as a single

25 trust, all pension plans maintained by
67

•S 1821 IS

1 the employer shall be treated as a sin2 gle plan, all profit-sharing plans main3 tained by the employer shall be treat4 ed as a single plan, and all stock

5 bonus plans maintained by the em6 ployer shall be treated as a single

7 plan, and

8 ‘‘(II) trusts which are not quali9 fied trusts under section 401(a) and

10 annuity contracts which do not satisfy

11 the requirements of section 404(a)(2)

12 shall not be taken into account.

13 ‘‘(iii) COMMUNITY PROPERTY LAWS.—

14 The provisions of this paragraph shall be

15 applied without regard to community prop16 erty laws.

17 ‘‘(iv) AMOUNTS SUBJECT TO PEN18 ALTY.—This paragraph shall not apply to

19 amounts described in subparagraph (A) of

20 section 72(m)(5) to the extent that section

21 72(m)(5) applies to such amounts.

22 ‘‘(v) BALANCE TO CREDIT OF EM23 PLOYEE NOT TO INCLUDE AMOUNTS PAY24 ABLE UNDER QUALIFIED DOMESTIC RELA25 TIONS ORDER.—For purposes of this para-
68

•S 1821 IS

1 graph, the balance to the credit of an em2 ployee shall not include any amount pay3 able to an alternate payee under a quali4 fied domestic relations order (within the

5 meaning of section 414(p)).

6 ‘‘(vi) TRANSFERS TO COST-OF-LIVING

7 ARRANGEMENT NOT TREATED AS DIS8 TRIBUTION.—For purposes of this para9 graph, the balance to the credit of an em10 ployee under a defined contribution plan

11 shall not include any amount transferred

12 from such defined contribution plan to a

13 qualified cost-of-living arrangement (within

14 the meaning of section 415(k)(2)) under a

15 defined benefit plan.

16 ‘‘(vii) LUMP-SUM DISTRIBUTIONS OF

17 ALTERNATE PAYEES.—If any distribution

18 or payment of the balance to the credit of

19 an employee would be treated as a lump20 sum distribution, then, for purposes of this

21 paragraph, the payment under a qualified

22 domestic relations order (within the mean23 ing of section 414(p)) of the balance to the

24 credit of an alternate payee who is the

25 spouse or former spouse of the employee
69

•S 1821 IS

1 shall be treated as a lump-sum distribu2 tion. For purposes of this clause, the bal3 ance to the credit of the alternate payee

4 shall not include any amount payable to

5 the employee.’’

6 (2) Section 402(c) (relating to rules applicable

7 to rollovers from exempt trusts) is amended by strik8 ing paragraph (10).

9 (3) Paragraph (1) of section 55(c) (defining

10 regular tax) is amended by striking ‘‘shall not in11 clude any tax imposed by section 402(d) and’’.

12 (4) Paragraph (8) of section 62(a) (relating to

13 certain portion of lump-sum distributions from pen14 sion plans taxed under section 402(d)) is hereby re15 pealed.

16 (5) Section 401(a)(28)(B) (relating to coordina17 tion with distribution rules) is amended by striking

18 clause (v).

19 (6) Subparagraph (B)(ii) of section 401(k)(10)

20 (relating to distributions that must be lump-sum dis21 tributions) is amended to read as follows:

22 ‘‘(ii) LUMP-SUM DISTRIBUTION.—For

23 purposes of this subparagraph, the term

24 ‘lump-sum distribution’ has the meaning

25 given such term by section 402(e)(4)(D),
70

•S 1821 IS

1 without regard to subclauses (I), (II),

2 (III), and (IV) of clause (i) thereof.’’

3 (7) Section 406(c) (relating to termination of

4 status as deemed employee not to be treated as sep5 aration from service for purposes of limitation of

6 tax) is hereby repealed.

7 (8) Section 407(c) (relating to termination of

8 status as deemed employee not to be treated as sep9 aration from service for purposes of limitation of

10 tax) is hereby repealed.

11 (9) Section 691(c) (relating to deduction for es12 tate tax) is amended by striking paragraph (5).

13 (10) Paragraph (1) of section 871(b) (relating

14 to imposition of tax) is amended by striking ‘‘section

15 1, 55, or 402(d)(1)’’ and inserting ‘‘section 1 or

16 55’’.

17 (11) Subsection (b) of section 877 (relating to

18 alternative tax) is amended by striking ‘‘section 1,

19 55, or 402(d)(1)’’ and inserting ‘‘section 1 or 55’’.

20 (12) Section 4980A(c)(4) is amended—

21 (A) by striking ‘‘to which an election under

22 section 402(d)(4)(B) applies’’ and inserting

23 ‘‘(as defined in section 402(e)(4)(D)) with re24 spect to which the individual elects to have this

25 paragraph apply’’,
71

•S 1821 IS

1 (B) by adding at the end the following new

2 flush sentence:

3 ‘‘An individual may elect to have this paragraph

4 apply to only one lump-sum distribution.’’, and

5 (C) by striking the heading and inserting:

6 ‘‘(4) SPECIAL ONE-TIME ELECTION.—’’.

7 (13) Section 402(e) is amended by striking

8 paragraph (5).

9 (c) EFFECTIVE DATES.—

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

11 this section shall apply to taxable years beginning

12 after December 31, 1998.

13 (2) RETENTION OF CERTAIN TRANSITION

14 RULES.—Notwithstanding any other provision of

15 this section, the amendments made by this section

16 shall not apply to any distribution for which the tax17 payer elects the benefits of section 1122 (h)(3) or

18 (h)(5) of the Tax Reform Act of 1986. For purposes

19 of the preceding sentence, the rules of sections

20 402(c)(10) and 402(d) of the Internal Revenue Code

21 of 1986 (as in effect before the amendments made

22 by this Act) shall apply.
72

•S 1821 IS

1 SEC. 1208. ELIMINATION OF HALF-YEAR REQUIREMENTS.

2 (a) IN GENERAL.—Each of the following provisions

are amended by striking ‘‘age 591 3 ⁄2’’ and inserting ‘‘age

4 59’’:

5 (1) Section 72(q)(2)(A).

6 (2) Section 72(q)(3)(B)(i).

7 (3) Section 72(q)(3)(B)(ii).

8 (4) Section 72(t)(2)(A)(i).

9 (5) Section 72(t)(4)(A)(ii)(I).

10 (6) Section 72(t)(4)(A)(ii)(II).

11 (7) Section 72(v)(2)(A).

12 (8) Section 401(k)(2)(B)(i)(III).

13 (9) Section 403(b)(7)(A)(ii).

14 (10) Section 403(b)(11)(A).

15 (11) The heading for section 403(b)(11).

16 (12) Section 4978(d)(1)(B).

17 (b) OTHER PROVISIONS.—Each of the following provisions are amended by striking ‘‘age 701 18 ⁄2’’ each place

19 it appears and inserting ‘‘age 70’’:

20 (1) Section 219(d)(1).

21 (2) The heading for section 219(d)(1).

22 (3) Section 401(a)(9)(B)(iv)(I).

23 (4) Section 401(a)(9)(C).

24 (5) Section 408(b).

25 (6) Section 457(d)(1)(A).
73

•S 1821 IS

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

2 this section shall apply to years beginning after December

3 31, 1996.

4 SEC. 1209. DISTRIBUTIONS UNDER RURAL COOPERATIVE

5 PLANS.

6 (a) DISTRIBUTIONS FOR HARDSHIP OR AFTER A

7 CERTAIN AGE.—Section 401(k)(7) is amended by adding

8 at the end the following new subparagraph:

9 ‘‘(C) SPECIAL RULE FOR CERTAIN DIS10 TRIBUTIONS.—A rural cooperative plan which

11 includes a qualified cash or deferred arrange12 ment shall not be treated as violating the re13 quirements of section 401(a) or of paragraph

14 (2) merely because, under the plan, distribu15 tions may be made by reason of hardship or the

attainment of age 591 16 ⁄2. For purposes of this

17 section, the term ‘hardship distribution’ means

18 a distribution described in paragraph

19 (2)(B)(i)(IV) (without regard to the limitation

20 of its application to profit-sharing or stock

21 bonus plans).’’

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

23 subsection (a) shall apply to distributions after the date

24 of the enactment of this Act.
74

•S 1821 IS

1 SEC. 1210. MODIFICATION OF ADDITIONAL PARTICIPATION

2 REQUIREMENTS.

3 (a) GENERAL RULE.—Section 401(a)(26)(A) (relat4 ing to additional participation requirements) is amended

5 to read as follows:

6 ‘‘(A) IN GENERAL.—In the case of a trust

7 which is a part of a defined benefit plan, such

8 trust shall not constitute a qualified trust under

9 this subsection unless, on each day of the plan

10 year, such plan benefits at least the lesser of—

11 ‘‘(i) 50 employees of the employer, or

12 ‘‘(ii) the greater of—

13 ‘‘(I) 40 percent of all employees

14 of the employer, or

15 ‘‘(II) 2 employees (or if there is

16 only 1 employee, such employee).’’

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

18 this section shall apply to plan years beginning after De19 cember 31, 1996.

20 SEC. 1211. UNIFORM RETIREMENT AGE.

21 (a) DISCRIMINATION TESTING.—Paragraph (5) of

22 section 401(a) (relating to special rules relating to non23 discrimination requirements) is amended by adding at the

24 end the following new subparagraph:
75

•S 1821 IS

1 ‘‘(F) SOCIAL SECURITY RETIREMENT

2 AGE.—For purposes of testing for discrimina3 tion under paragraph (4)—

4 ‘‘(i) the social security retirement age

5 (as defined in section 415(b)(8)) shall be

6 treated as a uniform retirement age, and

7 ‘‘(ii) subsidized early retirement bene8 fits and joint and survivor annuities shall

9 not be treated as being unavailable to em10 ployees on the same terms merely because

11 such benefits or annuities are based in

12 whole or in part on an employee’s social

13 security retirement age (as so defined).’’

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

15 this section shall apply to plan years beginning after De16 cember 31, 1996.

17 SEC. 1212. TREATMENT OF LEASED EMPLOYEES.

18 (a) GENERAL RULE.—Subparagraph (C) of section

19 414(n)(2) (defining leased employee) is amended to read

20 as follows:

21 ‘‘(C) such services are performed under

22 significant direction or control by the recipi23 ent.’’

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

25 subsection (a) shall apply to years beginning after Decem-
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•S 1821 IS

1 ber 31, 1996, but shall not apply to any relationship deter2 mined under an Internal Revenue Service ruling issued be3 fore the date of the enactment of this Act pursuant to

4 section 414(n)(2)(C) of the Internal Revenue Code of

5 1986 (as in effect on the day before such date) not to

6 involve a leased employee.

7 SEC. 1213. FULL FUNDING LIMITATION FOR MULTIEM8 PLOYER PLANS.

9 (a) FULL-FUNDING LIMITATION.—Section

10 412(c)(7)(C) (relating to full-funding limitation) is

11 amended—

12 (1) by inserting ‘‘or in the case of a multiem13 ployer plan,’’ after ‘‘paragraph (6)(B),’’, and

14 (2) by inserting ‘‘AND MULTIEMPLOYER PLANS’’

15 after ‘‘PARAGRAPH (6)(B)’’ in the heading thereof.

16 (b) VALUATION.—Section 412(c)(9) is amended—

17 (1) by inserting ‘‘(3 years in the case of a mul18 tiemployer plan)’’ after ‘‘year’’, and

19 (2) by striking ‘‘ANNUAL VALUATION’’ in the

20 heading and inserting ‘‘VALUATION’’.

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

22 this section shall apply to plan years beginning after De23 cember 31, 1996.
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•S 1821 IS

1 SEC. 1214. ELIMINATION OF PARTIAL TERMINATION RULES

2 FOR MULTIEMPLOYER PLANS.

3 (a) PARTIAL TERMINATION RULES FOR MULTIEM4 PLOYER PLANS.—Section 411(d)(3) is amended by adding

5 at the end the following new sentence: ‘‘This paragraph

6 shall not apply in the case of a partial termination of a

7 multiemployer plan.’’

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

9 this section shall apply to partial terminations beginning

10 after December 31, 1996.

11 SEC. 1215. ELECTIVE DEFERRALS UNDER SECTION 403(b).

12 (a) IN GENERAL.—Subparagraph (E) of section

13 403(b)(1) is amended to read as follows:

14 ‘‘(E) in the case of a contract purchased

15 under a salary reduction agreement, the con16 tract meets the requirements of section

17 401(a)(30),’’.

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

19 this section shall apply to years beginning after December

20 31, 1996.

21 SEC. 1216. UNIFORM PENALTY PROVISIONS TO APPLY TO

22 CERTAIN PENSION REPORTING REQUIRE23 MENTS.

24 (a) PENALTIES.—

25 (1) STATEMENTS.—Paragraph (1) of section

26 6724(d) is amended by striking ‘‘and’’ at the end of
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•S 1821 IS

1 subparagraph (A), by striking the period at the end

2 of subparagraph (B) and inserting ‘‘, and’’, and by

3 inserting after subparagraph (B) the following new

4 subparagraph:

5 ‘‘(C) any statement required to be made to

6 the Secretary under—

7 ‘‘(i) section 408(i) (relating to reports

8 with respect to individual retirement ac9 counts or annuities), or

10 ‘‘(ii) section 6047(d) (relating to re11 ports by employers, plan administrators,

12 etc.).’’

13 (2) REPORTS.—Paragraph (2) of section

14 6724(d) is amended by striking ‘‘or’’ at the end of

15 subparagraph (S), by striking the period at the end

16 of subparagraph (T) and inserting a comma, and by

17 inserting after subparagraph (T) the following new

18 subparagraphs:

19 ‘‘(U) section 408(i) (relating to reports

20 with respect to individual retirement plans) to

21 any person other than the Secretary, or

22 ‘‘(V) section 6047(d) (relating to reports

23 by plan administrators) to any person other

24 than the Secretary.’’

25 (3) PENALTIES.—
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•S 1821 IS

1 (A) Section 6721(e)(2)(A) is amended by

2 striking ‘‘or 6050L’’ and inserting ‘‘6050L, or

3 408(i)’’.

4 (B) Section 6722(c)(1)(A) is amended by

5 striking ‘‘or 6050L(c)’’ and inserting

6 ‘‘6050L(c), or 408(i)’’.

7 (b) MODIFICATION OF REPORTABLE DESIGNATED

8 DISTRIBUTIONS.—

9 (1) SECTION 408.—Subsection (i) of section 408

10 (relating to individual retirement account reports) is

11 amended by inserting ‘‘aggregating $10 or more in

12 any calendar year’’ after ‘‘distributions’’.

13 (2) SECTION 6047.—Paragraph (1) of section

14 6047(d) (relating to reports by employers, plan ad15 ministrators, etc.) is amended by adding at the end

16 the following new sentence: ‘‘No return or report

17 may be required under the preceding sentence with

18 respect to distributions to any person during any

19 year unless such distributions aggregate $10 or

20 more.’’

21 (c) CONFORMING AMENDMENTS.—
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•S 1821 IS

1 (1) Paragraph (1) of section 6047(f) is amend2 ed to read as follows:

‘‘(1) For provisions relating to penalties for failures to file returns and reports required under this

section, see sections 6652(e), 6721, and 6722.’’

3 (2) Subsection (e) of section 6652 is amended

4 by adding at the end the following new sentence:

5 ‘‘This subsection shall not apply to any return or

6 statement which is an information return described

7 in section 6724(d)(1)(C)(ii) or a payee statement de8 scribed in section 6724(d)(2)(V).’’

9 (3) Subsection (a) of section 6693 is amended

10 by adding at the end the following new sentence:

11 ‘‘This subsection shall not apply to any report which

12 is an information return described in section

13 6724(d)(1)(C)(i) or a payee statement described in

14 section 6724(d)(2)(U).’’

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

16 this section shall apply to returns, reports, and other

17 statements the due date for which (determined without re18 gard to extensions) is after December 31, 1996.

19 SEC. 1217. TAX ON PROHIBITED TRANSACTIONS.

20 (a) IN GENERAL.—Section 4975(a) is amended by

21 striking ‘‘5 percent’’ and inserting ‘‘10 percent’’.

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

23 this section shall apply to prohibited transactions occur24 ring after the date of the enactment of this Act.
81

•S 1821 IS

1 SEC. 1218. DATE FOR ADOPTION OF PLAN AMENDMENTS.

2 (a) IN GENERAL.—If any amendment made by this

3 subtitle requires an amendment to any plan, such plan

4 amendment shall not be required to be made before the

5 last day of the first plan year beginning on or after Janu6 ary 1, 1998, if—

7 (1) during the period after such amendment

8 takes effect and before the last day of such first

9 plan year, the plan is operated in accordance with

10 the requirements of such amendment, and

11 (2) such plan amendment applies retroactively

12 to such period.

13 (b) GOVERNMENTAL PLANS.—In the case of a gov14 ernmental plan (as defined in section 414(d) of the Inter15 nal Revenue Code of 1986), subsection (a) shall be applied

16 by substituting for ‘‘January 1, 1998’’ the later of—

17 (1) January 1, 1999, or

18 (2) the date which is 90 days after the opening

19 of the first legislative session beginning after Janu20 ary 1, 1999, of the governing body with authority to

21 amend the plan, but only if such governing body

22 does not meet continuously.
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•S 1821 IS

1 Subtitle B—Expanded Individual

2 Retirement Accounts to In3 crease Coverage and Portability

4 CHAPTER 1—RETIREMENT SAVINGS

5 INCENTIVES

6 Subchapter A—IRA Deduction

7 SEC. 1301. INCREASE IN INCOME LIMITATIONS.

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

9 219(g)(3) is amended—

10 (1) by striking ‘‘$40,000’’ in clause (i) and in11 serting ‘‘$80,000 ($70,000 in the case of taxable

12 years beginning in 1996, 1997, or 1998)’’, and

13 (2) by striking ‘‘$25,000’’ in clause (ii) and in14 serting ‘‘$50,000 ($45,000 in the case of taxable

15 years beginning in 1996, 1997, or 1998)’’.

16 (b) PHASEOUT OF LIMITATIONS.—Clause (ii) of sec17 tion 219(g)(2)(A) is amended by striking ‘‘$10,000’’ and

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

19 applicable for the taxable year under subsection

20 (b)(1)(A)’’.

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

22 this section shall apply to taxable years beginning after

23 December 31, 1995.
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•S 1821 IS

1 SEC. 1302. INFLATION ADJUSTMENT FOR DEDUCTIBLE

2 AMOUNT AND INCOME LIMITATIONS.

3 (a) IN GENERAL.—Section 219 is amended by redes4 ignating subsection (h) as subsection (i) and by inserting

5 after subsection (g) the following new subsection:

6 ‘‘(h) COST-OF-LIVING ADJUSTMENTS.—

7 ‘‘(1) DEDUCTIBLE AMOUNTS.—In the case of

8 any taxable year beginning in a calendar year after

9 1996, the $2,000 amounts under subsections

10 (b)(1)(A) and (c)(2) shall be increased by an amount

11 equal to—

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

13 ‘‘(B) the cost-of-living adjustment deter14 mined under section 1(f)(3) for the calendar

15 year in which the taxable year begins, deter16 mined by substituting ‘calendar year 1995’ for

17 ‘calendar year 1992’ in subparagraph (B)

18 thereof.

19 ‘‘(2) APPLICABLE DOLLAR AMOUNT.—In the

20 case of any taxable year beginning in a calendar

21 year after 1999, the applicable dollar amounts under

22 subsection (g)(3)(B) shall be increased by an

23 amount equal to—

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

25 ‘‘(B) the cost-of-living adjustment deter26 mined under section 1(f)(3) for the calendar
84

•S 1821 IS

1 year in which the taxable year begins, deter2 mined by substituting ‘calendar year 1998’ for

3 ‘calendar year 1992’ in subparagraph (B)

4 thereof.

5 ‘‘(3) ROUNDING RULES.—

6 ‘‘(A) DEDUCTION AMOUNTS.—If any

7 amount after adjustment under paragraph (1)

8 is not a multiple of $500, such amount shall be

9 rounded to the next lowest multiple of $500.

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

11 any amount after adjustment under paragraph

12 (2) is not a multiple of $5,000, such amount

13 shall be rounded to the next lowest multiple of

14 $5,000.’’

15 (b) CONFORMING AMENDMENTS.—

16 (1) Clause (i) of section 219(c)(2)(A) is amend17 ed to read as follows:

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

19 amount in effect for the taxable year under

20 subsection (b)(1)(A), or’’.

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

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

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

24 of the amount in effect for such taxable year under

25 section 219(b)(1)(A)’’.
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•S 1821 IS

1 (3) Section 408(b)(2)(B) is amended by strik2 ing ‘‘$2,000’’ and inserting ‘‘the dollar amount in

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

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

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

6 dollar amount in effect for the taxable year under

7 section 219(c)(2)(A)(i)’’.

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

9 ‘‘$2,000’’.

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

11 this section shall apply to taxable years beginning after

12 December 31, 1995.

13 SEC. 1303. COORDINATION OF IRA DEDUCTION LIMIT WITH

14 ELECTIVE DEFERRAL LIMIT.

15 (a) IN GENERAL.—Section 219(b) (relating to maxi16 mum amount of deduction) is amended by adding at the

17 end the following new paragraph:

18 ‘‘(4) COORDINATION WITH ELECTIVE DEFER19 RAL LIMIT.—The amount determined under para20 graph (1) or subsection (c)(2) with respect to any

21 individual for any taxable year shall not exceed the

22 excess (if any) of—

23 ‘‘(A) the limitation applicable for the tax24 able year under section 402(g)(1), over
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•S 1821 IS

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

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

3 taxable year.’’

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

5 amended by adding at the end the following new para6 graph:

7 ‘‘(3) CROSS REFERENCE.—

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

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

9 this section shall apply to taxable years beginning after

10 December 31, 1995.

11 Subchapter B—Nondeductible Tax-Free IRAs

12 SEC. 1311. ESTABLISHMENT OF NONDEDUCTIBLE TAX-FREE

13 INDIVIDUAL RETIREMENT ACCOUNTS.

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

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

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

17 408 the following new section:

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

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

20 chapter, a special individual retirement account shall be

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

22 an individual retirement plan.

23 ‘‘(b) SPECIAL INDIVIDUAL RETIREMENT AC24 COUNT.—For purposes of this title, the term ‘special indi-
87

•S 1821 IS

1 vidual retirement account’ means an individual retirement

2 plan which is designated at the time of establishment of

3 the plan as a special individual retirement account.

4 ‘‘(c) TREATMENT OF CONTRIBUTIONS.—

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

6 shall be allowed under section 219 for a contribution

7 to a special individual retirement account.

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

9 amount of contributions for any taxable year to all

10 special individual retirement accounts maintained for

11 the benefit of an individual shall not exceed the ex12 cess (if any) of—

13 ‘‘(A) the maximum amount allowable as a

14 deduction under section 219 with respect to

15 such individual for such taxable year, over

16 ‘‘(B) the aggregate amount of contribu17 tions for such taxable year to all individual re18 tirement plans (other than special individual re19 tirement accounts) maintained for the benefit of

20 the individual.

21 ‘‘(3) SPECIAL RULES FOR QUALIFIED TRANS22 FERS.—

23 ‘‘(A) IN GENERAL.—No rollover contribu24 tion may be made to a special individual retire25 ment account unless it is a qualified transfer.
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•S 1821 IS

1 ‘‘(B) LIMIT NOT TO APPLY.—The limita2 tion under paragraph (2) shall not apply to a

3 qualified transfer to a special individual retire4 ment account.

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

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

7 subsection, any amount paid or distributed out of a

8 special individual retirement account shall not be in9 cluded in the gross income of the distributee.

10 ‘‘(2) EXCEPTION FOR EARNINGS ON CONTRIBU11 TIONS HELD LESS THAN 5 YEARS.—

12 ‘‘(A) IN GENERAL.—Any amount distrib13 uted out of a special individual retirement ac14 count which consists of earnings allocable to

15 contributions made to the account during the 5-

16 year period ending on the day before such dis17 tribution shall be included in the gross income

18 of the distributee for the taxable year in which

19 the distribution occurs.

20 ‘‘(B) ORDERING RULE.—

21 ‘‘(i) FIRST-IN, FIRST-OUT RULE.—

22 Distributions from a special individual re23 tirement account shall be treated as having

24 been made—
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•S 1821 IS

1 ‘‘(I) first from the earliest con2 tribution (and earnings allocable

3 thereto) remaining in the account at

4 the time of the distribution, and

5 ‘‘(II) then from other contribu6 tions (and earnings allocable thereto)

7 in the order in which made.

8 ‘‘(ii) ALLOCATIONS BETWEEN CON9 TRIBUTIONS AND EARNINGS.—Any portion

10 of a distribution allocated to a contribution

11 (and earnings allocable thereto) shall be

12 treated as allocated first to the earnings

13 and then to the contribution.

14 ‘‘(iii) ALLOCATION OF EARNINGS.—

15 Earnings shall be allocated to a contribu16 tion in such manner as the Secretary may

17 prescribe.

18 ‘‘(iv) AGGREGATIONS OF CONTRIBU19 TIONS.—Except as provided by the Sec20 retary, for purposes of this subpara21 graph—

22 ‘‘(I) all contributions made dur23 ing the same taxable year may be

24 treated as 1 contribution, and
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•S 1821 IS

1 ‘‘(II) all contributions made be2 fore the first day of the 5-year period

3 ending on the day before any distribu4 tion may be treated as 1 contribution.

5 ‘‘(C) CROSS REFERENCE.—

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

6 ‘‘(3) QUALIFIED TRANSFER.—

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

8 not apply to any distribution which is trans9 ferred in a qualified transfer to another special

10 individual retirement account.

11 ‘‘(B) CONTRIBUTION PERIOD.—For pur12 poses of paragraph (2), the special individual

13 retirement account to which any contributions

14 are transferred shall be treated as having held

15 such contributions during any period such con16 tributions were held (or are treated as held

17 under this subparagraph) by the special individ18 ual retirement account from which transferred.

19 ‘‘(4) SPECIAL RULES RELATING TO CERTAIN

20 TRANSFERS.—

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

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

23 transfer to a special individual retirement ac-
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•S 1821 IS

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, 1998, 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. The amount of such qualified trans18 fer taken into account for purposes of section

19 4980A(c) shall be taken into account ratably

20 over such period.

21 ‘‘(C) ADDITIONAL REPORTING.—A trustee

22 of an individual retirement plan shall include

23 such additional information in any report re24 quired under section 408(i) as the Secretary

25 may require to insure that amounts described
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•S 1821 IS

1 in subparagraph (B) are included in gross in2 come for the appropriate taxable year.

3 ‘‘(e) QUALIFIED TRANSFER.—For purposes of this

4 section—

5 ‘‘(1) IN GENERAL.—The term ‘qualified trans6 fer’ means a transfer to a special individual retire7 ment account from another such account or from an

8 individual retirement plan but only if such transfer

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

10 ‘‘(2) LIMITATION.—

11 ‘‘(A) IN GENERAL.—A transfer otherwise

12 described in paragraph (1) shall not be treated

13 as a qualified transfer if the taxpayer’s adjusted

14 gross income for the taxable year of the trans15 fer exceeds the sum of—

16 ‘‘(i) the applicable dollar amount, plus

17 ‘‘(ii) the dollar amount applicable for

18 the taxable year under section

19 219(g)(2)(A)(ii).

20 This subparagraph shall not apply to a transfer

21 from a special individual retirement account to

22 another special individual retirement account.

23 ‘‘(B) TRANSITION RULE.—In the case of a

24 transfer before January 1, 1999, the dollar lim25 itation under subparagraph (A) shall be
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•S 1821 IS

1 $100,000 in the case of a married individual fil2 ing a joint return, zero in the case of a married

3 individual filing a separate return, and $70,000

4 in any other case.

5 ‘‘(3) DEFINITIONS.—For purposes of this sub6 section, the terms ‘adjusted gross income’ and ‘ap7 plicable dollar amount’ have the meanings given

8 such terms by section 219(g)(3), except that ad9 justed gross income shall be determined by taking

10 into account the deduction under section 219 and

11 not taking into account any transfer to which para12 graph (2) applies.’’

13 (b) ADDITIONAL TAX ON EARLY DISTRIBUTIONS.—

14 Section 72(t) is amended by adding at the end the follow15 ing new paragraph:

16 ‘‘(6) RULES RELATING TO SPECIAL INDIVIDUAL

17 RETIREMENT ACCOUNTS.—In the case of a special

18 individual retirement account under section 408A—

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

20 distributions out of such account which consist

21 of earnings allocable to contributions made to

22 the account during the 5-year period ending on

23 the day before such distribution, and
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•S 1821 IS

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

2 any distribution described in subparagraph

3 (A).’’

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

5 amended—

6 (1) by inserting ‘‘, or a qualified transfer de7 scribed in section 408A(e)’’ after ‘‘408(d)(3)’’ in

8 paragraph (1)(A), and

9 (2) by adding at the end the following new sen10 tence: ‘‘For purposes of paragraphs (1)(B) and

11 (2)(C), the amount allowable as a deduction under

12 section 219 shall be computed without regard to sec13 tion 408A.’’

14 (d) REPORTING.—Section 408(i) is amended by strik15 ing ‘‘under regulations’’ and ‘‘in such regulations’’ each

16 place such terms appear.

17 (e) CONFORMING AMENDMENT.—The table of sec18 tions for subpart A of part I of subchapter D of chapter

19 1 is amended by inserting after the item relating to section

20 408 the following new item:

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

21 (f) EFFECTIVE DATE.—The amendments made by

22 this section shall apply to taxable years beginning after

23 December 31, 1995.
95

•S 1821 IS

1 CHAPTER 2—DISTRIBUTIONS AND

2 INVESTMENTS

3 SEC. 1321. DISTRIBUTIONS FROM IRAS MAY BE USED WITH4 OUT ADDITIONAL TAX TO PURCHASE FIRST

5 HOMES, TO PAY HIGHER EDUCATION OR FI6 NANCIALLY DEVASTATING MEDICAL EX7 PENSES, OR BY THE UNEMPLOYED.

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

9 (relating to exceptions to 10-percent additional tax on

10 early distributions from qualified retirement plans) is

11 amended by adding at the end the following new subpara12 graph:

13 ‘‘(D) DISTRIBUTIONS FROM CERTAIN

14 PLANS FOR FIRST HOME PURCHASES OR EDU15 CATIONAL EXPENSES.—Distributions to an in16 dividual from an individual retirement plan—

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

18 homebuyer distributions (as defined in

19 paragraph (7)); or

20 ‘‘(ii) to the extent such distributions

21 do not exceed the qualified higher edu22 cation expenses (as defined in paragraph

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

24 (b) FINANCIALLY DEVASTATING MEDICAL EX25 PENSES.—
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•S 1821 IS

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

2 amended by striking ‘‘(B),’’.

3 (2) CERTAIN LINEAL DESCENDANTS AND AN4 CESTORS TREATED AS DEPENDENTS AND LONG5 TERM CARE SERVICES TREATED AS MEDICAL

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

7 amended by striking ‘‘medical care’’ and all that fol8 lows and inserting ‘‘medical care determined—

9 ‘‘(i) without regard to whether the

10 employee itemizes deductions for such tax11 able year, and

12 ‘‘(ii) in the case of an individual re13 tirement plan—

14 ‘‘(I) by treating such employee’s

15 dependents as including all children,

16 grandchildren, and ancestors of the

17 employee or such employee’s spouse

18 and

19 ‘‘(II) by treating qualified long20 term care services (as defined in para21 graph (9)) as medical care for pur22 poses of this subparagraph.’’

23 (3) CONFORMING AMENDMENT.—Subparagraph

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

25 (C)’’ and inserting ‘‘, (C), or (D)’’.
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•S 1821 IS

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

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

3 paragraphs:

4 ‘‘(7) QUALIFIED FIRST-TIME HOMEBUYER DIS5 TRIBUTIONS.—For purposes of paragraph

6 (2)(D)(i)—

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

8 first-time homebuyer distribution’ means any

9 payment or distribution received by an individ10 ual to the extent such payment or distribution

11 is used by the individual before the close of the

12 60th day after the day on which such payment

13 or distribution is received to pay qualified ac14 quisition costs with respect to a principal resi15 dence of a first-time homebuyer who is such in16 dividual or the spouse, child (as defined in sec17 tion 151(c)(3)), or grandchild of such individ18 ual.

19 ‘‘(B) QUALIFIED ACQUISITION COSTS.—

20 For purposes of this paragraph, the term

21 ‘qualified acquisition costs’ means the costs of

22 acquiring, constructing, or reconstructing a res23 idence. Such term includes any usual or reason24 able settlement, financing, or other closing

25 costs.
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•S 1821 IS

1 ‘‘(C) FIRST-TIME HOMEBUYER; OTHER

2 DEFINITIONS.—For purposes of this para3 graph—

4 ‘‘(i) FIRST-TIME HOMEBUYER.—The

5 term ‘first-time homebuyer’ means any in6 dividual if—

7 ‘‘(I) such individual (and if mar8 ried, such individual’s spouse) had no

9 present ownership interest in a prin10 cipal residence during the 3-year pe11 riod ending on the date of acquisition

12 of the principal residence to which

13 this paragraph applies, and

14 ‘‘(II) subsection (h) or (k) of sec15 tion 1034 did not suspend the run16 ning of any period of time specified in

17 section 1034 with respect to such in18 dividual on the day before the date

19 the distribution is applied pursuant to

20 subparagraph (A).

21 In the case of an individual described in

22 section 143(i)(1)(C) for any year, an own23 ership interest shall not include any inter24 est under a contract of deed described in

25 such section. An individual who loses an
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•S 1821 IS

1 ownership interest in a principal residence

2 incident to a divorce or legal separation is

3 deemed for purposes of this subparagraph

4 to have had no ownership interest in such

5 principal residence within the period re6 ferred to in subclause (II).

7 ‘‘(ii) PRINCIPAL RESIDENCE.—The

8 term ‘principal residence’ has the same

9 meaning as when used in section 1034.

10 ‘‘(iii) DATE OF ACQUISITION.—The

11 term ‘date of acquisition’ means the date—

12 ‘‘(I) on which a binding contract

13 to acquire the principal residence to

14 which subparagraph (A) applies is en15 tered into, or

16 ‘‘(II) on which construction or re17 construction of such a principal resi18 dence is commenced.

19 ‘‘(D) SPECIAL RULE WHERE DELAY IN AC20 QUISITION.—Any portion of any distribution

21 from any individual retirement plan which fails

22 to meet the requirements of subparagraph (A)

23 solely by reason of a delay or cancellation of the

24 purchase or construction of the residence may

25 be contributed to an individual retirement plan
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•S 1821 IS

1 as provided in section 408(d)(3)(A)(i) (deter2 mined by substituting ‘120 days’ for ‘60 days’

3 in such section), except that—

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

5 applied to such portion, and

6 ‘‘(ii) such portion shall not be taken

7 into account in determining whether sec8 tion 408(d)(3)(B) applies to any other

9 amount.

10 ‘‘(8) QUALIFIED HIGHER EDUCATION EX11 PENSES.—For purposes of paragraph (2)(D)(ii)—

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

13 higher education expenses’ means tuition and

14 fees required for the enrollment or attendance

15 of—

16 ‘‘(i) the taxpayer,

17 ‘‘(ii) the taxpayer’s spouse,

18 ‘‘(iii) a dependent of the taxpayer

19 with respect to whom the taxpayer is al20 lowed a deduction under section 151, or

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

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

23 as an eligible student at an institution of higher

24 education.
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•S 1821 IS

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

2 higher education expenses’ does not include—

3 ‘‘(i) expenses with respect to any

4 course or other education involving sports,

5 games, or hobbies, unless such expenses—

6 ‘‘(I) are part of a degree pro7 gram, or

8 ‘‘(II) are deductible under this

9 chapter without regard to this section;

10 or

11 ‘‘(ii) any student activity fees, athletic

12 fees, insurance expenses, or other expenses

13 unrelated to a student’s academic course of

14 instruction.

15 ‘‘(C) COORDINATION WITH SAVINGS BOND

16 PROVISIONS.—The amount of qualified higher

17 education expenses for any taxable year shall be

18 reduced by any amount excludable from gross

19 income under section 135.

20 ‘‘(D) ELIGIBLE STUDENT.—For purposes

21 of subparagraph (A), the term ‘eligible student’

22 means a student who—

23 ‘‘(i) meets the requirements of section

24 484(a)(1) of the Higher Education Act of

25 1965 (20 U.S.C. 1091(a)(1)), as in effect
102

•S 1821 IS

1 on the date of the enactment of this sec2 tion, and

3 ‘‘(ii)(I) is carrying at least one-half

4 the normal full-time work load for the

5 course of study the student is pursuing, as

6 determined by the institution of higher

7 education, or

8 ‘‘(II) is enrolled in a course which en9 ables the student to improve the student’s

10 job skills or to acquire new job skills.

11 ‘‘(E) INSTITUTION OF HIGHER EDU12 CATION.—The term ‘institution of higher edu13 cation’ means an institution which—

14 ‘‘(i) is described in section 481 of the

15 Higher Education Act of 1965 (20 U.S.C.

16 1088), as in effect on the date of the en17 actment of this section, and

18 ‘‘(ii) is eligible to participate in pro19 grams under title IV of such Act.

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

21 For purposes of paragraph (2)(B)—

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

23 long-term care services’ means necessary diag24 nostic, curing, mitigating, treating, preventive,

25 therapeutic, and rehabilitative services, and
103

•S 1821 IS

1 maintenance and personal care services (wheth2 er performed in a residential or nonresidential

3 setting) which—

4 ‘‘(i) are required by an individual dur5 ing any period the individual is an inca6 pacitated individual (as defined in subpara7 graph (B)),

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

9 ‘‘(I) the provision of needed as10 sistance with 1 or more activities of

11 daily living (as defined in subpara12 graph (C)), or

13 ‘‘(II) protection from threats to

14 health and safety due to severe cog15 nitive impairment, and

16 ‘‘(iii) are provided pursuant to a con17 tinuing plan of care prescribed by a li18 censed professional (as defined in subpara19 graph (D)).

20 ‘‘(B) INCAPACITATED INDIVIDUAL.—The

21 term ‘incapacitated individual’ means any indi22 vidual who—

23 ‘‘(i) is unable to perform, without sub24 stantial assistance from another individual

25 (including assistance involving cueing or
104

•S 1821 IS

1 substantial supervision), at least 2 activi2 ties of daily living as defined in subpara3 graph (C), or

4 ‘‘(ii) has severe cognitive impairment

5 as defined by the Secretary in consultation

6 with the Secretary of Health and Human

7 Services.

8 Such term shall not include any individual oth9 erwise meeting the requirements of the preced10 ing sentence unless, within the preceding 12-

11 month period, a licensed professional has cer12 tified that such individual meets such require13 ments.

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

15 of the following is an activity of daily living:

16 ‘‘(i) Eating.

17 ‘‘(ii) Toileting.

18 ‘‘(iii) Transferring.

19 ‘‘(iv) Bathing.

20 ‘‘(v) Dressing.

21 ‘‘(D) LICENSED PROFESSIONAL.—The

22 term ‘licensed professional’ means—

23 ‘‘(i) a physician or registered profes24 sional nurse, or
105

•S 1821 IS

1 ‘‘(ii) any other individual who meets

2 such requirements as may be prescribed by

3 the Secretary after consultation with the

4 Secretary of Health and Human Services.

5 ‘‘(E) CERTAIN SERVICES NOT IN6 CLUDED.—The term ‘qualified long-term care

7 services’ shall not include any services provided

8 to an individual—

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

10 a partnership, corporation, or other entity)

11 unless the relative is a licensed professional

12 with respect to such services, or

13 ‘‘(ii) by a corporation or partnership

14 which is related (within the meaning of

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

16 For purposes of this subparagraph, the term

17 ‘relative’ means an individual bearing a rela18 tionship to the individual which is described in

19 paragraphs (1) through (8) of section 152(a).’’

20 (d) DISTRIBUTIONS FOR CERTAIN UNEMPLOYED IN21 DIVIDUALS.—Paragraph (2) of section 72(t) is amended

22 by adding at the end the following new subparagraph:

23 ‘‘(E) DISTRIBUTIONS TO UNEMPLOYED IN24 DIVIDUALS.—A distribution from an individual
106

•S 1821 IS

1 retirement plan to an individual after separa2 tion from employment, if—

3 ‘‘(i) such individual has received un4 employment compensation for 12 consecu5 tive weeks under any Federal or State un6 employment compensation law by reason of

7 such separation, and

8 ‘‘(ii) such distributions are made dur9 ing any taxable year during which such un10 employment compensation is paid or the

11 succeeding taxable year.’’

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

13 this section shall apply to payments and distributions after

14 December 31, 1995.

15 SEC. 1322. CONTRIBUTIONS MUST BE HELD AT LEAST 5

16 YEARS IN CERTAIN CASES.

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

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

19 paragraph:

20 ‘‘(10) CERTAIN CONTRIBUTIONS MUST BE HELD

21 5 YEARS.—

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

23 shall not apply to any amount distributed out

24 of an individual retirement plan (other than a

25 special individual retirement account) which is
107

•S 1821 IS

1 allocable to contributions made to the plan dur2 ing the 5-year period ending on the date of

3 such distribution (and earnings on such con4 tributions).

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

6 this paragraph—

7 ‘‘(i) FIRST-IN, FIRST-OUT RULE.—

8 Distributions shall be treated as having

9 been made—

10 ‘‘(I) first from the earliest con11 tribution (and earnings allocable

12 thereto) remaining in the account at

13 the time of the distribution, and

14 ‘‘(II) then from other contribu15 tions (and earnings allocable thereto)

16 in the order in which made.

17 ‘‘(ii) ALLOCATION OF EARNINGS.—

18 Earnings shall be allocated to contribu19 tions in such manner as the Secretary may

20 prescribe.

21 ‘‘(iii) AGGREGATIONS OF CONTRIBU22 TIONS.—Except as provided by the Sec23 retary, for purposes of this subpara24 graph—
108

•S 1821 IS

1 ‘‘(I) all contributions made dur2 ing the same taxable year may be

3 treated as 1 contribution, and

4 ‘‘(II) all contributions made be5 fore the first day of the 5-year period

6 ending on the day before any distribu7 tion may be treated as 1 contribution.

8 ‘‘(C) SPECIAL RULE FOR ROLLOVERS.—

9 ‘‘(i) PENSION PLANS.—Subparagraph

10 (A) shall not apply to distributions out of

11 an individual retirement plan which are al12 locable to rollover contributions to which

13 section 402(c), 403(a)(4), or 403(b)(8) ap14 plied.

15 ‘‘(ii) CONTRIBUTION PERIOD.—For

16 purposes of subparagraph (A), amounts

17 shall be treated as having been held by a

18 plan during any period such contributions

19 were held (or are treated as held under

20 this clause) by any individual retirement

21 plan from which transferred.

22 ‘‘(D) SPECIAL ACCOUNTS.—For rules ap23 plicable to special individual retirement ac24 counts under section 408A, see paragraph (8).’’
109

•S 1821 IS

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

2 this section shall apply to contributions (and earnings allo3 cable thereto) which are made after December 31, 1995.

4 SEC. 1323. INVESTMENTS IN QUALIFIED STATE PREPAID

5 TUITION PROGRAMS.

6 (a) IN GENERAL.—Section 408, as amended by sec7 tion 1101, is amended by redesignating subsection (q) as

8 subsection (r) and by inserting after subsection (p) the

9 following new subsection:

10 ‘‘(q) SPECIAL RULES FOR QUALIFIED STATE PRE11 PAID TUITION PROGRAM INSTRUMENTS.—

12 ‘‘(1) IN GENERAL.—In the case of a qualified

13 State prepaid tuition program instrument to which

14 this subsection applies—

15 ‘‘(A) the use of all or part of the assets of

16 an individual retirement plan to purchase such

17 an instrument shall be treated for purposes of

18 this section as for the exclusive benefit of the

19 individual for whom the plan was established or

20 the individual’s beneficiaries, and

21 ‘‘(B) to the extent such instrument is con22 verted into tuition and fees as provided in para23 graph (3)(B)(i), such individual (or such bene24 ficiaries) shall be treated—
110

•S 1821 IS

1 ‘‘(i) for purposes of subsection (d) as

2 having received a distribution in an

3 amount equal to such tuition and fees (as

4 of the time of the conversion), and

5 ‘‘(ii) for purposes of section

6 72(t)(2)(D)(ii), as having incurred quali7 fied higher education expenses to the ex8 tent such tuition and fees otherwise con9 stitute such expenses.

10 ‘‘(2) INSTRUMENTS TO WHICH SUBSECTION AP11 PLIES.—To the extent provided by the Secretary,

12 this subsection shall apply to any qualified State

13 prepaid tuition program instrument if—

14 ‘‘(A) the instrument is purchased by the

15 individual retirement plan directly from the

16 State or an instrumentality thereof, and

17 ‘‘(B) the beneficiary designated under the

18 instrument is the taxpayer, the taxpayer’s

19 spouse, a dependent of the taxpayer with re20 spect to whom the taxpayer is allowed a deduc21 tion under section 151, or the taxpayer’s child

22 (as defined in section 151(c)(3)) or grandchild.

23 ‘‘(3) QUALIFIED STATE PREPAID TUITION PRO24 GRAM INSTRUMENT.—For purposes of this sub-
111

•S 1821 IS

1 section, the term ‘qualified State prepaid tuition pro2 gram instrument’ means an instrument which—

3 ‘‘(A) is issued under a program established

4 and maintained by a State, and

5 ‘‘(B) which may only be—

6 ‘‘(i) converted into a percentage (de7 termined as of the time of purchase) of

8 tuition and fees which would constitute

9 qualified higher education expenses (within

10 the meaning of section 72(t)(8)) if the ben11 eficiary designated under the instrument

12 enrolls in or attends an institution of high13 er education specified in the instrument as

14 an eligible student, or

15 ‘‘(ii) redeemed for an amount not less

16 than the purchase price (less any reason17 able administrative fees) if the instrument

18 is not converted as provided in clause (i).

19 ‘‘(4) DEFINITIONS.—For purposes of this sub20 section, the terms ‘institution of higher education’

21 and ‘eligible student’ have the meanings given such

22 terms by section 72(t)(8).’’

23 (b) EXEMPTION FROM PROHIBITED TRANS24 ACTIONS.—Section 4975(d) is amended by striking ‘‘or’’

25 at the end of paragraph (14), by striking the period at
112

•S 1821 IS

1 the end of paragraph (15) and inserting ‘‘; or’’, and by

2 inserting after paragraph (15) the following new para3 graph:

4 ‘‘(16) any purchase of a qualified State prepaid

5 tuition program instrument to which section 408(q)

6 applies.’’

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

8 this section shall apply to taxable years beginning after

9 December 31, 1995.

10 CHAPTER 3—TERMINATION OF CERTAIN

11 PROVISIONS

12 SEC. 1331. TERMINATION OF CERTAIN PROVISIONS.

13 (a) TERMINATION OF INFLATION ADJUSTMENT FOR

14 IRA LIMITATIONS.—The dollar amounts applicable under

15 section 219 of the Internal Revenue Code of 1986 shall

16 be determined without regard to subsection (h) of such

17 section in the case of taxable years beginning after Decem18 ber 31, 2000.

19 (b) TERMINATION OF CONTRIBUTIONS TO SPECIAL

20 INDIVIDUAL RETIREMENT ACCOUNTS.—No contribution

21 may be made after December 31, 2000, to any special in22 dividual retirement account (within the meaning of section

23 408A of such Code).

24 (c) TERMINATION OF TRANSFERS TO SPECIAL INDI25 VIDUAL RETIREMENT ACCOUNTS FROM REGULAR INDI-
113

•S 1821 IS

1 VIDUAL RETIREMENT ACCOUNTS.—For purposes of sec2 tion 408A of such Code, the term ‘‘qualified transfer’’

3 shall not include any transfer after December 31, 2000,

4 to a special individual retirement account from any ac5 count other than a special individual retirement account.

6 (d) APPLICATION OF EARLY WITHDRAWAL TAX.—

7 The amendments made by the following provisions shall

8 not apply to any distribution after December 31, 2000:

9 (1) Section 1311(b) (relating to exception for

10 distributions from special individual retirement ac11 counts allocable to contributions held at least 5

12 years).

13 (2) Section 1321 (relating to distributions from

14 IRAs may be used without additional tax to pur15 chase first homes, to pay higher education or finan16 cially devastating medical expenses, or by the unem17 ployed).

18 (3) Section 1322 (relating to exception for dis19 tributions allocable to contributions held at least 5

20 years).

21 (e) TERMINATION OF INCREASES IN CERTAIN LIMI22 TATIONS.—The amendments made by the following provi23 sions shall not apply to any taxable year beginning after

24 December 31, 2000:
114

•S 1821 IS

1 (1) Section 1301 (relating to increase in income

2 limitations for individual retirement plans).

3 (2) Section 1303 (relating to coordination of

4 IRA deduction limit with elective deferral limit).

5 Subtitle C—Other Expansions of

6 Pension Portability

7 SEC. 1401. ALTERNATIVE NONDISCRIMINATION RULES FOR

8 CERTAIN PLANS THAT PROVIDE FOR EARLY

9 PARTICIPATION.

10 (a) CASH OR DEFERRED ARRANGEMENTS.—Para11 graph (3) of section 401(k) (relating to application of par12 ticipation and discrimination standards), as amended by

13 section 1103(d), is amended by adding at the end the fol14 lowing new subparagraph:

15 ‘‘(F) SPECIAL RULE FOR EARLY PARTICI16 PATION.—If an employer elects to apply section

17 410(b)(4)(B) in determining whether a cash or

18 deferred arrangement meets the requirements

19 of subparagraph (A)(i), the employer may, in

20 determining whether the arrangement meets the

21 requirements of subparagraph (A)(ii), exclude

22 from consideration all eligible employees (other

23 than highly compensated employees) who have

24 not met the minimum age and service require25 ments of section 410(a)(1)(A).’’
115

•S 1821 IS

1 (b) MATCHING CONTRIBUTIONS.—Paragraph (5) of

2 section 401(m) (relating to employees taken into consider3 ation) is amended by adding at the end the following new

4 subparagraph:

5 ‘‘(C) SPECIAL RULE FOR EARLY PARTICI6 PATION.—If an employer elects to apply section

7 410(b)(4)(B) in determining whether a plan

8 meets the requirements of section 410(b), the

9 employer may, in determining whether the plan

10 meets the requirements of paragraph (2), ex11 clude from consideration all eligible employees

12 (other than highly compensated employees) who

13 have not met the minimum age and service re14 quirements of section 410(a)(1)(A).’’

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

16 this section shall apply to plan years beginning after De17 cember 31, 1996.

18 SEC. 1402. TREATMENT OF CERTAIN VETERANS’ REEM19 PLOYMENT RIGHTS.

20 (a) IN GENERAL.—Section 414 is amended by adding

21 at the end the following new subsection:

22 ‘‘(u) SPECIAL RULES RELATING TO VETERANS’ RE23 EMPLOYMENT RIGHTS UNDER USSERA.—

24 ‘‘(1) TREATMENT OF CERTAIN CONTRIBUTIONS

25 MADE PURSUANT TO VETERANS’ REEMPLOYMENT
116

•S 1821 IS

1 RIGHTS UNDER USERRA.—If any contribution is

2 made by an employer or an employee under an indi3 vidual account plan with respect to an employee, or

4 by an employee to a defined benefit plan that pro5 vides for employee contributions, and such contribu6 tion is required by reason of such employee’s rights

7 under chapter 43 of title 38, United States Code, re8 sulting from qualified military service, then—

9 ‘‘(A) such contribution shall not be subject

10 to any otherwise applicable limitation contained

11 in section 402(g), 402(h), 403(b), 404(a),

12 404(h), 408, 415, or 457, and shall not be

13 taken into account in applying such limitations

14 to other contributions or benefits under such

15 plan or any other plan, with respect to the year

16 in which the contribution is made,

17 ‘‘(B) such contribution shall be subject to

18 the limitations referred to in subparagraph (A)

19 with respect to the year to which the contribu20 tion relates (in accordance with rules prescribed

21 by the Secretary), and

22 ‘‘(C) such plan shall not be treated as fail23 ing to meet the requirements of section

24 401(a)(4), 401(a)(26), 401(k)(3), 401(k)(11),

25 401(m), 403(b)(12), 408(k)(3), 408(k)(6),
117

•S 1821 IS

1 408(p), 410(b), or 416 by reason of the making

2 of (or the right to make) such contribution.

3 For purposes of the preceding sentence, any elective

4 deferral or employee contribution made under para5 graph (2) shall be treated as required by reason of

6 the employee’s rights under such chapter 43.

7 ‘‘(2) REEMPLOYMENT RIGHTS UNDER USERRA

8 WITH RESPECT TO ELECTIVE DEFERRALS.—

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

10 subchapter and section 457, if an employee is

11 entitled to the benefits of chapter 43 of title 38,

12 United States Code, with respect to any plan

13 which provides for elective deferrals, the em14 ployer sponsoring the plan shall be treated as

15 meeting the requirements of such chapter 43

16 with respect to such elective deferrals only if

17 such employer—

18 ‘‘(i) permits such employee to make

19 additional elective deferrals under such

20 plan (in the amount determined under sub21 paragraph (B) or such lesser amount as is

22 elected by the employee) during the period

23 which begins on the date of the reemploy24 ment of such employee with such employer

25 and has the same length as the lesser of—
118

•S 1821 IS

1 ‘‘(I) the product of 3 and the pe2 riod of qualified military service which

3 resulted in such rights, and

4 ‘‘(II) 5 years, and

5 ‘‘(ii) makes a matching contribution

6 with respect to any additional elective de7 ferral made pursuant to clause (i) which

8 would have been required had such defer9 ral actually been made during the period of

10 such qualified military service.

11 ‘‘(B) AMOUNT OF MAKEUP REQUIRED.—

12 The amount determined under this subpara13 graph with respect to any plan is the maximum

14 amount of the elective deferrals that the indi15 vidual would have been permitted to make

16 under the plan in accordance with the limita17 tions referred to in paragraph (1)(A) during the

18 period of qualified military service if the indi19 vidual had continued to be employed by the em20 ployer during such period and received com21 pensation as determined under paragraph (7).

22 Proper adjustment shall be made to the amount

23 determined under the preceding sentence for

24 any elective deferrals actually made during the

25 period of such qualified military service.
119

•S 1821 IS

1 ‘‘(C) ELECTIVE DEFERRAL.—For purposes

2 of this paragraph, the term ‘elective deferral’

3 has the meaning given such term by section

4 402(g)(3); except that such term shall include

5 any deferral of compensation under an eligible

6 deferred compensation plan (as defined in sec7 tion 457(b)).

8 ‘‘(D) AFTER-TAX EMPLOYEE CONTRIBU9 TIONS.—References in subparagraphs (A) and

10 (B) to elective deferrals shall be treated as in11 cluding references to employee contributions.

12 ‘‘(3) CERTAIN RETROACTIVE ADJUSTMENTS

13 NOT REQUIRED.—For purposes of this subchapter

14 and subchapter E, no provision of chapter 43 of title

15 38, United States Code, shall be construed as re16 quiring—

17 ‘‘(A) any crediting of earnings to an em18 ployee with respect to any contribution before

19 such contribution is actually made, or

20 ‘‘(B) any allocation of any forfeiture with

21 respect to the period of qualified military serv22 ice.

23 ‘‘(4) LOAN REPAYMENT SUSPENSIONS PER24 MITTED.—If any plan suspends the obligation to

25 repay any loan made to an employee from such plan
120

•S 1821 IS

1 for any part of any period during which such em2 ployee is performing service in the uniformed serv3 ices (as defined in chapter 43 of title 38, United

4 States Code), whether or not qualified military serv5 ice, such suspension shall not be taken into account

6 for purposes of section 72(p) or 401(a).

7 ‘‘(5) QUALIFIED MILITARY SERVICE.—For pur8 poses of this subsection, the term ‘qualified military

9 service’ means any service in the uniformed services

10 (as defined in chapter 43 of title 38, United States

11 Code) by any individual if such individual is entitled

12 to reemployment rights under such chapter with re13 spect to such service.

14 ‘‘(6) INDIVIDUAL ACCOUNT PLAN.—For pur15 poses of this subsection, the term ‘individual account

16 plan’ means any defined contribution plan (including

17 any tax-sheltered annuity plan under section 403(b),

18 any simplified employee pension under section

19 408(k), and any NEST under section 408(p)) and

20 any eligible deferred compensation plan (as defined

21 in section 457(b)).

22 ‘‘(7) COMPENSATION.—For purposes of sections

23 403(b)(3), 415(c)(3), and 457(e)(5), an employee

24 who is in qualified military service shall be treated
121

•S 1821 IS

1 as receiving compensation from the employer during

2 such period of qualified military service equal to—

3 ‘‘(A) the compensation the employee would

4 have received during such period if the em5 ployee were not in qualified military service, de6 termined based on the rate of pay the employee

7 would have received from the employer but for

8 absence during the period of qualified military

9 service, or

10 ‘‘(B) if the compensation the employee

11 would have received during such period was not

12 reasonably certain, the employee’s average com13 pensation from the employer during the 12-

14 month period immediately preceding the quali15 fied military service (or, if shorter, the period of

16 employment immediately preceding the qualified

17 military service).

18 ‘‘(8) USERRA REQUIREMENTS FOR QUALIFIED

19 RETIREMENT PLANS.—For purposes of this sub20 chapter and section 457, an employer sponsoring a

21 retirement plan shall be treated as meeting the re22 quirements of chapter 43 of title 38, United States

23 Code, only if each of the following requirements is

24 met:
122

•S 1821 IS

1 ‘‘(A) An individual reemployed under such

2 chapter is treated with respect to such plan as

3 not having incurred a break in service with the

4 employer maintaining the plan by reason of

5 such individual’s period of qualified military

6 service.

7 ‘‘(B) Each period of qualified military

8 service served by an individual is, upon reem9 ployment under such chapter, deemed with re10 spect to such plan to constitute service with the

11 employer maintaining the plan for the purpose

12 of determining the nonforfeitability of the indi13 vidual’s accrued benefits under such plan and

14 for the purpose of determining the accrual of

15 benefits under such plan.

16 ‘‘(C) An individual reemployed under such

17 chapter is entitled to accrued benefits that are

18 contingent on the making of, or derived from,

19 employee contributions or elective deferrals only

20 to the extent the individual makes payment to

21 the plan with respect to such contributions or

22 deferrals. No such payment may exceed the

23 amount the individual would have been per24 mitted or required to contribute had the indi25 vidual remained continuously employed by the
123

•S 1821 IS

1 employer throughout the period of qualified

2 military service. Any payment to such plan shall

3 be made during the period beginning with the

4 date of reemployment and whose duration is 3

5 times the period of the qualified military service

6 (but not greater than 5 years).

7 ‘‘(9) PLANS NOT SUBJECT TO TITLE 38.—This

8 subsection shall not apply to any retirement plan to

9 which chapter 43 of title 38, United States Code,

10 does not apply.

11 ‘‘(10) REFERENCES.—For purposes of this sec12 tion, any reference to chapter 43 of title 38, United

13 States Code, shall be treated as a reference to such

14 chapter as in effect on December 12, 1994 (without

15 regard to any subsequent amendment).’’

16 (b) COORDINATION WITH PROHIBITED TRANS17 ACTION RULES.—Section 4975(d) is amended by adding

18 at the end the following new sentence: ‘‘A loan made by

19 a plan shall not fail to meet the requirements of paragraph

20 (1) by reason of a loan repayment suspension described

21 under section 414(u)(4).’’

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

23 this section shall be effective as of December 12, 1994.
124

•S 1821 IS

1 SEC. 1403. ELIMINATION OF SPECIAL VESTING RULE FOR

2 MULTIEMPLOYER PLANS.

3 (a) IN GENERAL.—Paragraph (2) of section 411(a)

4 (relating to minimum vesting standards) is amended—

5 (1) by striking ‘‘subparagraph (A), (B), or (C)’’

6 and inserting ‘‘subparagraph (A) or (B)’’; and

7 (2) by striking subparagraph (C).

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

9 this section shall apply to plan years beginning on or after

10 the earlier of—

11 (1) the later of—

12 (A) January 1, 1997, or

13 (B) the date on which the last of the col14 lective bargaining agreements pursuant to

15 which the plan is maintained terminates (deter16 mined without regard to any extension thereof

17 after the date of the enactment of this Act), or

18 (2) January 1, 1999.

19 Such amendments shall not apply to any individual who

20 does not have more than 1 hour of service under the plan

21 on or after the 1st day of the 1st plan year to which such

22 amendments apply.
125

•S 1821 IS

1 Subtitle D—Conforming

2 Amendments

3 SEC. 1501. CONFORMING AMENDMENT RELATING TO MISS4 ING PARTICIPANTS.

5 Section 401(a)(34) is amended by striking ‘‘title IV’’

6 and inserting ‘‘section 4050’’.

7 SEC. 1502. CONFORMING AMENDMENTS RELATING TO

8 ERISA ENFORCEMENT.

9 (a) SPECIAL RULE FOR CERTAIN JUDGMENTS AND

10 SETTLEMENTS.—Section 401(a)(13) is amended by add11 ing at the end the following new subparagraphs:

12 ‘‘(C) SPECIAL RULE FOR CERTAIN JUDG13 MENTS AND SETTLEMENTS.—Subparagraph (A)

14 shall not apply to any offset of a participant’s

15 accrued benefit in a plan against an amount

16 that the participant is ordered or required to

17 pay to the plan if—

18 ‘‘(i) the order or requirement to pay

19 arises—

20 ‘‘(I) under a judgment of convic21 tion for a crime involving such plan,

22 ‘‘(II) under a civil judgment (in23 cluding a consent order or decree) en24 tered by a court in an action brought

25 in connection with a violation (or al-
126

•S 1821 IS

1 leged violation) of part 4 of subtitle B

2 of title I of the Employee Retirement

3 Income Security Act of 1974, or

4 ‘‘(III) pursuant to a settlement

5 agreement between the Secretary of

6 Labor and the participant, or a settle7 ment agreement between the Pension

8 Benefit Guaranty Corporation and the

9 participant, in connection with a viola10 tion (or alleged violation) of part 4 of

11 subtitle B of title I of such Act,

12 ‘‘(ii) the judgment, order, decree, or

13 settlement agreement expressly provides

14 for the offset of all or part of the amount

15 ordered or required to be paid to the plan

16 against the participant’s accrued benefit in

17 the plan, and

18 ‘‘(iii) if the participant has a spouse

19 at the time at which the offset is to be

20 made—

21 ‘‘(I) such spouse has consented

22 in writing to such offset and such con23 sent is witnessed by a notary public or

24 representative of the plan,
127

•S 1821 IS

1 ‘‘(II) such spouse is ordered or

2 required to pay in such judgment,

3 order, decree, or settlement an

4 amount to the plan in connection with

5 a violation of part 4 of this title, or

6 ‘‘(III) in such judgment, order,

7 decree, or settlement, such spouse re8 tains the right to receive the value of

9 the survivor annuity under a qualified

10 joint and survivor annuity provided

11 pursuant to paragraph (11)(A)(i) and

12 under a qualified preretirement survi13 vor annuity provided pursuant to

14 paragraph 11(A)(ii), determined in

15 accordance with subparagraph (D).

16 ‘‘(D) DETERMINATION OF VALUE OF SUR17 VIVOR ANNUITY IN CONNECTION WITH OFF18 SET.—The value of the survivor annuity de19 scribed in subparagraph (C)(iii)(III) shall be

20 determined as if—

21 ‘‘(i) the participant terminated em22 ployment on the date of the offset,

23 ‘‘(ii) there was no offset,

24 ‘‘(iii) the plan permitted retirement

25 only on or after normal retirement age,
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•S 1821 IS

1 ‘‘(iv) the plan provided only the mini2 mum-required qualified joint and survivor

3 annuity, and

4 ‘‘(v) the amount of the qualified pre5 retirement survivor annuity under the plan

6 is equal to the amount of the survivor an7 nuity payable under the minimum-required

8 qualified joint and survivor annuity.

9 For purposes of this subparagraph, the term

10 ‘minimum-required qualified joint and survivor

11 annuity’ means the qualified joint and survivor

12 annuity which is the actuarial equivalent of a

13 single annuity for the life of the participant and

14 under which the survivor annuity is 50 percent

15 of the amount of the annuity which is payable

16 during the joint lives of the participant and the

17 spouse.

18 ‘‘(E) WAIVER OF CERTAIN DISTRIBUTION

19 REQUIREMENTS.—With respect to the require20 ments of subsections (a) and (k) of section 401,

21 section 403(b), and section 409(d), a plan shall

22 not be treated as failing to meet such require23 ments solely by reason of an offset under sub24 paragraph (C).’’
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•S 1821 IS

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

2 subsection (a) shall apply to judgments, orders, and de3 crees issued, and settlement agreements entered into, on

4 or after the date of enactment of this Act.

Æ