I

106TH CONGRESS

1ST SESSION H. R. 188

To amend the Internal Revenue Code of 1986 to allow penalty-free withdrawals from IRAs for certain purposes, to increase the amount of tax

deductible IRA contributions, and for other purposes.

IN THE HOUSE OF REPRESENTATIVES

JANUARY 6, 1999

Mr. MCCOLLUM introduced the following bill; which was referred to the

Committee on Ways and Means

A BILL

To amend the Internal Revenue Code of 1986 to allow penalty-free withdrawals from IRAs for certain purposes,

to increase the amount of tax deductible IRA contributions, and for other purposes.

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

3 SECTION 1. PENALTY-FREE DISTRIBUTIONS FROM IRAS

4 AND EXCLUSION FROM INCOME OF CERTAIN

5 IRA DISTRIBUTIONS WHICH ARE REPAID.

6 (a) IRA DISTRIBUTIONS FOR LONG-TERM CARE

7 SERVICES.—Paragraph (2) of section 72(t) of the Internal
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1 Revenue Code of 1986 is amended by adding at the end

2 the following new subparagraph:

3 ‘‘(G) DISTRIBUTIONS FROM CERTAIN

4 PLANS FOR LONG-TERM CARE SERVICES.—Dis5 tributions to an individual from an individual

6 retirement plan to the extent such distributions

7 do not exceed the expenses paid by the taxpayer

8 during the taxable year for qualified long-term

9 care services (as defined in section 7702B(c)).

10 Distributions shall not be taken into account

11 under the preceding sentence if such distribu12 tions are described in subparagraph (A), (C),

13 (D), (E), or (F) or to the extent paragraph (1)

14 does not apply to such distributions by reason

15 of subparagraph (B).’’

16 (b) EXPANDED PENALTY-FREE WITHDRAWALS FOR

17 UNEMPLOYED.—

18 (1) IN GENERAL.—Clause (i) of section

19 72(t)(2)(D) of such Code is amended by inserting

20 ‘‘and’’ at the end of subclause (I), by striking ‘‘,

21 and’’ at the end of subclause (II) and inserting a pe22 riod, and by striking subclause (III).

23 (2) CONFORMING AMENDMENT.—The heading

24 for subparagraph (D) of section 72(t)(2) of such
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1 Code is amended by striking ‘‘FOR HEALTH INSUR2 ANCE PREMIUMS’’.

3 (c) IRA DISTRIBUTIONS TO PAY FINANCIALLY DEV4 ASTATING MEDICAL EXPENSES OF CERTAIN LINEAL DE5 SCENDANTS AND ANCESTORS.—Subparagraph (B) of sec6 tion 72(t)(2) of such Code is amended by striking ‘‘medi7 cal care’’ and all that follows and inserting ‘‘medical care

8 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, by treating such employee’s

14 dependents as including—

15 ‘‘(I) all children and grand16 children of the employee or such em17 ployee’s spouse, and

18 ‘‘(II) all ancestors of the em19 ployee or such employee’s spouse.’’

20 (d) EXCLUSION FROM INCOME OF CERTAIN DIS21 TRIBUTIONS WHICH ARE REPAID.—Section 408 of the In22 ternal Revenue Code of 1986 (relating to individual retire23 ment accounts) is amended by redesignating subsection

24 (q) as subsection (r) and by inserting after subsection (p)

25 the following new subsection:
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1 ‘‘(q) REPAYABLE DISTRIBUTIONS FROM INDIVIDUAL

2 RETIREMENT ACCOUNTS FOR FIRST HOME PURCHASES,

3 HIGHER EDUCATION EXPENSES, QUALIFIED LONG TERM

4 CARE EXPENSES, QUALIFIED UNEMPLOYMENT DIS5 TRIBUTIONS, AND FINANCIALLY DEVASTATING MEDICAL

6 EXPENSES.—

7 ‘‘(1) IN GENERAL.—Notwithstanding any other

8 provision of this section, gross income shall not in9 clude any qualified distribution.

10 ‘‘(2) REPAYMENT REQUIREMENT.—

11 ‘‘(A) ADDITION TO TAX.—If the required

12 recontributions made by the taxpayer during

13 the repayment period are less than the qualified

14 distribution, the tax imposed by this chapter for

15 the last taxable year in the repayment period

16 shall be increased by the amount determined

17 under subparagraph (B).

18 ‘‘(B) DETERMINATION OF AMOUNT.—The

19 amount determined under this subparagraph

20 shall be an amount which bears the same ratio

21 to the tax benefit amount as—

22 ‘‘(i) the excess (if any) of the qualified

23 distribution over required recontributions

24 made during the repayment period, bears

25 to
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1 ‘‘(ii) the qualified distribution.

2 ‘‘(C) REPAYMENT PERIOD.—For purposes

3 of this subsection, the term ‘repayment period’

4 means, with respect to any qualified distribu5 tion, the 5-taxable year period beginning after

6 the taxable year in which such distribution is

7 received.

8 ‘‘(D) TAX BENEFIT AMOUNT.—For pur9 poses of this subsection, the term ‘tax benefit

10 amount’ means, with respect to any qualified

11 distribution, the sum of—

12 ‘‘(i) the aggregate reduction in the tax

13 imposed by this chapter for the taxable

14 year in which such distribution is received

15 by reason of the exclusion under paragraph

16 (1), and

17 ‘‘(ii) interest on the amount of such

18 reduction for the repayment period com19 puted at the Federal mid-term rate (within

20 the meaning of section 1274(d)(1)) and

21 compounded annually.

22 ‘‘(3) QUALIFIED DISTRIBUTION.—For purposes

23 of this subsection, the term ‘qualified distribution’

24 means any distribution described in subparagraph

25 (B), (D), (E), (F), or (G) of section 72(t)(2) to an
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1 individual from an individual retirement plan main2 tained for the benefit of such individual.

3 ‘‘(4) RECONTRIBUTION OF QUALIFIED DIS4 TRIBUTIONS.—

5 ‘‘(A) IN GENERAL.—If an individual re6 ceived a qualified distribution, such individual

7 shall make required recontributions in the man8 ner provided in this paragraph to an individual

9 retirement plan maintained for the benefit of

10 such individual.

11 ‘‘(B) METHOD OF MAKING RECONTRIBU12 TION.—Any required recontribution—

13 ‘‘(i) shall be made during the repay14 ment period for the qualified distribution,

15 ‘‘(ii) shall not exceed the qualified dis16 tribution reduced by any prior recontribu17 tion under this paragraph with respect to

18 such distribution, and

19 ‘‘(iii) shall be made by making a pay20 ment in cash to an individual retirement

21 plan for the benefit of such individual.

22 An individual making a required recontribution

23 under this paragraph shall designate (in the

24 manner prescribed by the Secretary) such con25 tribution as a required recontribution under
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1 this paragraph and shall specify the qualified

2 distribution with respect to which such recon3 tribution is being made.

4 ‘‘(C) TREATMENT AS ROLLOVER CON5 TRIBUTION.—For purposes of this title, any re6 quired recontribution under this paragraph

7 shall be treated as a rollover contribution de8 scribed in subsection (d)(3).

9 ‘‘(7) OTHER SPECIAL RULES.—

10 ‘‘(A) BASIS RULES NOT AFFECTED.—The

11 tax treatment under this chapter of any dis12 tribution (other than a qualified distribution)

13 shall be determined as if this subsection had

14 not been enacted.

15 ‘‘(B) AGGREGATION RULE.—For purposes

16 of this subsection, all qualified distributions re17 ceived by an individual during a taxable year

18 shall be treated as a single distribution.’’

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

20 this section shall apply to distributions received in taxable

21 years beginning after December 31, 1998.

22 SEC. 2. INCREASE IN AMOUNT OF DEDUCTIBLE IRA CON23 TRIBUTIONS AND INDEXING FOR INFLATION.

24 (a) INCREASE IN MAXIMUM AMOUNT OF DEDUC25 TION.—Subparagraph (A) of section 219(b)(1) of the In-
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1 ternal Revenue Code of 1986 (relating to maximum

2 amount of deduction) is amended by striking ‘‘$2,000’’

3 and inserting ‘‘$4,500’’.

4 (b) INFLATION ADJUSTMENTS.—Subsection (f) of

5 section 219 of such Code is amended by adding at the

6 end the following new paragraph:

7 ‘‘(8) INFLATION ADJUSTMENTS.—In the case of

8 a taxable year beginning in a calendar year after

9 1999, each dollar amount set forth in subsections

10 (b)(1)(A) and (g)(3)(B) shall be increased by an

11 amount equal to—

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

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

15 year by substituting ‘calendar year 1998’ for

16 ‘calendar year 1992’ in subparagraph (B)

17 thereof.

18 If any increase determined under the preceding sen19 tence is not a multiple of $100, such increase shall

20 be rounded to the nearest multiple of $100.’’

21 (c) CONFORMING AMENDMENTS.—

22 (1) Subsections (a)(1) and (b) of section 408 of

23 such Code are each amended by striking ‘‘$2,000’’

24 each place it appears and inserting ‘‘the dollar limi25 tation in effect under section 219(b)(1)(A)’’.
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1 (2) Subsection (j) of section 408 of such Code

2 is amended by striking ‘‘the $2,000 amounts con3 tained’’ and inserting ‘‘the dollar limitations referred

4 to’’.

5 (3) Paragraph (8) of section 408(p) of such

6 Code is amended by striking ‘‘$2,000’’ and inserting

7 ‘‘the dollar limitation in effect under section

8 219(b)(1)(A)’’.

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

10 this section shall apply to taxable years beginning after

11 December 31, 1998.

12 SEC. 3. ELIMINATION OF PHASE-OUT FOR INDIVIDUALS

13 NOT ACTIVE PARTICIPANTS IN DEFINED CON14 TRIBUTION PLANS AND INCREASE OF IN15 COME LIMITS FOR OTHERS.

16 (a) ELIMINATION OF PHASE-OUT FOR INDIVIDUALS

17 NOT ACTIVE PARTICIPANTS IN DEFINED CONTRIBUTION

18 PLAN.—Paragraph (5) of section 219(g) of the Internal

19 Revenue Code of 1986 (relating to active participant) is

20 amended by striking the period at the end of subpara21 graph (B) and inserting a comma, and by inserting after

22 subparagraph (B) the following:

23 ‘‘if such plan, contract, pension, or trust is a defined

24 contribution plan (as defined in section 414(i)).’’

25 (b) INCREASE IN INCOME PHASEOUT LEVELS.—
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1 (1) IN GENERAL.—Subparagraph (B) of section

2 219(g)(3) of such Code (relating to applicable dollar

3 amount) is amended to read as follows:

4 ‘‘(B) APPLICABLE DOLLAR AMOUNT.—The

5 term ‘applicable dollar amount’ means—

6 ‘‘(i) in the case of a taxpayer filing a

7 joint return, $120,000,

8 ‘‘(ii) in the case of any other taxpayer

9 (other than a married individual filing a

10 separate return), $75,000, and

11 ‘‘(iii) in the case of a married individ12 ual filing a separate return, zero.’’

13 (2) CROSS REFERENCE TO INFLATION ADJUST14 MENT.—Paragraph (3) of section 219(g) of such

15 Code is amended by adding at the end the following

16 new subparagraph:

17 ‘‘(C) CROSS REFERENCE.—

‘‘For inflation adjustment of dollar amounts set

forth in subparagraph (B), see subsection (f)(8).’’

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

19 this section shall apply to taxable years beginning after

20 December 31, 1998.
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1 SEC. 4. WITHHOLDING, CONTRIBUTION LIMITS, AND

2 MATCHING CONTRIBUTION NONDISCRIMINA3 TION REQUIREMENTS FOR 401(k) PLANS.

4 (a) INAPPLICABILITY OF WITHHOLDING REQUIRE5 MENT TO 401(k) DISTRIBUTIONS.—

6 (1) IN GENERAL.—Paragraph (3) of section

7 3405(c) of the Internal Revenue Code of 1986 (re8 lating to eligible rollover distribution) is amended by

9 striking the period at the end and inserting the fol10 lowing: ‘‘, except that such term shall not include a

11 distribution from a qualified cash or deferred ar12 rangement (as defined in section 401(k)).’’

13 (2) EFFECTIVE DATE.—The amendment made

14 by this subsection shall apply to distributions made

15 after December 31, 1998.

16 (b) INCREASE IN CONTRIBUTION LIMITS FOR 401(k)

17 PLANS.—

18 (1) IN GENERAL.—Paragraph (1) of section

19 402(g) of such Code (relating to limitation on exclu20 sion for elective deferrals) is amended by striking

21 ‘‘$7,000’’ and inserting ‘‘$20,000’’.

22 (2) CONFORMING AMENDMENT.—Paragraph (5)

23 of section 402(g) of such Code (relating to cost-of24 living adjustment) is amended by striking ‘‘$7,000’’

25 and inserting ‘‘$20,000’’ and by inserting before the
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1 period ‘‘and the base period taken into account shall

2 be the calendar quarter beginning October 1, 1998’’.

3 (3) EFFECTIVE DATE.—The amendments made

4 by this subsection shall apply to taxable years begin5 ning after December 31, 1998.

6 (c) ALTERNATIVE METHODS FOR MEETING SECTION

7 401(k) NONDISCRIMINATION TEST AND NONDISCRIMINA8 TION TEST FOR MATCHING CONTRIBUTIONS.—

9 (1) SECTION 401(k) NONDISCRIMINATION

10 TEST.—Subsection (k) of section 401 of such Code

11 (relating to cash or deferred arrangements) is

12 amended by adding at the end the following new

13 paragraph:

14 ‘‘(13) ADDITIONAL ALTERNATIVE METHOD OF

15 MEETING NONDISCRIMINATION REQUIREMENTS.—

16 ‘‘(A) IN GENERAL.—A cash or deferred ar17 rangement shall be treated as meeting the re18 quirements of paragraph (3)(A)(ii) if—

19 ‘‘(i) under the arrangement, the em20 ployer makes matching contributions on

21 behalf of each employee in an amount

22 equal to a percentage of the contributions

23 and elective deferrals of such employee,

24 ‘‘(ii) the same such percentage applies

25 to all employees of the employer, and
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1 ‘‘(iii) not less than biannually, each

2 employee eligible to participate under the

3 arrangement is given written notice of the

4 employee’s rights and obligations under the

5 arrangement which meets the requirements

6 of clauses (i) and (ii) of paragraph

7 (12)(D).

8 ‘‘(B) SPECIAL RULES REGARDING IN9 CREASE AND DECREASE IN MATCHING CON10 TRIBUTIONS.—

11 ‘‘(i) INCREASE IN RATE OF MATCHING

12 CONTRIBUTIONS.—An arrangement shall

13 not be treated as meeting the requirement

14 of subparagraph (A)(ii) if the rate of the

15 employer’s matching contributions in16 creases as the rate of an employee’s con17 tributions or elective deferrals increases.

18 ‘‘(ii) PERMISSIBLE DECREASE AS

19 ELECTIVE DEFERRALS AND CONTRIBU20 TIONS INCREASE.—An arrangement shall

21 not fail to be treated as meeting the re22 quirement of subparagraph (A)(ii) by rea23 son of a decrease in the rate of the employ24 er’s matching contributions as the rate of

25 the employee’s contributions or elective de-
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1 ferrals increases, if the same such rate of

2 decrease applies to all employees of the

3 employer.’’

4 (2) NONDISCRIMINATION TEST FOR MATCHING

5 CONTRIBUTIONS.—Subsection (m) of section 401 of

6 such Code is amended by redesignating paragraph

7 (12) as paragraph (13) and by inserting after para8 graph (11) the following new paragraph:

9 ‘‘(12) ADDITIONAL ALTERNATIVE METHOD FOR

10 CASH OR DEFERRED ARRANGEMENTS.—A qualified

11 cash or deferred arrangement (as defined in sub12 section (k)) shall be treated as meeting the require13 ments of paragraph (2) with respect to matching

14 contributions if the arrangement meets the require15 ments of subsection (k)(13).’’

16 (3) EFFECTIVE DATE.—The amendments made

17 by this section shall apply to years beginning after

18 December 31, 1998.

19 SEC. 5. INHERITED IRAS AND INHERITED 401(k) AMOUNTS.

20 (a) EXCLUSION OF INHERITED IRAS AND CERTAIN

21 INHERITED 401(k) AMOUNTS FROM GROSS ESTATE.—

22 (1) IN GENERAL.—Section 2039 of the Internal

23 Revenue Code of 1986 is amended by adding at the

24 end the following new subsection:
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1 ‘‘(c) EXCLUSION OF INDIVIDUAL RETIREMENT AC2 COUNTS AND CERTAIN INHERITED 401(k) AMOUNTS.—

3 Notwithstanding any other provision of this section or of

4 any other provision of law, there shall be excluded from

5 the value of the gross estate any amount receivable by any

6 beneficiary (other than the executor) under—

7 ‘‘(1) an individual retirement plan of the dece8 dent, or

9 ‘‘(2) a qualified cash or deferred arrangement

10 (as defined in section 401(k)) of the decedent, if the

11 requirements of section 408(o)(2)(B)(iii) are met

12 with respect to such amount.’’

13 (2) EFFECTIVE DATE.—The amendment made

14 by paragraph (1) shall apply to estates of decedents

15 dying after December 31, 1998.

16 (b) BENEFICIARY PERMITTED TO HOLD IRA RE17 CEIVED FROM DECEDENT.—

18 (1) IN GENERAL.—Subparagraph (B) of section

19 401(a)(9) of such Code (relating to required dis20 tributions) is amended by adding at the end the fol21 lowing new clause:

22 ‘‘(v) EXCEPTION FOR DESIGNATED

23 BENEFICIARY OF INDIVIDUAL RETIREMENT

24 PLAN.—Notwithstanding clauses (iii) and

25 (iv), if any portion of the interest in an in-
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1 dividual retirement plan is payable to (or

2 for the benefit of) a designated beneficiary

3 by reason of the death of another individ4 ual, the date on which distributions from

5 such plan are required to begin under this

6 paragraph shall be determined by applying

7 this paragraph as if such beneficiary were

8 the employee.’’

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

10 of section 408(d) of such Code is amended by strik11 ing subparagraph (C) (relating to denial of rollover

12 treatment for inherited accounts, etc.).

13 (3) EFFECTIVE DATE.—The amendments made

14 by this subsection shall apply to amounts payable

15 after, and acquisitions after, December 31, 1998.

16 (c) CONTRIBUTION OF INHERITED 401(k) AMOUNTS

17 TO IRA; EXCLUSION FROM GROSS INCOME FOR SUCH

18 AMOUNTS.—

19 (1) IN GENERAL.—Subparagraph (B) of section

20 408(o)(2) of such Code (relating to nondeductible

21 limit) is amended by adding at the end the following

22 new clause:

23 ‘‘(iii) INHERITED 401(k) AMOUNTS.—

24 If, by reason of the death of an employee,

25 an individual receives an amount attrib-
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1 utable to an elective deferral described in

2 section 402(g)(3)(A) of such employee—

3 ‘‘(I) such individual’s nondeduct4 ible limit for the taxable year in which

5 such amount is received shall be in6 creased by the portion of such amount

7 which is paid (not later than the 60th

8 day after the date of such receipt)

9 into an individual retirement plan for

10 the benefit of such individual, and

11 ‘‘(II) such portion shall not be

12 includible in the gross income of such

13 individual.’’

14 (2) CONFORMING AMENDMENT.—Paragraph (1)

15 of section 4973(b) of such Code (relating to excess

16 contributions) is amended by striking ‘‘408(d)(3))’’

17 and inserting ‘‘408(d)(3)) and other than amounts

18 excluded from gross income under section

19 408(o)(2)(B)(iii)’’.

20 (3) EFFECTIVE DATE.—The amendments made

21 by this subsection shall apply to amounts received

22 after December 31, 1998.

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