I

104TH CONGRESS

2D SESSION H. R. 4311

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

SEPTEMBER 28, 1996

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

7 the Internal Revenue Code of 1986 (relating to exceptions

8 to 10-percent additional tax on early distributions from
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1 qualified retirement plans) is amended by adding at the

2 end the following new subparagraph:

3 ‘‘(D) DISTRIBUTIONS FROM CERTAIN

4 PLANS FOR FIRST HOME PURCHASES, HIGHER

5 EDUCATION EXPENSES, QUALIFIED LONG TERM

6 CARE EXPENSES, AND QUALIFIED UNEMPLOY7 MENT DISTRIBUTIONS.—Distributions to an

8 employee from an individual retirement plan—

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

10 homebuyer distributions,

11 ‘‘(ii) to the extent such distributions

12 do not exceed the qualified higher edu13 cation expenses of the taxpayer for the tax14 able year,

15 ‘‘(iii) to the extent such distributions

16 do not exceed the expenses paid by the tax17 payer during the taxable year for qualified

18 long-term care services (as defined in sec19 tion 7702B(c)), or

20 ‘‘(iv) which are qualified unemploy21 ment distributions.’’

22 (b) DEFINITIONS.—Section 72(t) of such Code is

23 amended by adding at the end the following new para24 graphs:
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1 ‘‘(6) QUALIFIED FIRST-TIME HOMEBUYER DIS2 TRIBUTIONS.—

3 ‘‘(A) IN GENERAL.—For purposes of para4 graph (2)(D)(i), the term ‘qualified first-time

5 homebuyer distribution’ means any payment or

6 distribution received by an individual to the ex7 tent such payment or distribution is used by the

8 individual before the close of the 60th day after

9 the day on which such payment or distribution

10 is received to pay qualified acquisition costs

11 with respect to a principal residence for such

12 individual as a first-time homebuyer.

13 ‘‘(B) QUALIFIED ACQUISITION COSTS.—

14 For purposes of this paragraph, the term

15 ‘qualified acquisition costs’ means the costs of

16 acquiring, constructing, or reconstructing a res17 idence. Such term includes any usual or reason18 able settlement, financing, or other closing

19 costs.

20 ‘‘(C) FIRST-TIME HOMEBUYER; OTHER

21 DEFINITIONS.—For purposes of this para22 graph—

23 ‘‘(i) FIRST-TIME HOMEBUYER.—The

24 term ‘first-time homebuyer’ means any in25 dividual if such individual (and, if married,
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1 such individual’s spouse) had no present

2 ownership interest in a principal residence

3 during the 3-year period ending on the

4 date of acquisition of the principal resi5 dence to which this paragraph applies.

6 ‘‘(ii) PRINCIPAL RESIDENCE.—The

7 term ‘principal residence’ has the same

8 meaning as when used in section 1034.

9 ‘‘(iii) DATE OF ACQUISITION.—The

10 term ‘date of acquisition’ means the date—

11 ‘‘(I) on which a binding contract

12 to acquire the principal residence to

13 which subparagraph (A) applies is en14 tered into, or

15 ‘‘(II) on which a binding contract

16 to construct or reconstruct such a

17 principal residence is entered into.

18 ‘‘(D) SPECIAL RULE WHERE DELAY IN AC19 QUISITION.—If any payment or distribution

20 fails to meet the requirements of subparagraph

21 (A) solely by reason of a delay or cancellation

22 of the purchase, construction, or reconstruction

23 of the residence, the amount of the payment or

24 distribution may be contributed to an individual

25 retirement account as provided in subsection
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1 (d)(3)(A)(i) of section 408 (determined by sub2 stituting ‘120th day’ for ‘60th day’ in such sub3 section), except that—

4 ‘‘(i) subsection (d)(3)(B) of such sec5 tion shall not be applied to such contribu6 tion, and

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

8 into account in applying subsection

9 (d)(3)(B) to any other amount.

10 ‘‘(3) 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, fees,

14 books, supplies, and equipment required for the

15 enrollment or attendance of—

16 ‘‘(i) the taxpayer,

17 ‘‘(ii) the taxpayer’s spouse, or

18 ‘‘(iii) the taxpayer’s dependent (as de19 fined in section 152),

20 at an eligible educational institution (as defined

21 in section 135(c)(3)).

22 ‘‘(B) COORDINATION WITH SAVINGS BOND

23 PROVISIONS.—The amount of qualified higher

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

2 income under section 135.

3 ‘‘(8) QUALIFIED UNEMPLOYMENT DISTRIBU4 TION.—For purposes of paragraph (2)(D)(iv), the

5 term ‘qualified unemployment distribution’ means a

6 distribution from an individual retirement plan to an

7 individual after the individual or the individual’s

8 spouse has received benefits under any Federal or

9 State unemployment compensation law for not less

10 than 12 consecutive weeks by reason of separation

11 from employment, if such distribution is made dur12 ing the taxable year during which such unemploy13 ment compensation is paid or the succeeding taxable

14 year.’’

15 (c) IRA DISTRIBUTIONS TO PAY FINANCIALLY DEV16 ASTATING MEDICAL EXPENSES.—

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

18 Code is amended by striking ‘‘, (B),’’.

19 (2) CERTAIN LINEAL DESCENDANTS AND AN20 CESTORS TREATED AS DEPENDENTS.—Subpara21 graph (B) of section 72(t)(2) of such Code is

22 amended by striking ‘‘medical care’’ and all that fol23 lows and inserting ‘‘medical care determined—
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1 ‘‘(i) without regard to whether the

2 employee itemizes deductions for such tax3 able year, and

4 ‘‘(ii) in the case of an individual re5 tirement plan, by treating such employee’s

6 dependents as including—

7 ‘‘(I) all children and grand8 children of the employee or such em9 ployee’s spouse, and

10 ‘‘(II) all ancestors of the em11 ployee or such employee’s spouse.’’

12 (3) CONFORMING AMENDMENT.—Subparagraph

13 (B) of section 72(t)(2) of such Code is amended by

14 striking ‘‘or (C)’’ and inserting ‘‘, (C), or (D)’’.

15 (d) EXCLUSION FROM INCOME OF CERTAIN DIS16 TRIBUTIONS WHICH ARE REPAID.—Section 408 of the In17 ternal Revenue Code of 1986 (relating to individual retire18 ment accounts) is amended by redesignating subsection

19 (p) as subsection (q) and by inserting after subsection (o)

20 the following new subsection:

21 ‘‘(p) REPAYABLE DISTRIBUTIONS FROM INDIVIDUAL

22 RETIREMENT ACCOUNTS FOR FIRST HOME PURCHASES,

23 HIGHER EDUCATION EXPENSES, QUALIFIED LONG TERM

24 CARE EXPENSES, QUALIFIED UNEMPLOYMENT DIS-
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1 TRIBUTIONS, AND FINANCIALLY DEVASTATING MEDICAL

2 EXPENSES.—

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

4 provision of this section, gross income shall not in5 clude any qualified distribution.

6 ‘‘(2) REPAYMENT REQUIREMENT.—

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

8 recontributions made by the taxpayer during

9 the repayment period are less than the qualified

10 distribution, the tax imposed by this chapter for

11 the last taxable year in the repayment period

12 shall be increased by the amount determined

13 under subparagraph (B).

14 ‘‘(B) DETERMINATION OF AMOUNT.—The

15 amount determined under this subparagraph

16 shall be an amount which bears the same ratio

17 to the tax benefit amount as—

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

19 distribution over required recontributions

20 made during the repayment period, bears

21 to

22 ‘‘(ii) the qualified distribution.

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

24 of this subsection, the term ‘repayment period’

25 means, with respect to any qualified distribu-
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1 tion, the 5-taxable year period beginning after

2 the taxable year in which such distribution is

3 received.

4 ‘‘(D) TAX BENEFIT AMOUNT.—For pur5 poses of this subsection, the term ‘tax benefit

6 amount’ means, with respect to any qualified

7 distribution, the sum of—

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

9 imposed by this chapter for the taxable

10 year in which such distribution is received

11 by reason of the exclusion under paragraph

12 (1), and

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

14 reduction for the repayment period com15 puted at the Federal mid-term rate (within

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

17 compounded annually.

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

19 of this subsection, the term ‘qualified distribution’

20 means any distribution described in subparagraph

21 (B) or (D) of section 72(d)(2) to an individual from

22 an individual retirement plan maintained for the

23 benefit of such individual.

24 ‘‘(4) RECONTRIBUTION OF QUALIFIED DIS25 TRIBUTIONS.—
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1 ‘‘(A) IN GENERAL.—If an individual re2 ceived a qualified distribution, such individual

3 shall make required recontributions in the man4 ner provided in this paragraph to an individual

5 retirement plan maintained for the benefit of

6 such individual.

7 ‘‘(B) METHOD OF MAKING RECONTRIBU8 TION.—Any required recontribution—

9 ‘‘(i) shall be made during the repay10 ment period for the qualified distribution,

11 ‘‘(ii) shall not exceed the qualified dis12 tribution reduced by any prior recontribu13 tion under this paragraph with respect to

14 such distribution, and

15 ‘‘(iii) shall be made by making a pay16 ment in cash to an individual retirement

17 plan for the benefit of such individual.

18 An individual making a required recontribution

19 under this paragraph shall designate (in the

20 manner prescribed by the Secretary) such con21 tribution as a required recontribution under

22 this paragraph and shall specify the qualified

23 distribution with respect to which such recon24 tribution is being made.
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1 ‘‘(C) TREATMENT AS ROLLOVER CON2 TRIBUTION.—For purposes of this title, any re3 quired recontribution under this paragraph

4 shall be treated as a rollover contribution de5 scribed in subsection (d)(3).

6 ‘‘(7) OTHER SPECIAL RULES.—

7 ‘‘(A) BASIS RULES NOT AFFECTED.—The

8 tax treatment under this chapter of any dis9 tribution (other than a qualified distribution)

10 shall be determined as if this subsection had

11 not been enacted.

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

13 of this subsection, all qualified distributions re14 ceived by an individual during a taxable year

15 shall be treated as a single distribution.’’

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

17 this section shall apply to distributions received in taxable

18 years beginning after December 31, 1996.

19 SEC. 2. INCREASE IN AMOUNT OF DEDUCTIBLE IRA CON20 TRIBUTIONS AND INDEXING FOR INFLATION.

21 (a) INCREASE IN MAXIMUM AMOUNT OF DEDUC22 TION.—Subparagraph (A) of section 219(b)(1) of the In23 ternal Revenue Code of 1986 (relating to maximum

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

25 and inserting ‘‘$4,500’’.
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1 (b) INFLATION ADJUSTMENTS.—Subsection (f) of

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

3 end the following new paragraph:

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

5 a taxable year beginning in a calendar year after

6 1997, each dollar amount set forth in subsections

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

8 amount equal to—

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

10 ‘‘(B) the cost-of-living adjustment deter11 mined under section 1(f)(3) for such calendar

12 year by substituting ‘calendar year 1996’ for

13 ‘calendar year 1992’ in subparagraph (B)

14 thereof.

15 If any increase determined under the preceding sen16 tence is not a multiple of $100, such increase shall

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

18 (c) CONFORMING AMENDMENTS.—

19 (1) Subsections (a)(1) and (b)(2)(B) of section

20 408 of such Code are each amended by striking

21 ‘‘$2,000’’ and inserting ‘‘the dollar limitation in ef22 fect under section 219(b)(1)(A)’’.

23 (2) Subsection (j) of section 408 of such Code

24 is amended by striking ‘‘the $2,000 amounts con-
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1 tained’’ and inserting ‘‘the dollar limitations referred

2 to’’.

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

4 this section shall apply to taxable years beginning after

5 December 31, 1996.

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

7 NOT ACTIVE PARTICIPANTS IN DEFINED CON8 TRIBUTION PLANS AND INCREASE OF IN9 COME LIMITS FOR OTHERS.

10 (a) ELIMINATION OF PHASE-OUT FOR INDIVIDUALS

11 NOT ACTIVE PARTICIPANTS IN DEFINED CONTRIBUTION

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

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

14 amended by striking the period at the end of subpara15 graph (B) and inserting a comma, and by inserting after

16 subparagraph (B) the following:

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

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

19 (b) INCREASE IN INCOME PHASEOUT LEVELS.—

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

21 219(g)(3) of such Code (relating to applicable dollar

22 amount) is amended—

23 (A) by striking ‘‘$40,000’’ and inserting

24 ‘‘$120,000’’, and
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1 (B) by striking ‘‘$25,000’’ and inserting

2 ‘‘$75,000’’.

3 (2) CROSS REFERENCE TO INFLATION ADJUST4 MENT.—Paragraph (3) of section 219(g) of such

5 Code is amended by adding at the end the following

6 new subparagraph:

7 ‘‘(C) CROSS REFERENCE.—

‘‘For inflation adjustment of dollar amounts set

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

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

9 this section shall apply to taxable years beginning after

10 December 31, 1996.

11 SEC. 4. WITHHOLDING, CONTRIBUTION LIMITS, AND

12 MATCHING CONTRIBUTION NONDISCRIMINA13 TION REQUIREMENTS FOR 401(k) PLANS.

14 (a) INAPPLICABILITY OF WITHHOLDING REQUIRE15 MENT TO 401(k) DISTRIBUTIONS.—

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

17 3405(c) of the Internal Revenue Code of 1986 (re18 lating to eligible rollover distribution) is amended by

19 striking the period at the end and inserting the fol20 lowing: ‘‘, except that such term shall not include a

21 distribution from a qualified cash or deferred ar22 rangement (as defined in section 401(k)).’’
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1 (2) EFFECTIVE DATE.—The amendment made

2 by this subsection shall apply to distributions made

3 after December 31, 1996.

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

5 PLANS.—

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

7 402(g) of such Code (relating to limitation on exclu8 sion for elective deferrals) is amended by striking

9 ‘‘$7,000’’ and inserting ‘‘$20,000’’.

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

11 of section 402(g) of such Code (relating to cost-of12 living adjustment) is amended by striking ‘‘$7,000’’

13 and inserting ‘‘$20,000’’.

14 (3) EFFECTIVE DATE.—The amendments made

15 by this subsection shall apply to taxable years begin16 ning after December 31, 1996.

17 (c) ALTERNATIVE METHODS FOR MEETING SECTION

18 401(k) Nondiscrimination Test and Nondiscrimination

19 Test for Matching Contributions.—

20 (1) SECTION 401(k) NONDISCRIMINATION

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

22 (relating to cash or deferred arrangements) is

23 amended by adding at the end the following new

24 paragraph:
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1 ‘‘(13) ADDITIONAL ALTERNATIVE METHOD OF

2 MEETING NONDISCRIMINATION REQUIREMENTS.—

3 ‘‘(A) IN GENERAL.—A cash or deferred ar4 rangement shall be treated as meeting the re5 quirements of paragraph (3)(A)(ii) if—

6 ‘‘(i) under the arrangement, the em7 ployer makes matching contributions on

8 behalf of each employee in an amount

9 equal to a percentage of the contributions

10 and elective deferrals of such employee,

11 ‘‘(ii) the same such percentage applies

12 to all employees of the employer, and

13 ‘‘(iii) not less than biannually, each

14 employee eligible to participate under the

15 arrangement is given written notice of the

16 employee’s rights and obligations under the

17 arrangement which meets the requirements

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

19 (12)(D).

20 ‘‘(B) SPECIAL RULES REGARDING IN21 CREASE AND DECREASE IN MATCHING CON22 TRIBUTIONS.—

23 ‘‘(i) INCREASE IN RATE OF MATCHING

24 CONTRIBUTIONS.—An arrangement shall

25 not be treated as meeting the requirement
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1 of subparagraph (A)(ii) if the rate of the

2 employer’s matching contributions in3 creases as the rate of an employee’s con4 tributions or elective deferrals increases.

5 ‘‘(ii) PERMISSIBLE DECREASE AS

6 ELECTIVE DEFERRALS AND CONTRIBU7 TIONS INCREASE.—An arrangement shall

8 not fail to be treated as meeting the re9 quirement of subparagraph (A)(ii) by rea10 son of a decrease in the rate of the employ11 er’s matching contributions as the rate of

12 the employee’s contributions or elective de13 ferrals increases, if the same such rate of

14 decrease applies to all employees of the

15 employer.’’

16 (2) NONDISCRIMINATION TEST FOR MATCHING

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

18 such Code is amended by redesignating paragraph

19 (12) as paragraph (13) and by inserting after para20 graph (11) the following new paragraph:

21 ‘‘(12) ADDITIONAL ALTERNATIVE METHOD FOR

22 CASH OR DEFERRED ARRANGEMENTS.—A qualified

23 cash or deferred arrangement (as defined in sub24 section (k)) shall be treated as meeting the require25 ments of paragraph (2) with respect to matching
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1 contributions if the arrangement meets the require2 ments of subsection (k)(13).’’

3 (3) EFFECTIVE DATE.—The amendments made

4 by this section shall apply to years beginning after

5 December 31, 1996.

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

7 (a) EXCLUSION OF INHERITED IRAS AND CERTAIN

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

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

10 Revenue Code of 1986 is amended by adding at the

11 end the following new subsection:

12 ‘‘(c) EXCLUSION OF INDIVIDUAL RETIREMENT AC13 COUNTS AND CERTAIN INHERITED 401(k) AMOUNTS.—

14 Notwithstanding any other provision of this section or of

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

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

17 beneficiary (other than the executor) under—

18 ‘‘(1) an individual retirement plan of the dece19 dent, or

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

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

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

23 with respect to such amount.’’
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1 (2) EFFECTIVE DATE.—The amendment made

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

3 dying after December 31, 1996.

4 (b) BENEFICIARY PERMITTED TO HOLD IRA RE5 CEIVED FROM DECEDENT.—

6 (1) IN GENERAL.—Paragraph (9) of section

7 401(a) of such Code (relating to required distribu8 tions) is amended by adding at the end the following

9 new clause:

10 ‘‘(v) EXCEPTION FOR DESIGNATED

11 BENEFICIARY OF INDIVIDUAL RETIREMENT

12 PLAN.—Notwithstanding clauses (iii) and

13 (iv), if any portion of the interest in an in14 dividual retirement plan is payable to (or

15 for the benefit of) a designated beneficiary

16 by reason of the death of another individ17 ual, the date on which distributions from

18 such plan are required to begin under this

19 paragraph shall be determined by applying

20 this paragraph as if such beneficiary were

21 the employee.’’

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

23 of section 408(d) of such Code is amended by strik24 ing subparagraph (C) (relating to denial of rollover

25 treatment for inherited accounts, etc.).
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1 (3) EFFECTIVE DATE.—The amendments made

2 by this subsection shall apply to amounts payable

3 after, and acquisitions after, December 31, 1996.

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

5 TO IRA.—

6 (1) INCREASE OF NONDEDUCTIBLE LIMIT TO

7 ALLOW CONTRIBUTION OF INHERITED 401(k)

8 AMOUNTS.—Subparagraph (B) of section 408(o)(2)

9 of such Code (relating to nondeductible limit) is

10 amended by adding at the end the following new

11 clause:

12 ‘‘(iii) INHERITED 401(k) AMOUNTS.—

13 The nondeductible limit for the taxable

14 year shall be increased by the amount re15 ceived during the taxable year by the indi16 vidual under a qualified cash or deferred

17 arrangement (as defined in section 401(k))

18 of a decedent, if such amount is paid into

19 an individual retirement plan for the bene20 fit of such individual not later than the

21 60th day after the date of such receipt.’’

22 (2) EXCLUSION FROM GROSS INCOME IF INHER23 ITED 401(k) AMOUNT CONTRIBUTED TO IRA .—Sub24 section (m) of section 72 of such Code (relating to

25 special rules applicable to employee annuities and
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1 distributions under employee plans) is amended by

2 adding at the end the following new paragraph:

3 ‘‘(11) CONTRIBUTION OF INHERITED 401(k)

4 AMOUNTS TO IRAS.—No amount shall be included in

5 gross income under this section by reason of an

6 amount received during the taxable year by the indi7 vidual under a qualified cash or deferred arrange8 ment (as defined in section 401(k)) of a decedent,

9 if the requirements of section 408(o)(2)(B)(iii) are

10 met with respect to such amount.’’

11 (3) CONFORMING AMENDMENT.—Subsection (b)

12 of section 4973 of such Code (relating to excess con13 tributions) is amended by adding at the end the fol14 lowing: ‘‘For purposes of paragraph (1)(B), the

15 amount allowable as a deduction under section 219

16 shall be increased by the amount of the increase in

17 the nondeductible limit for the taxable year by rea18 son of section 408(o)(2)(B)(iii).’’

19 (4) EFFECTIVE DATE.—The amendments made

20 by this subsection shall apply to amounts received

21 after December 31, 1996.

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