I
106TH CONGRESS
1ST SESSION
H. R. 188
To amend the Internal Revenue Code of 1986 to allow penalty-free withdraw-
als 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 pen-
alty-free withdrawals from IRAs for certain purposes,
to increase the amount of tax deductible IRA contribu-
tions, and for other purposes.
Be it enacted by the Senate and House of Representa-
tives of the United States of America in Congress assembled,
SECTION 1. PENALTY-FREE DISTRIBUTIONS FROM IRAS
AND EXCLUSION FROM INCOME OF CERTAIN
IRA DISTRIBUTIONS WHICH ARE REPAID.
(a) IRA DISTRIBUTIONS
FOR LONG-TERM CARE
SERVICES.—Paragraph (2) of section 72(t) of the Internal
Revenue Code of 1986 is amended by adding at the end
the following new subparagraph:
‘‘(G) 
DISTRIBUTIONS
FROM
CERTAIN
PLANS FOR LONG-TERM CARE SERVICES.—Dis-
tributions to an individual from an individual
retirement plan to the extent such distributions
do not exceed the expenses paid by the taxpayer
during the taxable year for qualified long-term
care services (as defined in section 7702B(c)).
Distributions shall not be taken into account
under the preceding sentence if such distribu-
tions are described in subparagraph (A), (C),
(D), (E), or (F) or to the extent paragraph (1)
does not apply to such distributions by reason
of subparagraph (B).’’
(b) EXPANDED PENALTY-FREE WITHDRAWALS FOR
UNEMPLOYED.—
(1) 
IN
GENERAL.—Clause 
(i) 
of 
section
72(t)(2)(D) of such Code is amended by inserting
‘‘and’’ at the end of subclause (I), by striking ‘‘,
and’’ at the end of subclause (II) and inserting a pe-
riod, and by striking subclause (III).
(2) CONFORMING AMENDMENT.—The heading
for subparagraph (D) of section 72(t)(2) of such
‘‘(q) REPAYABLE DISTRIBUTIONS FROM INDIVIDUAL
RETIREMENT ACCOUNTS FOR FIRST HOME PURCHASES,
HIGHER EDUCATION EXPENSES, QUALIFIED LONG TERM
CARE
EXPENSES, QUALIFIED
UNEMPLOYMENT
DIS-
TRIBUTIONS, AND FINANCIALLY DEVASTATING MEDICAL
EXPENSES.—
‘‘(1) IN GENERAL.—Notwithstanding any other
provision of this section, gross income shall not in-
clude any qualified distribution.
‘‘(2) REPAYMENT REQUIREMENT.—
‘‘(A) ADDITION TO TAX.—If the required
recontributions made by the taxpayer during
the repayment period are less than the qualified
distribution, the tax imposed by this chapter for
the last taxable year in the repayment period
shall be increased by the amount determined
under subparagraph (B).
‘‘(B) DETERMINATION OF AMOUNT.—The
amount determined under this subparagraph
shall be an amount which bears the same ratio
to the tax benefit amount as—
‘‘(i) the excess (if any) of the qualified
distribution over required recontributions
made during the repayment period, bears
to
‘‘(ii) the qualified distribution.
‘‘(C) REPAYMENT PERIOD.—For purposes
of this subsection, the term ‘repayment period’
means, with respect to any qualified distribu-
tion, the 5-taxable year period beginning after
the taxable year in which such distribution is
received.
‘‘(D) TAX
BENEFIT
AMOUNT.—For pur-
poses of this subsection, the term ‘tax benefit
amount’ means, with respect to any qualified
distribution, the sum of—
‘‘(i) the aggregate reduction in the tax
imposed by this chapter for the taxable
year in which such distribution is received
by reason of the exclusion under paragraph
(1), and
‘‘(ii) interest on the amount of such
reduction for the repayment period com-
puted at the Federal mid-term rate (within
the meaning of section 1274(d)(1)) and
compounded annually.
‘‘(3) QUALIFIED DISTRIBUTION.—For purposes
of this subsection, the term ‘qualified distribution’
means any distribution described in subparagraph
(B), (D), (E), (F), or (G) of section 72(t)(2) to an
individual from an individual retirement plan main-
tained for the benefit of such individual.
‘‘(4) RECONTRIBUTION
OF
QUALIFIED
DIS-
TRIBUTIONS.—
‘‘(A) IN
GENERAL.—If an individual re-
ceived a qualified distribution, such individual
shall make required recontributions in the man-
ner provided in this paragraph to an individual
retirement plan maintained for the benefit of
such individual.
‘‘(B) METHOD OF MAKING RECONTRIBU-
TION.—Any required recontribution—
‘‘(i) shall be made during the repay-
ment period for the qualified distribution,
‘‘(ii) shall not exceed the qualified dis-
tribution reduced by any prior recontribu-
tion under this paragraph with respect to
such distribution, and
‘‘(iii) shall be made by making a pay-
ment in cash to an individual retirement
plan for the benefit of such individual.
An individual making a required recontribution
under this paragraph shall designate (in the
manner prescribed by the Secretary) such con-
tribution as a required recontribution under
this paragraph and shall specify the qualified
distribution with respect to which such recon-
tribution is being made.
‘‘(C) TREATMENT
AS
ROLLOVER
CON-
TRIBUTION.—For purposes of this title, any re-
quired recontribution under this paragraph
shall be treated as a rollover contribution de-
scribed in subsection (d)(3).
‘‘(7) OTHER SPECIAL RULES.—
‘‘(A) BASIS RULES NOT AFFECTED.—The
tax treatment under this chapter of any dis-
tribution (other than a qualified distribution)
shall be determined as if this subsection had
not been enacted.
‘‘(B) AGGREGATION RULE.—For purposes
of this subsection, all qualified distributions re-
ceived by an individual during a taxable year
shall be treated as a single distribution.’’
(e) EFFECTIVE DATE.—The amendments made by
this section shall apply to distributions received in taxable
years beginning after December 31, 1998.
SEC. 2. INCREASE IN AMOUNT OF DEDUCTIBLE IRA CON-
TRIBUTIONS AND INDEXING FOR INFLATION.
(a) INCREASE IN MAXIMUM AMOUNT OF DEDUC-
TION.—Subparagraph (A) of section 219(b)(1) of the In-
ternal Revenue Code of 1986 (relating to maximum
amount of deduction) is amended by striking ‘‘$2,000’’
and inserting ‘‘$4,500’’.
(b) INFLATION ADJUSTMENTS.—Subsection (f) of
section 219 of such Code is amended by adding at the
end the following new paragraph:
‘‘(8) INFLATION ADJUSTMENTS.—In the case of
a taxable year beginning in a calendar year after
1999, each dollar amount set forth in subsections
(b)(1)(A) and (g)(3)(B) shall be increased by an
amount equal to—
‘‘(A) such dollar amount, multiplied by
‘‘(B) the cost-of-living adjustment deter-
mined under section 1(f)(3) for such calendar
year by substituting ‘calendar year 1998’ for
‘calendar year 1992’ in subparagraph (B)
thereof.
If any increase determined under the preceding sen-
tence is not a multiple of $100, such increase shall
be rounded to the nearest multiple of $100.’’
(c) CONFORMING AMENDMENTS.—
(1) Subsections (a)(1) and (b) of section 408 of
such Code are each amended by striking ‘‘$2,000’’
each place it appears and inserting ‘‘the dollar limi-
tation in effect under section 219(b)(1)(A)’’.
(2) Subsection (j) of section 408 of such Code
is amended by striking ‘‘the $2,000 amounts con-
tained’’ and inserting ‘‘the dollar limitations referred
to’’.
(3) Paragraph (8) of section 408(p) of such
Code is amended by striking ‘‘$2,000’’ and inserting
‘‘the dollar limitation in effect under section
219(b)(1)(A)’’.
(d) EFFECTIVE DATE.—The amendments made by
this section shall apply to taxable years beginning after
December 31, 1998.
SEC. 3. ELIMINATION OF PHASE-OUT FOR INDIVIDUALS
NOT ACTIVE PARTICIPANTS IN DEFINED CON-
TRIBUTION PLANS AND INCREASE OF IN-
COME LIMITS FOR OTHERS.
(a) ELIMINATION OF PHASE-OUT FOR INDIVIDUALS
NOT ACTIVE PARTICIPANTS IN DEFINED CONTRIBUTION
PLAN.—Paragraph (5) of section 219(g) of the Internal
Revenue Code of 1986 (relating to active participant) is
amended by striking the period at the end of subpara-
graph (B) and inserting a comma, and by inserting after
subparagraph (B) the following:
‘‘if such plan, contract, pension, or trust is a defined
contribution plan (as defined in section 414(i)).’’
(b) INCREASE IN INCOME PHASEOUT LEVELS.—
SEC. 
4. 
WITHHOLDING, 
CONTRIBUTION 
LIMITS, 
AND
MATCHING CONTRIBUTION NONDISCRIMINA-
TION REQUIREMENTS FOR 401(k) PLANS.
(a) INAPPLICABILITY OF WITHHOLDING REQUIRE-
MENT TO 401(k) DISTRIBUTIONS.—
(1) IN
GENERAL.—Paragraph (3) of section
3405(c) of the Internal Revenue Code of 1986 (re-
lating to eligible rollover distribution) is amended by
striking the period at the end and inserting the fol-
lowing: ‘‘, except that such term shall not include a
distribution from a qualified cash or deferred ar-
rangement (as defined in section 401(k)).’’
(2) EFFECTIVE DATE.—The amendment made
by this subsection shall apply to distributions made
after December 31, 1998.
(b) INCREASE IN CONTRIBUTION LIMITS FOR 401(k)
PLANS.—
(1) IN
GENERAL.—Paragraph (1) of section
402(g) of such Code (relating to limitation on exclu-
sion for elective deferrals) is amended by striking
‘‘$7,000’’ and inserting ‘‘$20,000’’.
(2) CONFORMING AMENDMENT.—Paragraph (5)
of section 402(g) of such Code (relating to cost-of-
living adjustment) is amended by striking ‘‘$7,000’’
and inserting ‘‘$20,000’’ and by inserting before the
period ‘‘and the base period taken into account shall
be the calendar quarter beginning October 1, 1998’’.
(3) EFFECTIVE DATE.—The amendments made
by this subsection shall apply to taxable years begin-
ning after December 31, 1998.
(c) ALTERNATIVE METHODS FOR MEETING SECTION
401(k) NONDISCRIMINATION TEST AND NONDISCRIMINA-
TION TEST FOR MATCHING CONTRIBUTIONS.—
(1) 
SECTION
401(k) 
NONDISCRIMINATION
TEST.—Subsection (k) of section 401 of such Code
(relating to cash or deferred arrangements) is
amended by adding at the end the following new
paragraph:
‘‘(13) ADDITIONAL ALTERNATIVE METHOD OF
MEETING NONDISCRIMINATION REQUIREMENTS.—
‘‘(A) IN GENERAL.—A cash or deferred ar-
rangement shall be treated as meeting the re-
quirements of paragraph (3)(A)(ii) if—
‘‘(i) under the arrangement, the em-
ployer makes matching contributions on
behalf of each employee in an amount
equal to a percentage of the contributions
and elective deferrals of such employee,
‘‘(ii) the same such percentage applies
to all employees of the employer, and
‘‘(iii) not less than biannually, each
employee eligible to participate under the
arrangement is given written notice of the
employee’s rights and obligations under the
arrangement which meets the requirements
of clauses (i) and (ii) of paragraph
(12)(D).
‘‘(B) SPECIAL
RULES
REGARDING
IN-
CREASE
AND
DECREASE
IN
MATCHING
CON-
TRIBUTIONS.—
‘‘(i) INCREASE IN RATE OF MATCHING
CONTRIBUTIONS.—An arrangement shall
not be treated as meeting the requirement
of subparagraph (A)(ii) if the rate of the
employer’s 
matching 
contributions 
in-
creases as the rate of an employee’s con-
tributions or elective deferrals increases.
‘‘(ii) 
PERMISSIBLE
DECREASE
AS
ELECTIVE
DEFERRALS
AND
CONTRIBU-
TIONS
INCREASE.—An arrangement shall
not fail to be treated as meeting the re-
quirement of subparagraph (A)(ii) by rea-
son of a decrease in the rate of the employ-
er’s matching contributions as the rate of
the employee’s contributions or elective de-
ferrals increases, if the same such rate of
decrease applies to all employees of the
employer.’’
(2) NONDISCRIMINATION TEST FOR MATCHING
CONTRIBUTIONS.—Subsection (m) of section 401 of
such Code is amended by redesignating paragraph
(12) as paragraph (13) and by inserting after para-
graph (11) the following new paragraph:
‘‘(12) ADDITIONAL ALTERNATIVE METHOD FOR
CASH OR DEFERRED ARRANGEMENTS.—A qualified
cash or deferred arrangement (as defined in sub-
section (k)) shall be treated as meeting the require-
ments of paragraph (2) with respect to matching
contributions if the arrangement meets the require-
ments of subsection (k)(13).’’
(3) EFFECTIVE DATE.—The amendments made
by this section shall apply to years beginning after
December 31, 1998.
SEC. 5. INHERITED IRAS AND INHERITED 401(k) AMOUNTS.
(a) EXCLUSION OF INHERITED IRAS AND CERTAIN
INHERITED 401(k) AMOUNTS FROM GROSS ESTATE.—
(1) IN GENERAL.—Section 2039 of the Internal
Revenue Code of 1986 is amended by adding at the
end the following new subsection:
‘‘(c) EXCLUSION OF INDIVIDUAL RETIREMENT AC-
COUNTS AND CERTAIN INHERITED 401(k) AMOUNTS.—
Notwithstanding any other provision of this section or of
any other provision of law, there shall be excluded from
the value of the gross estate any amount receivable by any
beneficiary (other than the executor) under—
‘‘(1) an individual retirement plan of the dece-
dent, or
‘‘(2) a qualified cash or deferred arrangement
(as defined in section 401(k)) of the decedent, if the
requirements of section 408(o)(2)(B)(iii) are met
with respect to such amount.’’
(2) EFFECTIVE DATE.—The amendment made
by paragraph (1) shall apply to estates of decedents
dying after December 31, 1998.
(b) BENEFICIARY PERMITTED TO HOLD IRA RE-
CEIVED FROM DECEDENT.—
(1) IN GENERAL.—Subparagraph (B) of section
401(a)(9) of such Code (relating to required dis-
tributions) is amended by adding at the end the fol-
lowing new clause:
‘‘(v) EXCEPTION
FOR
DESIGNATED
BENEFICIARY OF INDIVIDUAL RETIREMENT
PLAN.—Notwithstanding clauses (iii) and
(iv), if any portion of the interest in an in-
dividual retirement plan is payable to (or
for the benefit of) a designated beneficiary
by reason of the death of another individ-
ual, the date on which distributions from
such plan are required to begin under this
paragraph shall be determined by applying
this paragraph as if such beneficiary were
the employee.’’
(2) CONFORMING AMENDMENT.—Paragraph (3)
of section 408(d) of such Code is amended by strik-
ing subparagraph (C) (relating to denial of rollover
treatment for inherited accounts, etc.).
(3) EFFECTIVE DATE.—The amendments made
by this subsection shall apply to amounts payable
after, and acquisitions after, December 31, 1998.
(c) CONTRIBUTION OF INHERITED 401(k) AMOUNTS
TO IRA; EXCLUSION FROM GROSS INCOME FOR SUCH
AMOUNTS.—
(1) IN GENERAL.—Subparagraph (B) of section
408(o)(2) of such Code (relating to nondeductible
limit) is amended by adding at the end the following
new clause:
‘‘(iii) INHERITED 401(k) AMOUNTS.—
If, by reason of the death of an employee,
an individual receives an amount attrib-
utable to an elective deferral described in
section 402(g)(3)(A) of such employee—
‘‘(I) such individual’s nondeduct-
ible limit for the taxable year in which
such amount is received shall be in-
creased by the portion of such amount
which is paid (not later than the 60th
day after the date of such receipt)
into an individual retirement plan for
the benefit of such individual, and
‘‘(II) such portion shall not be
includible in the gross income of such
individual.’’
(2) CONFORMING AMENDMENT.—Paragraph (1)
of section 4973(b) of such Code (relating to excess
contributions) is amended by striking ‘‘408(d)(3))’’
and inserting ‘‘408(d)(3)) and other than amounts
excluded 
from 
gross 
income 
under 
section
408(o)(2)(B)(iii)’’.
(3) EFFECTIVE DATE.—The amendments made
by this subsection shall apply to amounts received
after December 31, 1998.
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