438 
tive contribution is made to 
make either such election.’’. 
(b) 
MATCHING
CONTRIBUTIONS.—Section 
401(m) 
of 
such 
Code 
(relating 
to 
non-
discrimination test for matching contribu-
tions and employee contributions) is amended 
by redesignating paragraph (12) as paragraph 
(13) and by inserting after paragraph (11) the 
following new paragraph: 
‘‘(12) ALTERNATIVE METHOD FOR AUTO-
MATIC
CONTRIBUTION
ARRANGEMENTS.—A 
defined contribution plan shall be treated 
as meeting the requirements of para-
graph (2) with respect to matching con-
tributions if the plan— 
‘‘(A) is a qualified automatic con-
tribution arrangement (as defined in 
subsection (k)(13)), and 
‘‘(B) meets the requirements of 
paragraph (11)(B).’’. 
(c) EXCLUSION FROM DEFINITION
OF TOP- 
HEAVY PLANS.— 
(1) ELECTIVE
CONTRIBUTION
RULE.— 
Clause (i) of section 416(g)(4)(H) of such
439 
Code 
is 
amended 
by 
inserting 
‘‘or 
401(k)(13)’’ after ‘‘section 401(k)(12)’’. 
(2) MATCHING
CONTRIBUTION
RULE.— 
Clause (ii) of section 416(g)(4)(H) of such 
Code 
is 
amended 
by 
inserting 
‘‘or 
401(m)(12)’’ after ‘‘section 401(m)(11)’’. 
(d) CORRECTIVE DISTRIBUTIONS.— 
(1) IN GENERAL.—Section 414 of the In-
ternal Revenue Code of 1986 (relating to 
definitions and special rules) is amended 
by adding at the end the following new 
subsection: 
‘‘(w) AUTOMATIC CONTRIBUTION ARRANGE-
MENTS.— 
‘‘(1) IN GENERAL.—No tax shall be im-
posed under section 72(t) on a distribu-
tion from an applicable employer plan to 
the employee with respect to whom such 
contribution relates if such distribution 
does not exceed the erroneous automatic 
contribution amount and is made not 
later than the 1st April 15 following the 
close of the taxable year in which such 
contribution was made.
440 
‘‘(2) ERRONEOUS AUTOMATIC CONTRIBU-
TION AMOUNT.—For purposes of this sub-
section— 
‘‘(A) IN GENERAL.—The term ‘erro-
neous 
automatic 
contribution 
amount’ means the lesser of— 
‘‘(i) the amount of automatic 
contributions made during the 
applicable period which the em-
ployee elects in a notice to the 
plan administrator to treat as an 
erroneous automatic contribution 
amount for purposes of this sub-
section, or 
‘‘(ii) $500. 
‘‘(B) AUTOMATIC
CONTRIBUTION.— 
The term ‘automatic contribution’ 
means contributions which, under 
the terms of the plan— 
‘‘(i) the employee can elect to 
be made as contributions under 
the plan on behalf of the em-
ployee, or to the employee di-
rectly in cash, and
441 
‘‘(ii) which are made on behalf 
of the employee under the plan 
pursuant to a plan provision 
treating the employee as having 
elected to have the employer 
make such contributions on be-
half of the employee until the em-
ployee affirmatively elects not to 
have such contribution made or 
affirmatively elects to make con-
tributions as a specified level. 
‘‘(3) APPLICABLE EMPLOYER PLAN.—For 
purposes of this subsection, the term ‘ap-
plicable employer plan’means— 
‘‘(A) an employees’ trust described 
in section 401(a) which is exempt 
from tax under section 501(a), and 
‘‘(B) a plan under which amounts 
are contributed by an individual’s 
employer for an annuity contract de-
scribed in section 403(b). 
‘‘(4) 
APPLICABLE
PERIOD.—For 
pur-
poses of this subsection, the term ‘appli-
cable period’ means, with respect to any 
employee, the three month period that
442 
begins on the first date that an automatic 
contribution 
described 
in 
paragraph 
(2)(B) is made with respect to such em-
ployee.’’. 
(2) 
VESTING
CONFORMING
AMEND-
MENTS.— 
(A) Section 411(a)(3)(G) of such 
Code is amended by inserting ‘‘an er-
roneous 
automatic 
contribution 
under 
section 
414(w),’’ 
after 
‘‘402(g)(2)(A),’’. 
(B) 
The 
heading 
of 
section 
411(a)(3)(G) of such Code is amended 
by inserting ‘‘OR
ERRONEOUS
AUTO-
MATIC
CONTRIBUTION’’ before the pe-
riod. 
(C) Section 401(k)(8)(E) of such 
Code is amended by inserting ‘‘an er-
roneous 
automatic 
contribution 
under 
section 
414(w),’’ 
after 
‘‘402(g)(2)(A),’’. 
(D) 
The 
heading 
of 
section 
401(k)(8)(E) of such Code is amended 
by inserting ‘‘OR
ERRONEOUS
AUTO-
443 
MATIC
CONTRIBUTION’’ before the pe-
riod. 
(e) EFFECTIVE
DATE.—The amendments 
made by this section shall apply to plan years 
beginning after December 31, 2005. 
SEC. 904. PENALTY-FREE WITHDRAWALS FROM RETIRE-
MENT PLANS FOR INDIVIDUALS CALLED TO 
ACTIVE DUTY FOR AT LEAST 179 DAYS. 
(a) IN GENERAL.—Paragraph (2) of section 
72(t) of the Internal Revenue Code of 1986 (re-
lating to 10-percent additional tax on early 
distributions from qualified retirement plans) 
is amended by adding at the end the following 
new subparagraph: 
‘‘(G) DISTRIBUTIONS
FROM
RETIRE-
MENT PLANS TO INDIVIDUALS CALLED TO 
ACTIVE DUTY.— 
‘‘(i) IN
GENERAL.—Any quali-
fied reservist distribution. 
‘‘(ii) AMOUNT DISTRIBUTED MAY 
BE
REPAID.—Any individual who 
receives a qualified reservist dis-
tribution may, at any time during 
the 2-year period beginning on 
the day after the end of the active
444 
duty period, make one or more 
contributions to an individual re-
tirement plan of such individual 
in an aggregate amount not to ex-
ceed the amount of such distribu-
tion. The dollar limitations other-
wise applicable to contributions 
to individual retirement plans 
shall not apply to any contribu-
tion made pursuant to the pre-
ceding sentence. No deduction 
shall be allowed for any contribu-
tion pursuant to this clause. 
‘‘(iii) QUALIFIED RESERVIST DIS-
TRIBUTION.—For purposes of this 
subparagraph, the term ‘qualified 
reservist distribution’ means any 
distribution to an individual if— 
‘‘(I) such distribution is 
from an individual retirement 
plan, or from amounts attrib-
utable to employer contribu-
tions made pursuant to elec-
tive deferrals described in 
subparagraph (A) or (C) of
445 
section 402(g)(3) or section 
501(c)(18)(D)(iii), 
‘‘(II) such individual was 
(by reason of being a member 
of a reserve component (as de-
fined in section 101 of title 37, 
United States Code)), ordered 
or called to active duty for a 
period in excess of 179 days or 
for an indefinite period, and 
‘‘(III) such distribution is 
made during the period begin-
ning on the date of such order 
or call and ending at the close 
of the active duty period. 
‘‘(iv) APPLICATION OF SUBPARA-
GRAPH.—This 
subparagraph 
ap-
plies to individuals ordered or 
called to active duty after Sep-
tember 11, 2001, and before Sep-
tember 12, 2007. In no event shall 
the 2-year period referred to in 
clause (ii) end before the date 
which is 2-years after the date of
446 
the enactment of this subpara-
graph.’’. 
(b) CONFORMING AMENDMENTS.— 
(1) Section 401(k)(2)(B)(i) of such 
Code is amended by striking ‘‘or’’ at the 
end of subclause (III), by striking ‘‘and’’ 
at the end of subclause (IV) and inserting 
‘‘or’’, and by inserting after subclause (IV) 
the following new subclause: 
‘‘(V) in the case of a quali-
fied reservist distribution (as 
defined 
in 
section 
72(t)(2)(G)(iii)), the date on 
which a period referred to in 
subclause (III) of such section 
begins, and’’. 
(2) Section 403(b)(7)(A)(ii) of such 
Code is amended by inserting ‘‘(unless 
such amount is a distribution to which 
section 72(t)(2)(G) applies)’’ after ‘‘dis-
tributee’’. 
(3) Section 403(b)(11) of such Code is 
amended by striking ‘‘or’’ at the end of 
subparagraph (A), by striking the period 
at the end of subparagraph (B) and in-
447 
serting ‘‘, or’’, and by inserting after sub-
paragraph (B) the following new subpara-
graph: 
‘‘(C) for distributions to which 
section 72(t)(2)(G) applies.’’. 
(c) EFFECTIVE DATE; WAIVER
OF LIMITA-
TIONS.— 
(1) EFFECTIVE DATE.—The amendment 
made by this section shall apply to dis-
tributions after September 11, 2001. 
(2) WAIVER OF LIMITATIONS.—If refund 
or credit of any overpayment of tax re-
sulting from the amendments made by 
this section is prevented at any time be-
fore the close of the 1-year period begin-
ning on the date of the enactment of this 
Act by the operation of any law or rule of 
law (including res judicata), such refund 
or credit may nevertheless be made or al-
lowed if claim therefor is filed before the 
close of such period.
448 
SEC. 905. WAIVER OF 10 PERCENT EARLY WITHDRAWAL 
PENALTY TAX ON CERTAIN DISTRIBUTIONS 
OF PENSION PLANS FOR PUBLIC SAFETY EM-
PLOYEES. 
(a) IN GENERAL.—Section 72(t)(2) of the In-
ternal Revenue Code of 1986 (relating to sub-
section not to apply to certain distributions), 
as amended by section 904, is amended by 
adding at the end the following new sub-
section: 
‘‘(H) 
DROP 
DISTRIBUTIONS
TO 
QUALIFIED PUBLIC SAFETY EMPLOYEES IN 
GOVERNMENTAL PLANS.— 
‘‘(i) 
IN
GENERAL.—Distribu-
tions to an individual who is a 
qualified public safety employee 
from a governmental plan within 
the meaning of section 414(d) to 
the extent such distributions are 
attributable to a DROP benefit. 
‘‘(ii) 
DEFINITIONS.—For 
pur-
poses of this subparagraph— 
‘‘(I) DROP BENEFIT.—The 
term ‘DROP benefit’ means a 
feature 
of 
a 
governmental 
plan which is a defined ben-
449 
efit plan and under which an 
employee 
elects 
to 
receive 
credits to an account (includ-
ing a notional account) in the 
plan which are not in excess 
of the plan benefits (payable 
in the form of an annuity) 
that would have been pro-
vided if the employee had re-
tired under the plan at a spec-
ified earlier retirement date 
and which are in lieu of in-
creases in the employee’s ac-
crued pension benefit based 
on years of service after the 
effective date of the DROP 
election. 
‘‘(II) 
QUALIFIED
PUBLIC 
SAFETY
EMPLOYEE.—The term 
‘qualified public safety em-
ployee’ means any employee 
of any police department or 
fire 
department 
organized 
and operated by a State or po-
litical subdivision of a State if
450 
the employee provides police 
protection, firefighting serv-
ices, or emergency medical 
services for any area within 
the jurisdiction of such State 
or political subdivision and if 
the employee was eligible to 
retire on or before the date of 
such election and receive im-
mediate retirement benefits.’’. 
(b) EFFECTIVE
DATE.—The amendments 
made by this section shall apply to distribu-
tions after the date of the enactment of this 
Act. 
SEC. 906. COMBAT ZONE COMPENSATION TAKEN INTO AC-
COUNT FOR PURPOSES OF DETERMINING 
LIMITATION AND DEDUCTIBILITY OF CON-
TRIBUTIONS TO INDIVIDUAL RETIREMENT 
PLANS. 
(a) IN GENERAL.—Subsection (f) of section 
219 of the Internal Revenue Code of 1986 is 
amended by redesignating paragraph (7) as 
paragraph (8) and by inserting after para-
graph (6) the following new paragraph:
451 
‘‘(7) SPECIAL RULE FOR COMPENSATION 
EARNED BY MEMBERS OF THE ARMED FORCES 
FOR SERVICE IN A COMBAT ZONE.—For pur-
poses of subsections (b)(1)(B) and (c), the 
amount of compensation includible in an 
individual’s gross income shall be deter-
mined without regard to section 112.’’. 
(b) EFFECTIVE
DATE.—The amendments 
made by this section shall apply to taxable 
years beginning after December 31, 2005. 
SEC. 907. DIRECT PAYMENT OF TAX REFUNDS TO INDI-
VIDUAL RETIREMENT PLANS. 
(a) IN GENERAL.—The Secretary of the 
Treasury (or the Secretary’s delegate) shall 
make available a form (or modify existing 
forms) for use by individuals to direct that a 
portion of any refund of overpayment of tax 
imposed by chapter 1 of the Internal Revenue 
Code of 1986 be paid directly to an individual 
retirement 
plan 
(as 
defined 
in 
section 
7701(a)(37) of such Code) of such individual. 
(b) EFFECTIVE DATE.—The form required 
by subsection (a) shall be made available for 
taxable years beginning after December 31, 
2006.
452 
SEC. 908. IRA ELIGIBILITY FOR THE DISABLED. 
(a) IN GENERAL.—Subsection (f) of section 
219 of the Internal Revenue Code of 1986 (re-
lating to other definitions and special rules), 
as amended by this Act, is further amended by 
redesignating paragraph (8) as paragraph (9) 
and by inserting after paragraph (7) the fol-
lowing new paragraph: 
‘‘(8) SPECIAL
RULE
FOR
CERTAIN
DIS-
ABLED INDIVIDUALS.—In the case of an in-
dividual— 
‘‘(A) who is disabled (within the 
meaning of section 72(m)(7)), and 
‘‘(B) who has not attained the ap-
plicable age (as defined in section 
401(a)(9)(H)) before the close of the 
taxable year, 
subparagraph (B) of subsection (b)(1) 
shall not apply.’’. 
(b) EFFECTIVE
DATE.—The amendment 
made by this section shall apply to taxable 
years beginning after December 31, 2005. 
SEC. 909. ALLOW ROLLOVERS BY NONSPOUSE BENE-
FICIARIES OF CERTAIN RETIREMENT PLAN 
DISTRIBUTIONS. 
(a) IN GENERAL.—
453 
(1) QUALIFIED
PLANS.—Section 402(c) 
of the Internal Revenue Code of 1986 (re-
lating to rollovers from exempt trusts) is 
amended by adding at the end the fol-
lowing new paragraph: 
‘‘(11) DISTRIBUTIONS TO INHERITED INDI-
VIDUAL
RETIREMENT
PLAN
OF
NONSPOUSE 
BENEFICIARY.— 
‘‘(A) IN GENERAL.—If, with respect 
to any portion of a distribution from 
an eligible retirement plan of a de-
ceased employee, a direct trustee-to- 
trustee transfer is made to an indi-
vidual retirement plan described in 
clause (i) or (ii) of paragraph (8)(B) 
established for the purposes of re-
ceiving the distribution on behalf of 
an individual who is a designated 
beneficiary (as defined by section 
401(a)(9)(E)) of the employee and who 
is not the surviving spouse of the em-
ployee— 
‘‘(i) the transfer shall be treat-
ed as an eligible rollover distribu-