272
paid or incurred by the taxpayer to a quali-
fied research consortium for qualified re-
search on behalf of the taxpayer and 1 or
more unrelated taxpayers. For purposes of
the preceding sentence, all persons treated
as a single employer under subsection (a)
or (b) of section 52 shall be treated as relat-
ed taxpayers.
‘‘(ii) QUALIFIED
RESEARCH
CONSOR-
TIUM.—The term ‘qualified research consor-
tium’ means any organization which—
‘‘(I) 
is 
described 
in 
section
501(c)(3) or 501(c)(6) and is exempt
from tax under section 501(a),
‘‘(II) is organized and operated
primarily to conduct scientific re-
search, and
‘‘(III) is not a private founda-
tion.’’
(e) CONFORMING AMENDMENT.—Subparagraph (D) of
section 28(b)(1) is amended by inserting ‘‘, and before July
1, 1996, and periods after June 30, 1997’’ after ‘‘June 30,
1995’’.
(f) EFFECTIVE DATES.—
273
(1) IN GENERAL.—Except as provided in para-
graph (2), the amendments made by this section shall
apply to taxable years ending after June 30, 1996.
(2) SUBSECTIONS (c) AND (d).—The amendments
made by subsections (c) and (d) shall apply to taxable
years beginning after June 30, 1996.
SEC. 1204. ORPHAN DRUG TAX CREDIT.
(a) RECATEGORIZED AS A BUSINESS CREDIT.—
(1) IN GENERAL.—Section 28 (relating to clini-
cal testing expenses for certain drugs for rare diseases
or conditions) is transferred to subpart D of part IV
of subchapter A of chapter 1, inserted after section
45B, and redesignated as section 45C.
(2) CONFORMING
AMENDMENT.—Subsection (b)
of section 38 (relating to general business credit) is
amended by striking ‘‘plus’’ at the end of paragraph
(10), by striking the period at the end of paragraph
(11) and inserting ‘‘, plus’’, and by adding at the end
the following new paragraph:
‘‘(12) the orphan drug credit determined under
section 45C(a).’’
(3) CLERICAL AMENDMENTS.—
(A) The table of sections for subpart B of
such part IV is amended by striking the item re-
lating to section 28.
274
(B) The table of sections for subpart D of
such part IV is amended by adding at the end
the following new item:
‘‘Sec. 45C. Clinical testing expenses for certain drugs for rare diseases or
conditions.’’
(b) CREDIT TERMINATION.—Subsection (e) of section
45C, as redesignated by subsection (a)(1), is amended to
read as follows:
‘‘(e) TERMINATION.—This section shall not apply to
any amount paid or incurred—
‘‘(A) after December 31, 1994, and before
July 1, 1996, or
‘‘(B) after June 30, 1997.’’
(c) NO PRE-JULY 1, 1996 CARRYBACKS.—Subsection
(d) of section 39 (relating to carryback and carryforward
of unused credits) is amended by adding at the end the fol-
lowing new paragraph:
‘‘(7) NO CARRYBACK OF SECTION 45C CREDIT BE-
FORE JULY 1, 1996.—No portion of the unused busi-
ness credit for any taxable year which is attributable
to the orphan drug credit determined under section
45C may be carried back to a taxable year ending be-
fore July 1, 1996.’’
(d) ADDITIONAL CONFORMING AMENDMENTS.—
(1) Section 45C(a), as redesignated by subsection
(a)(1), is amended by striking ‘‘There shall be allowed
275
as a credit against the tax imposed by this chapter
for the taxable year’’ and inserting ‘‘For purposes of
section 38, the credit determined under this section
for the taxable year is’’.
(2) Section 45C(d), as so redesignated, is amend-
ed by striking paragraph (2) and by redesignating
paragraphs (3), (4), and (5) as paragraphs (2), (3),
and (4).
(3) Section 29(b)(6)(A) is amended by striking
‘‘sections 27 and 28’’ and inserting ‘‘section 27’’.
(4) Section 30(b)(3)(A) is amended by striking
‘‘sections 27, 28, and 29’’ and inserting ‘‘sections 27
and 29’’.
(5) Section 53(d)(1)(B) is amended—
(A) by striking ‘‘or not allowed under sec-
tion 28 solely by reason of the application of sec-
tion 28(d)(2)(B),’’ in clause (iii), and
(B) by striking ‘‘or not allowed under sec-
tion 28 solely by reason of the application of sec-
tion 28(d)(2)(B)’’ in clause (iv)(II).
(6) Section 55(c)(2) is amended by striking
‘‘28(d)(2),’’.
(7) Section 280C(b) is amended—
(A) by striking ‘‘section 28(b)’’ in para-
graph (1) and inserting ‘‘section 45C(b)’’,
276
(B) by striking ‘‘section 28’’ in paragraphs
(1) and (2)(A) and inserting ‘‘section 45C(b)’’,
and
(C) by striking ‘‘subsection (d)(2) thereof’’
in paragraphs (1) and (2)(A) and inserting ‘‘sec-
tion 38(c)’’.
(e) EFFECTIVE DATE.—The amendments made by this
section shall apply to amounts paid or incurred in taxable
years ending after June 30, 1996.
SEC. 1205. CONTRIBUTIONS OF STOCK TO PRIVATE FOUN-
DATIONS.
(a) IN
GENERAL.—Subparagraph (D) of section
170(e)(5) (relating to special rule for contributions of stock
for which market quotations are readily available) is
amended to read as follows:
‘‘(D) TERMINATION.—This paragraph shall
not apply to contributions made—
‘‘(A) after December 31, 1994, and before
July 1, 1996, or
‘‘(B) after June 30, 1997.’’
(b) EFFECTIVE DATE.—The amendment made by this
section shall apply to contributions made after June 30,
1996.
277
SEC. 1206. EXTENSION OF BINDING CONTRACT DATE FOR
BIOMASS AND COAL FACILITIES.
(a) IN
GENERAL.—Subparagraph (A) of section
29(g)(1) (relating to extension of certain facilities) is
amended by striking ‘‘January 1, 1997’’ and inserting
‘‘January 1, 1998’’ and by striking ‘‘January 1, 1996’’ and
inserting ‘‘the date which is 6 months after the date of the
enactment of the Small Business Job Protection Act of
1996’’.
(b) EFFECTIVE DATE.—The amendment made by this
section shall take effect on the date of the enactment of this
Act.
SEC. 1207. MORATORIUM FOR EXCISE TAX ON DIESEL FUEL
SOLD FOR USE OR USED IN DIESEL-POWERED
MOTORBOATS.
(a) IN
GENERAL.—Subparagraph (D) of section
4041(a)(1) (relating to the imposition of tax on diesel fuel
and special motor fuels) is amended by redesignating
clauses (i) and (ii) as clauses (ii) and (iii), respectively,
and by inserting before clause (ii) (as redesignated) the fol-
lowing new clause:
‘‘(i) no tax shall be imposed by sub-
section (a) or (d)(1) during the period after
June 30, 1996, and before July 1, 1997,’’.
(b) EFFECTIVE DATE.—The amendments made by this
section shall take effect on July 1, 1996.
278
Subtitle C—Provisions Relating to
S Corporations
SEC. 1301. S CORPORATIONS PERMITTED TO HAVE 75
SHAREHOLDERS.
Subparagraph (A) of section 1361(b)(1) (defining
small business corporation) is amended by striking ‘‘35
shareholders’’ and inserting ‘‘75 shareholders’’.
SEC. 1302. ELECTING SMALL BUSINESS TRUSTS.
(a) GENERAL RULE.—Subparagraph (A) of section
1361(c)(2) (relating to certain trusts permitted as share-
holders) is amended by inserting after clause (iv) the follow-
ing new clause:
‘‘(v) An electing small business trust.’’.
(b) CURRENT BENEFICIARIES TREATED AS SHARE-
HOLDERS.—Subparagraph (B) of section 1361(c)(2) is
amended by adding at the end the following new clause:
‘‘(v) In the case of a trust described in
clause (v) of subparagraph (A), each poten-
tial current beneficiary of such trust shall
be treated as a shareholder; except that, if
for any period there is no potential current
beneficiary of such trust, such trust shall be
treated as the shareholder during such pe-
riod.’’.
279
(c) ELECTING SMALL BUSINESS TRUST DEFINED.—
Section 1361 (defining S corporation) is amended by add-
ing at the end the following new subsection:
‘‘(e) ELECTING SMALL BUSINESS TRUST DEFINED.—
‘‘(1) ELECTING SMALL BUSINESS TRUST.—For
purposes of this section—
‘‘(A) IN GENERAL.—Except as provided in
subparagraph (B), the term ‘electing small busi-
ness trust’ means any trust if—
‘‘(i) such trust does not have as a bene-
ficiary any person other than (I) an indi-
vidual, (II) an estate, or (III) an organiza-
tion described in paragraph (2), (3), (4), or
(5) of section 170(c) which holds a contin-
gent interest and is not a potential current
beneficiary,
‘‘(ii) no interest in such trust was ac-
quired by purchase, and
‘‘(iii) an election under this subsection
applies to such trust.
‘‘(B) CERTAIN TRUSTS NOT ELIGIBLE.—The
term ‘electing small business trust’ shall not in-
clude—
‘‘(i) any qualified subchapter S trust
(as defined in subsection (d)(3)) if an elec-
280
tion under subsection (d)(2) applies to any
corporation the stock of which is held by
such trust, and
‘‘(ii) any trust exempt from tax under
this subtitle.
‘‘(C) PURCHASE.—For purposes of subpara-
graph (A), the term ‘purchase’ means any acqui-
sition if the basis of the property acquired is de-
termined under section 1012.
‘‘(2) POTENTIAL
CURRENT
BENEFICIARY.—For
purposes of this section, the term ‘potential current
beneficiary’ means, with respect to any period, any
person who at any time during such period is entitled
to, or at the discretion of any person may receive, a
distribution from the principal or income of the trust.
If a trust disposes of all of the stock which it holds
in an S corporation, then, with respect to such cor-
poration, the term ‘potential current beneficiary’ does
not include any person who first met the requirements
of the preceding sentence during the 60-day period
ending on the date of such disposition.
‘‘(3) ELECTION.—An election under this sub-
section shall be made by the trustee. Any such election
shall apply to the taxable year of the trust for which
281
made and all subsequent taxable years of such trust
unless revoked with the consent of the Secretary.
‘‘(4) CROSS REFERENCE.—
‘‘For special treatment of electing small business
trusts, see section 641(d).’’.
(d) TAXATION
OF
ELECTING
SMALL
BUSINESS
TRUSTS.—Section 641 (relating to imposition of tax on
trusts) is amended by adding at the end the following new
subsection:
‘‘(d) SPECIAL RULES FOR TAXATION OF ELECTING
SMALL BUSINESS TRUSTS.—
‘‘(1) IN GENERAL.—For purposes of this chap-
ter—
‘‘(A) the portion of any electing small busi-
ness trust which consists of stock in 1 or more
S corporations shall be treated as a separate
trust, and
‘‘(B) the amount of the tax imposed by this
chapter on such separate trust shall be deter-
mined with the modifications of paragraph (2).
‘‘(2) MODIFICATIONS.—For purposes of para-
graph (1), the modifications of this paragraph are the
following:
‘‘(A) Except as provided in section 1(h), the
amount of the tax imposed by section 1(e) shall
282
be determined by using the highest rate of tax set
forth in section 1(e).
‘‘(B) The exemption amount under section
55(d) shall be zero.
‘‘(C) The only items of income, loss, deduc-
tion, or credit to be taken into account are the
following:
‘‘(i) The items required to be taken
into account under section 1366.
‘‘(ii) Any gain or loss from the disposi-
tion of stock in an S corporation.
‘‘(iii) To the extent provided in regula-
tions, State or local income taxes or admin-
istrative expenses to the extent allocable to
items described in clauses (i) and (ii).
No deduction or credit shall be allowed for any
amount not described in this paragraph, and no
item described in this paragraph shall be appor-
tioned to any beneficiary.
‘‘(D) No amount shall be allowed under
paragraph (1) or (2) of section 1211(b).
‘‘(3) TREATMENT OF REMAINDER OF TRUST AND
DISTRIBUTIONS.—For purposes of determining—
‘‘(A) the amount of the tax imposed by this
chapter on the portion of any electing small
283
business trust not treated as a separate trust
under paragraph (1), and
‘‘(B) the distributable net income of the en-
tire trust,
the items referred to in paragraph (2)(C) shall be ex-
cluded. Except as provided in the preceding sentence,
this subsection shall not affect the taxation of any dis-
tribution from the trust.
‘‘(4) TREATMENT
OF
UNUSED
DEDUCTIONS
WHERE
TERMINATION
OF
SEPARATE
TRUST.—If a
portion of an electing small business trust ceases to
be treated as a separate trust under paragraph (1),
any carryover or excess deduction of the separate
trust which is referred to in section 642(h) shall be
taken into account by the entire trust.
‘‘(5) ELECTING SMALL BUSINESS TRUST.—For
purposes of this subsection, the term ‘electing small
business trust’ has the meaning given such term by
section 1361(e)(1).’’.
(e) TECHNICAL AMENDMENT.—Paragraph (1) of sec-
tion 1366(a) is amended by inserting ‘‘, or of a trust or
estate which terminates,’’ after ‘‘who dies’’.
284
SEC. 1303. EXPANSION OF POST-DEATH QUALIFICATION
FOR CERTAIN TRUSTS.
Subparagraph (A) of section 1361(c)(2) (relating to
certain trusts permitted as shareholders) is amended—
(1) by striking ‘‘60-day period’’ each place it ap-
pears in clauses (ii) and (iii) and inserting ‘‘2-year
period’’, and
(2) by striking the last sentence in clause (ii).
SEC. 1304. FINANCIAL INSTITUTIONS PERMITTED TO HOLD
SAFE HARBOR DEBT.
Clause (iii) of section 1361(c)(5)(B) (defining straight
debt) is amended by striking ‘‘or a trust described in para-
graph (2)’’ and inserting ‘‘a trust described in paragraph
(2), or a person which is actively and regularly engaged
in the business of lending money’’.
SEC. 1305. RULES RELATING TO INADVERTENT TERMI-
NATIONS AND INVALID ELECTIONS.
(a) GENERAL RULE.—Subsection (f) of section 1362
(relating to inadvertent terminations) is amended to read
as follows:
‘‘(f) INADVERTENT INVALID ELECTIONS OR TERMI-
NATIONS.—If—
‘‘(1) an election under subsection (a) by any cor-
poration—
‘‘(A) was not effective for the taxable year
for which made (determined without regard to
285
subsection (b)(2)) by reason of a failure to meet
the requirements of section 1361(b) or to obtain
shareholder consents, or
‘‘(B) was terminated under paragraph (2)
or (3) of subsection (d),
‘‘(2) the Secretary determines that the cir-
cumstances resulting in such ineffectiveness or termi-
nation were inadvertent,
‘‘(3) no later than a reasonable period of time
after discovery of the circumstances resulting in such
ineffectiveness or termination, steps were taken—
‘‘(A) so that the corporation is a small busi-
ness corporation, or
‘‘(B) to acquire the required shareholder
consents, and
‘‘(4) the corporation, and each person who was
a shareholder in the corporation at any time during
the period specified pursuant to this subsection, agrees
to make such adjustments (consistent with the treat-
ment of the corporation as an S corporation) as may
be required by the Secretary with respect to such pe-
riod,
then, notwithstanding the circumstances resulting in such
ineffectiveness or termination, such corporation shall be
286
treated as an S corporation during the period specified by
the Secretary.’’.
(b) LATE ELECTIONS, ETC.—Subsection (b) of section
1362 is amended by adding at the end the following new
paragraph:
‘‘(5) AUTHORITY
TO
TREAT
LATE
ELECTIONS,
ETC., AS TIMELY.—If—
‘‘(A) an election under subsection (a) is
made for any taxable year (determined without
regard to paragraph (3)) after the date pre-
scribed by this subsection for making such elec-
tion for such taxable year or no such election is
made for any taxable year, and
‘‘(B) the Secretary determines that there
was reasonable cause for the failure to timely
make such election,
the Secretary may treat such an election as timely
made for such taxable year (and paragraph (3) shall
not apply).’’.
(c) EFFECTIVE DATE.—The amendments made by sub-
section (a) and (b) shall apply with respect to elections for
taxable years beginning after December 31, 1982.
SEC. 1306. AGREEMENT TO TERMINATE YEAR.
Paragraph (2) of section 1377(a) (relating to pro rata
share) is amended to read as follows:
287
‘‘(2) ELECTION TO TERMINATE YEAR.—
‘‘(A) IN GENERAL.—Under regulations pre-
scribed by the Secretary, if any shareholder ter-
minates the shareholder’s interest in the corpora-
tion during the taxable year and all affected
shareholders and the corporation agree to the ap-
plication of this paragraph, paragraph (1) shall
be applied to the affected shareholders as if the
taxable year consisted of 2 taxable years the first
of which ends on the date of the termination.
‘‘(B) 
AFFECTED
SHAREHOLDERS.—For
purposes of subparagraph (A), the term ‘affected
shareholders’ means the shareholder whose inter-
est is terminated and all shareholders to whom
such shareholder has transferred shares during
the taxable year. If such shareholder has trans-
ferred shares to the corporation, the term ‘af-
fected shareholders’ shall include all persons who
are shareholders during the taxable year.’’.
SEC. 1307. EXPANSION OF POST-TERMINATION TRANSITION
PERIOD.
(a) IN GENERAL.—Paragraph (1) of section 1377(b)
(relating to post-termination transition period) is amended
by striking ‘‘and’’ at the end of subparagraph (A), by redes-
ignating subparagraph (B) as subparagraph (C), and by
288
inserting after subparagraph (A) the following new sub-
paragraph:
‘‘(B) the 120-day period beginning on the
date of any determination pursuant to an audit
of the taxpayer which follows the termination of
the corporation’s election and which adjusts a
subchapter S item of income, loss, or deduction
of the corporation arising during the S period
(as defined in section 1368(e)(2)), and’’.
(b) DETERMINATION DEFINED.—Paragraph (2) of sec-
tion 1377(b) is amended by striking subparagraphs (A) and
(B), by redesignating subparagraph (C) as subparagraph
(B), and by inserting before subparagraph (B) (as so redes-
ignated) the following new subparagraph:
‘‘(A) a determination as defined in section
1313(a), or’’.
(c) REPEAL OF SPECIAL AUDIT PROVISIONS FOR SUB-
CHAPTER S ITEMS.—
(1) GENERAL RULE.—Subchapter D of chapter
63 (relating to tax treatment of subchapter S items)
is hereby repealed.
(2) CONSISTENT
TREATMENT
REQUIRED.—Sec-
tion 6037 (relating to return of S corporation) is
amended by adding at the end the following new sub-
section:
289
‘‘(c) SHAREHOLDER’S RETURN MUST BE CONSISTENT
WITH CORPORATE RETURN OR SECRETARY NOTIFIED OF
INCONSISTENCY.—
‘‘(1) IN GENERAL.—A shareholder of an S cor-
poration shall, on such shareholder’s return, treat a
subchapter S item in a manner which is consistent
with the treatment of such item on the corporate re-
turn.
‘‘(2) NOTIFICATION
OF
INCONSISTENT
TREAT-
MENT.—
‘‘(A) IN GENERAL.—In the case of any sub-
chapter S item, if—
‘‘(i)(I) the corporation has filed a re-
turn but the shareholder’s treatment on his
return is (or may be) inconsistent with the
treatment of the item on the corporate re-
turn, or
‘‘(II) the corporation has not filed a re-
turn, and
‘‘(ii) the shareholder files with the Sec-
retary a statement identifying the inconsist-
ency,
paragraph (1) shall not apply to such item.
‘‘(B) SHAREHOLDER RECEIVING INCORRECT
INFORMATION.—A shareholder shall be treated as
290
having complied with clause (ii) of subpara-
graph (A) with respect to a subchapter S item if
the shareholder—
‘‘(i) demonstrates to the satisfaction of
the Secretary that the treatment of the sub-
chapter S item on the shareholder’s return
is consistent with the treatment of the item
on the schedule furnished to the shareholder
by the corporation, and
‘‘(ii) elects to have this paragraph
apply with respect to that item.
‘‘(3) EFFECT OF FAILURE TO NOTIFY.—In any
case—
‘‘(A) described in subparagraph (A)(i)(I) of
paragraph (2), and
‘‘(B) in which the shareholder does not com-
ply with subparagraph (A)(ii) of paragraph (2),
any adjustment required to make the treatment of the
items by such shareholder consistent with the treat-
ment of the items on the corporate return shall be
treated as arising out of mathematical or clerical er-
rors and assessed according to section 6213(b)(1).
Paragraph (2) of section 6213(b) shall not apply to
any assessment referred to in the preceding sentence.
291
‘‘(4) SUBCHAPTER S ITEM.—For purposes of this
subsection, the term ‘subchapter S item’ means any
item of an S corporation to the extent that regula-
tions prescribed by the Secretary provide that, for
purposes of this subtitle, such item is more appro-
priately determined at the corporation level than at
the shareholder level.
‘‘(5) ADDITION TO TAX FOR FAILURE TO COMPLY
WITH SECTION.—
‘‘For addition to tax in the case of a shareholder’s
negligence in connection with, or disregard of, the
requirements of this section, see part II of sub-
chapter A of chapter 68.’’.
(3) CONFORMING AMENDMENTS.—
(A) Section 1366 is amended by striking
subsection (g).
(B) Subsection (b) of section 6233 is
amended to read as follows:
‘‘(b) SIMILAR RULES IN CERTAIN CASES.—If a part-
nership return is filed for any taxable year but it is deter-
mined that there is no entity for such taxable year, to the
extent provided in regulations, rules similar to the rules
of subsection (a) shall apply.’’.
(C) The table of subchapters for chapter 63
is amended by striking the item relating to sub-
chapter D.
292
SEC. 1308. S CORPORATIONS PERMITTED TO HOLD SUBSIDI-
ARIES.
(a) IN GENERAL.—Paragraph (2) of section 1361(b)
(defining ineligible corporation) is amended by striking
subparagraph (A) and by redesignating subparagraphs (B),
(C), (D), and (E) as subparagraphs (A), (B), (C), and (D),
respectively.
(b) TREATMENT OF CERTAIN WHOLLY OWNED S COR-
PORATION SUBSIDIARIES.—Section 1361(b) (defining small
business corporation) is amended by adding at the end the
following new paragraph:
‘‘(3) TREATMENT OF CERTAIN WHOLLY OWNED
SUBSIDIARIES.—
‘‘(A) IN
GENERAL.—For purposes of this
title—
‘‘(i) a corporation which is a qualified
subchapter S subsidiary shall not be treated
as a separate corporation, and
‘‘(ii) all assets, liabilities, and items of
income, deduction, and credit of a qualified
subchapter S subsidiary shall be treated as
assets, liabilities, and such items (as the
case may be) of the S corporation.
‘‘(B) QUALIFIED SUBCHAPTER S SUBSIDI-
ARY.—For purposes of this paragraph, the term
‘qualified subchapter S subsidiary’ means any
293
domestic corporation which is not an ineligible
corporation (as defined in paragraph (2)), if—
‘‘(i) 100 percent of the stock of such
corporation is held by the S corporation,
and
‘‘(ii) the S corporation elects to treat
such corporation as a qualified subchapter
S subsidiary.
‘‘(C) TREATMENT
OF
TERMINATIONS
OF
QUALIFIED
SUBCHAPTER
S
SUBSIDIARY
STA-
TUS.—For purposes of this title, if any corpora-
tion which was a qualified subchapter S subsidi-
ary ceases to meet the requirements of subpara-
graph (B), such corporation shall be treated as
a new corporation acquiring all of its assets
(and assuming all of its liabilities) immediately
before such cessation from the S corporation in
exchange for its stock.
‘‘(D) ELECTION AFTER TERMINATION.—If a
corporation’s status as a qualified subchapter S
subsidiary terminates, such corporation (and
any successor corporation) shall not be eligible to
make—
294
‘‘(i) an election under subparagraph
(B)(ii) to be treated as a qualified sub-
chapter S subsidiary, or
‘‘(ii) an election under section 1362(a)
to be treated as an S corporation,
before its 5th taxable year which begins after the
1st taxable year for which such termination was
effective, unless the Secretary consents to such
election.’’
(c) CERTAIN DIVIDENDS NOT TREATED AS PASSIVE
INVESTMENT INCOME.—Paragraph (3) of section 1362(d) is
amended by adding at the end the following new subpara-
graph:
‘‘(F) 
TREATMENT
OF
CERTAIN
DIVI-
DENDS.—If an S corporation holds stock in a C
corporation meeting the requirements of section
1504(a)(2), the term ‘passive investment income’
shall not include dividends from such C corpora-
tion to the extent such dividends are attributable
to the earnings and profits of such C corporation
derived from the active conduct of a trade or
business.’’.
(d) CONFORMING AMENDMENTS.—
(1) Subsection (c) of section 1361 is amended by
striking paragraph (6).
295
(2) Subsection (b) of section 1504 (defining in-
cludible corporation) is amended by adding at the
end the following new paragraph:
‘‘(8) An S corporation.’’.
SEC. 1309. TREATMENT OF DISTRIBUTIONS DURING LOSS
YEARS.
(a) ADJUSTMENTS FOR DISTRIBUTIONS TAKEN INTO
ACCOUNT BEFORE LOSSES.—
(1) Subparagraph (A) of section 1366(d)(1) (re-
lating to losses and deductions cannot exceed share-
holder’s basis in stock and debt) is amended by strik-
ing ‘‘paragraph (1)’’ and inserting ‘‘paragraphs (1)
and (2)(A)’’.
(2) Subsection (d) of section 1368 (relating to
certain adjustments taken into account) is amended
by adding at the end the following new sentence:
‘‘In the case of any distribution made during any taxable
year, the adjusted basis of the stock shall be determined with
regard to the adjustments provided in paragraph (1) of sec-
tion 1367(a) for the taxable year.’’.
(b) ACCUMULATED ADJUSTMENTS ACCOUNT.—Para-
graph (1) of section 1368(e) (relating to accumulated ad-
justments account) is amended by adding at the end the
following new subparagraph:
‘‘(C) NET LOSS FOR YEAR DISREGARDED.—
296
‘‘(i) IN GENERAL.—In applying this section
to distributions made during any taxable year,
the amount in the accumulated adjustments ac-
count as of the close of such taxable year shall
be determined without regard to any net negative
adjustment for such taxable year.
‘‘(ii) NET
NEGATIVE
ADJUSTMENT.—For
purposes of clause (i), the term ‘net negative ad-
justment’ means, with respect to any taxable
year, the excess (if any) of—
‘‘(I) the reductions in the account for
the taxable year (other than for distribu-
tions), over
‘‘(II) the increases in such account for
such taxable year.’’.
(c) CONFORMING AMENDMENTS.—Subparagraph (A)
of section 1368(e)(1) is amended—
(1) by striking ‘‘as provided in subparagraph
(B)’’ and inserting ‘‘as otherwise provided in this
paragraph’’, and
(2) by striking ‘‘section 1367(b)(2)(A)’’ and in-
serting ‘‘section 1367(a)(2)’’.
297
SEC. 1310. TREATMENT OF S CORPORATIONS UNDER SUB-
CHAPTER C.
Subsection (a) of section 1371 (relating to application
of subchapter C rules) is amended to read as follows:
‘‘(a) APPLICATION OF SUBCHAPTER C RULES.—Ex-
cept as otherwise provided in this title, and except to the
extent inconsistent with this subchapter, subchapter C shall
apply to an S corporation and its shareholders.’’.
SEC. 1311. ELIMINATION OF CERTAIN EARNINGS AND PROF-
ITS.
(a) IN GENERAL.—If—
(1) a corporation was an electing small business
corporation under subchapter S of chapter 1 of the
Internal Revenue Code of 1986 for any taxable year
beginning before January 1, 1983, and
(2) such corporation is an S corporation under
subchapter S of chapter 1 of such Code for its first
taxable year beginning after December 31, 1996,
the amount of such corporation’s accumulated earnings and
profits (as of the beginning of such first taxable year) shall
be reduced by an amount equal to the portion (if any) of
such accumulated earnings and profits which were accumu-
lated in any taxable year beginning before January 1, 1983,
for which such corporation was an electing small business
corporation under such subchapter S.
(b) CONFORMING AMENDMENTS.—
298
(1) Paragraph (3) of section 1362(d), as amend-
ed by section 1308, is amended—
(A) by striking ‘‘SUBCHAPTER
C’’ in the
paragraph heading and inserting ‘‘ACCUMU-
LATED’’,
(B) by striking ‘‘subchapter C’’ in subpara-
graph (A)(i)(I) and inserting ‘‘accumulated’’,
and
(C) by striking subparagraph (B) and re-
designating the following subparagraphs accord-
ingly.
(2)(A) Subsection (a) of section 1375 is amended
by striking ‘‘subchapter C’’ in paragraph (1) and in-
serting ‘‘accumulated’’.
(B) Paragraph (3) of section 1375(b) is amended
to read as follows:
‘‘(3) PASSIVE INVESTMENT INCOME, ETC.—The
terms ‘passive investment income’ and ‘gross receipts’
have the same respective meanings as when used in
paragraph (3) of section 1362(d).’’.
(C) The section heading for section 1375 is
amended by striking ‘‘SUBCHAPTER C’’ and insert-
ing ‘‘ACCUMULATED’’.
(D) The table of sections for part III of sub-
chapter S of chapter 1 is amended by striking ‘‘sub-
299
chapter C’’ in the item relating to section 1375 and
inserting ‘‘accumulated’’.
(3) Clause (i) of section 1042(c)(4)(A) is amend-
ed by striking ‘‘section 1362(d)(3)(D)’’ and inserting
‘‘section 1362(d)(3)(C)’’.
SEC. 1312. CARRYOVER OF DISALLOWED LOSSES AND DE-
DUCTIONS UNDER AT-RISK RULES ALLOWED.
Paragraph (3) of section 1366(d) (relating to carryover
of disallowed losses and deductions to post-termination
transition period) is amended by adding at the end the fol-
lowing new subparagraph:
‘‘(D) AT-RISK LIMITATIONS.—To the extent
that any increase in adjusted basis described in
subparagraph (B) would have increased the
shareholder’s amount at risk under section 465 if
such increase had occurred on the day preceding
the commencement of the post-termination tran-
sition period, rules similar to the rules described
in subparagraphs (A) through (C) shall apply to
any losses disallowed by reason of section
465(a).’’.
SEC. 1313. ADJUSTMENTS TO BASIS OF INHERITED S STOCK
TO REFLECT CERTAIN ITEMS OF INCOME.
(a) IN GENERAL.—Subsection (b) of section 1367 (re-
lating to adjustments to basis of stock of shareholders, etc.)
300
is amended by adding at the end the following new para-
graph:
‘‘(4) ADJUSTMENTS
IN
CASE
OF
INHERITED
STOCK.—
‘‘(A) IN GENERAL.—If any person acquires
stock in an S corporation by reason of the death
of a decedent or by bequest, devise, or inherit-
ance, section 691 shall be applied with respect to
any item of income of the S corporation in the
same manner as if the decedent had held directly
his pro rata share of such item.
‘‘(B) ADJUSTMENTS TO BASIS.—The basis
determined under section 1014 of any stock in
an S corporation shall be reduced by the portion
of the value of the stock which is attributable to
items constituting income in respect of the dece-
dent.’’.
(b) EFFECTIVE DATE.—The amendment made by sub-
section (a) shall apply in the case of decedents dying after
the date of the enactment of this Act.
SEC. 1314. S CORPORATIONS ELIGIBLE FOR RULES APPLI-
CABLE TO REAL PROPERTY SUBDIVIDED FOR
SALE BY NONCORPORATE TAXPAYERS.
(a) IN GENERAL.—Subsection (a) of section 1237 (re-
lating to real property subdivided for sale) is amended by
301
striking ‘‘other than a corporation’’ in the material preced-
ing paragraph (1) and inserting ‘‘other than a C corpora-
tion’’.
(b) CONFORMING AMENDMENT.—Subparagraph (A) of
section 1237(a)(2) is amended by inserting ‘‘an S corpora-
tion which included the taxpayer as a shareholder,’’ after
‘‘controlled by the taxpayer,’’.
SEC. 1315. FINANCIAL INSTITUTIONS.
Subparagraph (A) of section 1361(b)(2) (defining in-
eligible corporation), as redesignated by section 1308(a), is
amended to read as follows:
‘‘(A) a financial institution which uses the
reserve method of accounting for bad debts de-
scribed in section 585 or 593,’’.
SEC. 1316. CERTAIN EXEMPT ORGANIZATIONS ALLOWED TO
BE SHAREHOLDERS.
(a) ELIGIBILITY TO BE SHAREHOLDERS.—
(1) IN GENERAL.—Subparagraph (B) of section
1361(b)(1) (defining small business corporation) is
amended to read as follows:
‘‘(B) have as a shareholder a person (other
than an estate, a trust described in subsection
(c)(2), or an organization described in subsection
(c)(7)) who is not an individual,’’.
302
(2) ELIGIBLE EXEMPT ORGANIZATIONS.—Section
1361(c) (relating to special rules for applying sub-
section (b)) is amended by adding at the end the fol-
lowing new paragraph:
‘‘(7) CERTAIN
EXEMPT
ORGANIZATIONS
PER-
MITTED AS SHAREHOLDERS.—For purposes of sub-
section (b)(1)(B), an organization which is—
‘‘(A) 
described 
in 
section 
401(a) 
or
501(c)(3), and
‘‘(B) exempt from taxation under section
501(a),
may be a shareholder in an S corporation.’’
(b) CONTRIBUTIONS OF S CORPORATION STOCK.—Sec-
tion 170(e)(1) (relating to certain contributions of ordinary
income and capital gain property) is amended by adding
at the end the following new sentence: ‘‘For purposes of ap-
plying this paragraph in the case of a charitable contribu-
tion of stock in an S corporation, rules similar to the rules
of section 751 shall apply in determining whether gain on
such stock would have been long-term capital gain if such
stock were sold by the taxpayer.’’
(c) TREATMENT OF INCOME.—Section 512 (relating to
unrelated business taxable income), as amended by section
1113, is amended by adding at the end the following new
subsection:
303
‘‘(e) SPECIAL RULES APPLICABLE TO S CORPORA-
TIONS.—
‘‘(1) IN GENERAL.—If an organization described
in section 1361(c)(7) holds stock in an S corpora-
tion—
‘‘(A) such interest shall be treated as an in-
terest in an unrelated trade or business; and
‘‘(B) notwithstanding any other provision
of this part, all items of income, loss, deduction
or credit taken into account under section
1366(a) and any gain or loss on the disposition
of the stock in the S corporation shall be taken
into account in computing the unrelated business
taxable income of such organization.
‘‘(2) DISPOSITION GAIN.—For purposes of para-
graph (1), gain on the sale or other disposition of C
corporation stock which was an S corporation at any
time the organization held such stock shall be treated
as gain from the disposition of stock in an S corpora-
tion to the extent of any gain which the organization
would have realized if it had sold the stock for fair
market value as of the last day of the corporation’s
last taxable year as an S corporation.’’
(d) CERTAIN BENEFITS NOT APPLICABLE TO S COR-
PORATIONS.—
304
(1) CONTRIBUTION TO ESOPS.—Paragraph (9) of
section 404(a) (relating to certain contributions to
employee ownership plans) is amended by inserting
at the end the following new subparagraph:
‘‘(C) S CORPORATIONS.—This paragraph
shall not apply to an S corporation.’’
(2) DIVIDENDS
ON
EMPLOYER
SECURITIES.—
Paragraph (1) of section 404(k) (relating to deduction
for dividends on certain employer securities) is
amended by striking ‘‘a corporation’’ and inserting
‘‘a C corporation’’.
(3) EXCHANGE TREATMENT.—Subparagraph (A)
of section 1042(c)(1) (defining qualified securities) is
amended by striking ‘‘domestic corporation’’ and in-
serting ‘‘domestic C corporation’’.
(e) CONFORMING AMENDMENT.—Clause (i) of section
1361(e)(1)(A), as added by section 1302, is amended by
striking ‘‘which holds a contingent interest and is not a
potential current beneficiary’’.
(f) EFFECTIVE DATE.—The amendments made by this
section shall apply to taxable years beginning after Decem-
ber 31, 1997.
305
SEC. 1317. EFFECTIVE DATE.
(a) IN GENERAL.—Except as otherwise provided in
this subtitle, the amendments made by this subtitle shall
apply to taxable years beginning after December 31, 1996.
(b) TREATMENT
OF CERTAIN ELECTIONS UNDER
PRIOR LAW.—For purposes of section 1362(g) of the Inter-
nal Revenue Code of 1986 (relating to election after termi-
nation), any termination under section 1362(d) of such
Code in a taxable year beginning before January 1, 1997,
shall not be taken into account.
Subtitle D—Pension Simplification
CHAPTER 1—SIMPLIFIED DISTRIBUTION
RULES
SEC. 1401. REPEAL OF 5-YEAR INCOME AVERAGING FOR
LUMP-SUM DISTRIBUTIONS.
(a) IN GENERAL.—Subsection (d) of section 402 (relat-
ing to taxability of beneficiary of employees’ trust) is
amended to read as follows:
‘‘(d) TAXABILITY OF BENEFICIARY OF CERTAIN FOR-
EIGN SITUS TRUSTS.—For purposes of subsections (a), (b),
and (c), a stock bonus, pension, or profit-sharing trust
which would qualify for exemption from tax under section
501(a) except for the fact that it is a trust created or orga-
nized outside the United States shall be treated as if it were
a trust exempt from tax under section 501(a).’’.
(b) CONFORMING AMENDMENTS.—
306
(1) Subparagraph (D) of section 402(e)(4) (relat-
ing to other rules applicable to exempt trusts) is
amended to read as follows:
‘‘(D) LUMP-SUM DISTRIBUTION.—For pur-
poses of this paragraph—
‘‘(i) IN
GENERAL.—The term ‘lump
sum distribution’ means the distribution or
payment within one taxable year of the re-
cipient of the balance to the credit of an em-
ployee which becomes payable to the recipi-
ent—
‘‘(I) on account of the employee’s
death,
‘‘(II) after the employee attains
age 591⁄2,
‘‘(III) on account of the employ-
ee’s separation from service, or
‘‘(IV) after the employee has be-
come disabled (within the meaning of
section 72(m)(7)),
from a trust which forms a part of a plan
described in section 401(a) and which is ex-
empt from tax under section 501 or from a
plan described in section 403(a). Subclause
(III) of this clause shall be applied only
307
with respect to an individual who is an em-
ployee without regard to section 401(c)(1),
and subclause (IV) shall be applied only
with respect to an employee within the
meaning of section 401(c)(1). For purposes
of this clause, a distribution to two or more
trusts shall be treated as a distribution to
one recipient. For purposes of this para-
graph, the balance to the credit of the em-
ployee does not include the accumulated de-
ductible employee contributions under the
plan (within the meaning of section
72(o)(5)).
‘‘(ii) 
AGGREGATION
OF
CERTAIN
TRUSTS AND PLANS.—For purposes of deter-
mining the balance to the credit of an em-
ployee under clause (i)—
‘‘(I) all trusts which are part of a
plan shall be treated as a single trust,
all pension plans maintained by the
employer shall be treated as a single
plan, all profit-sharing plans main-
tained by the employer shall be treated
as a single plan, and all stock bonus
308
plans maintained by the employer
shall be treated as a single plan, and
‘‘(II) trusts which are not quali-
fied trusts under section 401(a) and
annuity contracts which do not satisfy
the requirements of section 404(a)(2)
shall not be taken into account.
‘‘(iii) COMMUNITY PROPERTY LAWS.—
The provisions of this paragraph shall be
applied without regard to community prop-
erty laws.
‘‘(iv) AMOUNTS
SUBJECT
TO
PEN-
ALTY.—This paragraph shall not apply to
amounts described in subparagraph (A) of
section 72(m)(5) to the extent that section
72(m)(5) applies to such amounts.
‘‘(v) BALANCE
TO
CREDIT
OF
EM-
PLOYEE
NOT
TO
INCLUDE
AMOUNTS
PAY-
ABLE UNDER QUALIFIED DOMESTIC RELA-
TIONS ORDER.—For purposes of this para-
graph, the balance to the credit of an em-
ployee shall not include any amount pay-
able to an alternate payee under a qualified
domestic relations order (within the mean-
ing of section 414(p)).
309
‘‘(vi) TRANSFERS
TO
COST-OF-LIVING
ARRANGEMENT NOT TREATED AS DISTRIBU-
TION.—For purposes of this paragraph, the
balance to the credit of an employee under
a defined contribution plan shall not in-
clude any amount transferred from such de-
fined contribution plan to a qualified cost-
of-living arrangement (within the meaning
of section 415(k)(2)) under a defined benefit
plan.
‘‘(vii) LUMP-SUM
DISTRIBUTIONS
OF
ALTERNATE
PAYEES.—If any distribution
or payment of the balance to the credit of
an employee would be treated as a lump-
sum distribution, then, for purposes of this
paragraph, the payment under a qualified
domestic relations order (within the mean-
ing of section 414(p)) of the balance to the
credit of an alternate payee who is the
spouse or former spouse of the employee
shall be treated as a lump-sum distribution.
For purposes of this clause, the balance to
the credit of the alternate payee shall not
include any amount payable to the em-
ployee.’’.
310
(2) Section 402(c) (relating to rules applicable to
rollovers from exempt trusts) is amended by striking
paragraph (10).
(3) Paragraph (1) of section 55(c) (defining reg-
ular tax) is amended by striking ‘‘shall not include
any tax imposed by section 402(d) and’’.
(4) Paragraph (8) of section 62(a) (relating to
certain portion of lump-sum distributions from pen-
sion plans taxed under section 402(d)) is hereby re-
pealed.
(5) Section 401(a)(28)(B) (relating to coordina-
tion with distribution rules) is amended by striking
clause (v).
(6) Subparagraph (B)(ii) of section 401(k)(10)
(relating to distributions that must be lump-sum dis-
tributions) is amended to read as follows:
‘‘(ii) LUMP-SUM
DISTRIBUTION.—For
purposes of this subparagraph, the term
‘lump-sum distribution’ has the meaning
given such term by section 402(e)(4)(D)
(without regard to subclauses (I), (II), (III),
and (IV) of clause (i) thereof).’’.
(7) Section 406(c) (relating to termination of
status as deemed employee not to be treated as sepa-
311
ration from service for purposes of limitation of tax)
is hereby repealed.
(8) Section 407(c) (relating to termination of
status as deemed employee not to be treated as sepa-
ration from service for purposes of limitation of tax)
is hereby repealed.
(9) Section 691(c) (relating to deduction for es-
tate tax) is amended by striking paragraph (5).
(10) Paragraph (1) of section 871(b) (relating to
imposition of tax) is amended by striking ‘‘section 1,
55, or 402(d)(1)’’ and inserting ‘‘section 1 or 55’’.
(11) Subsection (b) of section 877 (relating to al-
ternative tax) is amended by striking ‘‘section 1, 55,
or 402(d)(1)’’ and inserting ‘‘section 1 or 55’’.
(12) Section 4980A(c)(4) is amended—
(A) by striking ‘‘to which an election under
section 402(d)(4)(B) applies’’ and inserting ‘‘(as
defined in section 402(e)(4)(D)) with respect to
which the individual elects to have this para-
graph apply’’,
(B) by adding at the end the following new
flush sentence:
‘‘An individual may elect to have this paragraph
apply to only one lump-sum distribution.’’, and
(C) by striking the heading and inserting:
312
‘‘(4) SPECIAL ONE-TIME ELECTION.—’’.
(13) Section 402(e) is amended by striking para-
graph (5).
(c) EFFECTIVE DATES.—
(1) IN
GENERAL.—The amendments made by
this section shall apply to taxable years beginning
after December 31, 1999.
(2) 
RETENTION
OF
CERTAIN
TRANSITION
RULES.—The amendments made by this section shall
not apply to any distribution for which the taxpayer
is eligible to elect the benefits of section 1122 (h)(3)
or (h)(5) of the Tax Reform Act of 1986. Notwith-
standing the preceding sentence, individuals who elect
such benefits after December 31, 1999, shall not be eli-
gible for 5-year averaging under section 402(d) of the
Internal Revenue Code of 1986 (as in effect imme-
diately before such amendments).
SEC. 1402. REPEAL OF $5,000 EXCLUSION OF EMPLOYEES’
DEATH BENEFITS.
(a) IN GENERAL.—Subsection (b) of section 101 is
hereby repealed.
(b) CONFORMING AMENDMENTS.—
(1) Subsection (c) of section 101 is amended by
striking ‘‘subsection (a) or (b)’’ and inserting ‘‘sub-
section (a)’’.
313
(2) Sections 406(e) and 407(e) are each amended
by striking paragraph (2) and by redesignating para-
graph (3) as paragraph (2).
(3) Section 7701(a)(20) is amended by striking
‘‘, for the purpose of applying the provisions of sec-
tion 101(b) with respect to employees’ death benefits’’.
(c) EFFECTIVE DATE.—The amendments made by this
section shall apply with respect to decedents dying after the
date of the enactment of this Act.
SEC. 1403. SIMPLIFIED METHOD FOR TAXING ANNUITY DIS-
TRIBUTIONS 
UNDER 
CERTAIN 
EMPLOYER
PLANS.
(a) GENERAL RULE.—Subsection (d) of section 72 (re-
lating to annuities; certain proceeds of endowment and life
insurance contracts) is amended to read as follows:
‘‘(d) SPECIAL RULES FOR QUALIFIED EMPLOYER RE-
TIREMENT PLANS.—
‘‘(1) SIMPLIFIED METHOD OF TAXING ANNUITY
PAYMENTS.—
‘‘(A) IN
GENERAL.—In the case of any
amount received as an annuity under a qualified
employer retirement plan—
‘‘(i) subsection (b) shall not apply, and
314
‘‘(ii) the investment in the contract
shall be recovered as provided in this para-
graph.
‘‘(B) METHOD OF RECOVERING INVESTMENT
IN CONTRACT.—
‘‘(i) IN GENERAL.—Gross income shall
not include so much of any monthly annu-
ity payment under a qualified employer re-
tirement plan as does not exceed the amount
obtained by dividing—
‘‘(I) the investment in the con-
tract (as of the annuity starting date),
by
‘‘(II) the number of anticipated
payments determined under the table
contained in clause (iii) (or, in the
case of a contract to which subsection
(c)(3)(B) 
applies, 
the 
number 
of
monthly annuity payments under such
contract).
‘‘(ii) CERTAIN RULES MADE APPLICA-
BLE.—Rules similar to the rules of para-
graphs (2) and (3) of subsection (b) shall
apply for purposes of this paragraph.
315
‘‘(iii) NUMBER OF ANTICIPATED PAY-
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.
‘‘(C) ADJUSTMENT FOR REFUND FEATURE
NOT APPLICABLE.—For purposes of this para-
graph, investment in the contract shall be deter-
mined under subsection (c)(1) without regard to
subsection (c)(2).
‘‘(D) SPECIAL
RULE
WHERE
LUMP
SUM
PAID IN CONNECTION WITH COMMENCEMENT OF
ANNUITY PAYMENTS.—If, in connection with the
commencement of annuity payments under any
qualified employer retirement plan, the taxpayer
receives a lump sum payment—
‘‘(i) such payment shall be taxable
under subsection (e) as if received before the
annuity starting date, and
‘‘(ii) the investment in the contract for
purposes of this paragraph shall be deter-
mined as if such payment had been so re-
ceived.
316
‘‘(E) EXCEPTION.—This paragraph shall
not apply in any case where the primary annu-
itant has attained age 75 on the annuity start-
ing date unless there are fewer than 5 years of
guaranteed payments under the annuity.
‘‘(F) ADJUSTMENT
WHERE
ANNUITY
PAY-
MENTS NOT ON MONTHLY BASIS.—In any case
where the annuity payments are not made on a
monthly basis, appropriate adjustments in the
application of this paragraph shall be made to
take into account the period on the basis of
which such payments are made.
‘‘(G) QUALIFIED
EMPLOYER
RETIREMENT
PLAN.—For purposes of this paragraph, the term
‘qualified employer retirement plan’ means any
plan or contract described in paragraph (1), (2),
or (3) of section 4974(c).
‘‘(2) TREATMENT OF EMPLOYEE CONTRIBUTIONS
UNDER
DEFINED
CONTRIBUTION
PLANS.—For pur-
poses of this section, employee contributions (and any
income allocable thereto) under a defined contribution
plan may be treated as a separate contract.’’.
(b) EFFECTIVE DATE.—The amendment made by this
section shall apply in cases where the annuity starting date
317
is after the 90th day after the date of the enactment of this
Act.
SEC. 1404. REQUIRED DISTRIBUTIONS.
(a) IN GENERAL.—Section 401(a)(9)(C) (defining re-
quired beginning date) is amended to read as follows:
‘‘(C) REQUIRED
BEGINNING
DATE.—For
purposes of this paragraph—
‘‘(i) IN GENERAL.—The term ‘required
beginning date’ means April 1 of the cal-
endar year following the later of—
‘‘(I) the calendar year in which
the employee attains age 701⁄2, or
‘‘(II) the calendar year in which
the employee retires.
‘‘(ii) EXCEPTION.—Subclause (II) of
clause (i) shall not apply—
‘‘(I) except as provided in section
409(d), in the case of an employee who
is a 5-percent owner (as defined in sec-
tion 416) with respect to the plan year
ending in the calendar year in which
the employee attains age 701⁄2, or
‘‘(II) for purposes of section 408
(a)(6) or (b)(3).
318
‘‘(iii) ACTUARIAL
ADJUSTMENT.—In
the case of an employee to whom clause
(i)(II) applies who retires in a calendar
year after the calendar year in which the
employee attains age 701⁄2, the employee’s
accrued benefit shall be actuarially in-
creased to take into account the period after
age 701⁄2 in which the employee was not re-
ceiving any benefits under the plan.
‘‘(iv) EXCEPTION FOR GOVERNMENTAL
AND CHURCH PLANS.—Clauses (ii) and (iii)
shall not apply in the case of a govern-
mental plan or church plan. For purposes
of this clause, the term ‘church plan’ means
a plan maintained by a church for church
employees, and the term ‘church’ means any
church 
(as 
defined 
in 
section
3121(w)(3)(A)) or qualified church-con-
trolled organization (as defined in section
3121(w)(3)(B)).’’.
(b) EFFECTIVE DATE.—The amendment made by sub-
section (a) shall apply to years beginning after December
31, 1996.
319
CHAPTER 2—INCREASED ACCESS TO
RETIREMENT PLANS
Subchapter A—Simple Savings Plans
SEC. 1421. ESTABLISHMENT OF SAVINGS INCENTIVE MATCH
PLANS FOR EMPLOYEES OF SMALL EMPLOY-
ERS.
(a) IN GENERAL.—Section 408 (relating to individual
retirement accounts) is amended by redesignating sub-
section (p) as subsection (q) and by inserting after sub-
section (o) the following new subsection:
‘‘(p) SIMPLE RETIREMENT ACCOUNTS.—
‘‘(1) IN GENERAL.—For purposes of this title, the
term ‘simple retirement account’ means an individual
retirement plan (as defined in section 7701(a)(37))—
‘‘(A) with respect to which the requirements
of paragraphs (3), (4), and (5) are met; and
‘‘(B) with respect to which the only con-
tributions allowed are contributions under a
qualified salary reduction arrangement.
‘‘(2) QUALIFIED SALARY REDUCTION ARRANGE-
MENT.—
‘‘(A) IN
GENERAL.—For purposes of this
subsection, the term ‘qualified salary reduction
arrangement’ means a written arrangement of
an eligible employer under which—
320
‘‘(i) an employee eligible to participate
in the arrangement may elect to have the
employer make payments—
‘‘(I) as elective employer contribu-
tions to a simple retirement account on
behalf of the employee, or
‘‘(II) to the employee directly in
cash,
‘‘(ii) the amount which an employee
may elect under clause (i) for any year is
required to be expressed as a percentage of
compensation and may not exceed a total of
$6,000 for any year,
‘‘(iii) the employer is required to make
a matching contribution to the simple re-
tirement account for any year in an
amount equal to so much of the amount the
employee elects under clause (i)(I) as does
not exceed the applicable percentage of com-
pensation for the year, and
‘‘(iv) no contributions may be made
other than contributions described in clause
(i) or (iii).
‘‘(B) EMPLOYER
MAY
ELECT
2-PERCENT
NONELECTIVE CONTRIBUTION.—
321
‘‘(i) IN GENERAL.—An employer shall
be treated as meeting the requirements of
subparagraph (A)(iii) for any year if, in
lieu of the contributions described in such
clause, the employer elects to make nonelec-
tive contributions of 2 percent of compensa-
tion for each employee who is eligible to
participate in the arrangement and who
has at least $5,000 of compensation from
the employer for the year. If an employer
makes an election under this subparagraph
for any year, the employer shall notify em-
ployees of such election within a reasonable
period of time before the 60-day period for
such year under paragraph (5)(C).
‘‘(ii) 
COMPENSATION
LIMITATION.—
The compensation taken into account under
clause (i) for any year shall not exceed the
limitation in effect for such year under sec-
tion 401(a)(17).
‘‘(C) DEFINITIONS.—For purposes of this
subsection—
‘‘(i) ELIGIBLE EMPLOYER.—
‘‘(I) IN GENERAL.—The term ‘eli-
gible employer’ means, with respect to
322
any year, an employer which had no
more than 100 employees who received
at least $5,000 of compensation from
the employer for the preceding year.
‘‘(II) 2-YEAR GRACE PERIOD.—An
eligible employer who establishes and
maintains a plan under this subsection
for 1 or more years and who fails to be
an eligible employer for any subsequent
year shall be treated as an eligible em-
ployer for the 2 years following the last
year the employer was an eligible em-
ployer. If such failure is due to any ac-
quisition, disposition, or similar trans-
action involving an eligible employer,
the preceding sentence shall apply only
in accordance with rules similar to the
rules of section 410(b)(6)(C)(i).
‘‘(ii) APPLICABLE PERCENTAGE.—
‘‘(I) IN GENERAL.—The term ‘ap-
plicable percentage’ means 3 percent.
‘‘(II) ELECTION OF LOWER PER-
CENTAGE.—An employer may elect to
apply a lower percentage (not less than
1 percent) for any year for all employ-
323
ees eligible to participate in the plan
for such year if the employer notifies
the employees of such lower percentage
within a reasonable period of time be-
fore the 60-day election period for such
year under paragraph (5)(C). An em-
ployer may not elect a lower percent-
age under this subclause for any year
if that election would result in the ap-
plicable percentage being lower than 3
percent in more than 2 of the years in
the 5-year period ending with such
year.
‘‘(III) SPECIAL RULE FOR YEARS
ARRANGEMENT
NOT
IN
EFFECT.—If
any year in the 5-year period de-
scribed in subclause (II) is a year
prior to the first year for which any
qualified salary reduction arrangement
is in effect with respect to the employer
(or any predecessor), the employer
shall be treated as if the level of the
employer matching contribution was at
3 percent of compensation for such
prior year.
324
‘‘(D) ARRANGEMENT MAY BE ONLY PLAN OF
EMPLOYER.—
‘‘(i) IN
GENERAL.—An arrangement
shall not be treated as a qualified salary re-
duction arrangement for any year if the
employer (or any predecessor employer)
maintained a qualified plan with respect to
which contributions were made, or benefits
were accrued, for service in any year in the
period beginning with the year such ar-
rangement became effective and ending with
the year for which the determination is
being made.
‘‘(ii) QUALIFIED PLAN.—For purposes
of this subparagraph, the term ‘qualified
plan’ means a plan, contract, pension, or
trust described in subparagraph (A) or (B)
of section 219(g)(5).
‘‘(E) COST-OF-LIVING
ADJUSTMENT.—The
Secretary shall adjust the $6,000 amount under
subparagraph (A)(ii) at the same time and in
the same manner as under section 415(d), except
that the base period taken into account shall be
the calendar quarter ending September 30, 1996,
and any increase under this subparagraph which
326
under subparagraph (A) employees described in
section 410(b)(3).
‘‘(5) ADMINISTRATIVE REQUIREMENTS.—The re-
quirements of this paragraph are met with respect to
any simplified retirement account if, under the quali-
fied salary reduction arrangement—
‘‘(A) an employer must—
‘‘(i) make the elective employer con-
tributions under paragraph (2)(A)(i) not
later than the close of the 30-day period fol-
lowing the last day of the month with re-
spect to which the contributions are to be
made, and
‘‘(ii) make the matching contributions
under paragraph (2)(A)(iii) or the nonelec-
tive contributions under paragraph (2)(B)
not later than the date described in section
404(m)(2)(B),
‘‘(B) an employee may elect to terminate
participation in such arrangement at any time
during the year, except that if an employee so
terminates, the arrangement may provide that
the employee may not elect to resume participa-
tion until the beginning of the next year, and
327
‘‘(C) each employee eligible to participate
may elect, during the 60-day period before the
beginning of any year (and the 60-day period
before the first day such employee is eligible to
participate), to participate in the arrangement,
or to modify the amounts subject to such ar-
rangement, for such year.
‘‘(6) DEFINITIONS.—For purposes of this sub-
section—
‘‘(A) COMPENSATION.—
‘‘(i) IN
GENERAL.—The term ‘com-
pensation’ means amounts described in
paragraphs (3) and (8) of section 6051(a).
‘‘(ii) SELF-EMPLOYED.—In the case of
an employee described in subparagraph (B),
the term ‘compensation’ means net earnings
from self-employment determined under sec-
tion 1402(a) without regard to any con-
tribution under this subsection.
‘‘(B) EMPLOYEE.—The term ‘employee’ in-
cludes an employee as defined in section
401(c)(1).
‘‘(C) YEAR.—The term ‘year’ means the cal-
endar year.
328
‘‘(7) USE OF DESIGNATED FINANCIAL INSTITU-
TION.—A plan shall not be treated as failing to sat-
isfy the requirements of this subsection or any other
provision of this title merely because the employer
makes all contributions to the individual retirement
accounts or annuities of a designated trustee or is-
suer. The preceding sentence shall not apply unless
each plan participant is notified in writing (either
separately or as part of the notice under subsection
(l)(2)(C)) that the participant’s balance may be
transferred without cost or penalty to another indi-
vidual account or annuity in accordance with section
408(d)(3)(G).’’
(b) TAX TREATMENT OF SIMPLE RETIREMENT AC-
COUNTS.—
(1) DEDUCTIBILITY OF CONTRIBUTIONS BY EM-
PLOYEES.—
(A) Section 219(b) (relating to maximum
amount of deduction) is amended by adding at
the end the following new paragraph:
‘‘(4) SPECIAL RULE FOR SIMPLE RETIREMENT
ACCOUNTS.—This section shall not apply with respect
to any amount contributed to a simple retirement ac-
count established under section 408(p).’’.
329
(B) Section 219(g)(5)(A) (defining active
participant) is amended by striking ‘‘or’’ at the
end of clause (iv) and by adding at the end the
following new clause:
‘‘(vi) any simple retirement account
(within the meaning of section 408(p)), or’’.
(2) DEDUCTIBILITY
OF
EMPLOYER
CONTRIBU-
TIONS.—Section 404 (relating to deductions for con-
tributions of an employer to pension, etc. plans) is
amended by adding at the end the following new sub-
section:
‘‘(m) SPECIAL RULES FOR SIMPLE RETIREMENT AC-
COUNTS.—
‘‘(1) IN GENERAL.—Employer contributions to a
simple retirement account shall be treated as if they
are made to a plan subject to the requirements of this
section.
‘‘(2) TIMING.—
‘‘(A) DEDUCTION.—Contributions described
in paragraph (1) shall be deductible in the tax-
able year of the employer with or within which
the calendar year for which the contributions
were made ends.
‘‘(B) 
CONTRIBUTIONS
AFTER
END
OF
YEAR.—For purposes of this subsection, contribu-
330
tions shall be treated as made for a taxable year
if they are made on account of the taxable year
and are made not later than the time prescribed
by law for filing the return for the taxable year
(including extensions thereof).’’.
(3) CONTRIBUTIONS AND DISTRIBUTIONS.—
(A) Section 402 (relating to taxability of
beneficiary of employees’ trust) is amended by
adding at the end the following new subsection:
‘‘(k) TREATMENT
OF
SIMPLE
RETIREMENT
AC-
COUNTS.—Rules similar to the rules of paragraphs (1) and
(3) of subsection (h) shall apply to contributions and dis-
tributions with respect to a simple retirement account
under section 408(p).’’.
(B) Section 408(d)(3) is amended by add-
ing at the end the following new subparagraph:
‘‘(G) SIMPLE
RETIREMENT
ACCOUNTS.—
This paragraph shall not apply to any amount
paid or distributed out of a simple retirement
account (as defined in section 408(p)) unless—
‘‘(i) it is paid into another simple re-
tirement account, or
‘‘(ii) in the case of any payment or
distribution to which section 72(t)(6) does
331
not apply, it is paid into an individual re-
tirement plan.’’.
(C) Clause (i) of section 457(c)(2)(B) is
amended by striking ‘‘section 402(h)(1)(B)’’ and
inserting ‘‘section 402(h)(1)(B) or (k)’’.
(4) PENALTIES.—
(A) EARLY
WITHDRAWALS.—Section 72(t)
(relating to additional tax in early distribu-
tions) is amended by adding at the end the fol-
lowing new paragraph:
‘‘(6) SPECIAL RULES FOR SIMPLE RETIREMENT
ACCOUNTS.—In the case of any amount received from
a simple retirement account (within the meaning of
section 408(p)) during the 2-year period beginning on
the date such individual first participated in any
qualified salary reduction arrangement maintained
by the individual’s employer under section 408(p)(2),
paragraph (1) shall be applied by substituting ‘25
percent’ for ‘10 percent’.’’.
(B) FAILURE TO REPORT.—Section 6693 is
amended by redesignating subsection (c) as sub-
section (d) and by inserting after subsection (b)
the following new subsection:
‘‘(c) PENALTIES RELATING TO SIMPLE RETIREMENT
ACCOUNTS.—
332
‘‘(1) EMPLOYER PENALTIES.—An employer who
fails to provide 1 or more notices required by section
408(l)(2)(C) shall pay a penalty of $50 for each day
on which such failures continue.
‘‘(2) TRUSTEE
PENALTIES.—A trustee who
fails—
‘‘(A) to provide 1 or more statements re-
quired by the last sentence of section 408(i) shall
pay a penalty of $50 for each day on which such
failures continue, or
‘‘(B) to provide 1 or more summary de-
scriptions required by section 408(l)(2)(B) shall
pay a penalty of $50 for each day on which such
failures continue.
‘‘(3) REASONABLE CAUSE EXCEPTION.—No pen-
alty shall be imposed under this subsection with re-
spect to any failure which the taxpayer shows was
due to reasonable cause.’’.
(5) REPORTING REQUIREMENTS.—
(A) Section 408(l) is amended by adding at
the end the following new paragraph:
‘‘(2) SIMPLE RETIREMENT ACCOUNTS.—
‘‘(A) NO EMPLOYER REPORTS.—Except as
provided in this paragraph, no report shall be
required under this section by an employer
333
maintaining a qualified salary reduction ar-
rangement under subsection (p).
‘‘(B) SUMMARY DESCRIPTION.—The trustee
of any simple retirement account established
pursuant to a qualified salary reduction ar-
rangement under subsection (p) shall provide to
the employer maintaining the arrangement, each
year a description containing the following in-
formation:
‘‘(i) The name and address of the em-
ployer and the trustee.
‘‘(ii) The requirements for eligibility
for participation.
‘‘(iii) The benefits provided with re-
spect to the arrangement.
‘‘(iv) The time and method of making
elections with respect to the arrangement.
‘‘(v) The procedures for, and effects of,
withdrawals (including rollovers) from the
arrangement.
‘‘(C) EMPLOYEE
NOTIFICATION.—The em-
ployer shall notify each employee immediately
before the period for which an election described
in subsection (p)(5)(C) may be made of the em-
ployee’s opportunity to make such election. Such
334
notice shall include a copy of the description de-
scribed in subparagraph (B).’’.
(B) Section 408(l) is amended by striking
‘‘An employer’’ and inserting the following:
‘‘(1) IN GENERAL.—An employer’’.
(6) REPORTING REQUIREMENTS.—Section 408(i)
is amended by adding at the end the following new
flush sentence:
‘‘In the case of a simple retirement account under sub-
section (p), only one report under this subsection shall be
required to be submitted each calendar year to the Secretary
(at the time provided under paragraph (2)) but, in addition
to the report under this subsection, there shall be furnished,
within 30 days after each calendar year, to the individual
on whose behalf the account is maintained a statement with
respect to the account balance as of the close of, and the
account activity during, such calendar year.’’.
(7) 
EXEMPTION
FROM
TOP-HEAVY
PLAN
RULES.—Section 416(g)(4) (relating to special rules
for top-heavy plans) is amended by adding at the end
the following new subparagraph:
‘‘(G) SIMPLE RETIREMENT ACCOUNTS.—The
term ‘top-heavy plan’ shall not include a simple
retirement account under section 408(p).’’.
(8) EMPLOYMENT TAXES.—
335
(A) Paragraph (5) of section 3121(a) is
amended by striking ‘‘or’’ at the end of subpara-
graph (F), by inserting ‘‘or’’ at the end of sub-
paragraph (G), and by adding at the end the fol-
lowing new subparagraph:
‘‘(H) under an arrangement to which sec-
tion 408(p) applies, other than any elective con-
tributions under paragraph (2)(A)(i) thereof,’’.
(B) Section 209(a)(4) of the Social Security
Act is amended by inserting ‘‘; or (J) under an
arrangement to which section 408(p) of such
Code applies, other than any elective contribu-
tions under paragraph (2)(A)(i) thereof’’ before
the semicolon at the end thereof.
(C) Paragraph (5) of section 3306(b) is
amended by striking ‘‘or’’ at the end of subpara-
graph (F), by inserting ‘‘or’’ at the end of sub-
paragraph (G), and by adding at the end the fol-
lowing new subparagraph:
‘‘(H) under an arrangement to which sec-
tion 408(p) applies, other than any elective con-
tributions under paragraph (2)(A)(i) thereof,’’.
(D) Paragraph (12) of section 3401(a) is
amended by adding the following new subpara-
graph:
336
‘‘(D) under an arrangement to which sec-
tion 408(p) applies; or’’.
(9) CONFORMING AMENDMENTS.—
(A) Section 280G(b)(6) is amended by strik-
ing ‘‘or’’ at the end of subparagraph (B), by
striking the period at the end of subparagraph
(C) and inserting ‘‘, or’’ and by adding after
subparagraph (C) the following new subpara-
graph:
‘‘(D) a simple retirement account described
in section 408(p).’’.
(B) Section 402(g)(3) is amended by strik-
ing ‘‘and’’ at the end of subparagraph (B), by
striking the period at the end of subparagraph
(C) and inserting ‘‘, and’’, and by adding after
subparagraph (C) the following new subpara-
graph:
‘‘(D) any elective employer contribution
under section 408(p)(2)(A)(i).’’.
(C) Subsections (b), (c), (m)(4)(B), and
(n)(3)(B) of section 414 are each amended by in-
serting ‘‘408(p),’’ after ‘‘408(k),’’.
(D) Section 4972(d)(1)(A) is amended by
striking ‘‘and’’ at the end of clause (ii), by strik-
ing the period at the end of clause (iii) and in-
337
serting ‘‘, and’’, and by adding after clause (iii)
the following new clause:
‘‘(iv) any simple retirement account
(within the meaning of section 408(p)).’’.
(c) REPEAL OF SALARY REDUCTION SIMPLIFIED EM-
PLOYEE PENSIONS.—Section 408(k)(6) is amended by add-
ing at the end the following new subparagraph:
‘‘(H) TERMINATION.—This paragraph shall
not apply to years beginning after December 31,
1996. The preceding sentence shall not apply to
a simplified employee pension if the terms of
such pension, as in effect on December 31, 1996,
provide that an employee may make the election
described in subparagraph (A).’’.
(d) MODIFICATIONS OF ERISA.—
(1) REPORTING REQUIREMENTS.—Section 101 of
the Employee Retirement Income Security Act of
1974 (29 U.S.C. 1021) is amended by redesignating
subsection (g) as subsection (h) and by inserting after
subsection (f) the following new subsection:
‘‘(g) SIMPLE RETIREMENT ACCOUNTS.—
‘‘(1) NO EMPLOYER REPORTS.—Except as pro-
vided in this subsection, no report shall be required
under this section by an employer maintaining a
338
qualified salary reduction arrangement under section
408(p) of the Internal Revenue Code of 1986.
‘‘(2) SUMMARY
DESCRIPTION.—The trustee of
any simple retirement account established pursuant
to a qualified salary reduction arrangement under
section 408(p) of such Code shall provide to the em-
ployer maintaining the arrangement each year a de-
scription containing the following information:
‘‘(A) The name and address of the employer
and the trustee.
‘‘(B) The requirements for eligibility for
participation.
‘‘(C) The benefits provided with respect to
the arrangement.
‘‘(D) The time and method of making elec-
tions with respect to the arrangement.
‘‘(E) The procedures for, and effects of,
withdrawals (including rollovers) from the ar-
rangement.
‘‘(3) EMPLOYEE
NOTIFICATION.—The employer
shall notify each employee immediately before the pe-
riod for which an election described in section
408(p)(5)(C) of such Code may be made of the em-
ployee’s opportunity to make such election. Such no-
339
tice shall include a copy of the description described
in paragraph (2).’’
(2) FIDUCIARY DUTIES.—Section 404(c) of such
Act (29 U.S.C. 1104(c)) is amended by inserting
‘‘(1)’’ after ‘‘(c)’’, by redesignating paragraphs (1)
and (2) as subparagraphs (A) and (B), respectively,
and by adding at the end the following new para-
graph:
‘‘(2) In the case of a simple retirement account
established pursuant to a qualified salary reduction
arrangement under section 408(p) of the Internal
Revenue Code of 1986, a participant or beneficiary
shall, for purposes of paragraph (1), be treated as ex-
ercising control over the assets in the account upon
the earliest of—
‘‘(A) an affirmative election with respect to
the initial investment of any contribution,
‘‘(B) a rollover to any other simple retire-
ment account or individual retirement plan, or
‘‘(C) one year after the simple retirement
account is established.
No reports, other than those required under section
101(g), shall be required with respect to a simple re-
tirement account established pursuant to such a
qualified salary reduction arrangement.’’
340
(e) EFFECTIVE DATE.—The amendments made by this
section shall apply to taxable years beginning after Decem-
ber 31, 1996.
SEC. 1422. EXTENSION OF SIMPLE PLAN TO 401(k) AR-
RANGEMENTS.
(a) ALTERNATIVE METHOD OF SATISFYING SECTION
401(k) NONDISCRIMINATION TESTS.—Section 401(k) (relat-
ing to cash or deferred arrangements) is amended by adding
at the end the following new paragraph:
‘‘(11) ADOPTION OF SIMPLE PLAN TO MEET NON-
DISCRIMINATION TESTS.—
‘‘(A) IN GENERAL.—A cash or deferred ar-
rangement maintained by an eligible employer
shall be treated as meeting the requirements of
paragraph 
(3)(A)(ii) 
if 
such 
arrangement
meets—
‘‘(i) the contribution requirements of
subparagraph (B),
‘‘(ii) the exclusive plan requirements of
subparagraph (C), and
‘‘(iii) the vesting requirements of sec-
tion 408(p)(3).
‘‘(B) CONTRIBUTION REQUIREMENTS.—
341
‘‘(i) IN
GENERAL.—The requirements
of this subparagraph are met if, under the
arrangement—
‘‘(I) an employee may elect to
have the employer make elective con-
tributions for the year on behalf of the
employee to a trust under the plan in
an amount which is expressed as a
percentage of compensation of the em-
ployee but which in no event exceeds
$6,000,
‘‘(II) the employer is required to
make a matching contribution to the
trust for the year in an amount equal
to so much of the amount the employee
elects under subclause (I) as does not
exceed 3 percent of compensation for
the year, and
‘‘(III) no other contributions may
be made other than contributions de-
scribed in subclause (I) or (II).
‘‘(ii) EMPLOYER
MAY
ELECT
2-PER-
CENT
NONELECTIVE
CONTRIBUTION.—An
employer shall be treated as meeting the re-
quirements of clause (i)(II) for any year if,
343
graph which is also used in section 408(p)
shall have the meaning given such term by
such section.
‘‘(ii) COORDINATION WITH TOP-HEAVY
RULES.—A plan meeting the requirements
of this paragraph for any year shall not be
treated as a top-heavy plan under section
416 for such year.’’.
(b) ALTERNATIVE METHODS OF SATISFYING SECTION
401(m) NONDISCRIMINATION TESTS.—Section 401(m) (re-
lating to nondiscrimination test for matching contributions
and employee contributions) is amended by redesignating
paragraph (10) as paragraph (11) and by adding after
paragraph (9) the following new paragraph:
‘‘(10) ALTERNATIVE
METHOD
OF
SATISFYING
TESTS.—A defined contribution plan shall be treated
as meeting the requirements of paragraph (2) with re-
spect to matching contributions if the plan—
‘‘(A) meets the contribution requirements of
subparagraph (B) of subsection (k)(11),
‘‘(B) meets the exclusive plan requirements
of subsection (k)(11)(C), and
‘‘(C) meets the vesting requirements of sec-
tion 408(p)(3).’’.
344
(c) EFFECTIVE DATE.—The amendments made by this
section shall apply to plan years beginning after December
31, 1996.
Subchapter B—Other Provisions
SEC. 1426. TAX-EXEMPT ORGANIZATIONS ELIGIBLE UNDER
SECTION 401(k).
(a) IN
GENERAL.—Subparagraph (B) of section
401(k)(4) is amended to read as follows:
‘‘(B) ELIGIBILITY
OF
STATE
AND
LOCAL
GOVERNMENTS
AND
TAX-EXEMPT
ORGANIZA-
TIONS.—
‘‘(i) TAX-EXEMPTS ELIGIBLE.—Except
as provided in clause (ii), any organization
exempt from tax under this subtitle may in-
clude a qualified cash or deferred arrange-
ment as part of a plan maintained by it.
‘‘(ii) GOVERNMENTS
INELIGIBLE.—A
cash or deferred arrangement shall not be
treated as a qualified cash or deferred ar-
rangement if it is part of a plan main-
tained by a State or local government or
political subdivision thereof, or any agency
or instrumentality thereof. This clause shall
not apply to a rural cooperative plan or to
345
a plan of an employer described in clause
(iii).
‘‘(iii) TREATMENT OF INDIAN TRIBAL
GOVERNMENTS.—An employer which is an
Indian tribal government (as defined in sec-
tion 7701(a)(40)), a subdivision of an In-
dian tribal government (determined in ac-
cordance with section 7871(d)), an agency
or instrumentality of an Indian tribal gov-
ernment or subdivision thereof, or a cor-
poration chartered under Federal, State, or
tribal law which is owned in whole or in
part by any of the foregoing may include a
qualified cash or deferred arrangement as
part of a plan maintained by the em-
ployer.’’.
(b) EFFECTIVE DATE.—The amendment made by this
section shall apply to plan years beginning after December
31, 1996, but shall not apply to any cash or deferred ar-
rangement to which clause (i) of section 1116(f)(2)(B) of
the Tax Reform Act of 1986 applies.
SEC. 1427. HOMEMAKERS ELIGIBLE FOR FULL IRA DEDUC-
TION.
(a) SPOUSAL IRA COMPUTED ON BASIS OF COM-
PENSATION OF BOTH SPOUSES.—Subsection (c) of section
346
219 (relating to special rules for certain married individ-
uals) is amended to read as follows:
‘‘(c) SPECIAL RULES FOR CERTAIN MARRIED INDIVID-
UALS.—
‘‘(1) IN GENERAL.—In the case of an individual
to whom this paragraph applies for the taxable year,
the limitation of paragraph (1) of subsection (b) shall
be equal to the lesser of—
‘‘(A) the dollar amount in effect under sub-
section (b)(1)(A) for the taxable year, or
‘‘(B) the sum of—
‘‘(i) the compensation includible in
such individual’s gross income for the tax-
able year, plus
‘‘(ii) the compensation includible in
the gross income of such individual’s spouse
for the taxable year reduced by the amount
allowed as a deduction under subsection (a)
to such spouse for such taxable year.
‘‘(2) INDIVIDUALS TO WHOM PARAGRAPH (1) AP-
PLIES.—Paragraph (1) shall apply to any individual
if—
‘‘(A) such individual files a joint return for
the taxable year, and
347
‘‘(B) the amount of compensation (if any)
includible in such individual’s gross income for
the taxable year is less than the compensation
includible in the gross income of such individ-
ual’s spouse for the taxable year.’’.
(b) CONFORMING AMENDMENTS.—
(1) Paragraph (2) of section 219(f) (relating to
other definitions and special rules) is amended by
striking ‘‘subsections (b) and (c)’’ and inserting ‘‘sub-
section (b)’’.
(2) Section 219(g)(1) is amended by striking
‘‘(c)(2)’’ and inserting ‘‘(c)(1)(A)’’.
(3) Section 408(d)(5) is amended by striking
‘‘$2,250’’ and inserting ‘‘the dollar amount in effect
under section 219(b)(1)(A)’’.
(c) EFFECTIVE DATE.—The amendments made by this
section shall apply to taxable years beginning after Decem-
ber 31, 1996.
CHAPTER 3—NONDISCRIMINATION
PROVISIONS
SEC. 1431. DEFINITION OF HIGHLY COMPENSATED EMPLOY-
EES; REPEAL OF FAMILY AGGREGATION.
(a) IN GENERAL.—Paragraph (1) of section 414(q)
(defining highly compensated employee) is amended to read
as follows:
348
‘‘(1) IN
GENERAL.—The term ‘highly com-
pensated employee’ means any employee who—
‘‘(A) was a 5-percent owner at any time
during the year or the preceding year, or
‘‘(B) for the preceding year had compensa-
tion from the employer in excess of $80,000.
The Secretary shall adjust the $80,000 amount under
subparagraph (B) at the same time and in the same
manner as under section 415(d), except that the base
period shall be the calendar quarter ending September
30, 1996.’’.
(b) REPEAL OF FAMILY AGGREGATION RULES.—
(1) IN
GENERAL.—Paragraph (6) of section
414(q) is hereby repealed.
(2) COMPENSATION LIMIT.—Paragraph (17)(A)
of section 401(a) is amended by striking the last sen-
tence.
(3) DEDUCTION.—Subsection (l) of section 404 is
amended by striking the last sentence.
(c) CONFORMING AMENDMENTS.—
(1)(A) Subsection (q) of section 414 is amended
by striking paragraphs (2), (4), (5), (8), and (12)
and by redesignating paragraphs (3), (7), (9), (10),
and (11) as paragraphs (2) through (6), respectively.
349
(B) 
Sections 
129(d)(8)(B), 
401(a)(5)(D)(ii),
408(k)(2)(C), and 416(i)(1)(D) are each amended by
striking ‘‘section 414(q)(7)’’ and inserting ‘‘section
414(q)(3)’’.
(C) Section 416(i)(1)(A) is amended by striking
‘‘section 414(q)(8)’’ and inserting ‘‘section 414(r)(9)’’.
(2)(A) Section 414(r) is amended by adding at
the end the following new paragraph:
‘‘(9) EXCLUDED EMPLOYEES.—For purposes of
paragraph (2)(A), the following employees shall be ex-
cluded:
‘‘(A) Employees who have not completed 6
months of service.
‘‘(B) Employees who normally work less
than 171⁄2 hours per week.
‘‘(C) Employees who normally work not
more than 6 months during any year.
‘‘(D) Employees who have not attained the
age of 21.
‘‘(E) Except to the extent provided in regu-
lations, employees who are included in a unit of
employees covered by an agreement which the
Secretary of Labor finds to be a collective bar-
gaining agreement between employee representa-
tives and the employer.
350
Except as provided by the Secretary, the employer
may elect to apply subparagraph (A), (B), (C), or (D)
by substituting a shorter period of service, smaller
number of hours or months, or lower age for the pe-
riod of service, number of hours or months, or age (as
the case may be) specified in such subparagraph.’’.
(B) Subparagraph (A) of section 414(r)(2) is
amended by striking ‘‘subsection (q)(8)’’ and inserting
‘‘paragraph (9)’’.
(3) Section 1114(c)(4) of the Tax Reform Act of
1986 is amended by adding at the end the following
new sentence: ‘‘Any reference in this paragraph to
section 414(q) shall be treated as a reference to such
section as in effect on the day before the date of the
enactment of the Small Business Job Protection Act
of 1996.’’.
(d) EFFECTIVE DATE.—
(1) IN
GENERAL.—The amendments made by
this section shall apply to years beginning after De-
cember 31, 1996, except that in determining whether
an employee is a highly compensated employee for
years beginning in 1997, such amendments shall be
treated as having been in effect for years beginning in
1996.
351
(2) FAMILY
AGGREGATION.—The amendments
made by subsection (b) shall apply to years beginning
after December 31, 1996.
SEC. 1432. MODIFICATION OF ADDITIONAL PARTICIPATION
REQUIREMENTS.
(a) GENERAL RULE.—Section 401(a)(26)(A) (relating
to additional participation requirements) is amended to
read as follows:
‘‘(A) IN GENERAL.—In the case of a trust
which is a part of a defined benefit plan, such
trust shall not constitute a qualified trust under
this subsection unless on each day of the plan
year such trust benefits at least the lesser of—
‘‘(i) 50 employees of the employer, or
‘‘(ii) the greater of—
‘‘(I) 40 percent of all employees of
the employer, or
‘‘(II) 2 employees (or if there is
only 1 employee, such employee).’’.
(b) SEPARATE LINE
OF BUSINESS TEST.—Section
401(a)(26)(G) (relating to separate line of business) is
amended by striking ‘‘paragraph (7)’’ and inserting ‘‘para-
graph (2)(A) or (7)’’.
352
(c) EFFECTIVE DATE.—The amendments made by this
section shall apply to years beginning after December 31,
1996.
SEC. 1433. NONDISCRIMINATION RULES FOR QUALIFIED
CASH OR DEFERRED ARRANGEMENTS AND
MATCHING CONTRIBUTIONS.
(a) ALTERNATIVE METHODS OF SATISFYING SECTION
401(k) NONDISCRIMINATION TESTS.—Section 401(k) (relat-
ing to cash or deferred arrangements), as amended by sec-
tion 1422, is amended by adding at the end the following
new paragraph:
‘‘(12) ALTERNATIVE METHODS OF MEETING NON-
DISCRIMINATION REQUIREMENTS.—
‘‘(A) IN GENERAL.—A cash or deferred ar-
rangement shall be treated as meeting the re-
quirements of paragraph (3)(A)(ii) if such ar-
rangement—
‘‘(i) meets the contribution require-
ments of subparagraph (B) or (C), and
‘‘(ii) meets the notice requirements of
subparagraph (D).
‘‘(B) MATCHING CONTRIBUTIONS.—
‘‘(i) IN
GENERAL.—The requirements
of this subparagraph are met if, under the
arrangement, the employer makes matching
353
contributions on behalf of each employee
who is not a highly compensated employee
in an amount equal to—
‘‘(I) 100 percent of the elective
contributions of the employee to the ex-
tent such elective contributions do not
exceed 3 percent of the employee’s com-
pensation, and
‘‘(II) 50 percent of the elective
contributions of the employee to the ex-
tent that such elective contributions ex-
ceed 3 percent but do not exceed 5 per-
cent of the employee’s compensation.
‘‘(ii) RATE FOR HIGHLY COMPENSATED
EMPLOYEES.—The requirements of this sub-
paragraph are not met if, under the ar-
rangement, the rate of matching contribu-
tion with respect to any elective contribu-
tion of a highly compensated employee at
any rate of elective contribution is greater
than that with respect to an employee who
is not a highly compensated employee.
‘‘(iii) ALTERNATIVE PLAN DESIGNS.—
If the rate of any matching contribution
with respect to any rate of elective contribu-
354
tion is not equal to the percentage required
under clause (i), an arrangement shall not
be treated as failing to meet the require-
ments of clause (i) if—
‘‘(I) the rate of an employer’s
matching contribution does not in-
crease as an employee’s rate of elective
contributions increase, and
‘‘(II) the aggregate amount of
matching contributions at such rate of
elective contribution is at least equal to
the aggregate amount of matching con-
tributions which would be made if
matching contributions were made on
the basis of the percentages described in
clause (i).
‘‘(C) NONELECTIVE
CONTRIBUTIONS.—The
requirements of this subparagraph are met if,
under the arrangement, the employer is required,
without regard to whether the employee makes an
elective contribution or employee contribution, to
make a contribution to a defined contribution
plan on behalf of each employee who is not a
highly compensated employee and who is eligible
to participate in the arrangement in an amount
355
equal to at least 3 percent of the employee’s com-
pensation.
‘‘(D) NOTICE REQUIREMENT.—An arrange-
ment meets the requirements of this paragraph
if, under the arrangement, each employee eligible
to participate is, within a reasonable period be-
fore any year, given written notice of the em-
ployee’s rights and obligations under the ar-
rangement which—
‘‘(i) is sufficiently accurate and com-
prehensive to appraise the employee of such
rights and obligations, and
‘‘(ii) is written in a manner calculated
to be understood by the average employee el-
igible to participate.
‘‘(E) OTHER REQUIREMENTS.—
‘‘(i) WITHDRAWAL
AND
VESTING
RE-
STRICTIONS.—An arrangement shall not be
treated as meeting the requirements of sub-
paragraph (B) or (C) of this paragraph un-
less the requirements of subparagraphs (B)
and (C) of paragraph (2) are met with re-
spect to all employer contributions (includ-
ing matching contributions) taken into ac-
count in determining whether the require-
356
ments of subparagraphs (B) and (C) of this
paragraph are met.
‘‘(ii) SOCIAL SECURITY AND SIMILAR
CONTRIBUTIONS
NOT
TAKEN
INTO
AC-
COUNT.—An arrangement shall not be treat-
ed as meeting the requirements of subpara-
graph (B) or (C) unless such requirements
are met without regard to subsection (l),
and, for purposes of subsection (l), employer
contributions under subparagraph (B) or
(C) shall not be taken into account.
‘‘(F) OTHER PLANS.—An arrangement shall
be treated as meeting the requirements under
subparagraph (A)(i) if any other plan main-
tained by the employer meets such requirements
with respect to employees eligible under the ar-
rangement.’’.
(b) ALTERNATIVE METHODS OF SATISFYING SECTION
401(m) NONDISCRIMINATION TESTS.—Section 401(m) (re-
lating to nondiscrimination test for matching contributions
and employee contributions), as amended by this section
1422(b), is amended by redesignating paragraph (11) as
paragraph (12) and by adding after paragraph (10) the
following new paragraph:
357
‘‘(11) ALTERNATIVE
METHOD
OF
SATISFYING
TESTS.—
‘‘(A) IN GENERAL.—A defined contribution
plan shall be treated as meeting the requirements
of paragraph (2) with respect to matching con-
tributions if the plan—
‘‘(i) meets the contribution require-
ments of subparagraph (B) or (C) of sub-
section (k)(12),
‘‘(ii) meets the notice requirements of
subsection (k)(12)(D), and
‘‘(iii) meets the requirements of sub-
paragraph (B).
‘‘(B) LIMITATION ON MATCHING CONTRIBU-
TIONS.—The requirements of this subparagraph
are met if—
‘‘(i) matching contributions on behalf
of any employee may not be made with re-
spect to an employee’s contributions or elec-
tive deferrals in excess of 6 percent of the
employee’s compensation,
‘‘(ii) the rate of an employer’s match-
ing contribution does not increase as the
rate of an employee’s contributions or elec-
tive deferrals increase, and
358
‘‘(iii) the matching contribution with
respect to any highly compensated employee
at any rate of an employee contribution or
rate of elective deferral is not greater than
that with respect to an employee who is not
a highly compensated employee.’’.
(c) YEAR FOR COMPUTING NONHIGHLY COMPENSATED
EMPLOYEE PERCENTAGE.—
(1) CASH OR DEFERRED ARRANGEMENTS.—Sec-
tion 401(k)(3)(A) is amended—
(A) by striking ‘‘such year’’ in clause (ii)
and inserting ‘‘the plan year’’,
(B) by striking ‘‘for such plan year’’ in
clause (ii) and inserting ‘‘for the preceding plan
year’’, and
(C) by adding at the end the following new
sentence: ‘‘An arrangement may apply clause
(ii) by using the plan year rather than the pre-
ceding plan year if the employer so elects, except
that if such an election is made, it may not be
changed except as provided by the Secretary.’’.
(2) 
MATCHING
AND
EMPLOYEE
CONTRIBU-
TIONS.—Section 401(m)(2)(A) is amended—
(A) by inserting ‘‘for such plan year’’ after
‘‘highly compensated employees’’,
359
(B) by inserting ‘‘for the preceding plan
year’’ after ‘‘eligible employees’’ each place it ap-
pears in clause (i) and clause (ii), and
(C) by adding at the end the following flush
sentence:
‘‘This subparagraph may be applied by using the
plan year rather than the preceding plan year if
the employer so elects, except that if such an elec-
tion is made, it may not be changed except as
provided the Secretary.’’.
(d) SPECIAL RULE FOR DETERMINING AVERAGE DE-
FERRAL PERCENTAGE FOR FIRST PLAN YEAR, ETC.—
(1) Paragraph (3) of section 401(k) is amended
by adding at the end the following new subparagraph:
‘‘(E) For purposes of this paragraph, in the
case of the first plan year of any plan (other
than a successor plan), the amount taken into
account as the actual deferral percentage of non-
highly compensated employees for the preceding
plan year shall be—
‘‘(i) 3 percent, or
‘‘(ii) if the employer makes an election
under this subclause, the actual deferral
percentage of nonhighly compensated em-
360
ployees determined for such first plan
year.’’.
(2) Paragraph (3) of section 401(m) is amended
by adding at the end the following: ‘‘Rules similar to
the rules of subsection (k)(3)(E) shall apply for pur-
poses of this subsection.’’.
(e) DISTRIBUTION OF EXCESS CONTRIBUTIONS AND
EXCESS AGGREGATE CONTRIBUTIONS.—
(1) Subparagraph (C) of section 401(k)(8) (relat-
ing to arrangement not disqualified if excess contribu-
tions distributed) is amended by striking ‘‘on the
basis of the respective portions of the excess contribu-
tions attributable to each of such employees’’ and in-
serting ‘‘on the basis of the amount of contributions
by, or on behalf of, each of such employees’’.
(2) Subparagraph (C) of section 401(m)(6) (re-
lating to method of distributing excess aggregate con-
tributions) is amended by striking ‘‘on the basis of the
respective portions of such amounts attributable to
each of such employees’’ and inserting ‘‘on the basis
of the amount of contributions on behalf of, or by,
each such employee’’.
(f) EFFECTIVE DATES.—
361
(1) IN
GENERAL.—The amendments made by
this section shall apply to years beginning after De-
cember 31, 1998.
(2) EXCEPTIONS.—The amendments made by
subsections (c), (d), and (e) shall apply to years be-
ginning after December 31, 1996.
SEC. 1434. DEFINITION OF COMPENSATION FOR SECTION
415 PURPOSES.
(a) GENERAL RULE.—Section 415(c)(3) (defining par-
ticipant’s compensation) is amended by adding at the end
the following new subparagraph:
‘‘(D) CERTAIN DEFERRALS INCLUDED.—The
term ‘participant’s compensation’ shall in-
clude—
‘‘(i) any elective deferral (as defined in
section 402(g)(3)), and
‘‘(ii) any amount which is contributed
or deferred by the employer at the election
of the employee and which is not includible
in the gross income of the employee by rea-
son of section 125 or 457.’’.
(b) CONFORMING AMENDMENTS.—
(1) Section 414(q)(3), as redesignated by section
1431, is amended to read as follows:
362
‘‘(4) COMPENSATION.—For purposes of this sub-
section, the term ‘compensation’ has the meaning
given such term by section 415(c)(3).’’.
(2) Section 414(s)(2) is amended by inserting
‘‘not’’ after ‘‘elect’’ in the text and heading thereof.
(c) EFFECTIVE DATE.—The amendments made by this
section shall apply to years beginning after December 31,
1997.
CHAPTER 4—MISCELLANEOUS
PROVISIONS
SEC. 1441. PLANS COVERING SELF-EMPLOYED INDIVID-
UALS.
(a) AGGREGATION RULES.—Section 401(d) (relating
to additional requirements for qualification of trusts and
plans benefiting owner-employees) is amended to read as
follows:
‘‘(d) CONTRIBUTION LIMIT ON OWNER-EMPLOYEES.—
A trust forming part of a pension or profit-sharing plan
which provides contributions or benefits for employees some
or all of whom are owner-employees shall constitute a quali-
fied trust under this section only if, in addition to meeting
the requirements of subsection (a), the plan provides that
contributions on behalf of any owner-employee may be
made only with respect to the earned income of such owner-
363
employee which is derived from the trade or business with
respect to which such plan is established.’’.
(b) EFFECTIVE DATE.—The amendments made by this
section shall apply to years beginning after December 31,
1996.
SEC. 1442. ELIMINATION OF SPECIAL VESTING RULE FOR
MULTIEMPLOYER PLANS.
(a) AMENDMENTS TO 1986 CODE.—Paragraph (2) of
section 411(a) (relating to minimum vesting standards) is
amended—
(1) by striking ‘‘subparagraph (A), (B), or (C)’’
and inserting ‘‘subparagraph (A) or (B)’’; and
(2) by striking subparagraph (C).
(b) AMENDMENTS TO ERISA.—Paragraph (2) of sec-
tion 203(a) of the Employee Retirement Income Security
Act of 1974 (29 U.S.C. 1053(a)) is amended—
(1) by striking ‘‘subparagraph (A), (B), or (C)’’
and inserting ‘‘subparagraph (A) or (B)’’; and
(2) by striking subparagraph (C).
(c) EFFECTIVE DATE.—The amendments made by this
section shall apply to plan years beginning on or after the
earlier of—
(1) the later of—
(A) January 1, 1997, or
364
(B) the date on which the last of the collec-
tive bargaining agreements pursuant to which
the plan is maintained terminates (determined
without regard to any extension thereof after the
date of the enactment of this Act), or
(2) January 1, 1999.
Such amendments shall not apply to any individual who
does not have more than 1 hour of service under the plan
on or after the 1st day of the 1st plan year to which such
amendments apply.
SEC. 1443. DISTRIBUTIONS UNDER RURAL COOPERATIVE
PLANS.
(a) DISTRIBUTIONS FOR HARDSHIP OR AFTER A CER-
TAIN AGE.—Section 401(k)(7) is amended by adding at the
end the following new subparagraph:
‘‘(C) SPECIAL
RULE
FOR
CERTAIN
DIS-
TRIBUTIONS.—A rural cooperative plan which
includes a qualified cash or deferred arrange-
ment shall not be treated as violating the re-
quirements of section 401(a) or of paragraph (2)
merely by reason of a hardship distribution or a
distribution to a participant after attainment of
age 591⁄2. For purposes of this section, the term
‘hardship distribution’ means a distribution de-
scribed in paragraph (2)(B)(i)(IV) (without re-
365
gard to the limitation of its application to prof-
it-sharing or stock bonus plans).’’.
(b) PUBLIC UTILITY DISTRICTS.—Clause (i) of section
401(k)(7)(B) (defining rural cooperative) is amended to
read as follows:
‘‘(i) any organization which—
‘‘(I) is engaged primarily in pro-
viding electric service on a mutual or
cooperative basis, or
‘‘(II) is engaged primarily in pro-
viding electric service to the public in
its area of service and which is exempt
from tax under this subtitle or which is
a State or local government (or an
agency or instrumentality thereof),
other than a municipality (or an agen-
cy or instrumentality thereof),’’.
(c) EFFECTIVE DATES.—
(1) DISTRIBUTIONS.—The amendments made by
subsection (a) shall apply to distributions after the
date of the enactment of this Act.
(2) PUBLIC
UTILITY
DISTRICTS.—The amend-
ments made by subsection (b) shall apply to plan
years beginning after December 31, 1996.
366
SEC. 1444. TREATMENT OF GOVERNMENTAL PLANS UNDER
SECTION 415.
(a) COMPENSATION LIMIT.—Subsection (b) of section
415 is amended by adding immediately after paragraph
(10) the following new paragraph:
‘‘(11) SPECIAL LIMITATION RULE FOR GOVERN-
MENTAL PLANS.—In the case of a governmental plan
(as defined in section 414(d)), subparagraph (B) of
paragraph (1) shall not apply.’’.
(b) TREATMENT
OF
CERTAIN
EXCESS
BENEFIT
PLANS.—
(1) IN GENERAL.—Section 415 is amended by
adding at the end the following new subsection:
‘‘(m) TREATMENT OF QUALIFIED GOVERNMENTAL EX-
CESS BENEFIT ARRANGEMENTS.—
‘‘(1) GOVERNMENTAL PLAN NOT AFFECTED.—In
determining whether a governmental plan (as defined
in section 414(d)) meets the requirements of this sec-
tion, benefits provided under a qualified governmental
excess benefit arrangement shall not be taken into ac-
count. Income accruing to a governmental plan (or to
a trust that is maintained solely for the purpose of
providing benefits under a qualified governmental ex-
cess benefit arrangement) in respect of a qualified
governmental excess benefit arrangement shall con-
stitute income derived from the exercise of an essen-
367
tial governmental function upon which such govern-
mental plan (or trust) shall be exempt from tax under
section 115.
‘‘(2) TAXATION OF PARTICIPANT.—For purposes
of this chapter—
‘‘(A) the taxable year or years for which
amounts in respect of a qualified governmental
excess benefit arrangement are includible in
gross income by a participant, and
‘‘(B) the treatment of such amounts when so
includible by the participant,
shall be determined as if such qualified governmental
excess benefit arrangement were treated as a plan for
the deferral of compensation which is maintained by
a corporation not exempt from tax under this chapter
and which does not meet the requirements for quali-
fication under section 401.
‘‘(3) QUALIFIED GOVERNMENTAL EXCESS BENE-
FIT ARRANGEMENT.—For purposes of this subsection,
the term ‘qualified governmental excess benefit ar-
rangement’ means a portion of a governmental plan
if—
‘‘(A) such portion is maintained solely for
the purpose of providing to participants in the
plan that part of the participant’s annual bene-
368
fit otherwise payable under the terms of the plan
that exceeds the limitations on benefits imposed
by this section,
‘‘(B) under such portion no election is pro-
vided at any time to the participant (directly or
indirectly) to defer compensation, and
‘‘(C) benefits described in subparagraph (A)
are not paid from a trust forming a part of such
governmental plan unless such trust is main-
tained solely for the purpose of providing such
benefits.’’.
(2) COORDINATION
WITH
SECTION
457.—Sub-
section (e) of section 457 is amended by adding at the
end the following new paragraph:
‘‘(14) TREATMENT
OF
QUALIFIED
GOVERN-
MENTAL
EXCESS
BENEFIT
ARRANGEMENTS.—Sub-
sections (b)(2) and (c)(1) shall not apply to any
qualified governmental excess benefit arrangement (as
defined in section 415(m)(3)), and benefits provided
under such an arrangement shall not be taken into
account in determining whether any other plan is an
eligible deferred compensation plan.’’.
(3) CONFORMING AMENDMENT.—Paragraph (2)
of section 457(f) is amended by striking ‘‘and’’ at the
end of subparagraph (C), by striking the period at the
369
end of subparagraph (D) and inserting ‘‘, and’’, and
by inserting immediately thereafter the following new
subparagraph:
‘‘(E) a qualified governmental excess benefit
arrangement described in section 415(m).’’.
(c) EXEMPTION FOR SURVIVOR AND DISABILITY BENE-
FITS.—Paragraph (2) of section 415(b) is amended by add-
ing at the end the following new subparagraph:
‘‘(I) EXEMPTION FOR SURVIVOR AND DIS-
ABILITY
BENEFITS
PROVIDED
UNDER
GOVERN-
MENTAL
PLANS.—Subparagraph (C) of this
paragraph and paragraph (5) shall not apply
to—
‘‘(i) income received from a govern-
mental plan (as defined in section 414(d))
as a pension, annuity, or similar allowance
as the result of the recipient becoming dis-
abled by reason of personal injuries or sick-
ness, or
‘‘(ii) amounts received from a govern-
mental plan by the beneficiaries, survivors,
or the estate of an employee as the result of
the death of the employee.’’.
(d) REVOCATION OF GRANDFATHER ELECTION.—
370
(1) IN GENERAL.—Subparagraph (C) of section
415(b)(10) is amended by adding at the end the fol-
lowing new clause:
‘‘(ii) REVOCATION OF ELECTION.—An
election under clause (i) may be revoked not
later than the last day of the third plan
year beginning after the date of the enact-
ment of this clause. The revocation shall
apply to all plan years to which the election
applied and to all subsequent plan years.
Any amount paid by a plan in a taxable
year ending after the revocation shall be in-
cludible in income in such taxable year
under the rules of this chapter in effect for
such taxable year, except that, for purposes
of applying the limitations imposed by this
section, any portion of such amount which
is attributable to any taxable year during
which the election was in effect shall be
treated as received in such taxable year.’’.
(2) CONFORMING
AMENDMENT.—Subparagraph
(C) of section 415(b)(10) is amended by striking
‘‘This’’ and inserting:
‘‘(i) IN GENERAL.—This’’.
(e) EFFECTIVE DATE.—
371
(1) IN
GENERAL.—The amendments made by
subsections (a), (b), and (c) shall apply to years be-
ginning after December 31, 1994. The amendments
made by subsection (d) shall apply with respect to
revocations adopted after the date of the enactment of
this Act.
(2) TREATMENT FOR YEARS BEGINNING BEFORE
JANUARY 1, 1995.—Nothing in the amendments made
by this section shall be construed to imply that a gov-
ernmental plan (as defined in section 414(d) of the
Internal Revenue Code of 1986) fails to satisfy the re-
quirements of section 415 of such Code for any tax-
able year beginning before January 1, 1995.
SEC. 1445. UNIFORM RETIREMENT AGE.
(a) DISCRIMINATION TESTING.—Paragraph (5) of sec-
tion 401(a) (relating to special rules relating to non-
discrimination requirements) is amended by adding at the
end the following new subparagraph:
‘‘(F) SOCIAL SECURITY RETIREMENT AGE.—
For purposes of testing for discrimination under
paragraph (4)—
‘‘(i) the social security retirement age
(as defined in section 415(b)(8)) shall be
treated as a uniform retirement age, and
372
‘‘(ii) subsidized early retirement bene-
fits and joint and survivor annuities shall
not be treated as being unavailable to em-
ployees on the same terms merely because
such benefits or annuities are based in
whole or in part on an employee’s social se-
curity retirement age (as so defined).’’
(b) EFFECTIVE DATE.—The amendment made by this
section shall apply to years beginning after December 31,
1996.
SEC. 1446. CONTRIBUTIONS ON BEHALF OF DISABLED EM-
PLOYEES.
(a) ALL DISABLED PARTICIPANTS RECEIVING CON-
TRIBUTIONS.—Section 415(c)(3)(C) is amended by adding
at the end the following: ‘‘If a defined contribution plan
provides for the continuation of contributions on behalf of
all participants described in clause (i) for a fixed or deter-
minable period, this subparagraph shall be applied without
regard to clauses (ii) and (iii).’’.
(b) EFFECTIVE DATE.—The amendment made by this
section shall apply to years beginning after December 31,
1996.
373
SEC. 1447. TREATMENT OF DEFERRED COMPENSATION
PLANS OF STATE AND LOCAL GOVERNMENTS
AND TAX-EXEMPT ORGANIZATIONS.
(a) SPECIAL RULES
FOR PLAN DISTRIBUTIONS.—
Paragraph (9) of section 457(e) (relating to other defini-
tions and special rules) is amended to read as follows:
‘‘(9) BENEFITS NOT TREATED AS MADE AVAIL-
ABLE BY REASON OF CERTAIN ELECTIONS, ETC.—
‘‘(A) TOTAL AMOUNT PAYABLE IS $3,500 OR
LESS.—The total amount payable to a partici-
pant under the plan shall not be treated as made
available merely because the participant may
elect to receive such amount (or the plan may
distribute such amount without the participant’s
consent) if—
‘‘(i) such amount does not exceed
$3,500, and
‘‘(ii) such amount may be distributed
only if—
‘‘(I) no amount has been deferred
under the plan with respect to such
participant during the 2-year period
ending on the date of the distribution,
and
‘‘(II) there has been no prior dis-
tribution under the plan to such par-
374
ticipant to which this subparagraph
applied.
A plan shall not be treated as failing to meet the
distribution requirements of subsection (d) by
reason of a distribution to which this subpara-
graph applies.
‘‘(B) ELECTION TO DEFER COMMENCEMENT
OF DISTRIBUTIONS.—The total amount payable
to a participant under the plan shall not be
treated as made available merely because the
participant may elect to defer commencement of
distributions under the plan if—
‘‘(i) such election is made after
amounts may be available under the plan
in accordance with subsection (d)(1)(A) and
before commencement of such distributions,
and
‘‘(ii) the participant may make only 1
such election.’’.
(b) COST-OF-LIVING ADJUSTMENT OF MAXIMUM DE-
FERRAL AMOUNT.—Subsection (e) of section 457, as amend-
ed by section 1444(b)(2) (relating to governmental plans),
is amended by adding at the end the following new para-
graph:
375
‘‘(15) COST-OF-LIVING ADJUSTMENT OF MAXIMUM
DEFERRAL AMOUNT.—The Secretary shall adjust the
$7,500 amount specified in subsections (b)(2) and
(c)(1) at the same time and in the same manner as
under section 415(d), except that the base period shall
be the calendar quarter ending September 30, 1994,
and any increase under this paragraph which is not
a multiple of $500 shall be rounded to the next lowest
multiple of $500.’’.
(c) EFFECTIVE DATE.—The amendments made by this
section shall apply to taxable years beginning after Decem-
ber 31, 1996.
SEC. 1448. TRUST REQUIREMENT FOR DEFERRED COM-
PENSATION PLANS OF STATE AND LOCAL
GOVERNMENTS.
(a) IN GENERAL.—Section 457 is amended by adding
at the end the following new subsection:
‘‘(g) GOVERNMENTAL PLANS MUST MAINTAIN SET-
ASIDES FOR EXCLUSIVE BENEFIT OF PARTICIPANTS.—
‘‘(1) IN GENERAL.—A plan maintained by an el-
igible employer described in subsection (e)(1)(A) shall
not be treated as an eligible deferred compensation
plan unless all assets and income of the plan de-
scribed in subsection (b)(6) are held in trust for the
376
exclusive benefit of participants and their bene-
ficiaries.
‘‘(2) TAXABILITY
OF
TRUSTS
AND
PARTICI-
PANTS.—For purposes of this title—
‘‘(A) a trust described in paragraph (1)
shall be treated as an organization exempt from
taxation under section 501(a), and
‘‘(B) notwithstanding any other provision
of this title, amounts in the trust shall be includ-
ible in the gross income of participants and
beneficiaries only to the extent, and at the time,
provided in this section.
‘‘(3) CUSTODIAL ACCOUNTS AND CONTRACTS.—
For purposes of this subsection, custodial accounts
and contracts described in section 401(f) shall be
treated as trusts under rules similar to the rules
under section 401(f).’’.
(b) CONFORMING AMENDMENT.—Paragraph (6) of sec-
tion 457(b) is amended by inserting ‘‘except as provided
in subsection (g),’’ before ‘‘which provides that’’.
(c) EFFECTIVE DATES.—
(1) IN GENERAL.—Except as provided in para-
graph (2), the amendments made by this section shall
apply to assets and income described in section
457(b)(6) of the Internal Revenue Code of 1986 held