H. R. 3448—4
Sec. 1902. Comparable penalties for failure to file return relating to transfers to
foreign entities.
Sec. 1903. Modifications of rules relating to foreign trusts having one or more
United States beneficiaries.
Sec. 1904. Foreign persons not to be treated as owners under grantor trust rules.
Sec. 1905. Information reporting regarding foreign gifts.
Sec. 1906. Modification of rules relating to foreign trusts which are not grantor
trusts.
Sec. 1907. Residence of trusts, etc.
Subtitle J—Generalized System of Preferences
Sec. 1951. Short title.
Sec. 1952. Generalized System of Preferences.
Sec. 1953. Effective date.
Sec. 1954. Conforming amendments.
TITLE II—PAYMENT OF WAGES
Sec. 2101. Short title.
Sec. 2102. Proper compensation for use of employer vehicles.
Sec. 2103. Effective date.
Sec. 2104. Minimum wage increase.
Sec. 2105. Fair Labor Standards Act Amendments.
TITLE I—SMALL BUSINESS AND OTHER
TAX PROVISIONS
SEC. 1101. AMENDMENT OF 1986 CODE.
Except as otherwise expressly provided, whenever in this title
an amendment or repeal is expressed in terms of an amendment
to, or repeal of, a section or other provision, the reference shall
be considered to be made to a section or other provision of the
Internal Revenue Code of 1986.
SEC. 1102. UNDERPAYMENTS OF ESTIMATED TAX.
No addition to the tax shall be made under section 6654 or
6655 of the Internal Revenue Code of 1986 (relating to failure
to pay estimated tax) with respect to any underpayment of an
installment required to be paid before the date of the enactment
of this Act to the extent such underpayment was created or
increased by any provision of this title.
Subtitle A—Expensing; Etc.
SEC. 1111. INCREASE 
IN 
EXPENSE 
TREATMENT 
FOR 
SMALL
BUSINESSES.
(a) GENERAL RULE.—Paragraph (1) of section 179(b) (relating
to dollar limitation) is amended to read as follows:
‘‘(1) DOLLAR LIMITATION.—The aggregate cost which may
be taken into account under subsection (a) for any taxable
year shall not exceed the following applicable amount:
‘‘If the taxable year
The applicable
begins in:
amount is:
1997 .......................................................................................
18,000
1998 .......................................................................................
18,500
1999 .......................................................................................
19,000
2000 .......................................................................................
20,000
2001 or 2002 .........................................................................
24,000
2003 or thereafter ................................................................
25,000.’’.
(b) EFFECTIVE DATE.—The amendment made by subsection (a)
shall apply to taxable years beginning after December 31, 1996.
H. R. 3448—5
SEC. 1112. TREATMENT OF EMPLOYEE TIPS.
(a) EMPLOYEE CASH TIPS.—
(1) REPORTING REQUIREMENT NOT CONSIDERED.—Subpara-
graph (A) of section 45B(b)(1) (relating to excess employer social
security tax) is amended by inserting ‘‘(without regard to
whether such tips are reported under section 6053)’’ after ‘‘sec-
tion 3121(q)’’.
(2) TAXES PAID.—Subsection (d) of section 13443 of the
Revenue Reconciliation Act of 1993 is amended by inserting
‘‘, with respect to services performed before, on, or after such
date’’ after ‘‘1993’’.
(3) EFFECTIVE DATE.—The amendments made by this sub-
section shall take effect as if included in the amendments
made by, and the provisions of, section 13443 of the Revenue
Reconciliation Act of 1993.
(b) TIPS FOR EMPLOYEES DELIVERING FOOD OR BEVERAGES.—
(1) IN
GENERAL.—Paragraph (2) of section 45B(b) is
amended to read as follows:
‘‘(2) ONLY TIPS RECEIVED FOR FOOD OR BEVERAGES TAKEN
INTO ACCOUNT.—In applying paragraph (1), there shall be taken
into account only tips received from customers in connection
with the providing, delivering, or serving of food or beverages
for consumption if the tipping of employees delivering or serving
food or beverages by customers is customary.’’.
(2) EFFECTIVE DATE.—The amendment made by paragraph
(1) shall apply to tips received for services performed after
December 31, 1996.
SEC. 1113. TREATMENT OF STORAGE OF PRODUCT SAMPLES.
(a) IN GENERAL.—Paragraph (2) of section 280A(c) is amended
by striking ‘‘inventory’’ and inserting ‘‘inventory or product sam-
ples’’.
(b) EFFECTIVE DATE.—The amendment made by subsection (a)
shall apply to taxable years beginning after December 31, 1995.
SEC. 1114. TREATMENT OF CERTAIN CHARITABLE RISK POOLS.
(a) GENERAL RULE.—Section 501 (relating to exemption from
tax on corporations, certain trusts, etc.) is amended by redesignating
subsection (n) as subsection (o) and by inserting after subsection
(m) the following new subsection:
‘‘(n) CHARITABLE RISK POOLS.—
‘‘(1) IN GENERAL.—For purposes of this title—
‘‘(A) a qualified charitable risk pool shall be treated
as an organization organized and operated exclusively for
charitable purposes, and
‘‘(B) subsection (m) shall not apply to a qualified chari-
table risk pool.
‘‘(2) QUALIFIED CHARITABLE RISK POOL.—For purposes of
this subsection, the term ‘qualified charitable risk pool’ means
any organization—
‘‘(A) which is organized and operated solely to pool
insurable risks of its members (other than risks related
to medical malpractice) and to provide information to its
members with respect to loss control and risk management,
‘‘(B) which is comprised solely of members that are
organizations described in subsection (c)(3) and exempt
from tax under subsection (a), and
H. R. 3448—6
‘‘(C) which meets the organizational requirements of
paragraph (3).
‘‘(3) ORGANIZATIONAL
REQUIREMENTS.—An organization
(hereinafter in this subsection referred to as the ‘risk pool’)
meets the organizational requirements of this paragraph if—
‘‘(A) such risk pool is organized as a nonprofit organiza-
tion under State law provisions authorizing risk pooling
arrangements for charitable organizations,
‘‘(B) such risk pool is exempt from any income tax
imposed by the State (or will be so exempt after such
pool qualifies as an organization exempt from tax under
this title),
‘‘(C) such risk pool has obtained at least $1,000,000
in startup capital from nonmember charitable organiza-
tions,
‘‘(D) such risk pool is controlled by a board of directors
elected by its members, and
‘‘(E) the organizational documents of such risk pool
require that—
‘‘(i) each member of such pool shall at all times
be an organization described in subsection (c)(3) and
exempt from tax under subsection (a),
‘‘(ii) any member which receives a final determina-
tion that it no longer qualifies as an organization
described in subsection (c)(3) shall immediately notify
the pool of such determination and the effective date
of such determination, and
‘‘(iii) each policy of insurance issued by the risk
pool shall provide that such policy will not cover the
insured with respect to events occurring after the date
such final determination was issued to the insured.
An organization shall not cease to qualify as a qualified chari-
table risk pool solely by reason of the failure of any of its
members to continue to be an organization described in sub-
section (c)(3) if, within a reasonable period of time after such
pool is notified as required under subparagraph (C)(ii), such
pool takes such action as may be reasonably necessary to
remove such member from such pool.
‘‘(4) OTHER DEFINITIONS.—For purposes of this subsection—
‘‘(A) STARTUP
CAPITAL.—The term ‘startup capital’
means any capital contributed to, and any program-related
investments (within the meaning of section 4944(c)) made
in, the risk pool before such pool commences operations.
‘‘(B) NONMEMBER
CHARITABLE
ORGANIZATION.—The
term ‘nonmember charitable organization’ means any
organization which is described in subsection (c)(3) and
exempt from tax under subsection (a) and which is not
a member of the risk pool and does not benefit (directly
or indirectly) from the insurance coverage provided by the
pool to its members.’’.
(b) EFFECTIVE DATE.—The amendment made by subsection (a)
shall apply to taxable years beginning after the date of the enact-
ment of this Act.
H. R. 3448—7
SEC. 1115. TREATMENT OF DUES PAID TO AGRICULTURAL OR HORTI-
CULTURAL ORGANIZATIONS.
(a) GENERAL RULE.—Section 512 (defining unrelated business
taxable income) is amended by adding at the end the following
new subsection:
‘‘(d) TREATMENT OF DUES OF AGRICULTURAL OR HORTICULTURAL
ORGANIZATIONS.—
‘‘(1) IN GENERAL.—If—
‘‘(A) an agricultural or horticultural organization
described in section 501(c)(5) requires annual dues to be
paid in order to be a member of such organization, and
‘‘(B) the amount of such required annual dues does
not exceed $100,
in no event shall any portion of such dues be treated as derived
by such organization from an unrelated trade or business by
reason of any benefits or privileges to which members of such
organization are entitled.
‘‘(2) INDEXATION OF $100 AMOUNT.—In the case of any tax-
able year beginning in a calendar year after 1995, the $100
amount in paragraph (1) shall be increased by an amount
equal to—
‘‘(A) $100, multiplied by
‘‘(B) the cost-of-living adjustment determined under
section 1(f)(3) for the calendar year in which the taxable
year begins, by substituting ‘calendar year 1994’ for ‘cal-
endar year 1992’ in subparagraph (B) thereof.
‘‘(3) DUES.—For purposes of this subsection, the term ‘dues’
means any payment (whether or not designated as dues) which
is required to be made in order to be recognized by the organiza-
tion as a member of the organization.’’.
(b) EFFECTIVE DATES.—
(1) IN GENERAL.—The amendment made by this section
shall apply to taxable years beginning after December 31, 1986.
(2) TRANSITIONAL RULE.—If—
(A) for purposes of applying part III of subchapter
F of chapter 1 of the Internal Revenue Code of 1986 to
any taxable year beginning before January 1, 1987, an
agricultural or horticultural organization did not treat any
portion of membership dues received by it as income
derived in an unrelated trade or business, and
(B) such organization had a reasonable basis for not
treating such dues as income derived in an unrelated trade
or business,
then, for purposes of applying such part III to any such taxable
year, in no event shall any portion of such dues be treated
as derived in an unrelated trade or business.
(3) REASONABLE BASIS.—For purposes of paragraph (2), an
organization shall be treated as having a reasonable basis
for not treating membership dues as income derived in an
unrelated trade or business if the taxpayer’s treatment of such
dues was in reasonable reliance on any of the following:
(A) Judicial precedent, published rulings, technical
advice with respect to the organization, or a letter ruling
to the organization.
(B) A past Internal Revenue Service audit of the
organization in which there was no assessment attributable
H. R. 3448—8
to the reclassification of membership dues for purposes
of the tax on unrelated business income.
(C) Long-standing recognized practice of agricultural
or horticultural organizations.
SEC. 1116. CLARIFICATION OF EMPLOYMENT TAX STATUS OF CER-
TAIN FISHERMEN.
(a) CLARIFICATION OF EMPLOYMENT TAX STATUS.—
(1) AMENDMENTS OF INTERNAL REVENUE CODE OF 1986.—
(A) DETERMINATION OF SIZE OF CREW.—Subsection (b)
of section 3121 (defining employment) is amended by add-
ing at the end the following new sentence:
‘‘For purposes of paragraph (20), the operating crew of a boat
shall be treated as normally made up of fewer than 10 individuals
if the average size of the operating crew on trips made during
the preceding 4 calendar quarters consisted of fewer than 10 indi-
viduals.’’.
(B) 
CERTAIN
CASH
REMUNERATION
PERMITTED.—
Subparagraph (A) of section 3121(b)(20) is amended to
read as follows:
‘‘(A) such individual does not receive any cash remu-
neration other than as provided in subparagraph (B) and
other than cash remuneration—
‘‘(i) which does not exceed $100 per trip;
‘‘(ii) which is contingent on a minimum catch; and
‘‘(iii) which is paid solely for additional duties (such
as mate, engineer, or cook) for which additional cash
remuneration is traditional in the industry,’’.
(C) CONFORMING
AMENDMENT.—Section 6050A(a) is
amended by striking ‘‘and’’ at the end of paragraph (3),
by striking the period at the end of paragraph (4) and
inserting ‘‘; and’’, and by adding at the end the following
new paragraph:
‘‘(5) 
any 
cash 
remuneration 
described 
in 
section
3121(b)(20)(A).’’.
(2) AMENDMENT OF SOCIAL SECURITY ACT.—
(A) DETERMINATION OF SIZE OF CREW.—Subsection (a)
of section 210 of the Social Security Act is amended by
adding at the end the following new sentence:
‘‘For purposes of paragraph (20), the operating crew of a boat
shall be treated as normally made up of fewer than 10 individuals
if the average size of the operating crew on trips made during
the preceding 4 calendar quarters consisted of fewer than 10 indi-
viduals.’’.
(B) 
CERTAIN
CASH
REMUNERATION
PERMITTED.—
Subparagraph (A) of section 210(a)(20) of such Act is
amended to read as follows:
‘‘(A) such individual does not receive any additional
compensation other than as provided in subparagraph (B)
and other than cash remuneration—
‘‘(i) which does not exceed $100 per trip;
‘‘(ii) which is contingent on a minimum catch; and
‘‘(iii) which is paid solely for additional duties (such
as mate, engineer, or cook) for which additional cash
remuneration is traditional in the industry,’’.
(3) EFFECTIVE DATES.—
H. R. 3448—9
(A) IN GENERAL.—The amendments made by this sub-
section shall apply to remuneration paid—
(i) after December 31, 1994, and
(ii) after December 31, 1984, and before January
1, 1995, unless the payor treated such remuneration
(when paid) as being subject to tax under chapter
21 of the Internal Revenue Code of 1986.
(B) REPORTING REQUIREMENT.—The amendment made
by paragraph (1)(C) shall apply to remuneration paid after
December 31, 1996.
(b) INFORMATION REPORTING.—
(1) IN GENERAL.—Subpart B of part III of subchapter A
of chapter 68 (relating to information concerning transactions
with other persons) is amended by inserting after section 6050Q
the following new section:
‘‘SEC. 6050R. RETURNS RELATING TO CERTAIN PURCHASES OF FISH.
‘‘(a) REQUIREMENT OF REPORTING.—Every person—
‘‘(1) who is engaged in the trade or business of purchasing
fish for resale from any person engaged in the trade or business
of catching fish; and
‘‘(2) who makes payments in cash in the course of such
trade or business to such a person of $600 or more during
any calendar year for the purchase of fish,
shall make a return (at such times as the Secretary may prescribe)
described in subsection (b) with respect to each person to whom
such a payment was made during such calendar year.
‘‘(b) RETURN.—A return is described in this subsection if such
return—
‘‘(1) is in such form as the Secretary may prescribe, and
‘‘(2) contains—
‘‘(A) the name, address, and TIN of each person to
whom a payment described in subsection (a)(2) was made
during the calendar year;
‘‘(B) the aggregate amount of such payments made
to such person during such calendar year and the date
and amount of each such payment, and
‘‘(C) such other information as the Secretary may
require.
‘‘(c) STATEMENT TO BE FURNISHED WITH RESPECT TO WHOM
INFORMATION IS REQUIRED.—Every person required to make a
return under subsection (a) shall furnish to each person whose
name is required to be set forth in such return a written statement
showing—
‘‘(1) the name and address of the person required to make
such a return, and
‘‘(2) the aggregate amount of payments to the person
required to be shown on the return.
The written statement required under the preceding sentence shall
be furnished to the person on or before January 31 of the year
following the calendar year for which the return under subsection
(a) is required to be made.
‘‘(d) DEFINITIONS.—For purposes of this section:
‘‘(1) CASH.—The term ‘cash’ has the meaning given such
term by section 6050I(d).
‘‘(2) FISH.—The term ‘fish’ includes other forms of aquatic
life.’’.
H. R. 3448—10
(2) TECHNICAL AMENDMENTS.—
(A) Subparagraph (A) of section 6724(d)(1) is amended
by striking ‘‘or’’ at the end of clause (vi), by striking ‘‘and’’
at the end of clause (vii) and inserting ‘‘or’’, and by adding
at the end the following new clause:
‘‘(viii) section 6050R (relating to returns relating
to certain purchases of fish), and’’.
(B) Paragraph (2) of section 6724(d) is amended by
redesignating subparagraphs (R) through (U) as subpara-
graphs (S) through (V), respectively, and by inserting after
subparagraph (Q) the following new subparagraph:
‘‘(R) section 6050R(c) (relating to returns relating to
certain purchases of fish),’’.
(C) The table of sections for subpart B of part III
of subchapter A of chapter 68 is amended by inserting
after the item relating to 6050Q the following new item:
‘‘Sec. 6050R. Returns relating to certain purchases of fish.’’.
(3) EFFECTIVE DATE.—The amendments made by this sub-
section shall apply to payments made after December 31, 1997.
SEC. 1117. MODIFICATIONS OF TAX-EXEMPT BOND RULES FOR FIRST-
TIME FARMERS.
(a) ACQUISITION FROM RELATED PERSON ALLOWED.—Section
147(c)(2) (relating to exception for first-time farmers) is amended
by adding at the end the following new subparagraph:
‘‘(G) ACQUISITION
FROM
RELATED
PERSON.—For pur-
poses of this paragraph and section 144(a), the acquisition
by a first-time farmer of land or personal property from
a related person (within the meaning of section 144(a)(3))
shall not be treated as an acquisition from a related person,
if—
‘‘(i) the acquisition price is for the fair market
value of such land or property, and
‘‘(ii) subsequent to such acquisition, the related
person does not have a financial interest in the farming
operation with respect to which the bond proceeds are
to be used.’’.
(b) SUBSTANTIAL FARMLAND AMOUNT DOUBLED.—Clause (i) of
section 147(c)(2)(E) (defining substantial farmland) is amended by
striking ‘‘15 percent’’ and inserting ‘‘30 percent’’.
(c) EFFECTIVE DATE.—The amendments made by this section
shall apply to bonds issued after the date of the enactment of
this Act.
SEC. 1118. NEWSPAPER DISTRIBUTORS TREATED AS DIRECT SELLERS.
(a) IN GENERAL.—Section 3508(b)(2)(A) is amended by striking
‘‘or’’ at the end of clause (i), by inserting ‘‘or’’ at the end of clause
(ii), and by inserting after clause (ii) the following new clause:
‘‘(iii) is engaged in the trade or business of the
delivering or distribution of newspapers or shopping
news (including any services directly related to such
trade or business),’’.
(b) EFFECTIVE DATE.—The amendments made by this section
shall apply to services performed after December 31, 1995.
H. R. 3448—11
SEC. 1119. APPLICATION OF INVOLUNTARY CONVERSION RULES TO
PRESIDENTIALLY DECLARED DISASTERS.
(a) IN GENERAL.—Section 1033(h) is amended by redesignating
paragraphs (2) and (3) as paragraphs (3) and (4), respectively,
and by inserting after paragraph (1) the following new paragraph:
‘‘(2) TRADE OR BUSINESS AND INVESTMENT PROPERTY.—If
a taxpayer’s property held for productive use in a trade or
business or for investment is compulsorily or involuntarily con-
verted as a result of a Presidentially declared disaster, tangible
property of a type held for productive use in a trade or business
shall be treated for purposes of subsection (a) as property
similar or related in service or use to the property so con-
verted.’’.
(b) CONFORMING AMENDMENTS.—Section 1033(h) is amended—
(1) by striking ‘‘residence’’ in paragraph (3) (as redesignated
by subsection (a)) and inserting ‘‘property’’,
(2) by striking ‘‘PRINCIPAL RESIDENCES’’ in the heading
and inserting ‘‘PROPERTY’’, and
(3) by striking ‘‘(1) IN GENERAL.—’’ and inserting ‘‘(1) PRIN-
CIPAL RESIDENCES.—’’.
(c) EXPANSION OF OKLAHOMA CITY ENTERPRISE COMMUNITY.—
Notwithstanding sections 1391 and 1392(a)(3)(D) of the Internal
Revenue Code of 1986, the boundaries of the enterprise community
for Oklahoma City, Oklahoma, designated by the Secretary of Hous-
ing and Urban Development on December 21, 1994, may be
extended with respect to census tracts located in the area damaged
due to the bombing of the Alfred P. Murrah Federal Building
in Oklahoma City on April 19, 1995, primarily in the area bounded
on the south by Robert S. Kerr Avenue, on the north by North
13th Street, on the east by Oklahoma Avenue, and on the west
by Shartel Avenue.
(d) EFFECTIVE DATE.—
(1) IN GENERAL.—The amendments made by this section
shall apply to disasters declared after December 31, 1994, in
taxable years ending after such date.
(2) SUBSECTION (c).—Subsection (c) shall take effect on
the date of the enactment of this Act.
SEC. 1120. CLASS LIFE FOR GAS STATION CONVENIENCE STORES AND
SIMILAR STRUCTURES.
(a) IN GENERAL.—Section 168(e)(3)(E) (classifying certain prop-
erty as 15-year property) is amended by striking ‘‘and’’ at the
end of clause (i), by striking the period at the end of clause (ii)
and inserting ‘‘, and’’, and by adding at the end the following
new clause:
‘‘(iii) any section 1250 property which is a retail
motor fuels outlet (whether or not food or other conven-
ience items are sold at the outlet).’’.
(b) CONFORMING AMENDMENT.—Subparagraph (B) of section
168(g)(3) is amended by inserting after the item relating to subpara-
graph (E)(ii) in the table contained therein the following new item:
‘‘(E)(iii) . . . . . . . . . . . . . . . . . 20’’.
(c) EFFECTIVE DATE.—The amendments made by this section
shall apply to property which is placed in service on or after
the date of the enactment of this Act and to which section 168
of the Internal Revenue Code of 1986 applies after the amendment
made by section 201 of the Tax Reform Act of 1986. A taxpayer
H. R. 3448—12
may elect (in such form and manner as the Secretary of the Treas-
ury may prescribe) to have such amendments apply with respect
to any property placed in service before such date and to which
such section so applies.
SEC. 1121. TREATMENT OF ABANDONMENT OF LESSOR IMPROVE-
MENTS AT TERMINATION OF LEASE.
(a) IN GENERAL.—Paragraph (8) of section 168(i) is amended
to read as follows:
‘‘(8) TREATMENT OF LEASEHOLD IMPROVEMENTS.—
‘‘(A) IN GENERAL.—In the case of any building erected
(or improvements made) on leased property, if such building
or improvement is property to which this section applies,
the depreciation deduction shall be determined under the
provisions of this section.
‘‘(B) TREATMENT OF LESSOR IMPROVEMENTS WHICH ARE
ABANDONED AT TERMINATION OF LEASE.—An improvement—
‘‘(i) which is made by the lessor of leased property
for the lessee of such property, and
‘‘(ii) which is irrevocably disposed of or abandoned
by the lessor at the termination of the lease by such
lessee,
shall be treated for purposes of determining gain or loss
under this title as disposed of by the lessor when so dis-
posed of or abandoned.’’.
(b) EFFECTIVE DATE.—Subparagraph (B) of section 168(i)(8)
of the Internal Revenue Code of 1986, as added by the amendment
made by subsection (a), shall apply to improvements disposed of
or abandoned after June 12, 1996.
SEC. 1122. SPECIAL RULES RELATING TO DETERMINATION WHETHER
INDIVIDUALS 
ARE 
EMPLOYEES 
FOR 
PURPOSES 
OF
EMPLOYMENT TAXES.
(a) IN GENERAL.—Section 530 of the Revenue Act of 1978 is
amended by adding at the end the following new subsection:
‘‘(e) SPECIAL RULES FOR APPLICATION OF SECTION.—
‘‘(1) NOTICE OF AVAILABILITY OF SECTION.—An officer or
employee of the Internal Revenue Service shall, before or at
the commencement of any audit inquiry relating to the employ-
ment status of one or more individuals who perform services
for the taxpayer, provide the taxpayer with a written notice
of the provisions of this section.
‘‘(2) RULES RELATING TO STATUTORY STANDARDS.—For pur-
poses of subsection (a)(2)—
‘‘(A) a taxpayer may not rely on an audit commenced
after December 31, 1996, for purposes of subparagraph
(B) thereof unless such audit included an examination for
employment tax purposes of whether the individual
involved (or any individual holding a position substantially
similar to the position held by the individual involved)
should be treated as an employee of the taxpayer,
‘‘(B) in no event shall the significant segment require-
ment of subparagraph (C) thereof be construed to require
a reasonable showing of the practice of more than 25 per-
cent of the industry (determined by not taking into account
the taxpayer), and
‘‘(C) in applying the long-standing recognized practice
requirement of subparagraph (C) thereof—
H. R. 3448—13
‘‘(i) such requirement shall not be construed as
requiring the practice to have continued for more than
10 years, and
‘‘(ii) a practice shall not fail to be treated as long-
standing merely because such practice began after
1978.
‘‘(3) AVAILABILITY OF SAFE HARBORS.—Nothing in this sec-
tion shall be construed to provide that subsection (a) only
applies where the individual involved is otherwise an employee
of the taxpayer.
‘‘(4) BURDEN OF PROOF.—
‘‘(A) IN GENERAL.—If—
‘‘(i) a taxpayer establishes a prima facie case that
it was reasonable not to treat an individual as an
employee for purposes of this section, and
‘‘(ii) the taxpayer has fully cooperated with reason-
able requests from the Secretary of the Treasury or
his delegate,
then the burden of proof with respect to such treatment
shall be on the Secretary.
‘‘(B) EXCEPTION FOR OTHER REASONABLE BASIS.—In the
case of any issue involving whether the taxpayer had a
reasonable basis not to treat an individual as an employee
for purposes of this section, subparagraph (A) shall only
apply for purposes of determining whether the taxpayer
meets the requirements of subparagraph (A), (B), or (C)
of subsection (a)(2).
‘‘(5) PRESERVATION OF PRIOR PERIOD SAFE HARBOR.—If—
‘‘(A) an individual would (but for the treatment referred
to in subparagraph (B)) be deemed not to be an employee
of the taxpayer under subsection (a) for any prior period,
and
‘‘(B) such individual is treated by the taxpayer as an
employee for employment tax purposes for any subsequent
period,
then, for purposes of applying such taxes for such prior period
with respect to the taxpayer, the individual shall be deemed
not to be an employee.
‘‘(6) SUBSTANTIALLY
SIMILAR
POSITION.—For purposes of
this section, the determination as to whether an individual
holds a position substantially similar to a position held by
another individual shall include consideration of the relation-
ship between the taxpayer and such individuals.’’.
(b) EFFECTIVE DATES.—
(1) IN GENERAL.—The amendment made by this section
shall apply to periods after December 31, 1996.
(2) NOTICE
BY
INTERNAL
REVENUE
SERVICE.—Section
530(e)(1) of the Revenue Act of 1978 (as added by subsection
(a)) shall apply to audits which commence after December
31, 1996.
(3) BURDEN OF PROOF.—
(A) IN GENERAL.—Section 530(e)(4) of the Revenue Act
of 1978 (as added by subsection (a)) shall apply to disputes
involving periods after December 31, 1996.
(B) NO INFERENCE.—Nothing in the amendments made
by this section shall be construed to infer the proper treat-
H. R. 3448—14
ment of the burden of proof with respect to disputes involv-
ing periods before January 1, 1997.
SEC. 1123. TREATMENT OF HOUSING PROVIDED TO EMPLOYEES BY
ACADEMIC HEALTH CENTERS.
(a) IN GENERAL.—Paragraph (4) of section 119(d) (relating to
lodging furnished by certain educational institutions to employees)
is amended to read as follows:
‘‘(4) EDUCATIONAL INSTITUTION, ETC.—For purposes of this
subsection—
‘‘(A) IN GENERAL.—The term ‘educational institution’
means—
‘‘(i) 
an 
institution 
described 
in 
section
170(b)(1)(A)(ii) (or an entity organized under State law
and composed of public institutions so described), or
‘‘(ii) an academic health center.
‘‘(B) ACADEMIC
HEALTH
CENTER.—For purposes of
subparagraph (A), the term ‘academic health center’ means
an entity—
‘‘(i) which is described in section 170(b)(1)(A)(iii),
‘‘(ii) which receives (during the calendar year in
which the taxable year of the taxpayer begins) pay-
ments under subsection (d)(5)(B) or (h) of section 1886
of the Social Security Act (relating to graduate medical
education), and
‘‘(iii) which has as one of its principal purposes
or functions the providing and teaching of basic and
clinical medical science and research with the entity’s
own faculty.’’.
(b) EFFECTIVE DATE.—The amendment made by this section
shall apply to taxable years beginning after December 31, 1995.
Subtitle B—Extension of Certain Expiring
Provisions
SEC. 1201. WORK OPPORTUNITY TAX CREDIT.
(a) AMOUNT OF CREDIT.—Subsection (a) of section 51 (relating
to amount of credit) is amended by striking ‘‘40 percent’’ and insert-
ing ‘‘35 percent’’.
(b) MEMBERS OF TARGETED GROUPS.—Subsection (d) of section
51 is amended to read as follows:
‘‘(d) MEMBERS
OF TARGETED GROUPS.—For purposes of this
subpart—
‘‘(1) IN GENERAL.—An individual is a member of a targeted
group if such individual is—
‘‘(A) a qualified IV–A recipient,
‘‘(B) a qualified veteran,
‘‘(C) a qualified ex-felon,
‘‘(D) a high-risk youth,
‘‘(E) a vocational rehabilitation referral,
‘‘(F) a qualified summer youth employee, or
‘‘(G) a qualified food stamp recipient.
‘‘(2) QUALIFIED IV–A RECIPIENT.—
‘‘(A) IN GENERAL.—The term ‘qualified IV–A recipient’
means any individual who is certified by the designated
local agency as being a member of a family receiving assist-
H. R. 3448—15
ance under a IV–A program for at least a 9-month period
ending during the 9-month period ending on the hiring
date.
‘‘(B) IV–A PROGRAM.—For purposes of this paragraph,
the term ‘IV–A program’ means any program providing
assistance under a State plan approved under part A of
title IV of the Social Security Act (relating to assistance
for needy families with minor children) and any successor
of such program.
‘‘(3) QUALIFIED VETERAN.—
‘‘(A) IN GENERAL.—The term ‘qualified veteran’ means
any veteran who is certified by the designated local agency
as being—
‘‘(i) a member of a family receiving assistance
under a IV–A program (as defined in paragraph (2)(B))
for at least a 9-month period ending during the 12-
month period ending on the hiring date, or
‘‘(ii) a member of a family receiving assistance
under a food stamp program under the Food Stamp
Act of 1977 for at least a 3-month period ending during
the 12-month period ending on the hiring date.
‘‘(B) VETERAN.—For purposes of subparagraph (A), the
term ‘veteran’ means any individual who is certified by
the designated local agency as—
‘‘(i)(I) having served on active duty (other than
active duty for training) in the Armed Forces of the
United States for a period of more than 180 days,
or
‘‘(II) having been discharged or released from
active duty in the Armed Forces of the United States
for a service-connected disability, and
‘‘(ii) not having any day during the 60-day period
ending on the hiring date which was a day of extended
active duty in the Armed Forces of the United States.
For purposes of clause (ii), the term ‘extended active duty’
means a period of more than 90 days during which the
individual was on active duty (other than active duty for
training).
‘‘(4) QUALIFIED
EX-FELON.—The term ‘qualified ex-felon’
means any individual who is certified by the designated local
agency—
‘‘(A) as having been convicted of a felony under any
statute of the United States or any State,
‘‘(B) as having a hiring date which is not more than
1 year after the last date on which such individual was
so convicted or was released from prison, and
‘‘(C) as being a member of a family which had an
income during the 6 months immediately preceding the
earlier of the month in which such income determination
occurs or the month in which the hiring date occurs, which,
on an annual basis, would be 70 percent or less of the
Bureau of Labor Statistics lower living standard.
Any determination under subparagraph (C) shall be valid for
the 45-day period beginning on the date such determination
is made.
‘‘(5) HIGH-RISK YOUTH.—
H. R. 3448—16
‘‘(A) IN GENERAL.—The term ‘high-risk youth’ means
any individual who is certified by the designated local
agency—
‘‘(i) as having attained age 18 but not age 25
on the hiring date, and
‘‘(ii) as having his principal place of abode within
an empowerment zone or enterprise community.
‘‘(B) YOUTH MUST CONTINUE TO RESIDE IN ZONE.—In
the case of a high-risk youth, the term ‘qualified wages’
shall not include wages paid or incurred for services per-
formed while such youth’s principal place of abode is out-
side an empowerment zone or enterprise community.
‘‘(6) VOCATIONAL
REHABILITATION
REFERRAL.—The term
‘vocational rehabilitation referral’ means any individual who
is certified by the designated local agency as—
‘‘(A) having a physical or mental disability which, for
such individual, constitutes or results in a substantial
handicap to employment, and
‘‘(B) having been referred to the employer upon comple-
tion of (or while receiving) rehabilitative services pursuant
to—
‘‘(i) an individualized written rehabilitation plan
under a State plan for vocational rehabilitation services
approved under the Rehabilitation Act of 1973, or
‘‘(ii) a program of vocational rehabilitation carried
out under chapter 31 of title 38, United States Code.
‘‘(7) QUALIFIED SUMMER YOUTH EMPLOYEE.—
‘‘(A) IN GENERAL.—The term ‘qualified summer youth
employee’ means any individual—
‘‘(i) who performs services for the employer
between May 1 and September 15,
‘‘(ii) who is certified by the designated local agency
as having attained age 16 but not 18 on the hiring
date (or if later, on May 1 of the calendar year
involved),
‘‘(iii) who has not been an employee of the employer
during any period prior to the 90-day period described
in subparagraph (B)(i), and
‘‘(iv) who is certified by the designated local agency
as having his principal place of abode within an
empowerment zone or enterprise community.
‘‘(B) SPECIAL
RULES
FOR
DETERMINING
AMOUNT
OF
CREDIT.—For purposes of applying this subpart to wages
paid or incurred to any qualified summer youth employee—
‘‘(i) subsection (b)(2) shall be applied by substitut-
ing ‘any 90-day period between May 1 and September
15’ for ‘the 1-year period beginning with the day the
individual begins work for the employer’, and
‘‘(ii) subsection (b)(3) shall be applied by substitut-
ing ‘$3,000’ for ‘$6,000’.
The preceding sentence shall not apply to an individual
who, with respect to the same employer, is certified as
a member of another targeted group after such individual
has been a qualified summer youth employee.
‘‘(C) YOUTH MUST CONTINUE TO RESIDE IN ZONE.—Para-
graph (5)(B) shall apply for purposes of subparagraph
(A)(iv).
H. R. 3448—17
‘‘(8) QUALIFIED FOOD STAMP RECIPIENT.—
‘‘(A) IN
GENERAL.—The term ‘qualified food stamp
recipient’ means any individual who is certified by the
designated local agency—
‘‘(i) as having attained age 18 but not age 25
on the hiring date, and
‘‘(ii) as being a member of a family—
‘‘(I) receiving assistance under a food stamp
program under the Food Stamp Act of 1977
for the 6-month period ending on the hiring date,
or
‘‘(II) receiving such assistance for at least 3
months of the 5-month period ending on the hiring
date, in the case of a member of a family who
ceases to be eligible for such assistance under sec-
tion 6(o) of the Food Stamp Act of 1977.
‘‘(B) PARTICIPATION
INFORMATION.—Notwithstanding
any other provision of law, the Secretary of the Treasury
and the Secretary of Agriculture shall enter into an agree-
ment to provide information to designated local agencies
with respect to participation in the food stamp program.
‘‘(9) HIRING DATE.—The term ‘hiring date’ means the day
the individual is hired by the employer.
‘‘(10) DESIGNATED LOCAL AGENCY.—The term ‘designated
local agency’ means a State employment security agency estab-
lished in accordance with the Act of June 6, 1933, as amended
(29 U.S.C. 49–49n).
‘‘(11) SPECIAL RULES FOR CERTIFICATIONS.—
‘‘(A) IN GENERAL.—An individual shall not be treated
as a member of a targeted group unless—
‘‘(i) on or before the day on which such individual
begins 
work 
for 
the 
employer, 
the 
employer
has received a certification from a designated local
agency that such individual is a member of a targeted
group, or
‘‘(ii)(I) on or before the day the individual is offered
employment with the employer, a pre-screening notice
is completed by the employer with respect to such
individual, and
‘‘(II) not later than the 21st day after the individual
begins work for the employer, the employer submits
such notice, signed by the employer and the individual
under penalties of perjury, to the designated local
agency as part of a written request for such a certifi-
cation from such agency.
For purposes of this paragraph, the term ‘pre-screening
notice’ means a document (in such form as the Secretary
shall prescribe) which contains information provided by
the individual on the basis of which the employer believes
that the individual is a member of a targeted group.
‘‘(B) INCORRECT CERTIFICATIONS.—If—
‘‘(i) an individual has been certified by a designated
local agency as a member of a targeted group, and
‘‘(ii) such certification is incorrect because it was
based on false information provided by such individual,
the certification shall be revoked and wages paid by the
employer after the date on which notice of revocation is
H. R. 3448—18
received by the employer shall not be treated as qualified
wages.
‘‘(C) EXPLANATION OF DENIAL OF REQUEST.—If a des-
ignated local agency denies a request for certification of
membership in a targeted group, such agency shall provide
to the person making such request a written explanation
of the reasons for such denial.’’.
(c) MINIMUM EMPLOYMENT PERIOD.—Paragraph (3) of section
51(i) (relating to certain individuals ineligible) is amended to read
as follows:
‘‘(3) INDIVIDUALS
NOT
MEETING
MINIMUM
EMPLOYMENT
PERIOD.—No wages shall be taken into account under sub-
section (a) with respect to any individual unless such individual
either—
‘‘(A) is employed by the employer at least 180 days
(20 days in the case of a qualified summer youth employee),
or
‘‘(B) has completed at least 400 hours (120 hours in
the case of a qualified summer youth employee) of services
performed for the employer.’’.
(d) TERMINATION.—Paragraph (4) of section 51(c) (relating to
wages defined) is amended to read as follows:
‘‘(4) TERMINATION.—The term ‘wages’ shall not include any
amount paid or incurred to an individual who begins work
for the employer—
‘‘(A) after December 31, 1994, and before October 1,
1996, or
‘‘(B) after September 30, 1997.’’.
(e) REDESIGNATION OF CREDIT.—
(1) Sections 38(b)(2), 41(b)(2)(D)(iii), 45A(b)(1)(B), 51 (a)
and (g), and 196(c) are each amended in the text by striking
‘‘targeted jobs credit’’ each place it appears and inserting ‘‘work
opportunity credit’’.
(2) The subpart heading for subpart F of part IV of sub-
chapter A of chapter 1 is amended by striking ‘‘Targeted
Jobs Credit’’ and inserting ‘‘Work Opportunity Credit’’.
(3) The table of subparts for such part IV is amended
by striking ‘‘targeted jobs credit’’ and inserting ‘‘work oppor-
tunity credit’’.
(4) The headings for sections 41(b)(2)(D)(iii) and 1396(c)(3)
are each amended by striking ‘‘TARGETED JOBS CREDIT’’ and
inserting ‘‘WORK OPPORTUNITY CREDIT’’.
(5) The heading for subsection (j) of section 51 is amended
by striking ‘‘TARGETED JOBS CREDIT’’ and inserting ‘‘WORK
OPPORTUNITY CREDIT’’.
(f) TECHNICAL AMENDMENT.—Paragraph (1) of section 51(c) is
amended by striking ‘‘, subsection (d)(8)(D),’’.
(g) EFFECTIVE DATE.—The amendments made by this section
shall apply to individuals who begin work for the employer after
September 30, 1996.
SEC. 1202. EMPLOYER-PROVIDED EDUCATIONAL ASSISTANCE PRO-
GRAMS.
(a) EXTENSION.—Subsection (d) of section 127 (relating to edu-
cational assistance programs) is amended by striking ‘‘December
31, 1994.’’ and inserting ‘‘May 31, 1997. In the case of any taxable
year beginning in 1997, only expenses paid with respect to courses
H. R. 3448—19
beginning before July 1, 1997, shall be taken into account in deter-
mining the amount excluded under this section.’’.
(b) LIMITATION TO EDUCATION BELOW GRADUATE LEVEL.—The
last sentence of section 127(c)(1) is amended by inserting before
the period the following: ‘‘, and such term also does not include
any payment for, or the provision of any benefits with respect
to, any graduate level course of a kind normally taken by an
individual pursuing a program leading to a law, business, medical,
or other advanced academic or professional degree’’.
(c) EFFECTIVE DATES.—
(1) EXTENSION.—The amendment made by subsection (a)
shall apply to taxable years beginning after December 31, 1994.
(2) GRADUATE EDUCATION.—The amendment made by sub-
section (b) shall apply with respect to expenses relating to
courses beginning after June 30, 1996.
(3) EXPEDITED PROCEDURES.—The Secretary of the Treas-
ury shall establish expedited procedures for the refund of any
overpayment of taxes imposed by the Internal Revenue Code
of 1986 which is attributable to amounts excluded from gross
income during 1995 or 1996 under section 127 of such Code,
including procedures waiving the requirement that an employer
obtain an employee’s signature where the employer dem-
onstrates to the satisfaction of the Secretary that any refund
collected by the employer on behalf of the employee will be
paid to the employee.
SEC. 1203. FUTA EXEMPTION FOR ALIEN AGRICULTURAL WORKERS.
(a) IN GENERAL.—Subparagraph (B) of section 3306(c)(1) (defin-
ing employment) is amended by striking ‘‘before January 1, 1995,’’.
(b) EFFECTIVE DATE.—The amendment made by subsection (a)
shall apply to services performed after December 31, 1994.
SEC. 1204. RESEARCH CREDIT.
(a) IN GENERAL.—Subsection (h) of section 41 (relating to credit
for research activities) is amended to read as follows:
‘‘(h) TERMINATION.—
‘‘(1) IN
GENERAL.—This section shall not apply to any
amount paid or incurred—
‘‘(A) after June 30, 1995, and before July 1,
1996, or
‘‘(B) after May 31, 1997.
Notwithstanding the preceding sentence, in the case of a tax-
payer making an election under subsection (c)(4) for its first
taxable year beginning after June 30, 1996, and before July
1, 1997, this section shall apply to amounts paid or incurred
during the first 11 months of such taxable year.
‘‘(2) COMPUTATION OF BASE AMOUNT.—In the case of any
taxable year with respect to which this section applies to a
number of days which is less than the total number of days
in such taxable year, the base amount with respect to such
taxable year shall be the amount which bears the same ratio
to the base amount for such year (determined without regard
to this paragraph) as the number of days in such taxable
year to which this section applies bears to the total number
of days in such taxable year.’’.
(b) BASE AMOUNT
FOR START-UP COMPANIES.—Clause (i) of
section 41(c)(3)(B) (relating to start-up companies) is amended to
read as follows:
H. R. 3448—20
‘‘(i) 
TAXPAYERS
TO
WHICH
SUBPARAGRAPH
APPLIES.—The fixed-base percentage shall be deter-
mined under this subparagraph if—
‘‘(I) the first taxable year in which a taxpayer
had both gross receipts and qualified research
expenses begins after December 31, 1983, or
‘‘(II) there are fewer than 3 taxable years
beginning after December 31, 1983, and before
January 1, 1989, in which the taxpayer had both
gross receipts and qualified research expenses.’’.
(c) ELECTION
OF ALTERNATIVE INCREMENTAL CREDIT.—Sub-
section (c) of section 41 is amended by redesignating paragraphs
(4) and (5) as paragraphs (5) and (6), respectively, and by inserting
after paragraph (3) the following new paragraph:
‘‘(4) ELECTION OF ALTERNATIVE INCREMENTAL CREDIT.—
‘‘(A) IN GENERAL.—At the election of the taxpayer, the
credit determined under subsection (a)(1) shall be equal
to the sum of—
‘‘(i) 1.65 percent of so much of the qualified
research expenses for the taxable year as exceeds 1
percent of the average described in subsection (c)(1)(B)
but does not exceed 1.5 percent of such average,
‘‘(ii) 2.2 percent of so much of such expenses as
exceeds 1.5 percent of such average but does not exceed
2 percent of such average, and
‘‘(iii) 2.75 percent of so much of such expenses
as exceeds 2 percent of such average.
‘‘(B) ELECTION.—An election under this paragraph may
be made only for the first taxable year of the taxpayer
beginning after June 30, 1996. Such an election shall apply
to the taxable year for which made and all succeeding
taxable years unless revoked with the consent of the Sec-
retary.’’.
(d) INCREASED CREDIT
FOR CONTRACT RESEARCH EXPENSES
WITH RESPECT TO CERTAIN RESEARCH CONSORTIA.—Paragraph (3)
of section 41(b) is amended by adding at the end the following
new subparagraph:
‘‘(C) 
AMOUNTS
PAID
TO
CERTAIN
RESEARCH
CONSORTIA.—
‘‘(i) IN
GENERAL.—Subparagraph (A) shall be
applied by substituting ‘75 percent’ for ‘65 percent’
with respect to amounts paid or incurred by the tax-
payer to a qualified research consortium for qualified
research 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 related taxpayers.
‘‘(ii) QUALIFIED RESEARCH CONSORTIUM.—The term
‘qualified research consortium’ 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 research, and
‘‘(III) is not a private foundation.’’.
H. R. 3448—21
(e) CONFORMING AMENDMENT.—Subparagraph (D) of section
28(b)(1) is amended by inserting ‘‘, and before July 1, 1996, and
periods after May 31, 1997’’ after ‘‘June 30, 1995’’.
(f) EFFECTIVE DATES.—
(1) IN GENERAL.—Except as provided in paragraph (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.
(3) ESTIMATED TAX.—The amendments made by this section
shall not be taken into account under section 6654 or 6655
of the Internal Revenue Code of 1986 (relating to failure to
pay estimated tax) in determining the amount of any install-
ment required to be paid for a taxable year beginning in 1997.
SEC. 1205. ORPHAN DRUG TAX CREDIT.
(a) RECATEGORIZED AS A BUSINESS CREDIT.—
(1) IN GENERAL.—Section 28 (relating to clinical 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 relating to section
28.
(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 condi-
tions.’’.
(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—
‘‘(1) after December 31, 1994, and before July 1,
1996, or
‘‘(2) after May 31, 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 following new paragraph:
‘‘(7) NO CARRYBACK OF SECTION 45C CREDIT BEFORE JULY
1, 1996.—No portion of the unused business credit for any tax-
able year which is attributable to the orphan drug credit deter-
mined under section 45C may be carried back to a taxable
year ending before 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 as a credit
against the tax imposed by this chapter for the taxable year’’
H. R. 3448—22
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 amended by strik-
ing 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 section 28 solely
by reason of the application of section 28(d)(2)(B),’’ in clause
(iii), and
(B) by striking ‘‘or not allowed under section 28 solely
by reason of the application of section 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 paragraph (1) and
inserting ‘‘section 45C(b)’’,
(B) by striking ‘‘section 28’’ in paragraphs (1) and (2)(A)
and inserting ‘‘section 45C’’, and
(C) by striking ‘‘subsection (d)(2) thereof’’ in paragraphs
(1) and (2)(A) and inserting ‘‘section 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. 1206. CONTRIBUTIONS OF STOCK TO PRIVATE FOUNDATIONS.
(a) IN GENERAL.—Subparagraph (D) of section 170(e)(5) (relat-
ing 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—
‘‘(i) after December 31, 1994, and before July 1,
1996, or
‘‘(ii) after May 31, 1997.’’.
(b) EFFECTIVE DATE.—The amendment made by this section
shall apply to contributions made after June 30, 1996.
SEC. 1207. 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 ‘‘July 1, 1998’’ and by striking ‘‘January
1, 1996’’ and inserting ‘‘January 1, 1997’’.
(b) EFFECTIVE DATE.—The amendment made by this section
shall take effect on the date of the enactment of this Act.
SEC. 1208. MORATORIUM FOR EXCISE TAX ON DIESEL FUEL SOLD FOR
USE OR USED IN DIESEL-POWERED MOTORBOATS.
Subparagraph (D) of section 4041(a)(1) (relating to the imposi-
tion of tax on diesel fuel and special motor fuels) is amended
by redesignating clauses (i) and (ii) as clauses (ii) and (iii), respec-
tively, and by inserting before clause (ii) (as redesignated) the
following new clause:
‘‘(i) no tax shall be imposed by subsection (a) or
(d)(1) during the period beginning on the date which
H. R. 3448—23
is 7 days after the date of the enactment of the Small
Business Job Protection Act of 1996 and ending on
December 31, 1997,’’.
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 shareholders) is amended
by inserting after clause (iv) the following new clause:
‘‘(v) An electing small business trust.’’.
(b) CURRENT BENEFICIARIES TREATED
AS SHAREHOLDERS.—
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 potential current bene-
ficiary 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 period.’’.
(c) ELECTING SMALL BUSINESS TRUST DEFINED.—Section 1361
(defining S corporation) is amended by adding 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 business trust’ means any
trust if—
‘‘(i) such trust does not have as a beneficiary any
person other than (I) an individual, (II) an estate,
or (III) an organization described in paragraph (2),
(3), (4), or (5) of section 170(c) which holds a contingent
interest and is not a potential current beneficiary,
‘‘(ii) no interest in such trust was acquired 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 include—
‘‘(i) any qualified subchapter S trust (as defined
in subsection (d)(3)) if an election 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 subparagraph (A),
the term ‘purchase’ means any acquisition if the basis
of the property acquired is determined under section 1012.
‘‘(2) POTENTIAL
CURRENT
BENEFICIARY.—For purposes of
this section, the term ‘potential current beneficiary’ means,
H. R. 3448—24
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 corporation,
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 subsection shall
be made by the trustee. Any such election shall apply to the
taxable year of the trust for which 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 sec-
tion 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 BUSI-
NESS TRUSTS.—
‘‘(1) IN GENERAL.—For purposes of this chapter—
‘‘(A) the portion of any electing small business 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 determined with the modi-
fications of paragraph (2).
‘‘(2) MODIFICATIONS.—For purposes of paragraph (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 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, deduction, 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 disposition of stock
in an S corporation.
‘‘(iii) To the extent provided in regulations, State
or local income taxes or administrative 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 apportioned 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 DISTRIBU-
TIONS.—For purposes of determining—
‘‘(A) the amount of the tax imposed by this chapter
on the portion of any electing small business trust not
treated as a separate trust under paragraph (1), and
‘‘(B) the distributable net income of the entire trust,
H. R. 3448—25
the items referred to in paragraph (2)(C) shall be excluded.
Except as provided in the preceding sentence, this subsection
shall not affect the taxation of any distribution from the trust.
‘‘(4) TREATMENT
OF
UNUSED
DEDUCTIONS
WHERE
TERMI-
NATION 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 section 1366(a)
is amended by inserting ‘‘, or of a trust or estate which terminates,’’
after ‘‘who dies’’.
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 appears 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 paragraph (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 TERMINATIONS 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 TERMINATIONS.—If—
‘‘(1) an election under subsection (a) by any corporation—
‘‘(A) was not effective for the taxable year for which
made (determined without regard to 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 circumstances result-
ing in such ineffectiveness or termination were inadvertent,
‘‘(3) no later than a reasonable period of time after discovery
of the circumstances resulting in such ineffectiveness or termi-
nation, steps were taken—
‘‘(A) so that the corporation is a small business corpora-
tion, or
‘‘(B) to acquire the required shareholder consents, and
‘‘(4) the corporation, and each person who was a share-
holder in the corporation at any time during the period specified
pursuant to this subsection, agrees to make such adjustments
(consistent with the treatment of the corporation as an S cor-
poration) as may be required by the Secretary with respect
to such period,
H. R. 3448—26
then, notwithstanding the circumstances resulting in such ineffec-
tiveness or termination, such corporation shall be 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 prescribed by this subsection for making
such election for such taxable year or no such election
is made for any taxable year, and
‘‘(B) the Secretary determines that there was reason-
able 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 subsections
(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:
‘‘(2) ELECTION TO TERMINATE YEAR.—
‘‘(A) IN GENERAL.—Under regulations prescribed by the
Secretary, if any shareholder terminates the shareholder’s
interest in the corporation during the taxable year and
all affected shareholders and the corporation agree to the
application 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 interest is terminated and all share-
holders to whom such shareholder has transferred shares
during the taxable year. If such shareholder has transferred
shares to the corporation, the term ‘affected 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 redesignating subparagraph
(B) as subparagraph (C), and by inserting after subparagraph (A)
the following new subparagraph:
‘‘(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 section 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 redesignated) the following new subpara-
graph:
H. R. 3448—27
‘‘(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.—Section 6037
(relating to return of S corporation) is amended by adding
at the end the following new subsection:
‘‘(c) SHAREHOLDER’S RETURN MUST BE CONSISTENT WITH COR-
PORATE RETURN OR SECRETARY NOTIFIED OF INCONSISTENCY.—
‘‘(1) IN GENERAL.—A shareholder of an S corporation 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 return.
‘‘(2) NOTIFICATION OF INCONSISTENT TREATMENT.—
‘‘(A) IN GENERAL.—In the case of any subchapter S
item, if—
‘‘(i)(I) the corporation has filed a return but the
shareholder’s treatment on his return is (or may be)
inconsistent with the treatment of the item on the
corporate return, or
‘‘(II) the corporation has not filed a return, and
‘‘(ii) the shareholder files with the Secretary a
statement identifying the inconsistency,
paragraph (1) shall not apply to such item.
‘‘(B) SHAREHOLDER
RECEIVING
INCORRECT
INFORMA-
TION.—A shareholder shall be treated as having complied
with clause (ii) of subparagraph (A) with respect to a sub-
chapter S item if the shareholder—
‘‘(i) demonstrates to the satisfaction of the Sec-
retary that the treatment of the subchapter S item
on the shareholder’s return is consistent with the treat-
ment 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 comply with
subparagraph (A)(ii) of paragraph (2),
any adjustment required to make the treatment of the items
by such shareholder consistent with the treatment of the items
on the corporate return shall be treated as arising out of
mathematical or clerical errors and assessed according to sec-
tion 6213(b)(1). Paragraph (2) of section 6213(b) shall not apply
to any assessment referred to in the preceding sentence.
‘‘(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 regulations prescribed by the Secretary pro-
vide that, for purposes of this subtitle, such item is more
appropriately determined at the corporation level than at the
shareholder level.
H. R. 3448—28
‘‘(5) ADDITION TO TAX FOR FAILURE TO COMPLY WITH SEC-
TION.—
‘‘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 subchapter A of chapter 68.’’.
(3) CONFORMING AMENDMENTS.—
(A) Section 1366 is amended by striking sub-
section (g).
(B) Subsection (b) of section 6233 is amended to read
as follows:
‘‘(b) SIMILAR RULES IN CERTAIN CASES.—If a partnership return
is filed for any taxable year but it is determined 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 subchapter D.
SEC. 1308. S CORPORATIONS PERMITTED TO HOLD SUBSIDIARIES.
(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 sub-
paragraphs (A), (B), (C), and (D), respectively.
(b) TREATMENT OF CERTAIN WHOLLY OWNED S CORPORATION
SUBSIDIARIES.—Section 1361(b) (defining small business corpora-
tion) is amended by adding at the end the following new paragraph:
‘‘(3) TREATMENT
OF
CERTAIN
WHOLLY
OWNED
SUBSIDI-
ARIES.—
‘‘(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 corpora-
tion, 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 SUBSIDIARY.—For pur-
poses of this paragraph, the term ‘qualified subchapter
S subsidiary’ means any 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 corpora-
tion as a qualified subchapter S subsidiary.
‘‘(C) TREATMENT OF TERMINATIONS OF QUALIFIED SUB-
CHAPTER S SUBSIDIARY STATUS.—For purposes of this title,
if any corporation which was a qualified subchapter S
subsidiary 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—
H. R. 3448—29
‘‘(i) an election under subparagraph (B)(ii) to be
treated as a qualified subchapter 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 subparagraph:
‘‘(F) TREATMENT OF CERTAIN DIVIDENDS.—If an S cor-
poration holds stock in a C corporation meeting the require-
ments of section 1504(a)(2), the term ‘passive investment
income’ shall not include dividends from such C corporation
to the extent such dividends are attributable to the earn-
ings 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).
(2) Subsection (b) of section 1504 (defining includible cor-
poration) 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) (relating to losses
and deductions cannot exceed shareholder’s basis in stock and
debt) is amended by striking ‘‘paragraph (1)’’ and inserting
‘‘paragraphs (1) and (2)(A)’’.
(2) Subsection (d) of section 1368 (relating to certain adjust-
ments taken into account) is amended by adding at the end
the following new flush 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 section 1367(a)
for the taxable year.’’.
(b) ACCUMULATED ADJUSTMENTS ACCOUNT.—Paragraph (1) of
section 1368(e) (relating to accumulated adjustments account) is
amended by adding at the end the following new subparagraph:
‘‘(C) NET LOSS FOR YEAR DISREGARDED.—
‘‘(i) IN GENERAL.—In applying this section to distribu-
tions made during any taxable year, the amount in the
accumulated adjustments account 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 adjustment’ 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 distributions), over
‘‘(II) the increases in such account for such taxable
year.’’.
(c) CONFORMING AMENDMENTS.—Subparagraph (A) of section
1368(e)(1) is amended—
H. R. 3448—30
(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 inserting ‘‘section
1367(a)(2)’’.
SEC. 1310. TREATMENT OF S CORPORATIONS UNDER SUBCHAPTER C.
Subsection (a) of section 1371 (relating to application of sub-
chapter C rules) is amended to read as follows:
‘‘(a) APPLICATION OF SUBCHAPTER C RULES.—Except as other-
wise 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 PROFITS.
(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 accumulated 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.—
(1) Paragraph (3) of section 1362(d), as amended by section
1308, is amended—
(A) by striking ‘‘SUBCHAPTER C’’ in the paragraph head-
ing and inserting ‘‘ACCUMULATED’’,
(B) by striking ‘‘subchapter C’’ in subparagraph (A)(i)(I)
and inserting ‘‘accumulated’’, and
(C) by striking subparagraph (B) and redesignating
the following subparagraphs accordingly.
(2)(A) Subsection (a) of section 1375 is amended by striking
‘‘subchapter C’’ in paragraph (1) and inserting ‘‘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 respec-
tive 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 inserting ‘‘accumulated’’.
(D) The table of sections for part III of subchapter S of
chapter 1 is amended by striking ‘‘subchapter C’’ in the item
relating to section 1375 and inserting ‘‘accumulated’’.
(3) Clause (i) of section 1042(c)(4)(A) is amended by striking
‘‘section 1362(d)(3)(D)’’ and inserting ‘‘section 1362(d)(3)(C)’’.
SEC. 1312. CARRYOVER OF DISALLOWED LOSSES AND DEDUCTIONS
UNDER AT-RISK RULES ALLOWED.
Paragraph (3) of section 1366(d) (relating to carryover of dis-
allowed losses and deductions to post-termination transition period)
is amended by adding at the end the following new subparagraph:
H. R. 3448—31
‘‘(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
transition 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 (relating to
adjustments to basis of stock of shareholders, etc.) is amended
by adding at the end the following new paragraph:
‘‘(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 inheritance, section 691 shall be
applied with respect to any item of income of the S corpora-
tion 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 decedent.’’.
(b) EFFECTIVE DATE.—The amendment made by subsection (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 APPLICABLE TO
REAL PROPERTY SUBDIVIDED FOR SALE BY NONCOR-
PORATE TAXPAYERS.
(a) IN GENERAL.—Subsection (a) of section 1237 (relating to
real property subdivided for sale) is amended by striking ‘‘other
than a corporation’’ in the material preceding paragraph (1) and
inserting ‘‘other than a C corporation’’.
(b) CONFORMING AMENDMENT.—Subparagraph (A) of section
1237(a)(2) is amended by inserting ‘‘an S corporation which included
the taxpayer as a shareholder,’’ after ‘‘controlled by the taxpayer,’’.
SEC. 1315. FINANCIAL INSTITUTIONS.
Subparagraph (A) of section 1361(b)(2) (defining ineligible cor-
poration), 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 described in section
585,’’.
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 organiza-
H. R. 3448—32
tion described in subsection (c)(7)) who is not an individ-
ual,’’.
(2) ELIGIBLE
EXEMPT
ORGANIZATIONS.—Section 1361(c)
(relating to special rules for applying subsection (b)) is amended
by adding at the end the following new paragraph:
‘‘(7) CERTAIN EXEMPT ORGANIZATIONS PERMITTED AS SHARE-
HOLDERS.—For purposes of subsection (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.—Section
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 applying this paragraph in the
case of a charitable contribution 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:
‘‘(e) SPECIAL RULES APPLICABLE TO S CORPORATIONS.—
‘‘(1) IN GENERAL.—If an organization described in section
1361(c)(7) holds stock in an S corporation—
‘‘(A) such interest shall be treated as an interest in
an unrelated trade or business, and
‘‘(B) notwithstanding any other provision of this part—
‘‘(i) all items of income, loss, or deduction taken
into account under section 1366(a), and
‘‘(ii) 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) BASIS REDUCTION.—Except as provided in regulations,
for purposes of paragraph (1), the basis of any stock acquired
by purchase (within the meaning of section 1012) shall be
reduced by the amount of any dividends received by the
organization with respect to the stock.’’.
(d) CERTAIN BENEFITS NOT APPLICABLE TO S CORPORATIONS.—
(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 inserting ‘‘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’’.
H. R. 3448—33
(f) EFFECTIVE DATE.—The amendments made by this section
shall apply to taxable years beginning after December 31, 1997.
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 Internal Revenue Code of
1986 (relating to election after termination), 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 (relating to
taxability of beneficiary of employees’ trust) is amended to read
as follows:
‘‘(d) TAXABILITY OF BENEFICIARY OF CERTAIN FOREIGN 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 organized outside the United States shall be treated
as if it were a trust exempt from tax under section 501(a).’’.
(b) CONFORMING AMENDMENTS.—
(1) Subparagraph (D) of section 402(e)(4) (relating to other
rules applicable to exempt trusts) is amended to read as follows:
‘‘(D) LUMP-SUM
DISTRIBUTION.—For purposes of this
paragraph—
‘‘(i) IN GENERAL.—The term ‘lump-sum distribution’
means the distribution or payment within one taxable
year of the recipient of the balance to the credit of
an employee which becomes payable to the recipient—
‘‘(I) on account of the employee’s death,
‘‘(II) after the employee attains age 591⁄2,
‘‘(III) on account of the employee’s separation
from service, or
‘‘(IV) after the employee has become 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 exempt from tax under
section 501 or from a plan described in section 403(a).
Subclause (III) of this clause shall be applied only
with respect to an individual who is an employee with-
out 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 paragraph, the balance to the credit of the
employee does not include the accumulated deductible
employee contributions under the plan (within the
meaning of section 72(o)(5)).
H. R. 3448—34
‘‘(ii) 
AGGREGATION
OF
CERTAIN
TRUSTS
AND
PLANS.—For purposes of determining the balance to
the credit of an employee 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 maintained
by the employer shall be treated as a single plan,
and all stock bonus plans maintained by the
employer shall be treated as a single plan, and
‘‘(II) trusts which are not qualified 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 property laws.
‘‘(iv) AMOUNTS SUBJECT TO PENALTY.—This para-
graph shall not apply to amounts described in subpara-
graph (A) of section 72(m)(5) to the extent that section
72(m)(5) applies to such amounts.
‘‘(v) BALANCE
TO
CREDIT
OF
EMPLOYEE
NOT
TO
INCLUDE AMOUNTS PAYABLE UNDER QUALIFIED DOMES-
TIC RELATIONS ORDER.—For purposes of this paragraph,
the balance to the credit of an employee shall not
include any amount payable to an alternate payee
under a qualified domestic relations order (within the
meaning of section 414(p)).
‘‘(vi) TRANSFERS TO COST-OF-LIVING ARRANGEMENT
NOT TREATED AS DISTRIBUTION.—For purposes of this
paragraph, the balance to the credit of an employee
under a defined contribution plan shall not include
any amount transferred from such defined contribution
plan to a qualified cost-of-living arrangement (within
the meaning of section 415(k)(2)) under a defined bene-
fit plan.
‘‘(vii) LUMP-SUM DISTRIBUTIONS OF ALTERNATE PAY-
EES.—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 para-
graph, the payment under a qualified domestic rela-
tions order (within the meaning 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
employee.’’.
(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 regular 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 pension plans taxed under sec-
tion 402(d)) is hereby repealed.
H. R. 3448—35
(5) Section 401(a)(28)(B) (relating to coordination with dis-
tribution rules) is amended by striking clause (v).
(6) Subparagraph (B)(ii) of section 401(k)(10) (relating to
distributions that must be lump-sum distributions) 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 separation 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 separation from service
for purposes of limitation of tax) is hereby repealed.
(9) Section 691(c) (relating to deduction for estate 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 alternative
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 paragraph apply’’,
(B) by adding at the end the following new flush sen-
tence:
‘‘An individual may elect to have this paragraph apply to only
one lump-sum distribution.’’, and
(C) by striking the heading and inserting:
‘‘(4) SPECIAL ONE-TIME ELECTION.—’’.
(13) Section 402(e) is amended by striking paragraph (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 amend-
ments 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 (5) of the Tax Reform Act of 1986. Notwithstand-
ing the preceding sentence, individuals who elect such benefits
after 
December 
31, 
1999, 
shall 
not 
be 
eligible 
for
5-year averaging under section 402(d) of the Internal Revenue
Code 
of 
1986 
(as 
in 
effect 
immediately 
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 ‘‘subsection (a)’’.
H. R. 3448—36
(2) Sections 406(e) and 407(e) are each amended by striking
paragraph (2) and by redesignating paragraph (3) as paragraph
(2).
(3) Section 7701(a)(20) is amended by striking ‘‘, for the
purpose of applying the provisions of section 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 DISTRIBU-
TIONS UNDER CERTAIN EMPLOYER PLANS.
(a) GENERAL RULE.—Subsection (d) of section 72 (relating to
annuities; certain proceeds of endowment and life insurance con-
tracts) is amended to read as follows:
‘‘(d) SPECIAL RULES
FOR QUALIFIED EMPLOYER RETIREMENT
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
‘‘(ii) the investment in the contract shall be recov-
ered as provided in this paragraph.
‘‘(B) 
METHOD
OF
RECOVERING
INVESTMENT
IN
CONTRACT.—
‘‘(i) IN GENERAL.—Gross income shall not include
so much of any monthly annuity payment under a
qualified employer retirement plan as does not exceed
the amount obtained by dividing—
‘‘(I) the investment in the contract (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 sub-
section (c)(3)(B) applies, the number of monthly
annuity payments under such contract).
‘‘(ii) CERTAIN
RULES
MADE
APPLICABLE.—Rules
similar to the rules of paragraphs (2) and (3) of sub-
section (b) shall apply for purposes of this paragraph.
‘‘(iii) NUMBER OF ANTICIPATED PAYMENTS.—
‘‘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 paragraph, investment
in the contract shall be determined under subsection (c)(1)
without regard to subsection (c)(2).
‘‘(D) SPECIAL RULE WHERE LUMP SUM PAID IN CONNEC-
TION 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—
H. R. 3448—37
‘‘(i) such payment shall be taxable under sub-
section (e) as if received before the annuity starting
date, and
‘‘(ii) the investment in the contract for purposes
of this paragraph shall be determined as if such pay-
ment had been so received.
‘‘(E) EXCEPTION.—This paragraph shall not apply in
any case where the primary annuitant has attained age
75 on the annuity starting date unless there are fewer
than 5 years of guaranteed payments under the annuity.
‘‘(F) ADJUSTMENT WHERE ANNUITY PAYMENTS 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 pur-
poses of this paragraph, the term ‘qualified employer retire-
ment plan’ means any plan or contract described in para-
graph (1), (2), or (3) of section 4974(c).
‘‘(2) TREATMENT
OF
EMPLOYEE
CONTRIBUTIONS
UNDER
DEFINED CONTRIBUTION PLANS.—For purposes 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 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 required begin-
ning 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 calendar 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 section 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).
‘‘(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 increased to take into
account the period after age 701⁄2
in which the
employee was not receiving any benefits under the
plan.
H. R. 3448—38
‘‘(iv) EXCEPTION FOR GOVERNMENTAL AND CHURCH
PLANS.—Clauses (ii) and (iii) shall not apply in the
case of a governmental plan or church plan. For pur-
poses 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-controlled
organization (as defined in section 3121(w)(3)(B)).’’.
(b) EFFECTIVE DATE.—The amendment made by subsection (a)
shall apply to years beginning after December 31, 1996.
CHAPTER 2—INCREASED ACCESS TO RETIREMENT
PLANS
Subchapter A—Simple Savings Plans
SEC. 1421. ESTABLISHMENT OF SAVINGS INCENTIVE MATCH PLANS
FOR EMPLOYEES OF SMALL EMPLOYERS.
(a) IN GENERAL.—Section 408 (relating to individual retirement
accounts) is amended by redesignating subsection (p) as subsection
(q) and by inserting after subsection (o) the following new sub-
section:
‘‘(p) SIMPLE RETIREMENT ACCOUNTS.—
‘‘(1) IN GENERAL.—For purposes of this title, the term ‘sim-
ple retirement account’ means an individual retirement plan
(as defined in section 7701(a)(37))—
‘‘(A) with respect to which the requirements of para-
graphs (3), (4), and (5) are met; and
‘‘(B) with respect to which the only contributions
allowed are contributions under a qualified salary reduction
arrangement.
‘‘(2) QUALIFIED SALARY REDUCTION ARRANGEMENT.—
‘‘(A) IN GENERAL.—For purposes of this subsection, the
term ‘qualified salary reduction arrangement’ means a writ-
ten arrangement of an eligible employer under which—
‘‘(i) an employee eligible to participate in the
arrangement may elect to have the employer make
payments—
‘‘(I) as elective employer contributions 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 retirement 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 compensation 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.—
H. R. 3448—39
‘‘(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 nonelective
contributions of 2 percent of compensation for each
employee who is eligible to participate in the arrange-
ment 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 employees 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 compensa-
tion taken into account under clause (i) for any year
shall not exceed the limitation in effect for such year
under section 401(a)(17).
‘‘(C) DEFINITIONS.—For purposes of this subsection—
‘‘(i) ELIGIBLE EMPLOYER.—
‘‘(I) IN GENERAL.—The term ‘eligible employer’
means, with respect to 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 subse-
quent year shall be treated as an eligible employer
for the 2 years following the last year the employer
was an eligible employer. If such failure is due
to any acquisition, 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 
‘applicable
percentage’ means 3 percent.
‘‘(II) ELECTION
OF
LOWER
PERCENTAGE.—An
employer may elect to apply a lower percentage
(not less than 1 percent) for any year for all
employees 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 before the 60-day election period
for such year under paragraph (5)(C). An employer
may not elect a lower percentage under this sub-
clause for any year if that election would result
in the applicable 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
described 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
H. R. 3448—40
contribution was at 3 percent of compensation for
such prior year.
‘‘(D) ARRANGEMENT MAY BE ONLY PLAN OF EMPLOYER.—
‘‘(i) IN
GENERAL.—An arrangement shall not be
treated as a qualified salary reduction 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 arrangement 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 is not
a multiple of $500 shall be rounded to the next lower
multiple of $500.
‘‘(3) VESTING
REQUIREMENTS.—The requirements of this
paragraph are met with respect to a simple retirement account
if the employee’s rights to any contribution to the simple retire-
ment account are nonforfeitable. For purposes of this para-
graph, rules similar to the rules of subsection (k)(4) shall apply.
‘‘(4) PARTICIPATION REQUIREMENTS.—
‘‘(A) IN GENERAL.—The requirements of this paragraph
are met with respect to any simple retirement account
for a year only if, under the qualified salary reduction
arrangement, all employees of the employer who—
‘‘(i) received at least $5,000 in compensation from
the employer during any 2 preceding years, and
‘‘(ii) are reasonably expected to receive at least
$5,000 in compensation during the year,
are eligible to make the election under paragraph (2)(A)(i)
or receive the nonelective contribution described in para-
graph (2)(B).
‘‘(B) EXCLUDABLE EMPLOYEES.—An employer may elect
to exclude from the requirement under subparagraph (A)
employees described in section 410(b)(3).
‘‘(5) ADMINISTRATIVE
REQUIREMENTS.—The requirements
of this paragraph are met with respect to any simplified retire-
ment account if, under the qualified salary reduction arrange-
ment—
‘‘(A) an employer must—
‘‘(i) make the elective employer contributions under
paragraph (2)(A)(i) not later than the close of the 30-
day period following the last day of the month with
respect to which the contributions are to be made,
and
‘‘(ii) make the matching contributions under para-
graph (2)(A)(iii) or the nonelective contributions under
H. R. 3448—41
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 partici-
pation until the beginning of the next year, and
‘‘(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 arrangement,
for such year.
‘‘(6) DEFINITIONS.—For purposes of this subsection—
‘‘(A) COMPENSATION.—
‘‘(i) IN GENERAL.—The term ‘compensation’ 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 section 1402(a) without regard to any contribu-
tion under this subsection.
‘‘(B) EMPLOYEE.—The term ‘employee’ includes an
employee as defined in section 401(c)(1).
‘‘(C) YEAR.—The term ‘year’ means the calendar year.
‘‘(7) USE OF DESIGNATED FINANCIAL INSTITUTION.—A plan
shall not be treated as failing to satisfy 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
issuer. 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 partici-
pant’s balance may be transferred without cost or penalty to
another individual account or annuity in accordance with sub-
section (d)(3)(G).’’.
(b) TAX TREATMENT OF SIMPLE RETIREMENT ACCOUNTS.—
(1) DEDUCTIBILITY OF CONTRIBUTIONS BY EMPLOYEES.—
(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 contrib-
uted to a simple retirement account established under section
408(p).’’.
(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 CONTRIBUTIONS.—Section
404 (relating to deductions for contributions of an employer
to pension, etc. plans) is amended by adding at the end the
following new subsection:
‘‘(m) SPECIAL RULES FOR SIMPLE RETIREMENT ACCOUNTS.—
H. R. 3448—42
‘‘(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 para-
graph (1) shall be deductible in the taxable 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 pur-
poses of this subsection, contributions 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 ACCOUNTS.—Rules
similar to the rules of paragraphs (1) and (3) of subsection (h)
shall apply to contributions and distributions with respect to a
simple retirement account under section 408(p).’’.
(B) Section 408(d)(3) is amended by adding 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 subsection
(p)) unless—
‘‘(i) it is paid into another simple retirement
account, or
‘‘(ii) in the case of any payment or distribution
to which section 72(t)(6) does not apply, it is paid
into an individual retirement 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 distributions) is amended by adding
at the end the following 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 partici-
pated in any qualified salary reduction arrangement main-
tained 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 subsection (d) and by insert-
ing after subsection (b) the following new subsection:
‘‘(c) PENALTIES RELATING TO SIMPLE RETIREMENT ACCOUNTS.—
‘‘(1) EMPLOYER PENALTIES.—An employer who fails to pro-
vide 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—
H. R. 3448—43
‘‘(A) to provide 1 or more statements required 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 descriptions
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 penalty shall be
imposed under this subsection with respect 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 maintaining a qualified salary
reduction arrangement under subsection (p).
‘‘(B) SUMMARY DESCRIPTION.—The trustee of any simple
retirement account established pursuant to a qualified sal-
ary reduction arrangement under subsection (p) shall pro-
vide to the employer maintaining the arrangement, each
year a description containing the following information:
‘‘(i) The name and address of the employer and
the trustee.
‘‘(ii) The requirements for eligibility for participa-
tion.
‘‘(iii) The benefits provided with respect 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 employer shall
notify each employee immediately before the period for
which an election described in subsection (p)(5)(C) may
be made of the employee’s opportunity to make such elec-
tion. Such notice shall include a copy of the description
described 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 subsection (p),
only one report under this subsection shall be required to be submit-
ted 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:
H. R. 3448—44
‘‘(G) SIMPLE RETIREMENT ACCOUNTS.—The term ‘top-
heavy plan’ shall not include a simple retirement account
under section 408(p).’’.
(8) EMPLOYMENT TAXES.—
(A) Paragraph (5) of section 3121(a) is amended by
striking ‘‘or’’ at the end of subparagraph (F), by inserting
‘‘or’’ at the end of subparagraph (G), and by adding at
the end the following new subparagraph:
‘‘(H) under an arrangement to which section 408(p)
applies, other than any elective contributions under para-
graph (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 contributions 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 subparagraph (F), by inserting
‘‘or’’ at the end of subparagraph (G), and by adding at
the end the following new subparagraph:
‘‘(H) under an arrangement to which section 408(p)
applies, other than any elective contributions under para-
graph (2)(A)(i) thereof,’’.
(D) Paragraph (12) of section 3401(a) is amended by
adding the following new subparagraph:
‘‘(D) under an arrangement to which section 408(p)
applies; or’’.
(9) CONFORMING AMENDMENTS.—
(A) Section 280G(b)(6) is amended by striking ‘‘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 striking ‘‘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
subparagraph:
‘‘(D) any elective employer contribution under section
408(p)(2)(A)(i).’’.
(C) Subsections (b), (c), (m)(4)(B), and (n)(3)(B) of sec-
tion 414 are each amended by inserting ‘‘408(p),’’ after
‘‘408(k),’’.
(D) Section 4972(d)(1)(A) is amended by striking ‘‘and’’
at the end of clause (ii), by striking the period at the
end of clause (iii) and inserting ‘‘, 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 EMPLOYEE PEN-
SIONS.—Section 408(k)(6) is amended by adding 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
H. R. 3448—45
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 provided in this
subsection, no report shall be required under this section by
an employer maintaining a qualified salary reduction arrange-
ment 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 employer maintaining the arrangement each
year a description 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 arrange-
ment.
‘‘(D) The time and method of making elections with
respect to the arrangement.
‘‘(E) The procedures for, and effects of, withdrawals
(including rollovers) from the arrangement.
‘‘(3) EMPLOYEE NOTIFICATION.—The employer shall notify
each employee immediately before the period for which an
election described in section 408(p)(5)(C) of such Code may
be made of the employee’s opportunity to make such election.
Such notice 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 paragraph:
‘‘(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 partici-
pant or beneficiary shall, for purposes of paragraph (1), be
treated as exercising control over the assets in the account
upon the earliest of—
‘‘(A) an affirmative election among investment options
with respect to the initial investment of any contribution,
‘‘(B) a rollover to any other simple retirement 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 retirement account
established pursuant to such a qualified salary reduction
arrangement.’’.
H. R. 3448—46
(e) EFFECTIVE DATE.—The amendments made by this section
shall apply to taxable years beginning after December 31, 1996.
SEC. 1422. EXTENSION OF SIMPLE PLAN TO 401(k) ARRANGEMENTS.
(a) ALTERNATIVE METHOD OF SATISFYING SECTION 401(k) NON-
DISCRIMINATION TESTS.—Section 401(k) (relating to cash or deferred
arrangements) is amended by adding at the end the following
new paragraph:
‘‘(11) ADOPTION OF SIMPLE PLAN TO MEET NONDISCRIMINA-
TION TESTS.—
‘‘(A) IN
GENERAL.—A cash or deferred arrangement
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 subpara-
graph (C), and
‘‘(iii) the vesting requirements of section 408(p)(3).
‘‘(B) CONTRIBUTION REQUIREMENTS.—
‘‘(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 contributions for the year
on behalf of the employee to a trust under the
plan in an amount which is expressed as a percent-
age of compensation of the employee but which
in no event exceeds $6,000,
‘‘(II) the employer is required to make a match-
ing 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 described in subclause
(I) or (II).
‘‘(ii) EMPLOYER MAY ELECT 2-PERCENT NONELECTIVE
CONTRIBUTION.—An employer shall be treated as meet-
ing the requirements of clause (i)(II) for any year if,
in lieu of the contributions described in such clause,
the employer elects (pursuant to the terms of the
arrangement) to make nonelective contributions of 2
percent of compensation 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 employees of such election within a reasonable
period of time before the 60th day before the beginning
of such year.
‘‘(C) EXCLUSIVE
PLAN
REQUIREMENT.—The require-
ments of this subparagraph are met for any year to which
this paragraph applies if no contributions were made, or
benefits were accrued, for services during such year under
any qualified plan of the employer on behalf of any
employee eligible to participate in the cash or deferred
H. R. 3448—47
arrangement, 
other 
than 
contributions 
described 
in
subparagraph (B).
‘‘(D) DEFINITIONS AND SPECIAL RULE.—
‘‘(i) DEFINITIONS.—For purposes of this paragraph,
any term used in this paragraph 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) NON-
DISCRIMINATION TESTS.—Section 401(m) (relating to nondiscrimina-
tion 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 respect to matching con-
tributions if the plan—
‘‘(A) meets the contribution requirements of subpara-
graph (B) of subsection (k)(11),
‘‘(B) meets the exclusive plan requirements of sub-
section (k)(11)(C), and
‘‘(C) meets the vesting requirements of section
408(p)(3).’’.
(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 ORGANIZATIONS.—
‘‘(i) TAX-EXEMPTS ELIGIBLE.—Except as provided in
clause (ii), any organization exempt from tax under
this subtitle may include a qualified cash or deferred
arrangement as part of a plan maintained by it.
‘‘(ii) 
GOVERNMENTS
INELIGIBLE.—A 
cash 
or
deferred arrangement shall not be treated as a quali-
fied cash or deferred arrangement if it is part of a
plan maintained 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 a plan of an employer
described in clause (iii).
‘‘(iii) TREATMENT
OF
INDIAN
TRIBAL
GOVERN-
MENTS.—An employer which is an Indian tribal govern-
ment (as defined in section 7701(a)(40)), a subdivision
of an Indian tribal government (determined in accord-
ance with section 7871(d)), an agency or instrumental-
ity of an Indian tribal government or subdivision
thereof, or a corporation chartered under Federal,
State, or tribal law which is owned in whole or in
H. R. 3448—48
part by any of the foregoing may include a qualified
cash or deferred arrangement as part of a plan main-
tained by the employer.’’.
(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 arrangement 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 DEDUCTION.
(a) SPOUSAL IRA COMPUTED ON BASIS OF COMPENSATION OF
BOTH SPOUSES.—Subsection (c) of section 219 (relating to special
rules for certain married individuals) is amended to read as follows:
‘‘(c) SPECIAL RULES FOR CERTAIN MARRIED INDIVIDUALS.—
‘‘(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 subsection
(b)(1)(A) for the taxable year, or
‘‘(B) the sum of—
‘‘(i) the compensation includible in such individ-
ual’s gross income for the taxable 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) APPLIES.—Para-
graph (1) shall apply to any individual if—
‘‘(A) such individual files a joint return for the taxable
year, and
‘‘(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 individual’s spouse for the taxable year.’’.
(b) CONFORMING AMENDMENTS.—
(1) Paragraph (2) of section 219(f) (relating to other defini-
tions and special rules) is amended by striking ‘‘subsections
(b) and (c)’’ and inserting ‘‘subsection (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 December 31, 1996.
CHAPTER 3—NONDISCRIMINATION PROVISIONS
SEC. 1431. DEFINITION 
OF 
HIGHLY 
COMPENSATED 
EMPLOYEES;
REPEAL OF FAMILY AGGREGATION.
(a) IN GENERAL.—Paragraph (1) of section 414(q) (defining
highly compensated employee) is amended to read as follows:
‘‘(1) IN GENERAL.—The term ‘highly compensated employee’
means any employee who—
‘‘(A) was a 5-percent owner at any time during the
year or the preceding year, or
H. R. 3448—49
‘‘(B) for the preceding year—
‘‘(i) had compensation from the employer in excess
of $80,000, and
‘‘(ii) if the employer elects the application of this
clause for such preceding year, was in the top-paid
group of employees for such preceding year.
The Secretary shall adjust the $80,000 amount under subpara-
graph (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 sentence.
(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), (5), and (12) and by redesignating paragraphs
(3), (4), (7), (8), (9), (10), and (11) as paragraphs (2) through
(8), respectively.
(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)(4)’’.
(C) Section 416(i)(1)(A) is amended by striking ‘‘section
414(q)(8)’’ and inserting ‘‘section 414(q)(5)’’.
(D) Subparagraph (A) of section 414(r)(2) is amended by
striking ‘‘subsection (q)(8)’’ and inserting ‘‘subsection (q)(5)’’.
(E) Section 414(q)(5), as redesignated by subparagraph (A),
is amended by striking ‘‘under paragraph (4), or the number
of officers taken into account under paragraph (5)’’.
(2) 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 December 31, 1996, except
that in determining whether an employee is a highly com-
pensated employee for years beginning in 1997, such amend-
ments shall be treated as having been in effect for years begin-
ning in 1996.
(2) FAMILY AGGREGATION.—The amendments made by sub-
section (b) shall apply to years beginning after December 31,
1996.
SEC. 1432. MODIFICATION OF ADDITIONAL PARTICIPATION REQUIRE-
MENTS.
(a) GENERAL RULE.—Section 401(a)(26)(A) (relating to addi-
tional 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 con-
stitute a qualified trust under this subsection unless on
H. R. 3448—50
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 ‘‘para-
graph (7)’’ and inserting ‘‘paragraph (2)(A) or (7)’’.
(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 CONTRIBU-
TIONS.
(a) ALTERNATIVE METHODS OF SATISFYING SECTION 401(k) NON-
DISCRIMINATION TESTS.—Section 401(k) (relating to cash or deferred
arrangements), as amended by section 1422, is amended by adding
at the end the following new paragraph:
‘‘(12) ALTERNATIVE METHODS OF MEETING NONDISCRIMINA-
TION REQUIREMENTS.—
‘‘(A) IN
GENERAL.—A cash or deferred arrangement
shall be treated as meeting the requirements of paragraph
(3)(A)(ii) if such arrangement—
‘‘(i) 
meets 
the 
contribution 
requirements 
of
subparagraph (B) or (C), and
‘‘(ii) meets the notice requirements of subpara-
graph (D).
‘‘(B) MATCHING CONTRIBUTIONS.—
‘‘(i) IN
GENERAL.—The requirements of this
subparagraph are met if, under the arrangement, the
employer makes matching 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 extent such elective con-
tributions do not exceed 3 percent of the employee’s
compensation, and
‘‘(II) 50 percent of the elective contributions
of the employee to the extent that such elective
contributions exceed 3 percent but do not exceed
5 percent of the employee’s compensation.
‘‘(ii) RATE FOR HIGHLY COMPENSATED EMPLOYEES.—
The requirements of this subparagraph are not met
if, under the arrangement, the rate of matching con-
tribution with respect to any elective contribution 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 contribution is not equal to the percentage
required under clause (i), an arrangement shall not
be treated as failing to meet the requirements of clause
(i) if—
H. R. 3448—51
‘‘(I) the rate of an employer’s matching con-
tribution does not increase as an employee’s rate
of elective contributions increase, and
‘‘(II) the aggregate amount of matching con-
tributions at such rate of elective contribution is
at least equal to the aggregate amount of matching
contributions 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 con-
tribution, to make a contribution to a defined contribution
plan on behalf of each employee who is not a highly com-
pensated employee and who is eligible to participate in
the arrangement in an amount equal to at least 3 percent
of the employee’s compensation.
‘‘(D) NOTICE
REQUIREMENT.—An arrangement meets
the requirements of this paragraph if, under the arrange-
ment, each employee eligible to participate is, within a
reasonable period before any year, given written notice
of the employee’s rights and obligations under the arrange-
ment which—
‘‘(i) is sufficiently accurate and comprehensive to
apprise the employee of such rights and obligations,
and
‘‘(ii) is written in a manner calculated to be under-
stood by the average employee eligible to participate.
‘‘(E) OTHER REQUIREMENTS.—
‘‘(i) WITHDRAWAL AND VESTING RESTRICTIONS.—An
arrangement shall not be treated as meeting the
requirements of subparagraph (B) or (C) of this para-
graph unless the requirements of subparagraphs (B)
and (C) of paragraph (2) are met with respect to all
employer contributions (including matching contribu-
tions) taken into account in determining whether the
requirements of subparagraphs (B) and (C) of this para-
graph are met.
‘‘(ii) SOCIAL SECURITY AND SIMILAR CONTRIBUTIONS
NOT TAKEN INTO ACCOUNT.—An arrangement shall not
be treated 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 subpara-
graph (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 maintained by the employer meets such
requirements with respect to employees eligible under the
arrangement.’’.
(b) ALTERNATIVE METHODS OF SATISFYING SECTION 401(m) NON-
DISCRIMINATION TESTS.—Section 401(m) (relating to nondiscrimina-
tion test for matching contributions and employee contributions),
as amended by section 1422(b), is amended by redesignating para-
graph (11) as paragraph (12) and by adding after paragraph (10)
the following new paragraph:
H. R. 3448—52
‘‘(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 contributions if the plan—
‘‘(i) 
meets 
the 
contribution 
requirements 
of
subparagraph (B) or (C) of subsection (k)(12),
‘‘(ii) meets the notice requirements of subsection
(k)(12)(D), and
‘‘(iii) meets the requirements of subparagraph (B).
‘‘(B) LIMITATION ON MATCHING CONTRIBUTIONS.—The
requirements of this subparagraph are met if—
‘‘(i) matching contributions on behalf of any
employee may not be made with respect to an employ-
ee’s contributions or elective deferrals in excess of 6
percent of the employee’s compensation,
‘‘(ii) the rate of an employer’s matching contribu-
tion does not increase as the rate of an employee’s
contributions or elective deferrals increase, and
‘‘(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.—Section
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 preceding 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
CONTRIBUTIONS.—Section
401(m)(2)(A) is amended—
(A) by inserting ‘‘for such plan year’’ after ‘‘highly
compensated employees’’,
(B) by inserting ‘‘for the preceding plan year’’ after
‘‘eligible employees’’ each place it appears 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 election is made, it may
not be changed except as provided by the Secretary.’’.
(d) SPECIAL
RULE
FOR
DETERMINING
AVERAGE
DEFERRAL
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 nonhighly compensated employees for the
preceding plan year shall be—
H. R. 3448—53
‘‘(i) 3 percent, or
‘‘(ii) if the employer makes an election under this
subclause, the actual deferral percentage of nonhighly
compensated employees 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 sub-
section (k)(3)(E) shall apply for purposes of this subsection.’’.
(e) DISTRIBUTION
OF
EXCESS
CONTRIBUTIONS
AND
EXCESS
AGGREGATE CONTRIBUTIONS.—
(1) Subparagraph (C) of section 401(k)(8) (relating to
arrangement not disqualified if excess contributions distributed)
is amended by striking ‘‘on the basis of the respective portions
of the excess contributions attributable to each of such employ-
ees’’ and inserting ‘‘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) (relating to
method of distributing excess aggregate contributions) 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.—
(1) IN GENERAL.—The amendments made by this section
shall apply to years beginning after December 31, 1998.
(2) EXCEPTIONS.—The amendments made by subsections
(c), (d), and (e) shall apply to years beginning after December
31, 1996.
SEC. 1434. DEFINITION OF COMPENSATION FOR SECTION 415 PUR-
POSES.
(a) GENERAL RULE.—Section 415(c)(3) (defining participant’s
compensation) is amended by adding at the end the following new
subparagraph:
‘‘(D) CERTAIN DEFERRALS INCLUDED.—The term ‘partici-
pant’s compensation’ shall include—
‘‘(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 reason of section 125 or 457.’’.
(b) CONFORMING AMENDMENTS.—
(1) Section 414(q)(4), as redesignated by section 1431, is
amended to read as follows:
‘‘(4) COMPENSATION.—For purposes of this subsection, 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.
H. R. 3448—54
CHAPTER 4—MISCELLANEOUS PROVISIONS
SEC. 1441. PLANS COVERING SELF-EMPLOYED INDIVIDUALS.
(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 qualified 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-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 MULTIEM-
PLOYER 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 section 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
(B) the date on which the last of the collective bargain-
ing 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 CERTAIN AGE.—
Section 401(k)(7) is amended by adding at the end the following
new subparagraph:
‘‘(C) SPECIAL
RULE
FOR
CERTAIN
DISTRIBUTIONS.—A
rural cooperative plan which includes a qualified cash or
deferred arrangement shall not be treated as violating the
requirements 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 described in paragraph (2)(B)(i)(IV) (without
H. R. 3448—55
regard to the limitation of its application to profit-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 providing electric
service on a mutual or cooperative basis, or
‘‘(II) is engaged primarily in providing 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 munici-
pality (or an agency 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 amendments made by
subsection (b) shall apply to plan years beginning after Decem-
ber 31, 1996.
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
GOVERNMENTAL
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 EXCESS BENE-
FIT ARRANGEMENTS.—
‘‘(1) GOVERNMENTAL PLAN NOT AFFECTED.—In determining
whether a governmental plan (as defined in section 414(d))
meets the requirements of this section, benefits provided under
a qualified governmental excess benefit arrangement shall not
be taken into account. Income accruing to a governmental plan
(or to a trust that is maintained solely for the purpose of
providing benefits under a qualified governmental excess bene-
fit arrangement) in respect of a qualified governmental excess
benefit arrangement shall constitute income derived from the
exercise of an essential governmental function upon which such
governmental 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 arrange-
ment 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
H. R. 3448—56
exempt from tax under this chapter and which does not meet
the requirements for qualification under section 401.
‘‘(3) QUALIFIED GOVERNMENTAL EXCESS BENEFIT ARRANGE-
MENT.—For purposes of this subsection, the term ‘qualified
governmental excess benefit arrangement’ 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 benefit 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 provided at any
time to the participant (directly or indirectly) to defer com-
pensation, and
‘‘(C) benefits described in subparagraph (A) are not
paid from a trust forming a part of such governmental
plan unless such trust is maintained solely for the purpose
of providing such benefits.’’.
(2) COORDINATION WITH SECTION 457.—Subsection (e) of sec-
tion 457 is amended by adding at the end the following new
paragraph:
‘‘(14) TREATMENT
OF
QUALIFIED
GOVERNMENTAL
EXCESS
BENEFIT
ARRANGEMENTS.—Subsections (b)(2) and (c)(1) shall
not apply to any qualified governmental excess benefit arrange-
ment (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 end of subparagraph (D)
and inserting ‘‘, and’’, and by inserting immediately thereafter
the following new subparagraph:
‘‘(E) a qualified governmental excess benefit arrange-
ment described in section 415(m).’’.
(c) EXEMPTION FOR SURVIVOR AND DISABILITY BENEFITS.—Para-
graph (2) of section 415(b) is amended by adding at the end the
following new subparagraph:
‘‘(I) EXEMPTION FOR SURVIVOR AND DISABILITY BENEFITS
PROVIDED
UNDER
GOVERNMENTAL
PLANS.—Subparagraph
(C) of this paragraph and paragraph (5) shall not apply
to—
‘‘(i) income received from a governmental plan (as
defined in section 414(d)) as a pension, annuity, or
similar allowance as the result of the recipient becom-
ing disabled by reason of personal injuries or sickness,
or
‘‘(ii) amounts received from a governmental 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.—
(1) IN GENERAL.—Subparagraph (C) of section 415(b)(10)
is amended by adding at the end the following 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 enactment of this clause. The revocation shall
H. R. 3448—57
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 includible 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 limita-
tions imposed by this section, any portion of such
amount which is attributable to any taxable year dur-
ing 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.—
(1) IN GENERAL.—The amendments made by subsections
(a), (b), and (c) shall apply to years beginning after December
31, 1994. The amendments made by subsection (d) shall apply
with respect to revocations adopted after the date of the enact-
ment 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 governmental plan (as defined
in section 414(d) of the Internal Revenue Code of 1986) fails
to satisfy the requirements of section 415 of such Code for
any taxable year beginning before January 1, 1995.
SEC. 1445. UNIFORM RETIREMENT AGE.
(a) DISCRIMINATION TESTING.—Paragraph (5) of section 401(a)
(relating to special rules relating to nondiscrimination require-
ments) is amended by adding at the end the following new subpara-
graph:
‘‘(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
‘‘(ii) subsidized early retirement benefits and joint
and survivor annuities shall not be treated as being
unavailable to employees on the same terms merely
because such benefits or annuities are based in whole
or in part on an employee’s social security 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 EMPLOYEES.
(a) ALL DISABLED PARTICIPANTS RECEIVING CONTRIBUTIONS.—
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 determinable 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.
H. R. 3448—58
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 definitions and special rules)
is amended to read as follows:
‘‘(9) BENEFITS NOT TREATED AS MADE AVAILABLE BY REASON
OF CERTAIN ELECTIONS, ETC.—
‘‘(A) TOTAL AMOUNT PAYABLE IS $3,500 OR LESS.—The
total amount payable to a participant 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 distribu-
tion, and
‘‘(II) there has been no prior distribution under
the plan to such participant to which this subpara-
graph applied.
A plan shall not be treated as failing to meet the distribu-
tion requirements of subsection (d) by reason of a distribu-
tion to which this subparagraph applies.
‘‘(B) ELECTION TO DEFER COMMENCEMENT OF DISTRIBU-
TIONS.—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 distribu-
tions, and
‘‘(ii) the participant may make only 1 such elec-
tion.’’.
(b) COST-OF-LIVING
ADJUSTMENT
OF
MAXIMUM
DEFERRAL
AMOUNT.—Subsection (e) of section 457, as amended by section
1444(b)(2) (relating to governmental plans), is amended by adding
at the end the following new paragraph:
‘‘(15) COST-OF-LIVING ADJUSTMENT OF MAXIMUM DEFERRAL
AMOUNT.—The Secretary shall adjust the $7,500 amount speci-
fied 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 December 31, 1996.
SEC. 1448. TRUST REQUIREMENT FOR DEFERRED COMPENSATION
PLANS OF STATE AND LOCAL GOVERNMENTS.
(a) IN GENERAL.—Section 457 is amended by adding at the
end the following new subsection:
H. R. 3448—59
‘‘(g) GOVERNMENTAL PLANS MUST MAINTAIN SET-ASIDES FOR
EXCLUSIVE BENEFIT OF PARTICIPANTS.—
‘‘(1) IN
GENERAL.—A plan maintained by an eligible
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 described in subsection (b)(6) are held
in trust for the exclusive benefit of participants and their
beneficiaries.
‘‘(2) TAXABILITY OF TRUSTS AND PARTICIPANTS.—For pur-
poses 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 includible 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 section 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 paragraph (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 by a plan on and after the date of the
enactment of this Act.
(2) TRANSITION RULE.—In the case of a plan in existence
on the date of the enactment of this Act, a trust need not
be established by reason of the amendments made by this
section before January 1, 1999.
SEC. 1449. TRANSITION RULE FOR COMPUTING MAXIMUM BENEFITS
UNDER SECTION 415 LIMITATIONS.
(a) IN GENERAL.—Subparagraph (A) of section 767(d)(3) of the
Uruguay Round Agreements Act is amended to read as follows:
‘‘(A) EXCEPTION.—A plan that was adopted and in effect
before December 8, 1994, shall not be required to apply
the amendments made by subsection (b) with respect to
benefits accrued before the earlier of—
‘‘(i) the later of the date a plan amendment apply-
ing the amendments made by subsection (b) is adopted
or made effective, or
‘‘(ii) the first day of the first limitation year begin-
ning after December 31, 1999.
Determinations under section 415(b)(2)(E) of the Internal
Revenue Code of 1986 before such earlier date shall be
made with respect to such benefits on the basis of such
section as in effect on December 7, 1994 (except that the
modification made by section 1449(b) of the Small Business
Job Protection Act of 1996 shall be taken into account),
and the provisions of the plan as in effect on December
7, 1994, but only if such provisions of the plan meet the
requirements of such section (as so in effect).’’.
H. R. 3448—60
(b) MODIFICATION OF CERTAIN ASSUMPTIONS FOR ADJUSTING
BENEFITS
OF DEFINED BENEFIT PLANS
FOR EARLY RETIREES.—
Subparagraph (E) of section 415(b)(2) (relating to limitation on
certain assumptions) is amended—
(1) by striking ‘‘Except as provided in clause (ii), for pur-
poses of adjusting any benefit or limitation under subparagraph
(B) or (C),’’ in clause (i) and inserting ‘‘For purposes of adjusting
any limitation under subparagraph (C) and, except as provided
in clause (ii), for purposes of adjusting any benefit under
subparagraph (B),’’, and
(2) by striking ‘‘For purposes of adjusting the benefit or
limitation of any form of benefit subject to section 417(e)(3),’’
in clause (ii) and inserting ‘‘For purposes of adjusting any
benefit under subparagraph (B) for any form of benefit subject
to section 417(e)(3),’’.
(c) EFFECTIVE DATE.—The amendments made by this section
shall take effect as if included in the provisions of section 767
of the Uruguay Round Agreements Act.
(d) TRANSITIONAL RULE.—In the case of a plan that was adopted
and in effect before December 8, 1994, if—
(1) a plan amendment was adopted or made effective on
or before the date of the enactment of this Act applying the
amendments made by section 767 of the Uruguay Round Agree-
ments Act, and
(2) within 1 year after the date of the enactment of this
Act, a plan amendment is adopted which repeals the amend-
ment referred to in paragraph (1),
the amendment referred to in paragraph (1) shall not be taken
into account in applying section 767(d)(3)(A) of the Uruguay Round
Agreements Act, as amended by subsection (a).
SEC. 1450. MODIFICATIONS OF SECTION 403(b).
(a) MULTIPLE SALARY REDUCTION AGREEMENTS PERMITTED.—
(1) GENERAL RULE.—For purposes of section 403(b) of the
Internal Revenue Code of 1986, the frequency that an employee
is permitted to enter into a salary reduction agreement, the
salary to which such an agreement may apply, and the ability
to revoke such an agreement shall be determined under the
rules applicable to cash or deferred elections under section
401(k) of such Code.
(2) CONSTRUCTIVE RECEIPT.—Section 402(e)(3) is amended
by inserting ‘‘or which is part of a salary reduction agreement
under section 403(b)’’ after ‘‘section 401(k)(2))’’.
(3) EFFECTIVE DATE.—This subsection shall apply to taxable
years beginning after December 31, 1995.
(b) TREATMENT OF INDIAN TRIBAL GOVERNMENTS.—
(1) IN GENERAL.—In the case of any contract purchased
in a plan year beginning before January 1, 1995, section 403(b)
of the Internal Revenue Code of 1986 shall be applied as
if any reference to an employer described in section 501(c)(3)
of the Internal Revenue Code of 1986 which is exempt from
tax under section 501 of such Code included a reference to
an employer which is an Indian tribal government (as defined
by section 7701(a)(40) of such Code), a subdivision of an Indian
tribal government (determined in accordance with section
7871(d) of such Code), an agency or instrumentality of an
Indian tribal government or subdivision thereof, or a corpora-
H. R. 3448—61
tion chartered under Federal, State, or tribal law which is
owned in whole or in part by any of the foregoing.
(2) ROLLOVERS.—Solely for purposes of applying section
403(b)(8) of such Code to a contract to which paragraph (1)
applies, a qualified cash or deferred arrangement under section
401(k) of such Code shall be treated as if it were a plan
or contract described in clause (ii) of section 403(b)(8)(A) of
such Code.
(c) ELECTIVE DEFERRALS.—
(1) IN
GENERAL.—Subparagraph (E) of section 403(b)(1)
is amended to read as follows:
‘‘(E) in the case of a contract purchased under a salary
reduction agreement, the contract meets the requirements
of section 401(a)(30),’’.
(2) EFFECTIVE DATE.—The amendment made by this sub-
section shall apply to years beginning after December 31, 1995,
except a contract shall not be required to meet any change
in any requirement by reason of such amendment before the
90th day after the date of the enactment of this Act.
SEC. 1451. SPECIAL RULES RELATING TO JOINT AND SURVIVOR
ANNUITY EXPLANATIONS.
(a) AMENDMENT TO INTERNAL REVENUE CODE.—Section 417(a)
is amended by adding at the end the following new paragraph:
‘‘(7) SPECIAL RULES RELATING TO TIME FOR WRITTEN EX-
PLANATION.—Notwithstanding any other provision of this sub-
section—
‘‘(A) EXPLANATION MAY BE PROVIDED AFTER ANNUITY
STARTING DATE.—
‘‘(i) IN GENERAL.—A plan may provide the written
explanation described in paragraph (3)(A) after the
annuity starting date. In any case to which this
subparagraph applies, the applicable election period
under paragraph (6) shall not end before the 30th
day after the date on which such explanation is pro-
vided.
‘‘(ii) REGULATORY AUTHORITY.—The Secretary may
by regulations limit the application of clause (i), except
that such regulations may not limit the period of time
by which the annuity starting date precedes the provi-
sion of the written explanation other than by providing
that the annuity starting date may not be earlier than
termination of employment.
‘‘(B) WAIVER OF 30-DAY PERIOD.—A plan may permit
a participant to elect (with any applicable spousal consent)
to waive any requirement that the written explanation
be provided at least 30 days before the annuity starting
date (or to waive the 30-day requirement under subpara-
graph (A)) if the distribution commences more than 7 days
after such explanation is provided.’’.
(b) AMENDMENT TO ERISA.—Section 205(c) of the Employee
Retirement Income Security Act of 1974 (29 U.S.C. 1055(c)) is
amended by adding at the end the following new paragraph:
‘‘(8) Notwithstanding any other provision of this sub-
section—
‘‘(A)(i) A plan may provide the written explanation
described in paragraph (3)(A) after the annuity starting
H. R. 3448—62
date. In any case to which this subparagraph applies, the
applicable election period under paragraph (7) shall not
end before the 30th day after the date on which such
explanation is provided.
‘‘(ii) The Secretary may by regulations limit the
application of clause (i), except that such regulations may
not limit the period of time by which the annuity starting
date precedes the provision of the written explanation other
than by providing that the annuity starting date may not
be earlier than termination of employment.
‘‘(B) A plan may permit a participant to elect (with
any applicable spousal consent) to waive any requirement
that the written explanation be provided at least 30 days
before the annuity starting date (or to waive the 30-day
requirement under subparagraph (A)) if the distribution
commences more than 7 days after such explanation is
provided.’’.
(c) EFFECTIVE DATE.—The amendments made by this section
shall apply to plan years beginning after December 31, 1996.
SEC. 1452. REPEAL OF LIMITATION IN CASE OF DEFINED BENEFIT
PLAN AND DEFINED CONTRIBUTION PLAN FOR SAME
EMPLOYEE; EXCESS DISTRIBUTIONS.
(a) IN GENERAL.—Section 415(e) is repealed.
(b) EXCESS DISTRIBUTIONS.—Section 4980A is amended by add-
ing at the end the following new subsection:
‘‘(g) LIMITATION ON APPLICATION.—This section shall not apply
to distributions during years beginning after December 31, 1996,
and before January 1, 2000, and such distributions shall be treated
as made first from amounts not described in subsection (f).’’.
(c) CONFORMING AMENDMENTS.—
(1) Paragraph (1) of section 415(a) is amended—
(A) by adding ‘‘or’’ at the end of subparagraph (A),
(B) by striking ‘‘, or’’ at the end of subparagraph (B)
and inserting a period, and
(C) by striking subparagraph (C).
(2) Subparagraph (B) of section 415(b)(5) is amended by
striking ‘‘and subsection (e)’’.
(3) Paragraph (1) of section 415(f) is amended by striking
‘‘subsections (b), (c), and (e)’’ and inserting ‘‘subsections (b)
and (c)’’.
(4) Subsection (g) of section 415 is amended by striking
‘‘subsections (e) and (f)’’ in the last sentence and inserting
‘‘subsection (f)’’.
(5) Clause (i) of section 415(k)(2)(A) is amended to read
as follows:
‘‘(i) any contribution made directly by an employee
under such an arrangement shall not be treated as
an annual addition for purposes of subsection (c), and’’.
(6) Clause (ii) of section 415(k)(2)(A) is amended by striking
‘‘subsections (c) and (e)’’ and inserting ‘‘subsection (c)’’.
(7) Section 416 is amended by striking subsection (h).
(d) EFFECTIVE DATE.—
(1) IN GENERAL.—Except as provided in paragraph (2), the
amendments made by this section shall apply to limitation
years beginning after December 31, 1999.
H. R. 3448—63
(2) EXCESS DISTRIBUTIONS.—The amendment made by sub-
section (b) shall apply to years beginning after December 31,
1996.
SEC. 1453. TAX ON PROHIBITED TRANSACTIONS.
(a) IN GENERAL.—Section 4975(a) is amended by striking ‘‘5
percent’’ and inserting ‘‘10 percent’’.
(b) EFFECTIVE DATE.—The amendment made by this section
shall apply to prohibited transactions occurring after the date of
the enactment of this Act.
SEC. 1454. TREATMENT OF LEASED EMPLOYEES.
(a) GENERAL RULE.—Subparagraph (C) of section 414(n)(2)
(defining leased employee) is amended to read as follows:
‘‘(C) such services are performed under primary direc-
tion or control by the recipient.’’.
(b) EFFECTIVE DATE.—The amendment made by subsection (a)
shall apply to years beginning after December 31, 1996, but shall
not apply to any relationship determined under an Internal Revenue
Service ruling issued before the date of the enactment of this
Act pursuant to section 414(n)(2)(C) of the Internal Revenue Code
of 1986 (as in effect on the day before such date) not to involve
a leased employee.
SEC. 1455. UNIFORM PENALTY PROVISIONS TO APPLY TO CERTAIN
PENSION REPORTING REQUIREMENTS.
(a) PENALTIES.—
(1) STATEMENTS.—Paragraph (1) of section 6724(d) is
amended by striking ‘‘and’’ at the end of subparagraph (A),
by striking the period at the end of subparagraph (B) and
inserting ‘‘, and’’, and by inserting after subparagraph (B) the
following new subparagraph:
‘‘(C) any statement of the amount of payments to
another person required to be made to the Secretary
under—
‘‘(i) section 408(i) (relating to reports with respect
to individual retirement accounts or annuities), or
‘‘(ii) section 6047(d) (relating to reports by employ-
ers, plan administrators, etc.).’’.
(2) REPORTS.—Paragraph (2) of section 6724(d) is amended
by striking ‘‘or’’ at the end of subparagraph (U), by striking
the period at the end of subparagraph (V) and inserting a
comma, and by inserting after subparagraph (V) the following
new subparagraphs:
‘‘(W) section 408(i) (relating to reports with respect
to individual retirement plans) to any person other than
the Secretary with respect to the amount of payments
made to such person, or
‘‘(X) section 6047(d) (relating to reports by plan
administrators) to any person other than the Secretary
with respect to the amount of payments made to such
person.’’.
(b) MODIFICATION
OF
REPORTABLE
DESIGNATED
DISTRIBU-
TIONS.—
(1) SECTION 408.—Subsection (i) of section 408 (relating
to individual retirement account reports) is amended by insert-
ing ‘‘aggregating $10 or more in any calendar year’’ after ‘‘dis-
tributions’’.
H. R. 3448—64
(2) SECTION 6047.—Paragraph (1) of section 6047(d) (relat-
ing to reports by employers, plan administrators, etc.) is
amended by adding at the end the following new sentence:
‘‘No return or report may be required under the preceding
sentence with respect to distributions to any person during
any year unless such distributions aggregate $10 or more.’’.
(c) QUALIFYING ROLLOVER DISTRIBUTIONS.—Section 6652(i) is
amended—
(1) by striking ‘‘the $10’’ and inserting ‘‘$100’’, and
(2) by striking ‘‘$5,000’’ and inserting ‘‘$50,000’’.
(d) CONFORMING AMENDMENTS.—
(1) Paragraph (1) of section 6047(f) is amended to read
as follows:
‘‘(1) For provisions relating to penalties for failures to file returns
and reports required under this section, see sections 6652(e), 6721,
and 6722.’’.
(2) Subsection (e) of section 6652 is amended by adding
at the end the following new sentence: ‘‘This subsection shall
not apply to any return or statement which is an information
return described in section 6724(d)(1)(C)(ii) or a payee state-
ment described in section 6724(d)(2)(X).’’.
(3) Subsection (a) of section 6693 is amended by adding
at the end the following new sentence: ‘‘This subsection shall
not apply to any report which is an information return described
in section 6724(d)(1)(C)(i) or a payee statement described in
section 6724(d)(2)(W).’’.
(e) EFFECTIVE DATE.—The amendments made by this section
shall apply to returns, reports, and other statements the due date
for which (determined without regard to extensions) is after Decem-
ber 31, 1996.
SEC. 1456. RETIREMENT BENEFITS OF MINISTERS NOT SUBJECT TO
TAX ON NET EARNINGS FROM SELF-EMPLOYMENT.
(a) IN GENERAL.—Section 1402(a)(8) (defining net earnings from
self-employment) is amended by inserting ‘‘, but shall not include
in such net earnings from self-employment the rental value of
any parsonage or any parsonage allowance (whether or not exclud-
able under section 107) provided after the individual retires, or
any other retirement benefit received by such individual from a
church plan (as defined in section 414(e)) after the individual
retires’’ before the semicolon at the end.
(b) EFFECTIVE DATE.—The amendments made by this section
shall apply to years beginning before, on, or after December 31,
1994.
SEC. 1457. SAMPLE LANGUAGE FOR SPOUSAL CONSENT AND QUALI-
FIED DOMESTIC RELATIONS FORMS.
(a) DEVELOPMENT OF SAMPLE LANGUAGE.—Not later than Janu-
ary 1, 1997, the Secretary of the Treasury shall develop—
(1) sample language for inclusion in a form for the spousal
consent required under section 417(a)(2) of the Internal Reve-
nue Code of 1986 and section 205(c)(2) of the Employee Retire-
ment Income Security Act of 1974 which—
(A) is written in a manner calculated to be understood
by the average person, and
(B) discloses in plain form—
(i) whether the waiver to which the spouse con-
sents is irrevocable, and
H. R. 3448—65
(ii) whether such waiver may be revoked by a
qualified domestic relations order, and
(2) sample language for inclusion in a form for a qualified
domestic relations order described in section 414(p)(1)(A) of
such Code and section 206(d)(3)(B)(i) of such Act which—
(A) meets the requirements contained in such sections,
and
(B) the provisions of which focus attention on the need
to consider the treatment of any lump sum payment, quali-
fied joint and survivor annuity, or qualified preretirement
survivor annuity.
(b) PUBLICITY.—The Secretary of the Treasury shall include
publicity for the sample language developed under subsection (a)
in the pension outreach efforts undertaken by the Secretary.
SEC. 1458. TREATMENT OF LENGTH OF SERVICE AWARDS TO VOLUN-
TEERS PERFORMING FIRE FIGHTING OR PREVENTION
SERVICES, EMERGENCY MEDICAL SERVICES, OR AMBU-
LANCE SERVICES.
(a) IN GENERAL.—Paragraph (11) of section 457(e) (relating
to deferred compensation plans of State and local governments
and tax-exempt organizations) is amended to read as follows:
‘‘(11) CERTAIN PLANS EXCLUDED.—
‘‘(A) IN GENERAL.—The following plans shall be treated
as not providing for the deferral of compensation:
‘‘(i) Any bona fide vacation leave, sick leave,
compensatory time, severance pay, disability pay, or
death benefit plan.
‘‘(ii) Any plan paying solely length of service
awards to bona fide volunteers (or their beneficiaries)
on account of qualified services performed by such
volunteers.
‘‘(B) SPECIAL RULES APPLICABLE TO LENGTH OF SERVICE
AWARD PLANS.—
‘‘(i) BONA FIDE VOLUNTEER.—An individual shall
be treated as a bona fide volunteer for purposes of
subparagraph (A)(ii) if the only compensation received
by such individual for performing qualified services
is in the form of—
‘‘(I) reimbursement for (or a reasonable allow-
ance for) reasonable expenses incurred in the
performance of such services, or
‘‘(II) reasonable benefits (including length of
service awards), and nominal fees for such services,
customarily paid by eligible employers in connec-
tion with the performance of such services by
volunteers.
‘‘(ii) LIMITATION ON ACCRUALS.—A plan shall not
be treated as described in subparagraph (A)(ii) if the
aggregate amount of length of service awards accruing
with respect to any year of service for any bona fide
volunteer exceeds $3,000.
‘‘(C) QUALIFIED SERVICES.—For purposes of this para-
graph, the term ‘qualified services’ means fire fighting and
prevention services, emergency medical services, and ambu-
lance services.’’.
(b) EXEMPTION FROM SOCIAL SECURITY TAXES.—
H. R. 3448—66
(1) Subsection (a)(5) of section 3121, as amended by section
1421, is amended by striking ‘‘(or)’’ at the end of subparagraph
(G), by inserting ‘‘or’’ at the end of subparagraph (H), and
by adding at the end the following new subparagraph:
‘‘(I) under a plan described in section 457(e)(11)(A)(ii)
and maintained by an eligible employer (as defined in
section 457(e)(1)).’’.
(2) Section 209(a)(4) of the Social Security Act is amended
by inserting ‘‘; or (K) under a plan described in section
457(e)(11)(A)(ii) of the Internal Revenue Code of 1986 and
maintained by an eligible employer (as defined in section
457(e)(1) of such Code)’’ before the semicolon at the end thereof.
(c) EFFECTIVE DATE.—
(1) SUBSECTION (a).—The amendment made by subsection
(a) shall apply to accruals of length of service awards after
December 31, 1996.
(2) SUBSECTION (b).—The amendments made by subsection
(b) shall apply to remuneration paid after December 31, 1996.
SEC. 1459. ALTERNATIVE NONDISCRIMINATION RULES FOR CERTAIN
PLANS THAT PROVIDE FOR EARLY PARTICIPATION.
(a) CASH OR DEFERRED ARRANGEMENTS.—Paragraph (3) of sec-
tion 401(k) (relating to application of participation and discrimina-
tion standards), as amended by section 1433(d)(1) of this Act, is
amended by adding at the end the following new subparagraph:
‘‘(F) SPECIAL RULE FOR EARLY PARTICIPATION.—If an
employer elects to apply section 410(b)(4)(B) in determining
whether a cash or deferred arrangement meets the require-
ments of subparagraph (A)(i), the employer may, in deter-
mining whether the arrangement meets the requirements
of subparagraph (A)(ii), exclude from consideration all
eligible employees (other than highly compensated employ-
ees) who have not met the minimum age and service
requirements of section 410(a)(1)(A).’’.
(b) MATCHING CONTRIBUTIONS.—Paragraph (5) of section 401(m)
(relating to employees taken into consideration) is amended by
adding at the end the following new subparagraph:
‘‘(C) SPECIAL RULE FOR EARLY PARTICIPATION.—If an
employer elects to apply section 410(b)(4)(B) in determining
whether a plan meets the requirements of section 410(b),
the employer may, in determining whether the plan meets
the requirements of paragraph (2), exclude from consider-
ation all eligible employees (other than highly compensated
employees) who have not met the minimum age and service
requirements of section 410(a)(1)(A).’’.
(c) EFFECTIVE DATE.—The amendments made by this section
shall apply to plan years beginning after December 31, 1998.
SEC. 1460. CLARIFICATION OF APPLICATION OF ERISA TO INSURANCE
COMPANY GENERAL ACCOUNTS.
(a) IN GENERAL.—Section 401 of the Employee Retirement
Income Security Act of 1974 (29 U.S.C. 1101) is amended by adding
at the end the following new subsection:
‘‘(c)(1)(A) Not later than June 30, 1997, the Secretary shall
issue proposed regulations to provide guidance for the purpose
of determining, in cases where an insurer issues 1 or more policies
to or for the benefit of an employee benefit plan (and such policies
are supported by assets of such insurer’s general account), which
H. R. 3448—67
assets held by the insurer (other than plan assets held in its
separate accounts) constitute assets of the plan for purposes of
this part and section 4975 of the Internal Revenue Code of 1986
and to provide guidance with respect to the application of this
title to the general account assets of insurers.
‘‘(B) The proposed regulations under subparagraph (A) shall
be subject to public notice and comment until September 30, 1997.
‘‘(C) The Secretary shall issue final regulations providing the
guidance described in subparagraph (A) not later than December
31, 1997.
‘‘(D) Such regulations shall only apply with respect to policies
which are issued by an insurer on or before December 31, 1998,
to or for the benefit of an employee benefit plan which is supported
by assets of such insurer’s general account. With respect to policies
issued on or before December 31, 1998, such regulations shall
take effect at the end of the 18-month period following the date
on which such regulations become final.
‘‘(2) The Secretary shall ensure that the regulations issued
under paragraph (1)—
‘‘(A) are administratively feasible, and
‘‘(B) protect the interests and rights of the plan and of
its participants and beneficiaries (including meeting the
requirements of paragraph (3)).
‘‘(3) The regulations prescribed by the Secretary pursuant to
paragraph (1) shall require, in connection with any policy issued
by an insurer to or for the benefit of an employee benefit plan
to the extent that the policy is not a guaranteed benefit policy
(as defined in subsection (b)(2)(B))—
‘‘(A) that a plan fiduciary totally independent of the insurer
authorize the purchase of such policy (unless such purchase
is a transaction exempt under section 408(b)(5)),
‘‘(B) that the insurer describe (in such form and manner
as shall be prescribed in such regulations), in annual reports
and in policies issued to the policyholder after the date on
which such regulations are issued in final form pursuant to
paragraph (1)(C)—
‘‘(i) a description of the method by which any income
and expenses of the insurer’s general account are allocated
to the policy during the term of the policy and upon the
termination of the policy, and
‘‘(ii) for each report, the actual return to the plan
under the policy and such other financial information as
the Secretary may deem appropriate for the period covered
by each such annual report,
‘‘(C) that the insurer disclose to the plan fiduciary the
extent to which alternative arrangements supported by assets
of separate accounts of the insurer (which generally hold plan
assets) are available, whether there is a right under the policy
to transfer funds to a separate account and the terms governing
any such right, and the extent to which support by assets
of the insurer’s general account and support by assets of sepa-
rate accounts of the insurer might pose differing risks to the
plan, and
‘‘(D) that the insurer manage those assets of the insurer
which are assets of such insurer’s general account (irrespective
of whether any such assets are plan assets) with the care,
skill, prudence, and diligence under the circumstances then