107
PLAN.—Subsection (b) shall not apply in the case of
amounts received after December 31, 1965, as an annuity
under chapter 73 of title 10 of the United States Code,
but all such amounts shall be excluded from gross income
until there has been so excluded (under section 122(b)(1)
of the Internal Revenue Code of 1986, section 93, or this
section, including amounts excluded before January 1,
1966) an amount equal to the consideration for the con-
tract (as defined by section 122(b)(2) of the Internal Rev-
enue Code of 1986). Thereafter all amounts so received
shall be included in gross income.
‘‘(m) SPECIAL RULES FOR DISTRIBUTIONS FROM
QUALIFIED PLANS
TO WHICH EMPLOYEE MADE DE-
DUCTIBLE CONTRIBUTIONS.—
‘‘(1) TREATMENT
OF
CONTRIBUTIONS.—For
purposes of this section and sections 402 and 403,
notwithstanding section 414(h), any deductible em-
ployee contribution made to a qualified employer
plan or government plan shall be treated as an
amount contributed by the employer which is not in-
cludible in the gross income of the employee.
‘‘(2) AMOUNTS CONSTRUCTIVELY RECEIVED.—
‘‘(A) IN GENERAL.—For purposes of this
subsection, rules similar to the rules provided
108
by subsection (n) (other than the exception con-
tained in paragraph (2) thereof) shall apply.
‘‘(B) PURCHASE OF LIFE INSURANCE.—To
the extent any amount of accumulated deduct-
ible employee contributions of an employee are
applied to the purchase of life insurance con-
tracts, such amount shall be treated as distrib-
uted to the employee in the year so applied.
‘‘(3) SPECIAL RULE FOR TREATMENT OF ROLL-
OVER AMOUNTS.—For purposes of sections 402(c),
403(a)(4), and 408(d)(3), the Secretary shall pre-
scribe regulations providing for such allocations of
amounts attributable to accumulated deductible em-
ployee contributions, and for such other rules, as
may be necessary to insure that such accumulated
deductible employee contributions do not become eli-
gible for additional tax benefits (or freed from limi-
tations) through the use of rollovers.
‘‘(4) ORDERING RULES.—Unless the plan speci-
fies otherwise, any distribution from such plan shall
not be treated as being made from the accumulated
deductible employee contributions, until all other
amounts to the credit of the employee have been dis-
tributed.
109
‘‘(n) LOANS TREATED AS DISTRIBUTIONS.—For pur-
poses of this section—
‘‘(1) TREATMENT AS DISTRIBUTIONS.—
‘‘(A) LOANS.—If during any taxable year a
participant or beneficiary receives (directly or
indirectly) any amount as a loan from a quali-
fied employer plan, such amount shall be treat-
ed as having been received by such individual as
a distribution under such plan.
‘‘(B) ASSIGNMENTS OR PLEDGES.—If dur-
ing any taxable year a participant or beneficiary
assigns (or agrees to assign) or pledges (or
agrees to pledge) any portion of his interest in
a qualified employer plan, such portion shall be
treated as having been received by such indi-
vidual as a loan from such plan.
‘‘(2) EXCEPTION FOR CERTAIN LOANS.—
‘‘(A) GENERAL
RULE.—Paragraph (1)
shall not apply to any loan to the extent that
such loan (when added to the outstanding bal-
ance of all other loans from such plan whether
made on, before, or after August 13, 1982),
does not exceed the lesser of—
‘‘(i) $50,000, reduced by the excess (if
any) of—
110
‘‘(I) the highest outstanding bal-
ance of loans from the plan during the
1-year period ending on the day be-
fore the date on which such loan was
made, over
‘‘(II) the outstanding balance of
loans from the plan on the date on
which such loan was made, or
‘‘(ii) the greater of (I) one-half of the
present value of the nonforfeitable accrued
benefit of the employee under the plan, or
(II) $10,000.
for purposes of clause (ii), the present value of
the nonforfeitable accrued benefit shall be de-
termined without regard to any accumulated
deductible employee contributions (as defined in
subsection (m)(5)(B)).
‘‘(B) REQUIREMENT THAT LOAN BE RE-
PAYABLE WITHIN 5 YEARS.—
‘‘(i) IN GENERAL.—Subparagraph (A)
shall not apply to any loan unless such
loan, by its terms, is required to be repaid
within 5 years.
‘‘(ii) EXCEPTION FOR HOME LOANS.—
Clause (i) shall not apply to any loan used
111
to acquire any dwelling unit which within
a reasonable time is to be used (deter-
mined at the time the loan is made) as the
principal residence of the participant.
‘‘(C) REQUIREMENT OF LEVEL AMORTIZA-
TION.—Except as provided in regulations, this
paragraph shall not apply to any loan unless
substantially level amortization of such loan
(with payments not less frequently than quar-
terly) is required over the term of the loan.
‘‘(D) RELATED EMPLOYERS AND RELATED
PLANS.—For purposes of this paragraph—
‘‘(i) the rules of subsections (b), (c),
and (m) of section 414 shall apply, and
‘‘(ii) all plans of an employer (deter-
mined after the application of such sub-
sections) shall be treated as 1 plan.
‘‘(o) 10-PERCENT PENALTY FOR PREMATURE DIS-
TRIBUTIONS FROM ANNUITY CONTRACTS.—
‘‘(1) IMPOSITION
OF
PENALTY.—If any tax-
payer receives any amount under an annuity con-
tract, the taxpayer’s tax under this chapter for the
taxable year in which such amount is received shall
be increased by an amount equal to 10 percent of
112
the portion of such amount which is includible in
gross income.
‘‘(2) SUBSECTION NOT TO APPLY TO CERTAIN
DISTRIBUTIONS.—Paragraph (1) shall not apply to
any distribution—
‘‘(A) made on or after the date on which
the taxpayer attains age 591⁄2,
‘‘(B) made on or after the death of the
holder (or, where the holder is not an indi-
vidual, the death of the primary annuitant),
‘‘(C) attributable to the taxpayer’s becom-
ing disabled within the meaning of subsection
(k)(5),
‘‘(D) which is a part of a series of substan-
tially equal periodic payments (not less fre-
quently than annually) made for the life (or life
expectancy) of the taxpayer or the joint lives
(or joint life expectancies) of such taxpayer and
his designated beneficiary,
‘‘(E) from a plan, contract, account, trust,
or annuity described in section 72(e)(5)(D) of
the Internal Revenue Code of 1986,
‘‘(F) allocable to investment in the con-
tract before August 14, 1982,
‘‘(G) under a qualified funding asset,
113
‘‘(H) to which subsection (r) applies (with-
out regard to paragraph (2) thereof),
‘‘(I) under an immediate annuity contract,
or
‘‘(J) which is purchased by an employer
upon the termination of a plan described in sec-
tion 401(a) or 403(a) and which is held by the
employer until such time as the employee sepa-
rates from service.
‘‘(3) CHANGE IN SUBSTANTIALLY EQUAL PAY-
MENTS.—If—
‘‘(A) paragraph (1) does not apply to a
distribution by reason of paragraph (2)(D), and
‘‘(B) the series of payments under such
paragraph are subsequently modified (other
than by reason of death or disability)—
‘‘(i) before the close of the 5-year pe-
riod beginning on the date of the first pay-
ment and after the taxpayer attains age
591⁄2, or
‘‘(ii) before the taxpayer attains age
591⁄2,
the taxpayer’s tax for the 1st taxable year in which
such modification occurs shall be increased by an
amount, determined under regulations, equal to the
114
tax which (but for paragraph (2)(D)) would have
been imposed, plus interest for the deferral period
(within the meaning of subsection (r)(4)(B)).
‘‘(p) CERTAIN RAILROAD RETIREMENT BENEFITS
TREATED AS RECEIVED UNDER EMPLOYER PLANS.—
‘‘(1) IN GENERAL.—Notwithstanding any other
provision of law, any benefit provided under the
Railroad Retirement Act of 1974 (other than a tier
1 railroad retirement benefit) shall be treated for
purposes of this title as a benefit provided under an
employer plan which meets the requirements of sec-
tion 401(a).
‘‘(2) TIER
TAXES
TREATED
AS
CONTRIBU-
TIONS.—For purposes of paragraph (1)—
‘‘(i) the tier 2 portion of the tax im-
posed by section 3201 (relating to tax on
employees) shall be treated as an employee
contribution,
‘‘(ii) the tier 2 portion of the tax im-
posed by section 3211 (relating to tax on
employee representatives) shall be treated
as an employee contribution, and
‘‘(iii) the tier 2 portion of the tax im-
posed by section 3221 (relating to tax on
115
employers) shall be treated as an employer
contribution.
‘‘(B) TIER 2 PORTION.—For purposes of
subparagraph (A)—
‘‘(1) AFTER 1984.—With respect to compensa-
tion paid after 1984, the tier 2 portion shall be the
taxes imposed by sections 3201(b), 3211(a)(2), and
3221(b).
‘‘(2) BEFORE 1985.—With respect to compensa-
tion paid before 1985, see section 72(r) of Internal
Revenue Code of 1986 for the definition of tier 2
portion.
‘‘(C) CONTRIBUTIONS NOT ALLOCABLE TO
SUPPLEMENTAL ANNUITY OR WINDFALL BENE-
FITS.—For purposes of paragraph (1), no
amount treated as an employee contribution
under this paragraph shall be allocated to—
‘‘(i) any supplemental annuity paid
under section 2(b) of the Railroad Retire-
ment Act of 1974, or
‘‘(ii) any benefit paid under section
3(h), 4(e), or 4(h) of such Act.
‘‘(3) TIER
RAILROAD
RETIREMENT
BEN-
EFIT.—For purposes of paragraph (1), the term
116
‘tier 1 railroad retirement benefit’ has the meaning
given such term by section 3(b)(2)(B).
‘‘(q) REQUIRED DISTRIBUTIONS WHERE HOLDER
DIES BEFORE ENTIRE INTEREST IS DISTRIBUTED.—
‘‘(1) IN
GENERAL.—A contract shall not be
treated as an annuity contract for purposes of this
chapter unless it provides that—
‘‘(A) if any holder of such contract dies on
or after the annuity starting date and before
the entire interest in such contract has been
distributed, the remaining portion of such inter-
est will be distributed at least as rapidly as
under the method of distributions being used as
of the date of his death, and
‘‘(B) if any holder of such contract dies be-
fore the annuity starting date, the entire inter-
est in such contract will be distributed within 5
years after the death of such holder.
‘‘(2) EXCEPTION FOR CERTAIN AMOUNTS PAY-
ABLE OVER LIFE OF BENEFICIARY.—If—
‘‘(A) any portion of the holder’s interest is
payable to (or for the benefit of) a designated
beneficiary,
‘‘(B) such portion will be distributed (in
accordance with regulations) over the life of
117
such designated beneficiary (or over a period
not extending beyond the life expectancy of
such beneficiary), and
‘‘(C) such distributions begin not later
than 1 year after the date of the holder’s death
or such later date as the Secretary may by reg-
ulations prescribe,
then for purposes of paragraph (1), the portion re-
ferred to in subparagraph (A) shall be treated as
distributed on the day on which such distributions
begin.
‘‘(3) SPECIAL RULE WHERE SURVIVING SPOUSE
BENEFICIARY.—If the designated beneficiary re-
ferred to in paragraph (2)(A) is the surviving spouse
of the holder of the contract, paragraphs (1) and (2)
shall be applied by treating such spouse as the hold-
er of such contract.
‘‘(4) DESIGNATED
BENEFICIARY.—For pur-
poses of this subsection, the term ‘designated bene-
ficiary’ means any individual designated a bene-
ficiary by the holder of the contract.
‘‘(5) EXCEPTION FOR CERTAIN ANNUITY CON-
TRACTS.—This subsection shall not apply to any an-
nuity contract—
‘‘(A) which is provided—
118
‘‘(i) under a plan described in section
401(a) which includes a trust exempt from
tax under section 501, or
‘‘(ii) under a plan described in section
403(a),
‘‘(B) which is described in section 403(b),
‘‘(C) which is an individual retirement an-
nuity or provided under an individual retire-
ment account or annuity, or
‘‘(D) which is a qualified funding asset.
‘‘(6) SPECIAL RULE WHERE HOLDER IS COR-
PORATION OR OTHER NON-INDIVIDUAL.—
‘‘(A) IN GENERAL.—For purposes of this
subsection, if the holder of the contract is not
an individual, the primary annuitant shall be
treated as the holder of the contract.
‘‘(B) PRIMARY ANNUITANT.—For purposes
of subparagraph (A), the term ‘primary annu-
itant’ means the individual, the events in the
life of whom are of primary importance in af-
fecting the timing or amount of the payout
under the contract.
‘‘(7) TREATMENT OF CHANGES IN PRIMARY AN-
NUITANT WHERE HOLDER OF CONTRACT IS NOT AN
INDIVIDUAL.—For purposes of this subsection, in
119
the case of a holder of an annuity contract which
is not an individual, if there is a change in a pri-
mary annuitant (as defined in paragraph (6)(B)),
such change shall be treated as the death of the
holder.
‘‘(r) 10-PERCENT ADDITIONAL TAX ON EARLY DIS-
TRIBUTIONS FROM QUALIFIED RETIREMENT PLANS.—
‘‘(1) IMPOSITION OF ADDITIONAL TAX.—If any
taxpayer receives any amount from a qualified re-
tirement plan (as defined in section 4974(c)), the
taxpayer’s tax under this chapter for the taxable
year in which such amount is received shall be in-
creased by an amount equal to 10 percent of the
portion of such amount which is includible in gross
income.
‘‘(2) SUBSECTION NOT TO APPLY TO CERTAIN
DISTRIBUTIONS.—Except as provided in paragraphs
(3) and (4), paragraph (1) shall not apply to any of
the following distributions:
‘‘(A) IN
GENERAL.—Distributions which
are—
‘‘(i) made on or after the date on
which the employee attains age 591⁄2,
120
‘‘(ii) made to a beneficiary (or to the
estate of the employee) on or after the
death of the employee,
‘‘(iii) attributable to the employee’s
being disabled within the meaning of sub-
section 72(m)(7) of the Internal Revenue
Code of 1986,
‘‘(iv) part of a series of substantially
equal periodic payments (not less fre-
quently than annually) made for the life
(or life expectancy) of the employee or the
joint lives (or joint life expectancies) of
such employee and his designated bene-
ficiary,
‘‘(v) made to an employee after sepa-
ration from service after attainment of age
55,
‘‘(vi) dividends paid with respect to
stock of a corporation which are described
in section 404(k), or
‘‘(vii) made from a Roth IRA (other
than a distribution described in section
30(d)(2)).
‘‘(B) MEDICAL
EXPENSES.—Distributions
made to the employee (other than distributions
121
described in subparagraph (A), (C), or (D)) to
the extent such distributions do not exceed the
amount allowable as a deduction under section
31 to the employee for amounts paid during the
taxable year for medical care (determined with-
out regard to whether the employee itemizes de-
ductions for such taxable year).
‘‘(C) PAYMENTS
TO
ALTERNATE
PAYEES
PURSUANT
TO
QUALIFIED
DOMESTIC
RELA-
TIONS ORDERS.—Any distribution to an alter-
nate payee pursuant to a qualified domestic re-
lations order (within the meaning of section
414(p)(1)).
‘‘(D) DISTRIBUTIONS TO UNEMPLOYED IN-
DIVIDUALS
FOR
HEALTH
INSURANCE
PRE-
MIUMS.—
‘‘(i) IN GENERAL.—Distributions from
an individual retirement plan to an indi-
vidual after separation from employment—
‘‘(I) if such individual has re-
ceived unemployment compensation
for 12 consecutive weeks under any
Federal or State unemployment com-
pensation law by reason of such sepa-
ration,
122
‘‘(II) if such distributions are
made during any taxable year during
which such unemployment compensa-
tion is paid or the succeeding taxable
year, and
‘‘(III) to the extent such distribu-
tions do not exceed the amount paid
during the taxable year for insurance
described in section 213(d)(1)(D) of
the Internal Revenue Code of 1986
with respect to the individual and the
individual’s spouse and dependents.
‘‘(ii) DISTRIBUTIONS
AFTER
REEM-
PLOYMENT.—Clause (i) shall not apply to
any distribution made after the individual
has been employed for at least 60 days
after the separation from employment to
which clause (i) applies.
‘‘(iii) 
SELF-EMPLOYED
INDIVID-
UALS.—To the extent provided in regula-
tions, a self-employed individual shall be
treated as meeting the requirements of
clause (i)(I) if, under Federal or State law,
the individual would have received unem-
123
ployment compensation but for the fact the
individual was self-employed.
‘‘(E) DISTRIBUTIONS
FROM
INDIVIDUAL
RETIREMENT PLANS FOR HIGHER EDUCATION
EXPENSES.—Distributions 
to 
an 
individual
from an individual retirement plan to the extent
such distributions do not exceed the qualified
higher education expenses (as defined in para-
graph (7)) of the taxpayer for the taxable year.
Distributions shall not be taken into account
under the preceding sentence if such distribu-
tions are described in subparagraph (A), (C), or
(D) or to the extent paragraph (1) does not
apply to such distributions by reason of sub-
paragraph (B).
‘‘(F) 
DISTRIBUTIONS
FROM
CERTAIN
PLANS
FOR
FIRST
HOME
PURCHASES.—Dis-
tributions to an individual from an individual
retirement plan which are qualified first-time
homebuyer distributions (as defined in para-
graph (8)). Distributions shall not be taken into
account under the preceding sentence if such
distributions are described in subparagraph (A),
(C), (D), or (E) or to the extent paragraph (1)
124
does not apply to such distributions by reason
of subparagraph (B).
‘‘(3) LIMITATIONS.—
‘‘(A) CERTAIN EXCEPTIONS NOT TO APPLY
TO
INDIVIDUAL
RETIREMENT
PLANS.—Sub-
paragraphs (A)(v), and (C) of paragraph (2)
shall not apply to distributions from an indi-
vidual retirement plan.
‘‘(B) PERIODIC PAYMENTS UNDER QUALI-
FIED
PLANS
MUST
BEGIN
AFTER
SEPARA-
TION.—Paragraph (2)(A)(iv) shall not apply to
any amount paid from a trust described in sec-
tion 401(a) which is exempt from tax under
section 501(a) or from a contract described in
section 72(e)(5)(D)(ii) of the Internal Revenue
Code of 1986 unless the series of payments be-
gins after the employee separates from service.
‘‘(4) CHANGE IN SUBSTANTIALLY EQUAL PAY-
MENTS.—
‘‘(A) IN GENERAL.—If—
‘‘(i) paragraph (1) does not apply to
a distribution by reason of paragraph
(2)(A)(iv), and
‘‘(ii) the series of payments under
such paragraph are subsequently modified