ferred compensation plan (within the meaning of 
section 457(b) of the Internal Revenue Code of 
1986) shall not be treated as a plan described in 
subparagraph (A)(iii). 
‘‘(6) CERTAIN INDIVIDUALS NOT TREATED AS 
ACTIVE PARTICIPANTS.—For purposes of this sub-
section, any individual described in any of the fol-
lowing subparagraphs shall not be treated as an ac-
tive participant for any taxable year solely because 
of any participation so described: 
‘‘(A) MEMBERS
OF
RESERVE
COMPO-
NENTS.—Participation in a plan described in 
subparagraph (A)(iii) of paragraph (5) by rea-
son of service as a member of a reserve compo-
nent of the Armed Forces (as defined in section 
10101 of title 10, unless such individual has 
served in excess of 90 days on active duty 
(other than active duty for training) during the 
year. 
‘‘(B) VOLUNTEER FIREFIGHTERS.—A vol-
unteer firefighter— 
‘‘(i) who is a participant in a plan de-
scribed in subparagraph (A)(iii) of para-
graph (5) based on his activity as a volun-
teer firefighter, and
‘‘(ii) whose accrued benefit as of the 
beginning of the taxable year is not more 
than an annual benefit of $1,800 (when 
expressed as a single life annuity com-
mencing at age 65). 
‘‘(7) SPECIAL RULE FOR CERTAIN SPOUSES.— 
In the case of an individual who is an active partici-
pant at no time during any plan year ending with 
or within the taxable year but whose spouse is an 
active participant for any part of any such plan 
year— 
‘‘(A) the applicable dollar amount under 
paragraph (3)(B)(i) with respect to the tax-
payer shall be $150,000, and 
‘‘(B) the amount applicable under para-
graph (2)(A)(ii) shall be $10,000. 
‘‘(h) CROSS REFERENCE.—For failure to provide re-
quired reports, see section 6652(g). 
‘‘SEC. 32. EFFECT OF REPEAL OF SPECIAL SAVINGS PROVI-
SIONS. 
‘‘(a) EDUCATION IRA’S.— 
‘‘(1) IN GENERAL.—An account that qualifies 
as an education IRA under the Internal Revenue 
Code of 1986 as in effect immediately before adop-
tion of the Simplified USA Tax Act shall be treated
as a Roth IRA for purposes of this chapter (includ-
ing rules allowing for tax-free rollover). 
‘‘(2) NO NEW CONTRIBUTIONS.—Neither para-
graph (1) nor section 530 of the Internal Revenue 
Code of 1986 shall apply to an education IRA to 
which contributions are made after December 31, 
2006. 
‘‘(3) SPECIAL RULE.—For purposes of applying 
section 30 to an account that was an educational 
IRA, the designated beneficiary of such account 
shall be treated as described in a subclause of clause 
(vi) of section 30(d)(5). 
‘‘(b) MEDICAL SAVINGS ACCOUNTS.— 
‘‘(1) EQUIVALENT
OF
DEDUCTIBLE
IRA.—A 
medical savings account shall be treated as an indi-
vidual retirement plan other than a Roth IRA for 
purposes of this chapter and chapter 3. 
‘‘(2) SPECIAL ROLLOVER RULES.— 
‘‘(A) NO INCOME LIMIT.—The income lim-
its of section 30(c)(3)(B) shall not apply to the 
rollover of a medical savings account into a 
Roth IRA. 
‘‘(B) MEDICAL DISTRIBUTIONS.—For pur-
poses of applying section 30 to the amount of 
any medical savings account rolled over to a
Roth IRA, subclause (iii) of section 30(d)(5) 
shall apply without regard to the limitation 
based on adjusted gross income. 
‘‘(3) MEDICAL
SAVINGS
ACCOUNT.—‘Medical 
savings account’ means an account established under 
section 220 of the Internal Revenue Code of 1986. 
‘‘(c) QUALIFIED STATE TUITION PROGRAMS.— 
‘‘(1) EDUCATION
SAVINGS
ACCOUNT
PRO-
GRAMS.—No account shall fail to qualify as a Roth 
IRA merely because in addition to the beneficiary of 
the account, there is a ‘designated beneficiary’ whose 
education expenses the beneficiary expects to pay or 
have paid with the proceeds of the account. The pay-
ment of such expenses with the proceeds of an ac-
count shall be treated as a distribution from the ac-
count. 
‘‘(2) PREPAID TUITION CERTIFICATES.— 
‘‘(A) CONTRIBUTION
TO
ACCOUNTS.—An 
individual may contribute prepaid tuition cer-
tificates to a Roth IRA before January 1, 2010, 
without recognizing gross income on the con-
tribution of such certificates. For purposes of 
section 30, the amount contributed shall equal 
the cost of the certificates.
‘‘(B) PURCHASE
OF
PREPAID
TUITION 
CERTIFICATES.—A Roth IRA account may pur-
chase prepaid tuition certificates without vio-
lating section 408. 
‘‘(C) PREPAID TUITION CERTIFICATES.— 
‘Prepaid tuition certificates’ means credits or 
certificates that entitle a designated beneficiary 
of such certificates to the waiver or payment of 
qualified higher education expenses of the des-
ignated beneficiary. 
‘‘(3) ROLLOVER OF ACCOUNTS.—An account to 
which section 529 of the Internal Revenue Code of 
1986 (before adoption of the Simplified USA Tax 
Act) shall be treated as a Roth IRA for purposes of 
rules relating to qualified rollovers (except that in 
the case of any such rollover, any contributions 
made to the section 529 account after July 1, 2006, 
shall be treated as contributions to the Roth IRA in 
the year of the rollover for purposes of section 
30(c)(2)). 
‘‘(4) TRANSITION.— 
‘‘(A) TRANSITION
PERIOD.—Subsections 
(a) and (c) of section 529 of the Internal Rev-
enue Code of 1986 shall apply until January 1, 
2010.
‘‘(B) TRANSITION.—The Secretary shall 
prescribe rules to facilitate use of the Roth IRA 
rules to exempt earnings on accounts and cer-
tificates previously exempted under section 529 
of the Internal Revenue Code of 1986. 
‘‘(5) QUALIFIED
HIGHER
EDUCATION
EX-
PENSES.—For purposes of this subsection, the defi-
nition ‘qualified higher education expenses’ in sec-
tion 529(e)(3) of the Internal Revenue Code of 1986 
shall apply. 
‘‘SEC. 33. ANNUITIES, CERTAIN PROCEEDS OF ENDOWMENT 
AND LIFE INSURANCE CONTRACTS. 
‘‘(a) GENERAL RULE FOR ANNUITIES.—Except as 
otherwise provided in this chapter, gross income includes 
any amount received as an annuity (whether for a period 
certain or during one or more lives) under an annuity, en-
dowment, or life insurance contract. 
‘‘(b) EXCLUSION RATIO.— 
‘‘(1) IN GENERAL.—Gross income does not in-
clude that part of any amount received as an annu-
ity under an annuity, endowment, or life insurance 
contract which bears the same ratio to such amount 
as the investment in the contract (as of the annuity 
starting date) bears to the expected return under the 
contract (as of such date).
‘‘(2) EXCLUSION LIMITED TO INVESTMENT.— 
The portion of any amount received as an annuity 
which is excluded from gross income under para-
graph (1) shall not exceed the unrecovered invest-
ment in the contract immediately before the receipt 
of such amount. 
‘‘(3) DEDUCTION WHERE ANNUITY PAYMENTS 
CEASE BEFORE ENTIRE INVESTMENT RECOVERED.— 
‘‘(A) IN GENERAL.—If— 
‘‘(i) after the annuity starting date, 
payments as an annuity under the contract 
cease by reason of the death of an annu-
itant, and 
‘‘(ii) as of the date of such cessation, 
there is unrecovered investment in the con-
tract, the amount of such unrecovered in-
vestment (in excess of any amount speci-
fied in subsection (e)(5) which was not in-
cluded in gross income) shall be allowed as 
a deduction from adjusted gross income in 
determining taxable income of the annu-
itant for his last taxable year. 
‘‘(B) PAYMENTS TO OTHER PERSONS.—In 
the case of any contract which provides for pay-
ments meeting the requirements of subpara-
graphs (B) and (C) of subsection (c)(2), the de-
duction under subparagraph (A) shall be al-
lowed to the person entitled to such payments 
for the taxable year in which such payments are 
received. 
‘‘(c) DEFINITIONS.— 
‘‘(1) INVESTMENT
IN
THE
CONTRACT.—For 
purposes of subsection (b), the investment in the 
contract as of the annuity starting date is— 
‘‘(A) the aggregate amount of premiums or 
other consideration paid for the contract (in-
cluding any amounts earned on the contract 
which were included in gross income and rein-
vested in the contract), minus 
‘‘(B) the aggregate amount received under 
the contract before such date, to the extent that 
such amount was excludable from gross income 
under this subtitle or prior income tax laws. 
‘‘(2) OTHER
TERMS
USED
IN
SUBSECTION 
(b).—Calculations under subsections (a) and (b) 
shall be made in accordance with regulations pre-
scribed by the Secretary, which regulations shall 
generally be consistent with the section 72 of the In-
ternal Revenue Code of 1986.
‘‘(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 quali-
fied employer retirement plan— 
‘‘(i) subsection (b) shall not apply, 
and 
‘‘(ii) the investment in the contract 
shall be recovered as provided in this para-
graph. 
‘‘(B) METHOD
OF
RECOVERING
INVEST-
MENT IN CONTRACT.— 
‘‘(i) 
IN
GENERAL.—Gross 
income 
shall not include so much of any monthly 
annuity payment under a qualified em-
ployer retirement plan as does not exceed 
the amount obtained by dividing— 
‘‘(I) the investment in the con-
tract (as of the annuity starting date), 
by 
‘‘(II) the number of anticipated 
payments determined under the table 
contained in clause (iii) (or, in the
case of a contract to which subsection 
(c)(3)(B) applies, the number of 
monthly annuity payments under such 
contract). 
‘‘(ii) CERTAIN RULES MADE APPLICA-
BLE.—Rules similar to the rules of para-
graphs (2) and (3) of subsection (b) shall 
apply for purposes of this paragraph. 
‘‘(iii) NUMBER OF ANTICIPATED PAY-
MENTS.—If the annuity is payable over the 
life of a single individual, the number of 
anticipated payments shall be determined 
as follows: 
‘‘If the age of the annuitant 
on the annuity starting 
date is: 
The number: 
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. 
‘‘(iv) NUMBER OF ANTICIPATED PAY-
MENTS WHERE MORE THAN ONE LIFE.—If 
the annuity is payable over the lives of 
more than 1 individual, the number of an-
ticipated payments shall be determined as 
follows: 
‘‘If the combined ages of the 
annuitants are: 
The number: 
Not more than 110 ............................................................................
410
More than 110 but not more than 120 .............................................
360
More than 120 but not more than 130 .............................................
310
‘‘If the combined ages of the 
annuitants are: 
The number: 
More than 130 but not more than 140 .............................................
260
More than 140 ...................................................................................
210. 
‘‘(C) SPECIAL
RULE
WHERE
LUMP
SUM 
PAID
IN
CONNECTION
WITH
COMMENCEMENT 
OF ANNUITY PAYMENTS.—If, in connection with 
the commencement of annuity payments under 
any qualified employer retirement plan, the tax-
payer receives a lump sum payment— 
‘‘(i) such payment shall be taxable 
under subsection (e) as if received before 
the annuity starting date, and 
‘‘(ii) the investment in the contract 
for purposes of this paragraph shall be de-
termined as if such payment had been so 
received. 
‘‘(D) EXCEPTION.—This paragraph shall 
not apply in any case where the primary annu-
itant has attained age 75 on the annuity start-
ing date unless there are fewer than 5 years of 
guaranteed payments under the annuity. 
‘‘(E) ADJUSTMENT WHERE ANNUITY PAY-
MENTS
NOT
ON
A
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. 
‘‘(F) QUALIFIED EMPLOYER RETIREMENT 
PLAN.—For purposes of this paragraph, the 
term ‘qualified employer retirement plan’ means 
any plan or contract described in paragraph 
(1), (2), or (3) of section 4974(c). 
‘‘(2) TREATMENT
OF
EMPLOYEE
CONTRIBU-
TIONS
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 con-
tract. 
‘‘(e) AMOUNTS NOT RECEIVED AS ANNUITIES.— 
‘‘(1) APPLICATION OF SUBSECTION.— 
‘‘(A) IN GENERAL.—This subsection shall 
apply to any amount which— 
‘‘(i) is received under an annuity, en-
dowment, or life insurance contract, and 
‘‘(ii) is not received as an annuity, if 
no provision of this subtitle (other than 
this subsection) applies with respect to 
such amount. 
‘‘(B) DIVIDENDS.—For purposes of this 
section, any amount received which is in the na-
ture of a dividend or similar distribution shall 
be treated as an amount not received as an an-
nuity. 
‘‘(2) GENERAL RULE.—Any amount to which 
this subsection applies— 
‘‘(A) if received on or after the annuity 
starting date, shall be included in gross income, 
or 
‘‘(B) if received before the annuity starting 
date— 
‘‘(i) shall be included in gross income 
to the extent allocable to income on the 
contract, and 
‘‘(ii) shall not be included in gross in-
come to the extent allocable to the invest-
ment in the contract. 
‘‘(3) ALLOCATION
OF
AMOUNTS
TO
INCOME 
AND
INVESTMENT.—For purposes of paragraph 
(2)(B): 
‘‘(A) Any amount to which this subsection 
applies shall be treated as allocable to income 
on the contract to the extent that such amount 
does not exceed the excess (if any) of— 
‘‘(i) the cash value of the contract 
(determined without regard to any sur-
render charge) immediately before the 
amount is received, over 
‘‘(ii) the investment in the contract at 
such time. 
‘‘(B) Any amount to which this subsection 
applies shall be treated as allocable to invest-
ment in the contract to the extent that such 
amount is not allocated to income under sub-
paragraph (A). 
‘‘(4) SPECIAL
RULES
FOR
APPLICATION
OF 
PARAGRAPH
(2)(b).—For purposes of paragraph 
(2)(B): 
‘‘(A) 
LOANS
TREATED
AS
DISTRIBU-
TIONS.—If, during any taxable year, an indi-
vidual— 
‘‘(i) receives (directly or indirectly) 
any amount as a loan under any contract 
to which this subsection applies, or 
‘‘(ii) assigns or pledges (or agrees to 
assign or pledge) any portion of the value 
of any such contract, such amount or por-
tion shall be treated as received under the 
contract as an amount not received as an 
annuity. The preceding sentence shall not 
apply for purposes of determining invest-
ment in the contract, except that the in-
vestment in the contract shall be increased 
by any amount included in gross income by 
reason of the amount treated as received 
under the preceding sentence. 
‘‘(B) TREATMENT
OF
TRANSFERS
WITH-
OUT ADEQUATE CONSIDERATION.— 
‘‘(i) IN
GENERAL.—If an individual 
who holds an annuity contract transfers it 
without full and adequate consideration, 
such individual shall be treated as receiv-
ing an amount equal to the excess of— 
‘‘(I) the cash surrender value of 
such contract at the time of transfer, 
over 
‘‘(II) the investment in such con-
tract at such time, under the contract 
as an amount not received as an an-
nuity. 
‘‘(ii) 
EXCEPTION
FOR
CERTAIN 
TRANSFERS
BETWEEN
SPOUSES
OR 
FORMER
SPOUSES.—Clause (i) shall not 
apply to any transfer to which section 
77(c) (relating to transfers of property be-
tween spouses or incident to divorce) ap-
plies. 
‘‘(iii) ADJUSTMENT
TO
INVESTMENT 
IN CONTRACT OF TRANSFEREE.—If under 
clause (i) an amount is included in the 
gross income of the transferor of an annu-
ity contract, the investment in the contract 
of the transferee in such contract shall be 
increased by the amount so included. 
‘‘(5) RETENTION OF EXISTING RULES IN CER-
TAIN CASES.—Paragraph (5) of section 72(e) of the 
Internal Revenue Code of 1986 shall apply to con-
tracts described in subparagraph (B) of such para-
graph to the extent provided therein. 
‘‘(6) INVESTMENT
IN
THE
CONTRACT.—For 
purposes of this subsection, the investment in the 
contract as of any date is— 
‘‘(A) the aggregate amount of premiums or 
other consideration paid for the contract before 
such date, minus 
‘‘(B) the aggregate amount received under 
the contract before such date, to the extent that 
such amount was excludable from gross income 
under this subtitle or prior income tax laws.
‘‘(7) APPLICATION
OF
PARAGRAPH (2)(b) TO 
QUALIFIED PLANS.— 
‘‘(A) IN GENERAL.—Notwithstanding any 
other provision of this subsection, in the case of 
any amount received before the annuity starting 
date from a trust or contract described in para-
graph (5)(D), paragraph (2)(B) shall apply to 
such amounts. 
‘‘(B) 
ALLOCATION
OF
AMOUNT
RE-
CEIVED.—For purposes of paragraph (2)(B), 
the amount allocated to the investment in the 
contract shall be the portion of the amount de-
scribed in subparagraph (A) which bears the 
same ratio to such amount as the investment in 
the contract bears to the account balance. The 
determination under the preceding sentence 
shall be made as of the time of the distribution 
or at such other time as the Secretary may pre-
scribe. 
‘‘(C) 
TREATMENT
OF
FORFEITABLE 
RIGHTS.—If an employee does not have a non-
forfeitable right to any amount under any trust 
or contract to which subparagraph (A) applies, 
such amount shall not be treated as part of the 
account balance.
‘‘(D) INVESTMENT IN THE CONTRACT BE-
FORE 1987.—In the case of a plan which on 
May 5, 1986, permitted withdrawal of any em-
ployee contributions before separation from 
service, subparagraph (A) shall apply only to 
the extent that amounts received before the an-
nuity starting date (when increased by amounts 
previously received under the contract after De-
cember 31, 1986) exceed the investment in the 
contract as of December 31, 1986. 
‘‘(8) TREATMENT OF MODIFIED ENDOWMENT 
CONTRACTS.— 
‘‘(A) IN GENERAL.—Notwithstanding para-
graph (5)(C), in the case of any modified en-
dowment contract (as defined in section 
7702A)— 
‘‘(i) paragraphs (2)(B) and (4)(A) 
shall apply, and 
‘‘(ii) in applying paragraph (4)(A), 
‘any person’ shall be substituted for ‘an in-
dividual’. 
‘‘(B) TREATMENT
OF
CERTAIN
BURIAL 
CONTRACTS.—Notwithstanding 
subparagraph 
(A), paragraph (4)(A) shall not apply to any as-
signment (or pledge) of a modified endowment
contract if such assignment (or pledge) is solely 
to cover the payment of expenses referred to in 
section 7702(e)(2)(C)(iii) and if the maximum 
death benefit under such contract does not ex-
ceed $25,000. 
‘‘(9) ANTI-ABUSE RULES.— 
‘‘(A) IN GENERAL.—For purposes of deter-
mining the amount includible in gross income 
under this subsection— 
‘‘(i) all modified endowment contracts 
issued by the same company to the same 
policyholder during any calendar year shall 
be treated as 1 modified endowment con-
tract, and 
‘‘(ii) all annuity contracts issued by 
the same company to the same policyholder 
during any calendar year shall be treated 
as 1 annuity contract. 
The preceding sentence shall not apply to any 
contract described in paragraph (5)(D). 
‘‘(B) REGULATORY AUTHORITY.—The Sec-
retary may by regulations prescribe such addi-
tional rules as may be necessary or appropriate 
to prevent avoidance of the purposes of this
100 
subsection through serial purchases of contracts 
or otherwise. 
‘‘(f) SPECIAL RULES FOR COMPUTING EMPLOYEES’ 
CONTRIBUTIONS.—In computing, for purposes of sub-
section (c)(1)(A), the aggregate amount of premiums or 
other consideration paid for the contract, and for purposes 
of subsection (e)(6), the aggregate premiums or other con-
sideration paid, amounts contributed by the employer shall 
be included, but only to the extent that— 
‘‘(1) such amounts were includible in the gross 
income of the employee under this subtitle or prior 
income tax laws; or 
‘‘(2) if such amounts had been paid directly to 
the employee at the time they were contributed, they 
would not have been includible in the gross income 
of the employee under the law applicable at the time 
of such contribution. 
‘‘(g) RULES FOR TRANSFEREE WHERE TRANSFER 
WAS FOR VALUE.—Where any contract (or any interest 
therein) is transferred (by assignment or otherwise) for 
a valuable consideration, to the extent that the contract 
(or interest therein) does not, in the hands of the trans-
feree, have a basis which is determined by reference to 
the basis in the hands of the transferor, then—
101 
‘‘(1) for purposes of this section, only the ac-
tual value of such consideration, plus the amount of 
the premiums and other consideration paid by the 
transferee after the transfer, shall be taken into ac-
count in computing the aggregate amount of the 
premiums or other consideration paid for the con-
tract; 
‘‘(2) for purposes of subsection (c)(1)(B), there 
shall be taken into account only the aggregate 
amount received under the contract by the trans-
feree before the annuity starting date, to the extent 
that such amount was excludable from gross income 
under this subtitle or prior income tax laws; and 
‘‘(3) the annuity starting date is January 1, 
1954, or the first day of the first period for which 
the transferee received an amount under the con-
tract as an annuity, whichever is the later. 
‘‘(h) OPTION TO RECEIVE ANNUITY IN LIEU OF 
LUMP SUM.—If— 
‘‘(1) a contract provides for payment of a lump 
sum in full discharge of an obligation under the con-
tract, subject to an option to receive an annuity in 
lieu of such lump sum;
102 
‘‘(2) the option is exercised within 60 days after 
the day on which such lump sum first became pay-
able; and 
‘‘(3) part or all of such lump sum would (but 
for this subsection) be includible in gross income by 
reason of subsection (e)(1), then, for purposes of 
this subtitle, no part of such lump sum shall be con-
sidered as includible in gross income at the time 
such lump sum first became payable. 
‘‘(i) INTEREST.—Notwithstanding any other provi-
sion of this section, if any amount is held under an agree-
ment to pay interest thereon, the interest payments shall 
be included in gross income. 
‘‘(j) FACE-AMOUNT CERTIFICATES.—For purposes of 
this section, the term ‘endowment contract’ includes a 
face-amount certificate, as defined in section 2(a)(15) of 
the Investment Company Act of 1940 (15 U.S.C., sec. 
80a–2), issued after December 31, 1954. 
‘‘(k) SPECIAL RULES APPLICABLE TO EMPLOYEE 
ANNUITIES
AND
DISTRIBUTIONS
UNDER
EMPLOYEE 
PLANS.— 
‘‘(1) COMPUTATION
OF
CONSIDERATION
PAID 
BY THE EMPLOYEE.—In computing— 
‘‘(A) the aggregate amount of premiums or 
other consideration paid for the contract for
103 
purposes of subsection (c)(1)(A) (relating to the 
investment in the contract), and 
‘‘(B) the aggregate premiums or other con-
sideration paid for purposes of subsection (e)(6) 
(relating to certain amounts not received as an 
annuity), any amount allowed as a deduction 
with respect to the contract under section 404 
which was paid while the employee was an em-
ployee within the meaning of section 401(c)(1) 
shall be treated as consideration contributed by 
the employer, and there shall not be taken into 
account any portion of the premiums or other 
consideration for the contract paid while the 
employee was an owner-employee which is prop-
erly allocable (as determined under regulations 
prescribed by the Secretary) to the cost of life, 
accident, health, or other insurance. 
‘‘(2) LIFE INSURANCE CONTRACTS.— 
‘‘(A) This paragraph shall apply to any life 
insurance contract— 
‘‘(i) purchased as a part of a plan de-
scribed in section 403(a), or 
‘‘(ii) purchased by a trust described in 
section 401(a) which is exempt from tax if 
the proceeds of such contract are payable
104 
directly or indirectly to a participant in 
such trust or to a beneficiary of such par-
ticipant. 
‘‘(B) Any contribution to a plan described 
in subparagraph (A)(i) or a trust described in 
subparagraph (A)(ii) which is allowed as a de-
duction under section 404, and any income of 
a trust described in subparagraph (A)(ii), which 
is determined in accordance with regulations 
prescribed by the Secretary to have been ap-
plied to purchase the life insurance protection 
under a contract described in subparagraph 
(A), is includible in the gross income of the par-
ticipant for the taxable year when so applied. 
‘‘(C) In the case of the death of an indi-
vidual insured under a contract described in 
subparagraph (A), an amount equal to the cash 
surrender value of the contract immediately be-
fore the death of the insured shall be treated as 
a payment under such plan or a distribution by 
such trust, and the excess of the amount pay-
able by reason of the death of the insured over 
such cash surrender value shall not be includ-
ible in gross income under this section and shall 
be treated as provided in section 101.
105 
‘‘(3) PENALTIES
APPLICABLE
TO
CERTAIN 
AMOUNTS RECEIVED BY 5-PERCENT OWNERS.— 
‘‘(A) This paragraph applies to amounts 
which are received from a qualified trust de-
scribed in section 401(a) or under a plan de-
scribed in section 403(a) at any time by an in-
dividual who is, or has been, a 5-percent owner, 
or by a successor of such an individual, but only 
to the extent such amounts are determined, 
under regulations prescribed by the Secretary, 
to exceed the benefits provided for such indi-
vidual under the plan formula. 
‘‘(B) If a person receives an amount to 
which this paragraph applies, his 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 the portion of 
the amount so received which is includible in 
his gross income for such taxable year. 
‘‘(C) For purposes of this paragraph, the 
term ‘5-percent owner’ means any individual 
who, at any time during the 5 plan years pre-
ceding the plan year ending in the taxable year 
in which the amount is received, is a 5-percent 
owner (as defined in section 416(i)(1)(B).
106 
‘‘(4) OWNER-EMPLOYEE
DEFINED.—For pur-
poses of this subsection, the term ‘owner-employee’ 
has the meaning assigned to it by section 401(c)(3) 
and includes an individual for whose benefit an indi-
vidual retirement account or annuity described in 
section 408(a) or (b) is maintained. For purposes of 
the preceding sentence, the term ‘owner-employee’ 
shall include an employee within the meaning of sec-
tion 401(c)(1). 
‘‘(5) MEANING OF DISABLED.—For purposes of 
this section, an individual shall be considered to be 
disabled if he is unable to engage in any substantial 
gainful activity by reason of any medically deter-
minable physical or mental impairment which can be 
expected to result in death or to be of long-continued 
and indefinite duration. An individual shall not be 
considered to be disabled unless he furnishes proof 
of the existence thereof in such form and manner as 
the Secretary may require. 
‘‘(6) DETERMINATION OF INVESTMENT IN THE 
CONTRACT IN THE CASE OF QUALIFIED DOMESTIC 
RELATIONS ORDERS.—Under regulations prescribed 
by the Secretary, in the case of a distribution or 
payment made to an alternate payee who is the 
spouse or former spouse of the participant pursuant
107 
to a qualified domestic relations order (as defined in 
section 414(p)), the investment in the contract as of 
the date prescribed in such regulations shall be allo-
cated on a pro rata basis between the present value 
of such distribution or payment and the present 
value of all other benefits payable with respect to the 
participant to which such order relates. 
‘‘(l) ANNUITIES UNDER RETIRED SERVICEMAN’S 
FAMILY
PROTECTION
PLAN
OR
SURVIVOR
BENEFIT 
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,
108 
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 
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-
109 
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. 
‘‘(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.—
110 
‘‘(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— 
‘‘(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)).
111 
‘‘(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 
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.
112 
‘‘(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 
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
113 
(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, 
‘‘(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)—
114 
‘‘(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, deter-
mined under regulations, equal to the tax 
which (but for paragraph (2)(D)) would 
have been imposed, plus interest for the 
deferral period (within the meaning of sub-
section (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)— 
‘‘(A) IN GENERAL.—
115 
‘‘(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 
employers) shall be treated as an employer 
contribution. 
‘‘(B) TIER 2 PORTION.—For purposes of 
subparagraph (A)— 
‘‘(i) AFTER
1984.—With respect to 
compensation paid after 1984, the tier 2 
portion shall be the taxes imposed by sec-
tions 3201(b), 3211(a)(2), and 3221(b). 
‘‘(ii) BEFORE 1985.—With respect to 
compensation 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
116 
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 
‘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-
117 
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 
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 para-
graph (1), the portion referred to in subpara-
graph (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.