1 percent) for any year for all employ-
ees eligible to participate in the plan
for such year if the employer notifies
the employees of such lower percentage
within a reasonable period of time be-
fore the 30-day election period for such
year under paragraph (5)(C). An em-
ployer may not elect a lower percent-
age under this subclause for any year
if that election would result in the ap-
plicable percentage being lower than 3
percent in more than 2 of the years in
the 5-year period ending with such
year.
‘‘(III) SPECIAL RULE FOR YEARS
ARRANGEMENT
NOT
IN
EFFECT.—If
any year in the 5-year period de-
scribed in subclause (II) is a year
prior to the first year for which any
qualified salary reduction arrangement
is in effect with respect to the employer
(or any predecessor), the employer
shall be treated as if the level of the
employer matching contribution was at
3 percent of compensation for such
prior year.
‘‘(D) ARRANGEMENT MAY BE ONLY PLAN OF
EMPLOYER.—
‘‘(i) IN
GENERAL.—An arrangement
shall not be treated as a qualified salary re-
duction arrangement for any year if the
employer (or any predecessor employer)
maintained a qualified plan with respect to
which contributions were made, or benefits
were accrued, for service in any year in the
period beginning with the year such ar-
rangement became effective and ending with
the year for which the determination is
being made.
‘‘(ii) QUALIFIED PLAN.—For purposes
of this subparagraph, the term ‘qualified
plan’ means a plan, contract, pension, or
trust described in subparagraph (A) or (B)
of section 219(g)(5).
‘‘(E) COST-OF-LIVING
ADJUSTMENT.—The
Secretary shall adjust the $6,000 amount under
subparagraph (A)(ii) at the same time and in
the same manner as under section 415(d), except
that the base period taken into account shall be
the calendar quarter ending September 30, 1995,
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 require-
ments of this paragraph are met with respect to a
simple retirement account if the employee’s rights to
any contribution to the simple retirement account are
nonforfeitable. For purposes of this paragraph, 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 sim-
ple 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 com-
pensation 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 paragraph (2)(B).
‘‘(B) EXCLUDABLE
EMPLOYEES.—An em-
ployer may elect to exclude from the requirement
under subparagraph (A) employees described in
section 410(b)(3).
‘‘(5) ADMINISTRATIVE REQUIREMENTS.—The re-
quirements of this paragraph are met with respect to
any simplified retirement account if, under the quali-
fied salary reduction arrangement—
‘‘(A) an employer must—
‘‘(i) make the elective employer con-
tributions under paragraph (2)(A)(i) not
later than the close of the 30-day period fol-
lowing the last day of the month with re-
spect to which the contributions are to be
made, and
‘‘(ii) make the matching contributions
under
paragraph
(2)(A)(iii)
or the
nonelective contributions under paragraph
(2)(B) not
later than the date described in
section 404(m)(2)(B),
‘‘(B) an employee may elect to terminate
participation in such arrangement at any time
during the year, except that if an employee so
terminates, the arrangement may provide that
the employee may not elect to resume participa-
tion until the beginning of the next year, and
‘‘(C) each employee eligible to participate
may elect, during the 30-day period before the
beginning of any year (and the 30-day period
before the first day such employee is eligible to
participate), to participate in the arrangement,
or to modify the amounts subject to such ar-
rangement, for such year.
‘‘(6) DEFINITIONS.—For purposes of this sub-
section—
‘‘(A) COMPENSATION.—
‘‘(i) IN
GENERAL.—The term ‘com-
pensation’ means amounts described in
paragraphs (3) and (8) of section 6051(a).
‘‘(ii) SELF-EMPLOYED.—In the case of
an employee described in subparagraph (B),
the term ‘compensation’ means net earnings
from self-employment determined under sec-
tion 1402(a) without regard to any con-
tribution under this subsection.
‘‘(B) EMPLOYEE.—The term ‘employee’ in-
cludes an employee as defined in section
401(c)(1).
‘‘(C) YEAR.—The term ‘year’ means the cal-
endar year.’’
(b) TAX TREATMENT OF SIMPLE RETIREMENT AC-
COUNTS.—
(1) DEDUCTIBILITY OF CONTRIBUTIONS BY EM-
PLOYEES.—
(A) Section 219(b) (relating to maximum
amount of deduction) is amended by adding at
the end the following new paragraph:
‘‘(4) SPECIAL RULE FOR SIMPLE RETIREMENT
ACCOUNTS.—This section shall not apply with respect
to any amount contributed to a simple retirement ac-
count established under section 408(p).’’
(B) Section 219(g)(5)(A) (defining active
participant) is amended by striking ‘‘or’’ at the
end of clause (iv) and by adding at the end the
following new clause:
‘‘(vi) any simple retirement account
(within the meaning of section 408(p)), or’’.
(2) DEDUCTIBILITY
OF
EMPLOYER
CONTRIBU-
TIONS.—Section 404 (relating to deductions for con-
tributions of an employer to pension, etc. plans) is
amended by adding at the end the following new sub-
section:
‘‘(m) SPECIAL RULES FOR SIMPLE RETIREMENT AC-
COUNTS.—
‘‘(1) IN GENERAL.—Employer contributions to a
simple retirement account shall be treated as if they
are made to a plan subject to the requirements of this
section.
‘‘(2) TIMING.—
‘‘(A) DEDUCTION.—Contributions described
in paragraph (1) shall be deductible in the tax-
able year of the employer with or within which
the calendar year for which the contributions
were made ends.
‘‘(B) 
CONTRIBUTIONS
AFTER
END
OF
YEAR.—For purposes of this subsection, contribu-
tions shall be treated as made for a taxable year
if they are made on account of the taxable year
and are made not later than the time prescribed
by law for filing the return for the taxable year
(including extensions thereof).’’
(3) CONTRIBUTIONS AND DISTRIBUTIONS.—
(A) Section 402 (relating to taxability of
beneficiary of employees’ trust) is amended by
adding at the end the following new subsection:
‘‘(k) TREATMENT
OF
SIMPLE
RETIREMENT
AC-
COUNTS.—Rules similar to the rules of paragraphs (1) and
(3) of subsection (h) shall apply to contributions and dis-
tributions with respect to a simple retirement account
under section 408(p).’’
(B) Section 408(d)(3) is amended by add-
ing at the end the following new subparagraph:
‘‘(G) SIMPLE
RETIREMENT
ACCOUNTS.—
This paragraph shall not apply to any amount
paid or distributed out of a simple retirement
account (as defined in section 408(p)) unless—
‘‘(i) it is paid into another simple re-
tirement account, or
‘‘(ii) in the case of any payment or
distribution to which section 72(t)(8) does
not apply, it is paid into an individual re-
tirement plan.’’
(C) Clause (i) of section 457(c)(2)(B) is
amended by striking ‘‘section 402(h)(1)(B)’’ and
inserting ‘‘section 402(h)(1)(B) or (k)’’.
(4) PENALTIES.—
(A) EARLY
WITHDRAWALS.—Section 72(t)
(relating to additional tax in early distribu-
tions), as amended by this Act, 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 participated in any
qualified salary reduction arrangement maintained
by the individual’s employer under section 408(p)(2),
paragraph (1) shall be applied by substituting ‘25
percent’ for ‘10 percent’.’’
(B) FAILURE TO REPORT.—Section 6693 is
amended by redesignating subsection (c) as sub-
section (d) and by inserting after subsection (b)
the following new subsection:
‘‘(c) PENALTIES RELATING TO SIMPLE RETIREMENT
ACCOUNTS.—
‘‘(1) EMPLOYER PENALTIES.—An employer who
fails to provide 1 or more notices required by section
408(l)(2)(C) shall pay a penalty of $50 for each day
on which such failures continue.
‘‘(2) TRUSTEE
PENALTIES.—A trustee who
fails—
‘‘(A) to provide 1 or more statements re-
quired by the last sentence of section 408(i) shall
pay a penalty of $50 for each day on which such
failures continue, or
‘‘(B) to provide 1 or more summary de-
scriptions required by section 408(l)(2)(B) shall
pay a penalty of $50 for each day on which such
failures continue.
‘‘(3) REASONABLE CAUSE EXCEPTION.—No pen-
alty shall be imposed under this subsection with re-
spect to any failure which the taxpayer shows was
due to reasonable cause.’’
(5) REPORTING REQUIREMENTS.—
(A) Section 408(l) is amended by adding at
the end the following new paragraph:
‘‘(2) SIMPLE RETIREMENT ACCOUNTS.—
‘‘(A) NO EMPLOYER REPORTS.—Except as
provided in this paragraph, no report shall be
required under this section by an employer
maintaining a qualified salary reduction ar-
rangement under subsection (p).
‘‘(B) SUMMARY DESCRIPTION.—The trustee
of any simple retirement account established
pursuant to a qualified salary reduction ar-
rangement under subsection (p) shall provide to
the employer maintaining the arrangement, each
year a description containing the following in-
formation:
‘‘(i) The name and address of the em-
ployer and the trustee.
‘‘(ii) The requirements for eligibility
for participation.
‘‘(iii) The benefits provided with re-
spect to the arrangement.
‘‘(iv) The time and method of making
elections with respect to the arrangement.
‘‘(v) The procedures for, and effects of,
withdrawals (including rollovers) from the
arrangement.
‘‘(C) EMPLOYEE
NOTIFICATION.—The em-
ployer shall notify each employee immediately
before the period for which an election described
in subsection (p)(5)(C) may be made of the em-
ployee’s opportunity to make such election. Such
notice shall include a copy of the description de-
scribed in subparagraph (B).’’
(B) Section 408(l) is amended by striking
‘‘An employer’’ and inserting the following:
‘‘(1) IN GENERAL.—An employer’’.
(6) REPORTING REQUIREMENTS.—Section 408(i)
is amended by adding at the end the following new
flush sentence:
‘‘In the case of a simple retirement account under sub-
section (p), only one report under this subsection shall be
required to be submitted each calendar year to the Secretary
(at the time provided under paragraph (2)) but, in addition
to the report under this subsection, there shall be furnished,
within 30 days after each calendar year, to the individual
on whose behalf the account is maintained a statement with
respect to the account balance as of the close of, and the
account activity during, such calendar year.’’
(7) 
EXEMPTION
FROM
TOP-HEAVY
PLAN
RULES.—Section 416(g)(4) (relating to special rules
for top-heavy plans) is amended by adding at the end
the following new subparagraph:
‘‘(G) SIMPLE RETIREMENT ACCOUNTS.—The
term ‘top-heavy plan’ shall not include a simple
retirement account under section 408(p).’’
(8) EMPLOYMENT TAXES.—
(A) Paragraph (5) of section 3121(a) is
amended by striking ‘‘or’’ at the end of subpara-
graph (F), by inserting ‘‘or’’ at the end of sub-
paragraph (G), and by adding at the end the fol-
lowing new subparagraph:
‘‘(H) under an arrangement to which sec-
tion 408(p) applies, other than any elective con-
tributions under paragraph (2)(A)(i) thereof,’’.
(B) Section 209(a)(4) of the Social Security Act
is amended by inserting ‘‘, or (J) under an arrange-
ment to which section 408(p) of such Code applies,
other than any elective contributions under para-
graph (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 sec-
tion 408(p) applies, other than any elective con-
tributions under paragraph (2)(A)(i) thereof,’’.
(D) Paragraph (12) of section 3401(a) is amend-
ed by adding the following new subparagraph:
‘‘(D) under an arrangement to which sec-
tion 408(p) applies; or’’.
(9) CONFORMING AMENDMENTS.—
(A) Section 280G(b)(6) is amended by strik-
ing ‘‘or’’ at the end of subparagraph (B), by
striking the period at the end of subparagraph
(C) and inserting ‘‘, or’’ and by adding after
subparagraph (C) the following new subpara-
graph:
‘‘(D) a simple retirement account described
in section 408(p).’’
(B) Section 402(g)(3) is amended by strik-
ing ‘‘and’’ at the end of subparagraph (B), by
striking the period at the end of subparagraph
(C) and inserting ‘‘, and’’, and by adding after
subparagraph (C) the following new subpara-
graph:
‘‘(D) any elective employer contribution
under section 408(p)(2)(A)(i).’’
(C) Subsections (b), (c), (m)(4)(B), and
(n)(3)(B) of section 414 are each amended by in-
serting ‘‘408(p),’’ after ‘‘408(k),’’.
(D) Section 4972(d)(1)(A) is amended by
striking ‘‘and’’ at the end of clause (ii), by strik-
ing the period at the end of clause (iii) and in-
serting ‘‘, and’’, and by adding after clause (iii)
the following new clause:
‘‘(iv) any simple retirement account
(within the meaning of section 408(p)).’’
(c) REPEAL OF SALARY REDUCTION SIMPLIFIED EM-
PLOYEE PENSIONS.—Section 408(k)(6) is amended by add-
ing at the end the following new subparagraph:
‘‘(H) TERMINATION.—This paragraph shall
not apply to years beginning after December 31,
1996. The preceding sentence shall not apply to
a simplified employee pension if the terms of
such pension, as in effect on December 31, 1996,
provide that an employee may make the election
described in subparagraph (A).’’
(d) EFFECTIVE DATE.—The amendments made by this
section shall apply to taxable years beginning after Decem-
ber 31, 1996.
SEC. 1422. EXTENSION OF SIMPLE PLAN TO 401(k) AR-
RANGEMENTS.
(a) ALTERNATIVE METHOD OF SATISFYING SECTION
401(k) NONDISCRIMINATION TESTS.—Section 401(k) (relat-
ing to cash or deferred arrangements) is amended by adding
at the end the following new paragraph:
‘‘(11) ADOPTION OF SIMPLE PLAN TO MEET NON-
DISCRIMINATION TESTS.—
‘‘(A) IN GENERAL.—A cash or deferred ar-
rangement maintained by an eligible employer
shall be treated as meeting the requirements of
paragraph 
(3)(A)(ii) 
if 
such 
arrangement
meets—
‘‘(i) the contribution requirements of
subparagraph (B),
‘‘(ii) the exclusive benefit requirements
of subparagraph (C), and
‘‘(iii) the vesting requirements of sec-
tion 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 con-
tributions for the year on behalf of the
employee to a trust under the plan in
an amount which is expressed as a
percentage of compensation of the em-
ployee but which in no event exceeds
$6,000,
‘‘(II) the employer is required to
make a matching contribution to the
trust for the year in an amount equal
to so much of the amount the employee
elects under subclause (I) as does not
exceed 3 percent of compensation for
the year, and
‘‘(III) no other contributions may
be made other than contributions de-
scribed in subclause (I) or (II).
‘‘(ii) EMPLOYER
MAY
ELECT
2-PER-
CENT
NONELECTIVE
CONTRIBUTION.—An
employer shall be treated as meeting the re-
quirements of clause (i)(II) for any year if,
in lieu of the contributions described in
such clause, the employer elects (pursuant to
the terms of the arrangement) to make non-
elective contributions of 2 percent of com-
pensation for each employee who is eligible
to participate in the arrangement and who
has at least $5,000 of compensation from
the employer for the year. If an employer
makes an election under this subparagraph
for any year, the employer shall notify em-
ployees of such election within a reasonable
period of time before the 30th day before the
beginning of such year.
‘‘(C) EXCLUSIVE
BENEFIT.—The require-
ments of this subparagraph are met for any year
to which this paragraph applies if no contribu-
tions 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 ar-
rangement, other than contributions described in
subparagraph (B).
‘‘(D) DEFINITIONS AND SPECIAL RULE.—
‘‘(i) DEFINITIONS.—For purposes of
this paragraph, any term used in this para-
graph which is also used in section 408(p)
shall have the meaning given such term by
such section.
‘‘(ii) COORDINATION WITH TOP-HEAVY
RULES.—A plan meeting the requirements
of this paragraph for any year shall not be
treated as a top-heavy plan under section
416 for such year.’’
(b) ALTERNATIVE METHODS OF SATISFYING SECTION
401(m) NONDISCRIMINATION TESTS.—Section 401(m) (re-
lating to nondiscrimination test for matching contributions
and employee contributions) is amended by redesignating
paragraph (10) as paragraph (11) and by adding after
paragraph (9) the following new paragraph:
‘‘(10) ALTERNATIVE
METHOD
OF
SATISFYING
TESTS.—A defined contribution plan shall be treated
as meeting the requirements of paragraph (2) with re-
spect to matching contributions if the plan—
‘‘(A) meets the contribution requirements of
subparagraph (B) of subsection (k)(11),
‘‘(B) meets the exclusive benefit require-
ments of subsection (k)(11)(C), and
‘‘(C) meets the vesting requirements of sec-
tion 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
ORGANIZA-
TIONS.—
‘‘(i) TAX-EXEMPTS ELIGIBLE.—Except
as provided in clause (ii), any organization
exempt from tax under this subtitle may in-
clude a qualified cash or deferred arrange-
ment as part of a plan maintained by it.
‘‘(ii) GOVERNMENTS
INELIGIBLE.—A
cash or deferred arrangement shall not be
treated as a qualified cash or deferred ar-
rangement if it is part of a plan main-
tained by a State or local government or
political subdivision thereof, or any agency
or instrumentality thereof. This clause shall
not apply to a rural cooperative plan or to
a plan of an employer described in clause
(iii).
‘‘(iii) TREATMENT OF INDIAN TRIBAL
GOVERNMENTS.—An employer which is an
Indian tribal government (as defined in sec-
tion 7701(a)(40)), a subdivision of an In-
dian tribal government (determined in ac-
cordance with section 7871(d)), an agency
or instrumentality of an Indian tribal gov-
ernment or subdivision thereof, or a cor-
poration chartered under Federal, State, or
tribal law which is owned in whole or in
part by any of the foregoing shall be treated
as an organization exempt from tax under
this subtitle for purposes of clause (i).’’
(b) EFFECTIVE DATE.—The amendment made by this
section shall apply to plan years beginning after December
31, 1996, but shall not apply to any cash or deferred ar-
rangement to which clause (i) of section 1116(f)(2)(B) of
the Tax Reform Act of 1986 applies.
CHAPTER 3—NONDISCRIMINATION
PROVISIONS
SEC. 1431. DEFINITION OF HIGHLY COMPENSATED EMPLOY-
EES; REPEAL OF FAMILY AGGREGATION.
(a) IN GENERAL.—Paragraph (1) of section 414(q)
(defining highly compensated employee) is amended to read
as follows:
‘‘(1) IN
GENERAL.—The term ‘highly com-
pensated employee’ means any employee who—
‘‘(A) was a 5-percent owner at any time
during the year or the preceding year, or
‘‘(B) for the preceding year—
‘‘(i) had compensation from the em-
ployer in excess of $80,000, and
‘‘(ii) was in the top-paid group of the
employer.
The Secretary shall adjust the $80,000 amount under
subparagraph (B) at the same time and in the same
manner as under section 415(d), except that the base
period shall be the calendar quarter ending September
30, 1996.’’
(b) REPEAL OF FAMILY AGGREGATION RULES.—
(1) IN
GENERAL.—Paragraph (6) of section
414(q) is hereby repealed.
(2) COMPENSATION LIMIT.—Paragraph (17)(A)
of section 401(a) is amended by striking the last sen-
tence.
(3) DEDUCTION.—Subsection (l) of section 404 is
amended by striking the last sentence.
(c) CONFORMING AMENDMENTS.—
(1)(A) Subsection (q) of section 414 is amended
by striking paragraphs (2), (5), (8), and (12) and by
redesignating paragraphs (3), (4), (7), (9), (10), and
(11) as paragraphs (2) through (7), 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(r)(9)’’.
(2)(A) Section 414(r) is amended by adding at
the end the following new paragraph:
‘‘(9) EXCLUDED EMPLOYEES.—For purposes of
this subsection, the following employees shall be ex-
cluded:
‘‘(A) Employees who have not completed 6
months of service.
‘‘(B) Employees who normally work less
than 171⁄2 hours per week.
‘‘(C) Employees who normally work not
more than 6 months during any year.
‘‘(D) Employees who have not attained the
age of 21.
‘‘(E) Except to the extent provided in regu-
lations, employees who are included in a unit of
employees covered by an agreement which the
Secretary of Labor finds to be a collective bar-
gaining agreement between employee representa-
tives and the employer.
Except as provided by the Secretary, the employer
may elect to apply subparagraph (A), (B), (C), or (D)
by substituting a shorter period of service, smaller
number of hours or months, or lower age for the pe-
riod of service, number of hours or months, or age (as
the case may be) specified in such subparagraph.’’
(B) Subparagraph (A) of section 414(r)(2) is
amended by striking ‘‘subsection (q)(8)’’ and inserting
‘‘paragraph (9)’’.
(3) Section 1114(c)(4) of the Tax Reform Act of
1986 is amended by adding at the end the following
new sentence: ‘‘Any reference in this paragraph to
section 414(q) shall be treated as a reference to such
section as in effect on the day before the date of the
enactment of the Small Business Job Protection Act
of 1996.’’.
(d) EFFECTIVE DATE.—
(1) IN
GENERAL.—The amendments made by
this section shall apply to years beginning after De-
cember 31, 1996, except that in determining whether
an employee is a highly compensated employee for
years beginning in 1997, such amendments shall be
treated as having been in effect for years beginning in
1996.
(2) FAMILY
AGGREGATION.—The amendments
made by subsection (b) shall apply to years beginning
after December 31, 1996.
SEC. 1432. MODIFICATION OF ADDITIONAL PARTICIPATION
REQUIREMENTS.
(a) GENERAL RULE.—Section 401(a)(26)(A) (relating
to additional participation requirements) is amended to
read as follows:
‘‘(A) IN GENERAL.—In the case of a trust
which is a part of a defined benefit plan, such
trust shall not constitute a qualified trust under
this subsection unless on each day of the plan
year such trust benefits at least the lesser of—
‘‘(i) 50 employees of the employer, or
‘‘(ii) the greater of—