‘‘(1) an election under subsection (a) by any cor-
poration—
‘‘(A) was not effective for the taxable year
for which made (determined without regard to
subsection (b)(2)) by reason of a failure to meet
the requirements of section 1361(b) or to obtain
shareholder consents, or
‘‘(B) was terminated under paragraph (2)
or (3) of subsection (d),
‘‘(2) the Secretary determines that the cir-
cumstances resulting in such ineffectiveness or termi-
nation were inadvertent,
‘‘(3) no later than a reasonable period of time
after discovery of the circumstances resulting in such
ineffectiveness or termination, steps were taken—
‘‘(A) so that the corporation is a small busi-
ness corporation, or
‘‘(B) to acquire the required shareholder
consents, and
‘‘(4) the corporation, and each person who was
a shareholder in the corporation at any time during
the period specified pursuant to this subsection, agrees
to make such adjustments (consistent with the treat-
ment of the corporation as an S corporation) as may
be required by the Secretary with respect to such pe-
riod,
then, notwithstanding the circumstances resulting in such
ineffectiveness or termination, such corporation shall be
treated as an S corporation during the period specified by
the Secretary.’’
(b) LATE ELECTIONS, ETC.—Subsection (b) of section
1362 is amended by adding at the end the following new
paragraph:
‘‘(5) AUTHORITY
TO
TREAT
LATE
ELECTIONS,
ETC., AS TIMELY.—If—
‘‘(A) an election under subsection (a) is
made for any taxable year (determined without
regard to paragraph (3)) after the date pre-
scribed by this subsection for making such elec-
tion for such taxable year or no such election is
made for any taxable year, and
‘‘(B) the Secretary determines that there
was reasonable cause for the failure to timely
make such election,
the Secretary may treat such an election as timely
made for such taxable year (and paragraph (3) shall
not apply).’’
(c) EFFECTIVE DATE.—The amendments made by sub-
section (a) and (b) shall apply with respect to elections for
taxable years beginning after December 31, 1982.
SEC. 1306. AGREEMENT TO TERMINATE YEAR.
Paragraph (2) of section 1377(a) (relating to pro rata
share) is amended to read as follows:
‘‘(2) ELECTION TO TERMINATE YEAR.—
‘‘(A) IN GENERAL.—Under regulations pre-
scribed by the Secretary, if any shareholder ter-
minates the shareholder’s interest in the corpora-
tion during the taxable year and all affected
shareholders and the corporation agree to the ap-
plication of this paragraph, paragraph (1) shall
be applied to the affected shareholders as if the
taxable year consisted of 2 taxable years the first
of which ends on the date of the termination.
‘‘(B) 
AFFECTED
SHAREHOLDERS.—For
purposes of subparagraph (A), the term ‘affected
shareholders’ means the shareholder whose inter-
est is terminated and all shareholders to whom
such shareholder has transferred shares during
the taxable year. If such shareholder has trans-
ferred shares to the corporation, the term ‘af-
fected shareholders’ shall include all persons who
are shareholders during the taxable year.’’
SEC. 1307. EXPANSION OF POST-TERMINATION TRANSITION
PERIOD.
(a) IN GENERAL.—Paragraph (1) of section 1377(b)
(relating to post-termination transition period) is amended
by striking ‘‘and’’ at the end of subparagraph (A), by redes-
ignating subparagraph (B) as subparagraph (C), and by
inserting after subparagraph (A) the following new sub-
paragraph:
‘‘(B) the 120-day period beginning on the
date of any determination pursuant to an audit
of the taxpayer which follows the termination of
the corporation’s election and which adjusts a
subchapter S item of income, loss, or deduction
of the corporation arising during the S period
(as defined in section 1368(e)(2)), and’’.
(b) DETERMINATION DEFINED.—Paragraph (2) of sec-
tion 1377(b) is amended by striking subparagraphs (A) and
(B), by redesignating subparagraph (C) as subparagraph
(B), and by inserting before subparagraph (B) (as so redes-
ignated) the following new subparagraph:
‘‘(A) a determination as defined in section
1313(a), or’’.
(c) REPEAL OF SPECIAL AUDIT PROVISIONS FOR SUB-
CHAPTER S ITEMS.—
(1) GENERAL RULE.—Subchapter D of chapter
63 (relating to tax treatment of subchapter S items)
is hereby repealed.
(2) CONSISTENT
TREATMENT
REQUIRED.—Sec-
tion 6037 (relating to return of S corporation) is
amended by adding at the end the following new sub-
section:
‘‘(c) SHAREHOLDER’S RETURN MUST BE CONSISTENT
WITH CORPORATE RETURN OR SECRETARY NOTIFIED OF
INCONSISTENCY.—
‘‘(1) IN GENERAL.—A shareholder of an S cor-
poration shall, on such shareholder’s return, treat a
subchapter S item in a manner which is consistent
with the treatment of such item on the corporate re-
turn.
‘‘(2) NOTIFICATION
OF
INCONSISTENT
TREAT-
MENT.—
‘‘(A) IN GENERAL.—In the case of any sub-
chapter S item, if—
‘‘(i)(I) the corporation has filed a re-
turn but the shareholder’s treatment on his
return is (or may be) inconsistent with the
treatment of the item on the corporate re-
turn, or
‘‘(II) the corporation has not filed a re-
turn, and
‘‘(ii) the shareholder files with the Sec-
retary a statement identifying the inconsist-
ency,
paragraph (1) shall not apply to such item.
‘‘(B) SHAREHOLDER RECEIVING INCORRECT
INFORMATION.—A shareholder shall be treated as
having complied with clause (ii) of subpara-
graph (A) with respect to a subchapter S item if
the shareholder—
‘‘(i) demonstrates to the satisfaction of
the Secretary that the treatment of the sub-
chapter S item on the shareholder’s return
is consistent with the treatment of the item
on the schedule furnished to the shareholder
by the corporation, and
‘‘(ii) elects to have this paragraph
apply with respect to that item.
‘‘(3) EFFECT OF FAILURE TO NOTIFY.—In any
case—
‘‘(A) described in subparagraph (A)(i)(I) of
paragraph (2), and
‘‘(B) in which the shareholder does not com-
ply with subparagraph (A)(ii) of paragraph (2),
any adjustment required to make the treatment of the
items by such shareholder consistent with the treat-
ment of the items on the corporate return shall be
treated as arising out of mathematical or clerical er-
rors and assessed according to section 6213(b)(1).
Paragraph (2) of section 6213(b) shall not apply to
any assessment referred to in the preceding sentence.
‘‘(4) SUBCHAPTER S ITEM.—For purposes of this
subsection, the term ‘subchapter S item’ means any
item of an S corporation to the extent that regula-
tions prescribed by the Secretary provide that, for
purposes of this subtitle, such item is more appro-
priately determined at the corporation level than at
the shareholder level.
‘‘(5) ADDITION TO TAX FOR FAILURE TO COMPLY
WITH SECTION.—
‘‘For addition to tax in the case of a shareholder’s
negligence in connection with, or disregard of, the
requirements of this section, see part II of sub-
chapter A of chapter 68.’’
(3) CONFORMING AMENDMENTS.—
(A) Section 1366 is amended by striking
subsection (g).
(B) Subsection (b) of section 6233 is
amended to read as follows:
‘‘(b) SIMILAR RULES IN CERTAIN CASES.—If a part-
nership return is filed for any taxable year but it is deter-
mined that there is no entity for such taxable year, to the
extent provided in regulations, rules similar to the rules
of subsection (a) shall apply.’’
(C) The table of subchapters for chapter 63
is amended by striking the item relating to sub-
chapter D.
SEC. 1308. S CORPORATIONS PERMITTED TO HOLD SUBSIDI-
ARIES.
(a) IN GENERAL.—Paragraph (2) of section 1361(b)
(defining ineligible corporation) is amended by striking
subparagraph (A) and by redesignating subparagraphs (B),
(C), (D), and (E) as subparagraphs (A), (B), (C), and (D),
respectively.
(b) TREATMENT OF CERTAIN WHOLLY OWNED S COR-
PORATION SUBSIDIARIES.—Section 1361(b) (defining small
business corporation) is amended by adding at the end the
following new paragraph:
‘‘(3) TREATMENT OF CERTAIN WHOLLY OWNED
SUBSIDIARIES.—
‘‘(A) IN
GENERAL.—For purposes of this
title—
‘‘(i) a corporation which is a qualified
subchapter S subsidiary shall not be treated
as a separate corporation, and
‘‘(ii) all assets, liabilities, and items of
income, deduction, and credit of a qualified
subchapter S subsidiary shall be treated as
assets, liabilities, and such items (as the
case may be) of the S corporation.
‘‘(B) QUALIFIED SUBCHAPTER S SUBSIDI-
ARY.—For purposes of this paragraph, the term
‘qualified subchapter S subsidiary’ means any
domestic corporation which is not an ineligible
corporation (as defined in paragraph (2)), if—
‘‘(i) 100 percent of the stock of such
corporation is held by the S corporation,
and
‘‘(ii) the S corporation elects to treat
such corporation as a qualified subchapter
S subsidiary.
‘‘(C) TREATMENT
OF
TERMINATIONS
OF
QUALIFIED
SUBCHAPTER
S
SUBSIDIARY
STA-
TUS.—For purposes of this title, if any corpora-
tion which was a qualified subchapter S subsidi-
ary ceases to meet the requirements of subpara-
graph (B), such corporation shall be treated as
a new corporation acquiring all of its assets
(and assuming all of its liabilities) immediately
before such cessation from the S corporation in
exchange for its stock.’’
(c) CERTAIN DIVIDENDS NOT TREATED AS PASSIVE
INVESTMENT INCOME.—Paragraph (3) of section 1362(d) is
amended by adding at the end the following new subpara-
graph:
‘‘(F) 
TREATMENT
OF
CERTAIN
DIVI-
DENDS.—If an S corporation holds stock in a C
corporation meeting the requirements of section
1504(a)(2), the term ‘passive investment income’
shall not include dividends from such C corpora-
tion to the extent such dividends are attributable
to the earnings and profits of such C corporation
derived from the active conduct of a trade or
business.’’
(d) CONFORMING AMENDMENTS.—
(1) Subsection (c) of section 1361 is amended by
striking paragraph (6).
(2) Subsection (b) of section 1504 (defining in-
cludible corporation) is amended by adding at the
end the following new paragraph:
‘‘(8) An S corporation.’’
be determined without regard to any net negative
adjustment for such taxable year.
‘‘(ii) NET
NEGATIVE
ADJUSTMENT.—For
purposes of clause (i), the term ‘net negative ad-
justment’ means, with respect to any taxable
year, the excess (if any) of—
‘‘(I) the reductions in the account for
the taxable year (other than for distribu-
tions), over
‘‘(II) the increases in such account for
such taxable year.’’
(c) CONFORMING AMENDMENTS.—Subparagraph (A)
of section 1368(e)(1) is amended—
(1) by striking ‘‘as provided in subparagraph
(B)’’ and inserting ‘‘as otherwise provided in this
paragraph’’, and
(2) by striking ‘‘section 1367(b)(2)(A)’’ and in-
serting ‘‘section 1367(a)(2)’’.
SEC. 1310. TREATMENT OF S CORPORATIONS UNDER SUB-
CHAPTER C.
Subsection (a) of section 1371 (relating to application
of subchapter C rules) is amended to read as follows:
‘‘(a) APPLICATION OF SUBCHAPTER C RULES.—Ex-
cept as otherwise provided in this title, and except to the
extent inconsistent with this subchapter, subchapter C shall
apply to an S corporation and its shareholders.’’
SEC. 1311. ELIMINATION OF CERTAIN EARNINGS AND PROF-
ITS.
(a) IN GENERAL.—If—
(1) a corporation was an electing small business
corporation under subchapter S of chapter 1 of the
Internal Revenue Code of 1986 for any taxable year
beginning before January 1, 1983, and
(2) such corporation is an S corporation under
subchapter S of chapter 1 of such Code for its first
taxable year beginning after December 31, 1996,
the amount of such corporation’s accumulated earnings and
profits (as of the beginning of such first taxable year) shall
be reduced by an amount equal to the portion (if any) of
such accumulated earnings and profits which were accumu-
lated in any taxable year beginning before January 1, 1983,
for which such corporation was an electing small business
corporation under such subchapter S.
(b) CONFORMING AMENDMENTS.—
(1) Paragraph (3) of section 1362(d), as amend-
ed by section 1308, is amended—
(A) by striking ‘‘SUBCHAPTER
C’’ in the
paragraph heading and inserting ‘‘ACCUMU-
LATED’’,
(B) by striking ‘‘subchapter C’’ in subpara-
graph (A)(i)(I) and inserting ‘‘accumulated’’,
and
(C) by striking subparagraph (B) and re-
designating the following subparagraphs accord-
ingly.
(2)(A) Subsection (a) of section 1375 is amended
by striking ‘‘subchapter C’’ in paragraph (1) and in-
serting ‘‘accumulated’’.
(B) Paragraph (3) of section 1375(b) is amended
to read as follows:
‘‘(3) PASSIVE INVESTMENT INCOME, ETC.—The
terms ‘passive investment income’ and ‘gross receipts’
have the same respective meanings as when used in
paragraph (3) of section 1362(d).’’
(C) The section heading for section 1375 is
amended by striking ‘‘SUBCHAPTER C’’ and insert-
ing ‘‘ACCUMULATED’’.
(D) The table of sections for part III of sub-
chapter S of chapter 1 is amended by striking ‘‘sub-
chapter C’’ in the item relating to section 1375 and
inserting ‘‘accumulated’’.
(3) Clause (i) of section 1042(c)(4)(A) is amend-
ed by striking ‘‘section 1362(d)(3)(D)’’ and inserting
‘‘section 1362(d)(3)(C)’’.
SEC. 1312. CARRYOVER OF DISALLOWED LOSSES AND DE-
DUCTIONS UNDER AT-RISK RULES ALLOWED.
Paragraph (3) of section 1366(d) (relating to carryover
of disallowed losses and deductions to post-termination
transition period) is amended by adding at the end the fol-
lowing new subparagraph:
‘‘(D) AT-RISK LIMITATIONS.—To the extent
that any increase in adjusted basis described in
subparagraph (B) would have increased the
shareholder’s amount at risk under section 465 if
such increase had occurred on the day preceding
the commencement of the post-termination tran-
sition period, rules similar to the rules described
in subparagraphs (A) through (C) shall apply to
any losses disallowed by reason of section
465(a).’’
SEC. 1313. ADJUSTMENTS TO BASIS OF INHERITED S STOCK
TO REFLECT CERTAIN ITEMS OF INCOME.
(a) IN GENERAL.—Subsection (b) of section 1367 (re-
lating to adjustments to basis of stock of shareholders, etc.)
is amended by adding at the end the following new para-
graph:
‘‘(4) ADJUSTMENTS
IN
CASE
OF
INHERITED
STOCK.—
‘‘(A) IN GENERAL.—If any person acquires
stock in an S corporation by reason of the death
of a decedent or by bequest, devise, or inherit-
ance, section 691 shall be applied with respect to
any item of income of the S corporation in the
same manner as if the decedent had held directly
his pro rata share of such item.
‘‘(B) ADJUSTMENTS TO BASIS.—The basis
determined under section 1014 of any stock in
an S corporation shall be reduced by the portion
of the value of the stock which is attributable to
items constituting income in respect of the dece-
dent.’’
(b) EFFECTIVE DATE.—The amendment made by sub-
section (a) shall apply in the case of decedents dying after
the date of the enactment of this Act.
SEC. 1314. S CORPORATIONS ELIGIBLE FOR RULES APPLI-
CABLE TO REAL PROPERTY SUBDIVIDED FOR
SALE BY NONCORPORATE TAXPAYERS.
(a) IN GENERAL.—Subsection (a) of section 1237 (re-
lating to real property subdivided for sale) is amended by
striking ‘‘other than a corporation’’ in the material preced-
ing paragraph (1) and inserting ‘‘other than a C corpora-
tion’’.
(b) CONFORMING AMENDMENT.—Subparagraph (A) of
section 1237(a)(2) is amended by inserting ‘‘an S corpora-
tion which included the taxpayer as a shareholder,’’ after
‘‘controlled by the taxpayer,’’.
SEC. 1315. EFFECTIVE DATE.
(a) IN GENERAL.—Except as otherwise provided in
this subtitle, the amendments made by this subtitle shall
apply to taxable years beginning after December 31, 1996.
(b) TREATMENT
OF CERTAIN ELECTIONS UNDER
PRIOR LAW.—For purposes of section 1362(g) of the Inter-
nal Revenue Code of 1986 (relating to election after termi-
nation), any termination under section 1362(d) of such
Code in a taxable year beginning before January 1, 1997,
shall not be taken into account.
Subtitle D—Pension Simplification
CHAPTER 1—SIMPLIFIED DISTRIBUTION
RULES
SEC. 1401. REPEAL OF 5-YEAR INCOME AVERAGING FOR
LUMP-SUM DISTRIBUTIONS.
(a) IN GENERAL.—Subsection (d) of section 402 (relat-
ing to taxability of beneficiary of employees’ trust) is
amended to read as follows:
‘‘(d) TAXABILITY OF BENEFICIARY OF CERTAIN FOR-
EIGN SITUS TRUSTS.—For purposes of subsections (a), (b),
and (c), a stock bonus, pension, or profit-sharing trust
which would qualify for exemption from tax under section
501(a) except for the fact that it is a trust created or orga-
nized outside the United States shall be treated as if it were
a trust exempt from tax under section 501(a).’’
(b) CONFORMING AMENDMENTS.—
(1) Subparagraph (D) of section 402(e)(4) (relat-
ing to other rules applicable to exempt trusts) is
amended to read as follows:
‘‘(D) LUMP-SUM DISTRIBUTION.—For pur-
poses of this paragraph—
‘‘(i) IN
GENERAL.—The term ‘lump
sum distribution’ means the distribution or
payment within one taxable year of the re-
cipient of the balance to the credit of an em-
ployee which becomes payable to the recipi-
ent—
‘‘(I) on account of the employee’s
death,
‘‘(II) after the employee attains
age 591⁄2,
‘‘(III) on account of the employ-
ee’s separation from service, or
‘‘(IV) after the employee has be-
come disabled (within the meaning of
section 72(m)(7)),
from a trust which forms a part of a plan
described in section 401(a) and which is ex-
empt from tax under section 501 or from a
plan described in section 403(a). Subclause
(III) of this clause shall be applied only
with respect to an individual who is an em-
ployee without regard to section 401(c)(1),
and subclause (IV) shall be applied only
with respect to an employee within the
meaning of section 401(c)(1). For purposes
of this clause, a distribution to two or more
trusts shall be treated as a distribution to
one recipient. For purposes of this para-
graph, the balance to the credit of the em-
ployee does not include the accumulated de-
ductible employee contributions under the
plan (within the meaning of section
72(o)(5)).
‘‘(ii) 
AGGREGATION
OF
CERTAIN
TRUSTS AND PLANS.—For purposes of deter-
mining the balance to the credit of an em-
ployee under clause (i)—
‘‘(I) all trusts which are part of a
plan shall be treated as a single trust,
all pension plans maintained by the
employer shall be treated as a single
plan, all profit-sharing plans main-
tained by the employer shall be treated
as a single plan, and all stock bonus
plans maintained by the employer
shall be treated as a single plan, and
‘‘(II) trusts which are not quali-
fied trusts under section 401(a) and
annuity contracts which do not satisfy
the requirements of section 404(a)(2)
shall not be taken into account.
‘‘(iii) COMMUNITY PROPERTY LAWS.—
The provisions of this paragraph shall be
applied without regard to community prop-
erty laws.
‘‘(iv) AMOUNTS
SUBJECT
TO
PEN-
ALTY.—This paragraph shall not apply to
amounts described in subparagraph (A) of
section 72(m)(5) to the extent that section
72(m)(5) applies to such amounts.
‘‘(v) BALANCE
TO
CREDIT
OF
EM-
PLOYEE
NOT
TO
INCLUDE
AMOUNTS
PAY-
ABLE UNDER QUALIFIED DOMESTIC RELA-
TIONS ORDER.—For purposes of this para-
graph, the balance to the credit of an em-
ployee shall not include any amount pay-
able to an alternate payee under a qualified
domestic relations order (within the mean-
ing of section 414(p)).
‘‘(vi) TRANSFERS
TO
COST-OF-LIVING
ARRANGEMENT NOT TREATED AS DISTRIBU-
TION.—For purposes of this paragraph, the
balance to the credit of an employee under
a defined contribution plan shall not in-
clude any amount transferred from such de-
fined contribution plan to a qualified cost-
of-living arrangement (within the meaning
of section 415(k)(2)) under a defined benefit
plan.
‘‘(vii) LUMP-SUM
DISTRIBUTIONS
OF
ALTERNATE
PAYEES.—If any distribution
or payment of the balance to the credit of
an employee would be treated as a lump-
sum distribution, then, for purposes of this
paragraph, the payment under a qualified
domestic relations order (within the mean-
ing of section 414(p)) of the balance to the
credit of an alternate payee who is the
spouse or former spouse of the employee
shall be treated as a lump-sum distribution.
For purposes of this clause, the balance to
the credit of the alternate payee shall not
include any amount payable to the em-
ployee.’’
(2) Section 402(c) (relating to rules applicable to
rollovers from exempt trusts) is amended by striking
paragraph (10).
(3) Paragraph (1) of section 55(c) (defining reg-
ular tax) is amended by striking ‘‘shall not include
any tax imposed by section 402(d) and’’.
(4) Paragraph (8) of section 62(a) (relating to
certain portion of lump-sum distributions from pen-
sion plans taxed under section 402(d)) is hereby re-
pealed.
(5) Section 401(a)(28)(B) (relating to coordina-
tion with distribution rules) is amended by striking
clause (v).
(6) Subparagraph (B)(ii) of section 401(k)(10)
(relating to distributions that must be lump-sum dis-
tributions) is amended to read as follows:
‘‘(ii) LUMP-SUM
DISTRIBUTION.—For
purposes of this subparagraph, the term
‘lump-sum distribution’ has the meaning
given such term by section 402(e)(4)(D)
(without regard to subclauses (I), (II), (III),
and (IV) of clause (i) thereof).’’
(7) Section 406(c) (relating to termination of
status as deemed employee not to be treated as sepa-
ration from service for purposes of limitation of tax)
is hereby repealed.
(8) Section 407(c) (relating to termination of
status as deemed employee not to be treated as sepa-
ration from service for purposes of limitation of tax)
is hereby repealed.
(9) Section 691(c) (relating to deduction for es-
tate tax) is amended by striking paragraph (5).
(10) Paragraph (1) of section 871(b) (relating to
imposition of tax) is amended by striking ‘‘section 1,
55, or 402(d)(1)’’ and inserting ‘‘section 1 or 55’’.
(11) Subsection (b) of section 877 (relating to al-
ternative tax) is amended by striking ‘‘section 1, 55,
or 402(d)(1)’’ and inserting ‘‘section 1 or 55’’.
(12) Section 4980A(c)(4) is amended—
(A) by striking ‘‘to which an election under
section 402(d)(4)(B) applies’’ and inserting ‘‘(as
defined in section 402(e)(4)(D)) with respect to
which the individual elects to have this para-
graph apply’’,
(B) by adding at the end the following new
flush sentence:
‘‘An individual may elect to have this paragraph
apply to only one lump-sum distribution.’’, and
(C) by striking the heading and inserting:
‘‘(4) SPECIAL ONE-TIME ELECTION.—’’.
(13) Section 402(e) is amended by striking para-
graph (5).
(c) EFFECTIVE DATES.—
(1) IN
GENERAL.—The amendments made by
this section shall apply to taxable years beginning
after December 31, 1998.
(2) 
RETENTION
OF
CERTAIN
TRANSITION
RULES.—Notwithstanding any other provision of this
section, the amendments made by this section shall
not apply to any distribution for which the taxpayer
elects the benefits of section 1122 (h)(3) or (h)(5) of
the Tax Reform Act of 1986. For purposes of the pre-
ceding sentence, the rules of sections 402(c)(10) and
402(d) of the Internal Revenue Code of 1986 (as in
effect before the amendments made by this Act) shall
apply.
SEC. 1402. REPEAL OF $5,000 EXCLUSION OF EMPLOYEES’
DEATH BENEFITS.
(a) IN GENERAL.—Subsection (b) of section 101 is
hereby repealed.
(b) CONFORMING AMENDMENTS.—
(1) Subsection (c) of section 101 is amended by
striking ‘‘subsection (a) or (b)’’ and inserting ‘‘sub-
section (a)’’.
(2) Sections 406(e) and 407(e) are each amended
by striking paragraph (2) and by redesignating para-
graph (3) as paragraph (2).
(3) Section 7701(a)(20) is amended by striking
‘‘, for the purpose of applying the provisions of sec-
tion 101(b) with respect to employees’ death benefits’’.
(c) EFFECTIVE DATE.—The amendments made by this
section shall apply with respect to decedents dying after the
date of the enactment of this Act.
SEC. 1403. SIMPLIFIED METHOD FOR TAXING ANNUITY DIS-
TRIBUTIONS 
UNDER 
CERTAIN 
EMPLOYER
PLANS.
(a) GENERAL RULE.—Subsection (d) of section 72 (re-
lating to annuities; certain proceeds of endowment and life
insurance contracts) is amended to read as follows:
‘‘(d) SPECIAL RULES FOR QUALIFIED EMPLOYER RE-
TIREMENT PLANS.—
‘‘(1) SIMPLIFIED METHOD OF TAXING ANNUITY
PAYMENTS.—
‘‘(A) IN
GENERAL.—In the case of any
amount received as an annuity under a qualified
employer retirement plan—
‘‘(i) subsection (b) shall not apply, and
‘‘(ii) the investment in the contract
shall be recovered as provided in this para-
graph.
‘‘(B) METHOD OF RECOVERING INVESTMENT
IN CONTRACT.—
‘‘(i) IN GENERAL.—Gross income shall
not include so much of any monthly annu-
ity payment under a qualified employer re-
tirement plan as does not exceed the amount
obtained by dividing—
‘‘(I) the investment in the con-
tract (as of the annuity starting date),
by
‘‘(II) the number of anticipated
payments determined under the table
contained in clause (iii) (or, in the
case of a contract to which subsection
(c)(3)(B) 
applies, 
the 
number 
of
monthly annuity payments under such
contract).
‘‘(ii) CERTAIN RULES MADE APPLICA-
BLE.—Rules similar to the rules of para-
graphs (2) and (3) of subsection (b) shall
apply for purposes of this paragraph.
‘‘(iii) NUMBER OF ANTICIPATED PAY-
MENTS.—
‘‘If the age of the
primary annuitant on
The number
the annuity starting
of anticipated
date is:
payments is:
Not more than 55 ....................................
360
More than 55 but not more than 60 ......
310
More than 60 but not more than 65 ......
260
More than 65 but not more than 70 ......
210
More than 70 ...........................................
160.
‘‘(C) ADJUSTMENT FOR REFUND FEATURE
NOT APPLICABLE.—For purposes of this para-
graph, investment in the contract shall be deter-
mined under subsection (c)(1) without regard to
subsection (c)(2).
‘‘(D) SPECIAL
RULE
WHERE
LUMP
SUM
PAID IN CONNECTION WITH COMMENCEMENT OF
ANNUITY PAYMENTS.—If, in connection with the
commencement of annuity payments under any
qualified employer retirement plan, the taxpayer
receives a lump sum payment—
‘‘(i) such payment shall be taxable
under subsection (e) as if received before the
annuity starting date, and
‘‘(ii) the investment in the contract for
purposes of this paragraph shall be deter-
mined as if such payment had been so re-
ceived.
‘‘(E) EXCEPTION.—This paragraph shall
not apply in any case where the primary annu-
itant has attained age 75 on the annuity start-
ing date unless there are fewer than 5 years of
guaranteed payments under the annuity.
‘‘(F) ADJUSTMENT
WHERE
ANNUITY
PAY-
MENTS NOT ON MONTHLY BASIS.—In any case
where the annuity payments are not made on a
monthly basis, appropriate adjustments in the
application of this paragraph shall be made to
take into account the period on the basis of
which such payments are made.
‘‘(G) QUALIFIED
EMPLOYER
RETIREMENT
PLAN.—For purposes of this paragraph, the term
‘qualified employer retirement plan’ means any
plan or contract described in paragraph (1), (2),
or (3) of section 4974(c).
‘‘(2) TREATMENT OF EMPLOYEE CONTRIBUTIONS
UNDER
DEFINED
CONTRIBUTION
PLANS.—For pur-
poses of this section, employee contributions (and any
income allocable thereto) under a defined contribution
plan may be treated as a separate contract.’’
(b) EFFECTIVE DATE.—The amendment made by this
section shall apply in cases where the annuity starting date
is after the 90th day after the date of the enactment of this
Act.
SEC. 1404. REQUIRED DISTRIBUTIONS.
(a) IN GENERAL.—Section 401(a)(9)(C) (defining re-
quired beginning date) is amended to read as follows:
‘‘(C) REQUIRED
BEGINNING
DATE.—For
purposes of this paragraph—
‘‘(i) IN GENERAL.—The term ‘required
beginning date’ means April 1 of the cal-
endar year following the later of—
‘‘(I) the calendar year in which
the employee attains age 701⁄2, or
‘‘(II) the calendar year in which
the employee retires.
‘‘(ii) EXCEPTION.—Subclause (II) of
clause (i) shall not apply—
‘‘(I) except as provided in section
409(d), in the case of an employee who
is a 5-percent owner (as defined in sec-
tion 416) with respect to the plan year
ending in the calendar year in which
the employee attains age 701⁄2, or
‘‘(II) for purposes of section 408
(a)(6) or (b)(3).
‘‘(iii) ACTUARIAL
ADJUSTMENT.—In
the case of an employee to whom clause
(i)(II) applies who retires in a calendar
year after the calendar year in which the
employee attains age 701⁄2, the employee’s
accrued benefit shall be actuarially in-
creased to take into account the period after
age 701⁄2 in which the employee was not re-
ceiving any benefits under the plan.
‘‘(iv) EXCEPTION FOR GOVERNMENTAL
AND CHURCH PLANS.—Clauses (ii) and (iii)
shall not apply in the case of a govern-
mental plan or church plan. For purposes
of this clause, the term ‘church plan’ means
a plan maintained by a church for church
employees, and the term ‘church’ means any
church 
(as 
defined 
in 
section
3121(w)(3)(A)) or qualified church-con-
trolled organization (as defined in section
3121(w)(3)(B)).’’
(b) EFFECTIVE DATE.—The amendment made by sub-
section (a) shall apply to years beginning after December
31, 1996.
CHAPTER 2—INCREASED ACCESS TO
PENSION PLANS
Subchapter A—Simple Savings Plans
SEC. 1421. ESTABLISHMENT OF SAVINGS INCENTIVE MATCH
PLANS FOR EMPLOYEES OF SMALL EMPLOY-
ERS.
(a) IN GENERAL.—Section 408 (relating to individual
retirement accounts) is amended by redesignating sub-
section (p) as subsection (q) and by inserting after sub-
section (o) the following new subsection:
‘‘(p) SIMPLE RETIREMENT ACCOUNTS.—
‘‘(1) IN GENERAL.—For purposes of this title, the
term ‘simple retirement account’ means an individual
retirement plan (as defined in section 7701(a)(37))—
‘‘(A) with respect to which the requirements
of paragraphs (3), (4), and (5) are met; and
‘‘(B) with respect to which the only con-
tributions allowed are contributions under a
qualified salary reduction arrangement.
‘‘(2) QUALIFIED SALARY REDUCTION ARRANGE-
MENT.—
‘‘(A) IN
GENERAL.—For purposes of this
subsection, the term ‘qualified salary reduction
arrangement’ means a written arrangement of
an eligible employer under which—
‘‘(i) an employee eligible to participate
in the arrangement may elect to have the
employer make payments—
‘‘(I) as elective employer contribu-
tions to a simple retirement account on
behalf of the employee, or
‘‘(II) to the employee directly in
cash,
‘‘(ii) the amount which an employee
may elect under clause (i) for any year is
required to be expressed as a percentage of
compensation and may not exceed a total of
$6,000 for any year,
‘‘(iii) the employer is required to make
a matching contribution to the simple re-
tirement account for any year in an
amount equal to so much of the amount the
employee elects under clause (i)(I) as does
not exceed the applicable percentage of com-
pensation for the year, and
‘‘(iv) no contributions may be made
other than contributions described in clause
(i) or (iii).
‘‘(B) EMPLOYER
MAY
ELECT
2-PERCENT
NONELECTIVE
CONTRIBUTION.—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 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 30-day period for such year under
paragraph (5)(C).
‘‘(C) DEFINITIONS.—For purposes of this
subsection—
‘‘(i) ELIGIBLE EMPLOYER.—The term
‘eligible employer’ means an employer who
employs 100 or fewer employees on any day
during the year.
‘‘(ii) APPLICABLE PERCENTAGE.—
‘‘(I) IN GENERAL.—The term ‘ap-
plicable percentage’ means 3 percent.
‘‘(II) ELECTION OF LOWER PER-
CENTAGE.—An employer may elect to
apply a lower percentage (not less than