An Act to encourage the establishment of voluntary pension plans by self-employed individuals
PL 87-792 (H.R.10), enacted 10/10/1962

76 STAT.] 
PUBLIC LAW 87-792-OCT. 10, 1962 
809 
accident and health insurance contracts" and inserting in lieu thereof 
"accident and health insurance and group life insurance contracts". 
(c) The amendments made by this section shall apply to taxable 
years beginning after December 31,1962. 
Approved October 10, 1962. 
Effective date. 
Public Law 87-791 
AN ACT 
To authorize reimbursement to appropriations of the United States Secret Service 
of moneys expended for the purchase of counterfeits. 
Be it enacted hy the Se-Tiate and House of Representatives 
of the 
United States of America in Congress assembled^ That title 18, United 
States Code, section 3056, as amended, is hereby further amended by 
adding at the end thereof the following -sentence: "Moneys expended 
from Secret Service appropriations for the purchase of counterfeits 
and subsequently recovered shall be reimbursed to the appropriation 
current at the time of deposit." 
Approved October 10, 1962. 
October 10, 1962 
[H. R.12451] 
U.S. Secret 
Service. 
65 Stat. 122. 
Public Law 87-792 
A N A C T 
October 10, 1962 
To encourage the establishment of voluntary pension plans by self-employed 
[H. R. lo] 
individuals. 
Be it enacted hy the Senate and House of Rej)resentatives 
of the 
United States of America in Congress assembled, That this Act may 
seif-Empioyed 
be cited as the "Self-Employed Individuals Tax Retirement Act of individuals Tax 
1 Qfi9" 
Retirement Act of 
SEC. 2. QUALIFICATION OF PLANS. 
Section 401 of the Internal Revenue Code of 1954 (relating to quali-
fied pension, profit-sharing, and stock bonus plans) is amended— 
(1) by adding at the end of paragraph (5) of subsection (a) 
the following new sentence: "For purposes of this paragraph and 
paragraph (10), the total compensation of an individual who is 
an employee within the meaning of subsection (c) (1) means such 
individual's earned income (as defined in subsection (c) (2)), and 
the basic or regular rate of compensation of such an individual 
shall be determined, under regulations prescribed by the Secre-
tary or his delegate, with respect to that portion of his earned 
income which bears the same ratio to his earned income as the 
basic or regular compensation of the employees under the plan 
bears to the total compensation of such employees."; 
(2) by adding at the end of subsection (a*) the following new 
paragraphs: 
"(7) A trust shall not constitute a qualified trust under this 
section unless the plan of which such trust is a part provides that, 
upon its termination or upon complete discontinuance of con-
tributions under the plan, the rights of all employees to benefits 
1962. 
68A Stat. 135. 
26 u s e 401. 
Post, 
p. 811. 
Post, 
p. 811. 
aiO 
PUBLIC L
A
W 87-792-OCT. 10, 1962 
[76 STAT. 
accrued to the date of such termination or discontinuance, to the 
extent then funded, or the amounts credited to the employees' 
• -
^
^ - 
accounts are nonforfeitable. 
This paragraph shall not apply to 
benefits or contributions which, under provisions of the plan 
adopted pursuant to regulations prescribed by the Secretary or 
his delegate to preclude the discrimination prohibited by para-
graph (4), may not be used for designated employees in the event 
of early termination of the plan. 
" (8) A trust forming part of a pension plan shall not constitute 
a qualified trust under this section unless the plan provides that 
forfeitures must not be applied to increase the benefits any 
employee would otherwise receive under the plan. 
"(9) In the case of a plan which provides contributions or 
benefits for employees some or all of whom are employees within 
the meaning of subsection (c) (1), a trust forming part of such 
plan shall not constitute a qualified trust under this section unless, 
under the plan, the entire interest of each employee— 
"(A) either will be distributed to him not later than his 
taxable year in which he attains the age of 70i/^ years, or, in 
the case of an employee other than an owner-employee (as 
Post. p.812. 
defined in subsection (c) (3)), in which he retires, whichever 
is the later, or 
"(B) will be distributed, commencing not later than such 
taxable year, (i) in accordance with regulations prescribed 
by the Secretary or his delegate, over the life of such 
employee or over the lives of such employee and his spouse, 
or (ii) in accordance with such regulations, over a period 
not extending beyond the life expectancy of such employee 
or the life expectancy of such employee and his spouse. 
A trust shall not be disqualified under this paragraph by reason of 
distributions under a designation, prior to the date of the enact-
ment of this paragraph, by any employee under the plan of which 
such trust is a part, of a method of distribution which does riot 
meet the terms of the preceding sentence. 
"(10) In the case of a plan which provides contributions or 
benefits for employees some or all of whom are owner-employees 
Post. p. 812. 
(as defined in subsection (c) (3)) — 
"(A) paragraph (3) and the first and seconds sentences of 
26 use 401. 
paragraph (5) shall not apply, but— 
"(i) such plan shall not be considered discriminatory 
withinthemeaningof paragraph (4) merely because the 
contributions or benefits of or on behalf of employees 
under the plan bear a uniform relationship to the total 
compensation, or the basic or regular rate of compensa-
tion, of such employees, and 
"(ii) such plan shall not be considered discriminatory 
within the meaning of paragraph (4) solely because 
under the plan contributions described in subsection (e) 
Post, p. 818. 
(3) (A) which are'in excess of the amounts which may 
26 use 404. 
be deducted under section 404 '(determined without 
Post, p. 820. 
regard to section 404 (a) (10)) for the taxable year may be 
made on behalf of any owner-employee; and 
76 STAT.] 
PUBLIC LAW 87-792-OCT. 10, 1962 
811 
"(B) a trust forming a part of such plan shall constitute a 
I 
qualified trust under this section only if the requirements 
in subsection (d) are also met."j and 
^o«'. p- 812. 
(3) by redesignating subsection (c) as subsection (h) and 
inserting after subsection (b) the following new subsections: 
"(c) 
DEFINITIONS AND RULES RELATING TO SELF-EMPLOYED INDIVID-
UALS A
N
D OWNER-EMPLOYEES,—For purposes of this section— 
"(1) EMPLOYEE.—The term 'employee' includes, for any tax-
able year, an individual who has earned income (as defined in 
paragraph (2)) for the taxable year. To the extent provided in 
regulations prescribed by the Secretary or his delegate, such term 
also includes, for any taxable year— 
"(A) an individual who would be an employee within the 
meaning of the preceding sentence but for the fact that the 
if^ . 
trade or business carried on by such individual did not have 
net profits for the taxable year, and 
•H)')!' 
"(B) an individual who has been an employee within the 
meaning of the preceding sentence for any prior taxable year. 
^ 
, "(2) 
EARNED INCOME.— 
j^^-, 
"(A) I N GENERAL.—The term 'earned income' means the 
net earnings from self-employment (as defined in section 
r» 
1402(a)) to the extent that such net earnings constitute 
26 use 1402. 
earned income (as defined in section 911(b) but determined 
26 use 911. 
with the application of subparagraph (B)), but such net 
earnings shall be determined— 
~j, 
"(i) without regard to paragraphs (4) and (5) of 
•|,' 
section 1402(c), 
^,P .,, J 
" (ii) in the case of any individual who is treated as an 
' "^ ' 
employee under sections 3121(d)(3)(A), (C), or (D), 
26 use 3121. 
^^I's 
without regard to paragraph (2) of section 1402(c), and 
i r 
"(iii) without regard to items which are not included 
. 
in gross income for purposes of this chapter, and the 
deductions properly allocable to or chargeable against 
such items. 
For purposes of this subparagraph, sections 911(b) and 
.,-, 
1402, as in effect for a taxable year ending on December 31, 
1962, and subparagraph (B), as in effect for a taxable year 
^, 
beginning on January 1, 1963, shall be treated as having 
been in effect for all taxable years ending before such date. 
"(B) 
EARNED INCOME WHEN BOTH PERSONAL SERVICES AND 
CAPITAL ARE MATERIAL INCOME-PRODUCING FACTORS.—In apply- 
.,,•. • ,-
,j ^^. 
ing section 911(b) for purposes of subparagraph (A), in the 
26 use 911. 
case of an individual who is an employee within the meaning 
,., 
of paragraph (1) and who is engaged in a trade or business 
,
^ 
in which both personal services and capital are material 
j'^ 
income-producing factors and with respect to which the indi- 
^.^ - » x 
. 
vidual actually renders personal services on a full-time, or 
substantially full-time, basis, so much of his share of the net 
profits of such trade or business as does not exceed $2,500 
r. 
shall be considered as earned income. In the case of any such 
I 
individual who is engaged in more than one trade or business 
t 
with respect to which he actually renders substantial per-
': 
sonal services, if with respect to all such trades or businesses 
812 
PUBLIC LAW 87-792-OCT. 10, 1962 
[76 STAT. 
he actually renders personal services on a full-time, or sub-
stantially full-time, basis, there shall be considered as earned 
income with respect to the trades or businesses in which both 
personal services and capital are material income-producing 
factors— 
"(i) so much of his share of the net profits of such 
trades or businesses as does not exceed $2,500, reduced by 
"(ii) his share of the net profits of any trade or busi-
ness in which only personal services is a material income-
producing factor. 
The preceding sentences shall not be construed to reduce the 
share of net profits of any trade or business which under the 
second sentence of section 911(b) would be considered as 
earned income of any such individual. 
"(3) OWNER-EMPLOYEE.—The term 'owner-employee' means an 
employee who— 
" (A) owns the entire interest in an unincorporated trade or 
business, or 
"(B) in the case of a partnership, is a partner who owns 
more than 10 percent of either the capital interest or the 
profits interest in such partnership. 
To the extent provided in regulations prescribed by the Secretary 
or his delegate, such term also means an individual who has been 
an owner-employee within the meaning of the preceding sentence. 
" (4) EMPLOYER.—An individual who owns the entire interest in 
an unincorporated trade or business shall be treated as his own 
employer. 
A partnership shall be treated as the employer of 
each partner who is an employee within the meaning of paragraph 
(1). 
"(5) 
CONTRIBUTIONS ON BEHALF OF OWNER-EMPLOYEES.—The 
term 'contribution on behalf of an owner-employee' includes, ex-
cept as the context otherwise requires, a contribution under a 
plan— 
" (A) by the employer for an owner-employee, and 
"(B) by an owner-employee as an employee. 
"(d) 
ADDITIONAL REQUIREMENTS FOR QUALIFICATION OF TRUSTS AND 
PLANS BENEFITING OWNER-EMPLOYEES.—A trust forming part of a 
pension or profit-sharing plan which provides contributions or benefits 
for employees some or all of whom are owner-employees shall consti-
tute a qualified trust under this section only if, in addition to meeting 
26 use 401. 
the requirements of subsection (a), the following requirements of this 
subsection are met by the trust and by the plan of which such trust is 
a part: 
"(1) In the case of a trust which is created on or after the date 
of the enactment of this subsection, or which was created before 
26 use 501. 
such date but is not exempt from tax under section 501(a) as an 
organization described in subsection (a) on the day before such 
date, the trustee is a bank, but a person (including the employer) 
other than a bank may be granted, under the trust instrument, 
the power to control the investment of the trust funds either by 
directing investments (including reinvestments, disposals, and 
exchanges) or by disapproving proposed investments (including 
76 STAT.] 
PUBLIC L
A
W 87-792-OCT. 10, 1962 
813 
reinvestments, disposals, and exchanges). This paragraph shall 
not apply to a trust created or organized outside the United States 
before the date of the enactment of this subsection if, under sec- 
26 use 402. 
tion 402(c), it is treated as exempt from tax under section 501(a) 
on the day before such date; or, to the extent provided under 
regulations prescribed by the Secretary or his delegate, to a trust 
which uses annuity, endowment, or life insurance contracts of a 
life insurance company exclusively to fund the benefits prescribed 
by the trust, if the life insurance company supplies annually such 
information about trust transactions affecting owner-employees 
as the Secretary or his delegate shall by forms or regulations pre-
scribe. For purposes of this paragraph, the term 'bank' means 
a bank as defined in section 581, a corporation which under the 
26 use 581. 
laws of the State of its incorporation is subject to supervision 
and examination by the commissioner of banking or other officer 
of such State in charge of the administration of the banking laws 
of such State, and, in the case of a trust created or organized out-
side the United States, a bank or trust company, wherever incor-
porated, exercising fiduciary powers and subject to supervision 
and examination by governmental authority. 
"(2) Under the plan— 
"(A) the employees' rights to or derived from the con-
tributions under the plan are nonforfeitable at the time the 
contributions are paid to or under the plan; and 
"(B) in the case of a profit-sharing plan, there is a definite 
formula for determining the contributions to be made by the 
employer on behalf of employees (other than owner-em-
ployees). 
Subparagraph (A) shall not apply to contributions which, under 
provisions of the plan adopted pursuant to regulations pre-
scribed by the Secretary or his delegate to preclude the discrimma-
tion prohibited by subsection (a) (4), may not be used to provide 
26 use 401. 
benefits for designated employees in the event of early termination 
of the plan. 
" (3) The plan benefits each employee having a period of employ-
ment of 3 years or more. For purposes of the preceding sentence, 
the term 'employee' does not include any employee whose custom-
ary employment is for not more than 20 hours in any one week 
or is for not more than 5 months in any calendar year. 
"(4) LTnder the plan— 
"(A) contributions or benefits are not provided for any 
owner-employee unless such owner-employee has consented to 
being included under the plan; and 
"(B) no benefits may be paid to any owner-employee, 
except in the case of his becoming disabled (within the 
meaning of section 213(g) (3)), prior to his attaining the age 
72 stat. leu. 
of 591/2 years. 
26 use 213. 
"(5) The plan does not permit— 
" (A) contributions to be made by the employer on behalf of 
any owner-employee in excess of the amounts which may be 
814 
PUBLIC LAW 87-792-OCT. 10, 1962 
[76 STAT. 
68 A Stat. 138; 
Post, 
p.'820. 
26 u s e 404. 
Post, 
p. 823. 
Post, 
p 
Poat, 
p 
.815. 
.817. 
26 u s e 401. 
26 use 
1403. 
26 use 
3126.1 
42 use 
seg. 
1401-
310 IT 
401 et 
26 u s e 1402. 
26 u s e 3111. 
Ante, 
p. 810. 
Post, 
p. 817. 
deducted under section 404 (determined without regard to 
section 404(a) (10)) for the taxable year; 
"(B) in the case of a plan which provides contributions or 
benefits only for owner-employees, contributions to be made 
on behalf of any owner-employee in excess of the amounts 
which may be deducted under section 404 (determined with-
out regard to section 404(a) (10)) for the taxable year; and 
"^(C) if a distribution under the plan is made to any em-
ployee and if any portion of such distribution is an amount 
described in section 72(m)(5)(A)(i), contributions to be 
made on behalf of such employee for the 5 taxable years 
succeeding the taxable year in which such distribution is 
made. 
Subparagraphs (A) and (B) shall not apply to any contribution 
which is not considered to be an excess contribution (as defined in 
subsection (e) (1)) by reason of the application of subsection (e) 
"(6) Except as provided in this paragraph, the plan meets the 
requirements of subsection (a)(4) without taking into account 
for any purpose contributions or benefits under chapter 2 (relating 
to tax on self-employment income), chapter 21 (relating to Fed-
eral Insurance Contributions Act), title II of the Social Security 
Act, as amended, or any other Federal or State law. If— 
"(A) of the contributions deductible under section 404 
(determined without regard to section 404(a) (10)), not more 
than one-third is deductible by reason of contributions by the 
employer on behalf of owner-employees, and 
"(B) taxes paid by the owner-employees under chapter 2 
(relating to tax on self-employment income), and the taxes 
which would be payable under such chapter 2 by the owner-
employees but for paragraphs (4) and (5) of section 1402(c), 
are taken into account as contributions by the employer on 
behalf of such owner-employees, 
then taxes paid under section 3111 (relating to tax on employers) 
with respect to an employee may, for purposes of subsection (a) 
(4), be taken into account as contributions by the employer for 
such employee under the plan. 
"(7) Under the plan, if an owner-employee dies before his en-
tire interest has been distributed to him, or if distribution has been 
commenced in accordance with subsection (a)(9)(B) to his sur-
viving spouse and such surviving spouse dies before his entire 
interest has been distributed to such surviving spouse, his entire 
interest (or the remaining part of such interest if distribution 
thereof has commenced) will, within 5 years after his death (or 
the death of his surviving spouse), be distributed, or applied to 
the purchase of an inmfediate annuity for his beneficiary or bene-
ficiaries 
(or the beneficiary or beneficiaries of his surviving 
spouse) which will be payable for the life of such beneficiary or 
beneficiaries (or for a term certain not extending beyond the life 
expectancy of such beneficiary or beneficiaries) and which will be 
immediately distributed to such beneficiary or beneficiaries. The 
preceding sentence shall not apply if distribution of the interest 
of an owner-employee has commenced and such distribution is 
for a term certain over a period permitted under subsection 
(a)(9)(B)(ii). 
"(8) Under the plan— 
"(A) any contribution which is an excess contribution, 
together with the income attributable to such excess contri-
bution, is (unless subsection (e)(2)(E) applies) to be repaid 
76 STAT.] 
PUBLIC LAW 8 7 - 7 9 2 - O C T 
10, 1962 
815 
to the owner-employee on whose behalf such excess contribu-
tion is made; 
• 
"(B) if for any taxable year the plan does not, by reason 
of subsection (e) (2) (A), meet (for purposes of section 404) 
Post, p.sie. 
the requirements of this subsection with respect to an owner-
employee, the income for the taxable year attributable to the 
interest of such owner-employee under the plan is to be paid 
to such owner-employee; and 
"(C) the entire interest of an owner-employee is to be 
repaid to him when required by the provisions of subsection 
(e)(2)(E). 
Post. p. 817. 
"(9) (A) If the plan provides contributions or benefits for an 
V owner-employee who controls, or for two or more owner-em-
^ ployees who together control, the trade or business with respect 
to which the plan is established, and who also control as an 
owner-employee or as owner-employees one or more other trades 
or businesses, such plan and the plans established with respect to 
such other trades or businesses, when coalesced, constitute a single 
plan which meets the requirements of subsection (a) (including 
f paragraph (10) thereof) and of this subsection with respect to 
68A stat. i34; 
; the employees of all such trades or businesses (including the trade '*'l'f'„S-®i?-, 
i
'
*
i 
I
'
l
l 
1 
• 
1 1 
i'i» 
^" u s e 4 0 1 . 
or busmess with respect to which the plan intended to qualify 
^ under this section is established). 
; 
"(B) For purposes of subparagraph (A), an owner-employee, 
• , or two or more owner-employees, shall be considered to control a 
trade or business if such owner-employee, or such two or more 
owner-employees together— 
"(i) own the entire interest in an unincorporated trade or 
business, or 
" (ii) in the case of a partnership, own more than 50 percent 
^ .., 
.- 
of either the capital interest or the profits interest m such 
partnership. 
For purposes of the preceding sentence, an owner-employee, or 
two or more owner-employees, shall be treated as owning any 
interest in a partnership which is owned, directly or indirectly, 
by a partnership which such owner-employee, or such two or 
more owner-employees, are considered to control within the mean-
, ing of the preceding sentence. 
"(10) The plan does riot provide contributions or benefits for 
any owner-employee who controls (within the meaning of para-
graph (9)(B)), or for two or more owner-employees who 
together control, as an owner-employee or as owner-employees, 
any other trade or business, unless the employees of each trade or 
business which such owner-employee or such owner-employees 
control are included under a plan which meets the requirements 
of subsection (a) (including paragraph (10) thereof) and of this 
subsection, and provides contributions and benefits for employees 
which are not less favorable than contributions and benefits pro-
vided for owner-employees under the plan. 
"(11) Under the plan, contributions on behalf of any owner-
employee may be made only with respect to the earned income 
of such owner-employee which is derived from the trade or busi-
ness with respect to which such plan is established. 
"(e) 
EXCESS CONTRIBUTIONS ON BEHALF OF OWNER-EMPLOYEES.— 
"(1) EXCESS CONTRIBUTION DEFINED.—For purposes of this sec-
tion, the term 'excess contribution' means, except as provided in 
paragraph (3)— 
"(A) if, in the taxable year, contributions are made under 
the plan only on behalf of owner-employees, the amount of 
816 
PUBLIC LAW 87-792-OCT. 10, 1%2 
[76 STAT. 
any contribution made on behalf of any owner-employee 
which (without regard to this subsection) is not deductible 
68A Stat. 138; 
Under section 404 (determined without regard to section 404 
''°26''usc"o4. 
(^) (10)) foi* the taxable year; or 
"(B) if, in the taxable year, contributions are made under 
the plan on behalf of employees other than 
owner-
employees— 
"(i) the amount of any contribution made by the em-
ployer on behalf of any owner-employee which (without 
regard to this subsection) is not deductible under section 
404 (determined without regard to section 404(a) (10)) 
for the taxable year; 
"(ii) the amount of any contribution made by any 
owner-employee (as an employee) at a rate which exceeds 
the rate of contributions permitted to be made by em-
ployees other than owner-employees; 
"(iii) the amount of any contribution made by any 
owner-employee (as an einployee) which exceeds the 
lesser of $2,500 or 10 percent of the earned income for 
such taxable year derived by such owner-employee from 
the trade or business with respect to which the plan is 
established; and 
"(iv) in the case of any individual on whose behalf 
contributions are made under more than one plan as an 
owner-employee, the amount of any contribution made 
by such owner-employee (as an employee) under all such 
plans which exceeds $2,500; and 
"(C) the amount of any contribution made on behalf of an 
owner-employee in any taxable year for which, under para-
intra. 
graph (2) (A) or (E), the plan does not (for purposes of 
section 404) meet the requirements of subsection (d) with 
respect to such owner-employee. 
For purposes of this subsection, the amount of any contribution 
v.hich is allocable (determined in accordance with regulations pre-
scribed by the Secretary or his delegate) to the purchase of life, 
accident, health, or other insurance shall not be taken into account. 
" ( 2 ) 
E F F E C T OF EXCESS CONTRIBUTION.— 
"(A) I N GENERAL.—If an excess contribution (other than 
an excess contribution to which subparagraph (E) applies) is 
made on behalf of an owner-employee in any taxable year, 
the plan with respect to which such excess contribution is 
made shall, except as provided in subparagraphs (C) and 
(D), be considered, for purposes of section 404, as not meeting 
the requirements of subsection (d) with respect to such 
owner-employee for the taxable year and for all succeeding 
taxable years. 
"(B) 
INCLUSION OF AMOUNTS IN GROSS INCOME OF OWNER-
EMPLOYEES.—For any taxable year for which any plan does 
not meet the requirements of subsection (d) with respect to an 
owner-employee by reason of subparagraph (A), the gross 
income of such owner-employee shall, for purposes of this 
chapter, include the amount of net income for such taxable 
year attributable to the interest of such owner-employee under 
such plan. 
"(C) 
REPAYMENT WITHIN PRESCRIBED PERIOD.—Subpara-
graph (A) shall not apply to an excess contribution with 
respect to any taxable year, if, on or before the close of the 
6-month period beginning on the da^ on which the Secretary 
or his delegate sends notice (by certified or registered mail) 
76 STAT.] 
PUBLIC LAW 87-792-OCT. 10, 1%2 
817 
to the pei'son to whom such excess contribution was paid of 
the amount of such excess contribution, the amount of such 
excess contribution, and the net income attributable thereto, iS 
repaid to the owner-employee on whose behalf such excess 
contribution was made. 
If the excess contribution is an 
excess contribution as defined in paragraph (1)(A) or (B^ 
(i), or is an excess contribution as defined in paragraph (l) 
(C) with respect to which a deduction has been claimed under 
section 404, the notice required by the preceding sentence shall 
26 use 404. 
not be mailed prior to the time that the amount of the tax 
under this chapter of such owner-employee for the taxable 
year in which such excess contribution was made has been 
finally determined. 
"(D) REPAYMENT AFTER PRESCRIBED PERIOD.—If an excess 
contribution, together with the net income attributable 
thereto, is not repaid within the 6-month period referred to 
in subparagraph (C), subparagraph (A) shall not apply to 
an excess contribution with respect to any taxable year begin-
ning with the taxable year in which the person to whom such 
excess contribution was paid repays the amount of such excess 
contribution to the owner-employee on whose behalf such 
excess contribution was made, and pays to such owner-
employee the amount of net income attributable to the interest 
of such owner-employee which, under subparagraph (B), 
has been included in the gross income of such owner-employee 
for any prior taxable year. 
"(E) 
SPECIAL RULE IF EXCESS CONTRIBUTION WAS WILLFULLY' 
MADE.—If an excess contribution made on behalf of an owner-
employee is determined to have been willfully made, then— 
"(i) subparagraphs (A), (B), (C),and (D) shall not 
apply with respect to such excess contribution; 
"(li) there shall be distributed to the owner-employee 
on whose behalf such excess contribution was willfully 
made his entire interest in all plans with respect to which 
he is an owner-employee; and 
"(iii) no plan shall, for purposes of section 404, be 
considered as meeting the requirements of subsection (d) 
with respect to such owner-employee for the taxable year 
in which it is determined that such excess contribution 
was willfully made and for the 5 taxable years following 
such taxable year. 
"(F) STATUTE OF LIMITATIONS.—In any case in which 
subparagraph ^A) applies, the period for assessing any de-
ficiency arising W reason of— 
"(i) the disallowance of any deduction under section 
404 on account of a plan not meeting the requirements of 
subsection (d) with respect to the owner-employee on 
whose behalf an excess contribution was made, or 
"(ii) the inclusion, under subparagraph (B), in gross 
income of such owner-employee of income attributable 
to the interest of such owner-employee under a plan, 
for the taxable year in which such excess contribution was 
made or for any succeeding taxable year shall not expire 
prior to one year after the close of the 6-month period 
referred to in subparagraph (C). 
"(3) 
CONTRIBUTIONS FOR PREMIUMS ON ANNUITY, ETC., CON-
TRACTS.—A contribution by the employer on behalf of an owner-
employee shall not be considered to be an excess contribution 
within the meaning of paragraph (1), if— 
Ante. p. sis. 
78135 0-63—55 
818 
PUBUC L
A
W 87-792-OCT. 10, 1962 
[76 STAT. 
" (A) under the plan such contribution is required to be 
applied (directly or through a trustee) to pay premiums or 
other consideration for one or more annuity, endowment, or 
life insurance contracts on the life of such owner-employee 
issued under the plan, 
"(B) the amount of such contribution exceeds the amount 
68A Stat. 138; 
deductible under section 404 (determined without regard to 
^*26''uscf404 
section 404 (a) (10)) with respect to contributions made by the 
employer on behalf of such owner-employee under the plan, 
and 
' 
"(C) the amount of such contribution does not exceed the 
average of the amounts which were deductible under section 
404 (determined without regard to section 404(a) (10)) with 
respect to contributions made by the employer on behalf of 
such owner-employee under the plan (or which would have 
been deductible under such section if such section had been 
in effect) for the first 3 taxable years (i) preceding the year 
in which the last such annuity, endowment^ or life insurance 
contract was issued under the plan and (li) in which such 
owner-employee derived earned income from the trade or 
business with respect to which the plan is established, or for 
so many of such taxable years as such owner-employee was 
engaged in such trade or business and derived earned income 
therefrom. 
In the case of any individual on whose behalf contributions 
described in subparagraph (A) are made under more than one 
plan as an owner-employee during any taxable year, the pre-
ceding sisntence shall not apply if the amount of such contribu-
tions under all such plans for such taxable year exceeds $2,500. 
Any contribution which is not considered to be an excess con-
tribution by reason of the application of this paragraph shall, 
for purposes of subparagraphs (B) (ii), (iii),and (iv) of p?ira-
Ante, p. 816. 
graph (1), be taken into account as a contribution made by such 
owner-employee as an employee to the extent that the amount 
of such contribution is not deductible under section 404 (deter-
mined without regard to section 404(|a) (10)) for the taxable 
year, but only for the purpose of applying such subparagraphs to 
other contributions made by such owner-employee as an employee. 
'(f) CERTAIN CUSTODIAL ACCOUNTS.— 
"(1) TREATMENT AS QUALIFIED TRUST.—For purposes of this 
title, a custodial account shall be treated as a qualified trust under 
this section, if— 
" (A) such custodial account would, except for the fact that 
it is not a trust, constitute a qualified trust under this section; 
"(B) the custodian is a bank (as defined in subsection 
Ante, p. 812. 
(d) ( 1 ) ) ; 
"(C) the investment of the funds in such account (includ-
ing all earnings) is to be made— 
"(i) solely in regulated investment company stock 
with respect to which an employee is the beneficial owner, 
or 
"(ii) solely in annuity, endowment, or life insurance 
contracts issued by an insurance company; 
"(D) the shareholder of record of any such stock described 
in subparagraph (C) (i) is the custodian or its nominee; and 
"(E) the contracts described in subparagraph (C) (ii) are 
held by the custodian until distributed under the plan. 
For purposes of this title, in the case of a custodial account treated 
as a qualified trust under this section by reason of the preceding 
76 STAT.] 
PUBLIC LAW 87-792-OCT. 10,1962 
819 
sentence, the custodian of such account shall be treated as the 
trustee thereof. 
"(2) DEFINITION.—For purposes of paragraph (1), the term 
'regulated investment company' means a domestic corporation 
which— 
" (A) is a regulated investment company within the mean-
ing of section 851(a), and 
26 use ssi. 
"(B) issues only redeemable stock. 
"(g) ANNUITY DEFINED.—For purposes of this section and sections 
402, 403, and 404, the term 'annuity' includes a face-amount certificate, 
26 use 402.403, 
as defined in section 2(a) (15) of the Investment Company Act of 1940 '*°'*-
(15 U.S.C, sec. 80a-2) ; but does not include any contract or certificate 
54 stat. 790. 
issued after December 31, 1962, which is transferable, if any person 
other than the trustee of a trust described in section 401(a) which is 
exempt from tax under section 501(a) is the owner of such con- 
26 use 401,501. 
tract or certificate." 
SEC. 3. DEDUCTIBILITY OF CONTRIBUTIONS TO PLANS. 
(a) INCLUSION OF SFXF-EMPLOYED INDIVIDUALS.—Section 404(a) of 
the Internal Kevenue Code of 1954 (relating to the deductibility of 
contributions to pension, annuity, profit-sharing, or stock bonus plans 
or plans of deferred compensation) is amended— 
(1) by striking out in paragraph (2) "and (6)," and inserting 
in lieu thereof "(6), (7), and (8), and, if applicable, the require-
ments of section 401(a) (9) and (10) and of section 401(d) 
Ante. pp. sio-
(other than paragraph (1)),"; and 
• 
^^2. 
(2) by adding after paragraph 
(7) the following new 
paragraphs: 
"(8) SELF-EMPLOYED INDIVIDUALS.—In the case of a plan in-
cluded in paragraph (1), (2), or (3) which provides contributions 
or benefits for employees some or all of whom are employees 
within the meaning of section 401(c)(1), for purposes of this 
section— 
"(A) the term 'employee' includes an individual who is an 
employee within the meaning of section 401(c) (1), and the 
employer of such individual is the person treated as his 
employer under section 401(c) (4); 
"(B) the term 'earned income' has the meaning assigned to 
it by section 401(c) (2); 
"(C) the contributions to such plan on behalf of an individ-
ual who is an employee within the meaning of section 401 
(c) (1) shall be considered to satisfy the conditions of section 
162 or 212 to the extent that such contributions do not exceed 
26 use 162,212. 
the earned income of such individual derived from the trade 
or business with respect to which such plan is established, 
and to the extent that such contributions are not allocable 
(determined in accordance with regulations prescribed by the 
Secretary or his delegate) to the purchase of life, accident, 
health, or other insurance; and 
"(D) any reference to compensation shall, in the case of an 
individual who is an employee within the meaning of section 
401(c) (1), be considered to be a reference to the earned in-
come of such individual derived from the trade or business 
with respect to which the plan is established. 
"(9) 
PLANS BENEFITING SELF-EMPLOYED INDIVIDUALS.—In 
the 
case of a plan included in paragraph (1), (2), or (3) which pro-
vides contributions or benefits for employees some or all of whom 
are employees within the meaning of section 401(c)(1)— 
" (A) the limitations provided by paragraphs (1),(2),(3), 
and (7) on the amounts deductible for any taxable year shall 
820 
PUBLIC LAW 87-792-OCT. 10, 1962 
[76 STAT. 
be computed, with respect to contributions on behalf of em-
ployees (other than employees within the meaning of section 
Ante, p.811. 
401(c)(1)), as if such employees were the only employees 
for whom contributions and benefits are provided under the 
plan; 
"(B) the limitations provided by paragraphs (1),(2),(3), 
and (7) on the amounts deductible for any taxable year shall 
be computed, with respect to contributions on behalf of em-
ployees within the meaning of section 401 (c)(1)— 
"(i) as if such employees were the only employees for 
whom contributions and benefits are provided under the 
plan, and 
" (ii) without regard to paragraph (1) (D), the second 
and third sentences of paragraph (3), and the second sen-
tence of paragraph (7); and 
"(C) the amounts deductible under paragraphs (1), (2), 
(3), and (7), with respect to contributions on behalf of any 
employee within the meaning of section 401(c) (1), shall not 
Infra. 
exceed the applicable limitation provided in suDsection (e). 
"(10) 
SPECIAL LIMITATION ON AMOUNT ALLOWED AS DEDUCTION 
F
O
R SELF-EMPLOYED INDIVIDUALS.—Notwithstanding any other pro-
vision of this section, the amount allowable as a deduction under 
paragraphs (1), (2), (3), and (7) in any taxable year with respect 
to contributions made on behalf of an individual who is an em-
ployee within the meaning of section 401(c)(1) shall be an 
amount equal to one-half of the contributions made on behalf of 
such individual in such taxable year which are deductible under 
such paragraphs (determined with the application of paragraph 
(9) and of subsection (e) but without regard to this paragraph). 
26 use 401. 
For purposes of section 401, the amount which may be deducted, or 
the amount deductible, under this section with respect to contribu-
tions made on behalf of such individual shall be determined with-
out regard to the preceding sentence." 
(b) LIMITATIONS ON DEDUCTIBLE CONTRIBUTIONS ON BEHALF OF 
SELF-EMPLOYED INDIVIDUALS.—Section 404 of the Internal Revenue 
26 use 404. 
Code of 1954 (relating to the deductibility of contributions to pension, 
annuity, profit-sharing, or stock bonus plans or plans of deferred com-
pensation) is amended by adding after subsection (d) the following 
new subsections: 
"(e) 
SPECIAL LIMITATIONS F
O
R SELF-EMPLOYED INDIVIDUALS.— 
"(1) I N GENERAL.—In the case of a plan included in subsection 
(a) (1), (2), or (3), which provides contributions or benefits for 
employees some or all of whom are employees within the meaning 
of section 401 (c) (1), the amounts deductible under subsection (a) 
(determined without regard to paragraph (10) thereof) in any 
taxable year with respect to contributions on behalf of any 
employee within the meaning of section 401(c) (1) shall, subject 
to the provisions of paragraph (2), not exceed $2,500, or 10 
percent of the earned income derived by such employee from the 
trade or business with respect to which the plan is established, 
whichever is the lesser. 
"(2) 
CONTRIBUTIONS MADE UNDER MORE THAN ONE PLAN.— 
"(A) OVERALL LIMITATION.—In any taxable year in which 
amounts are deductible with respect to contributions under 
two or more plans on behalf of an individual who is an em-
ployee within the meaning of section 401(c) (1) with respect 
to such plans, the aggregate amount deductible for such tax-
able year under all such plans with respect to contributions 
on behalf of such employee (determined without regard to 
76 STAT.] 
PUBLIC LAW 87-792-OCT. 10, 1962 
821 
subsection (a) (10)) shall not exceed $2,500, or 10 percent of 
the earned income derived by such employee from the trades 
or businesses with respect to which the plans are established, 
whichever is the lesser. 
"(B) ALLOCATION or AMOUNTS DEDUCTIBLE.—^In any case 
in which the amounts deductible under subsection (a) (with 
the application of the limitations of this subsection) with 
respect to contributions made on behalf of an employee within 
the meaning of section 401(c) (1) under two or more plans 
Ante, p. sii. 
are, by reason of subparagraph (A), less than the amounts 
deductible under such subsection determined without regard 
to such subparagraph, the amount deductible under subsec-
tion (a) (determined without regard to paragraph (10) 
thereof) with respect to such contributions under each such 
plan shall be determined in accordance with regulations pre-
scribed by the Secretary or his delegate. 
"(3) CONTRIBUTIONS ALLOCABLE TO INSURANCE PROTECTION.— 
For purposes of this subsection, contributions which are allocable 
(determined under regulations prescribed by the Secretary or his 
delegate) to the purchase of life, accident, health, or other insur-
ance shall not be taken into account. 
"(f) CERTAIN LOAN REPAYMENTS CONSIDERED AS CONTRIBUTIONS.— 
For purposes of this section, any amount paid, directly or indirectly, 
by an owner-employee (within the meaning of section 401(c) (3)) in 
repayment of any loan which under section 72(m) (4) (B) was treated 
as an amount received under a contract purchased by a trust describe;d 
in section 401(a) which is exempt from tax under section 501(a) or 
purchased as a part of a plan described in section 403(a) shall be 
treated as a contribution to which this section applies on behalf of 
such owner-employee to such trust or to or under such plan." 
SEC. 4. TAXABILITY OF DISTRIBUTIONS. 
(a) EMPLOYEES' ANNUITIES,—Section 72(d)(2) of the Internal 
Revenue Code of 1954 (relating to employees' annuities) is amended 
26 use 72. 
to read as follows: 
"(2) SPECIAL RULES FOR APPLICATION OF PARAGRAPH (i).—For 
purposes of paragraph (1)— 
" (A) if the employee died before any amount was received 
as an annuity under the contract, the words 'receivable by the 
employee' shall be read as 'receivable by a beneficiary of the 
employee'; and 
"(B) any contribution made with respect to the contract 
while the employee is an employee within the meaning of 
section 401(c) (1) which is not allowed as a deduction under 
section 404 shall be treated as consideration for the contract 
26 u§c 404. 
contributed by the employee." 
(b) SPECIAL RULES RELATING TO SELF-EMPLOYED INDIVIDUALS AND 
OWNER-EMPLOYEES.—Section 72 of the Internal Revenue Code of 
1954 (relating to annuities, etc.) is amended by redesignating sub- 
26 use 72. 
section (m) as subsection (o) and by inserting after subsection (1) the 
following new subsections: 
''(m) SPECIAL RULES APPLICABLE TO EMPLOYEE ANNUITIES AND DIS-
TRIBUTIONS UNDER EMPLOYEE PLANS.— 
"(1) 
CERTAIN AMOUNTS RECEIVED BEFORE ANNUITY STARTING 
DATE.—Any amounts received under an annuity, endowment, or 
life insurance contract before the annuity starting date which 
are not received as an annuity (within the meaning of subsection 
(e) (2)) shall be included in the recipient's gross income for the 
taxable year in which received to the extent that— 
An te, p. 
Post, p 
26 
501, use 
403. 
.812. 
.823. 
401, 
822 
PUBLIC L
A
W 87-792-OCT. 10, 1962 
[76 STAT. 
"(A) such amounts, plus all amounts theretofore received 
under the contract and includible in gross income under this 
paragraph, do not exceed 
"(B) the aggregate premiums or other consideration paid 
for the contract while the employee was an owner-employee 
26 use 404. 
which were allowed as deductions under section 404 for the 
taxable year and all prior taxable years. 
Any such amounts so received which are not includible in gross 
income under this paragraph shall be subject to the provisions of 
26 use 72. 
subsection (e). 
"(2) 
COMPUTATION OF CONSIDERATION PAID BY THE EMPLOYEE.—• 
In computing— 
"(A) the aggregate amount of premiums or other con-
sideration paid for the contract for purposes of subsection 
(c)(1)(A) (relating to the investment in the contract), 
"(B) the consideration for the contract contributed by the 
employee for purposes of subsection (d) (1) (relating to em-
ployee's contributions recoverable in 3 years), and 
"(C) the aggregate premiums or other consideration paid 
for purposes of subsection (e)(1)(B) (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 
Ante, p.811. 
employee withiu the meaning of sectiou 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 con-
sideration for the contract paid while the employee was an owner-
employee which is properly allocable (as determined under regu-
lations prescribed by the Secretary or his delegate) to the cost of 
life, accident, health, or other insurance. 
"(3) 
LIFE INSURANCE CONTRACTS.— 
"(A) This paragraph shall apply to any life insurance 
contract— 
"(i) purchased as a part of a plan described in section 
26 use 403. 
403(a), or 
26 use 401. 
"(ii) purchased by a trust described in section 401(a) 
26 use 501. 
which is exempt from tax under section 501 (a) if the pro-
ceeds of such contract are payable directly or indirectly 
to a participant in such trust or to a beneficiary of such 
participant. 
"(B) Any contribution to a plan described in subparagraph 
(A) (i) or a trust described in subparagraph (A) (ii) which 
is allowed as a deduction under section 404, and any income of 
a trust described in subparagraph (A) (ii), which is deter-
mined in accordance with regulations prescribed by the Sec-
retary or his delegate to have been applied to purchase the life 
insurance protection under a contract described in subpara-
graph (A), is includible in the gross income of the participant 
for the taxable year when so applied. 
"(C) In the case of the death of an individual insured 
under a contract described in subparagraph (A), an amount 
equal to the cash surrender value of the contract immediately 
before 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 payable by reason of the death of the insured 
over such cash surrender value shall not be includible in gross 
income under this section and shall be treated as provided in 
26 use 101. 
section 101. 
76 STAT.] 
PUBLIC LAW 8 7 - 7 9 2 - O C T . 10, 1962 
823 
"(•i) 
A M O U X T S CONSTRUCTIVELY RECEIVED. 
"(A) ASSIGNMENTS OR PLEDGES.—If during any taxable 
year an owner-employee assigns (or agrees to assign) or 
pledges (or agrees to pledge) any portion of his interest in a 
trust described in section 401(a) which is exempt from tax 
mider section 501(a) or any portion of the value of a contract 
purchased as part of a plan described in section 403(a), such 
26 use 4oi, 
portion shall be treated as having been received by such ^^*' '*°^-
owner-employee as a distribution from such trust or as an 
amount received under the contract. 
"(B) LOANS ON CONTRACTS.—If during any taxable year, 
an owner-employee receives, directly or indirectly, any 
amount from any insurance company as a loan under a con-
tract purchased by a trust described in section 401(a) which 
is exempt from tax under section 501(a) or purchased as 
part of a plan described in section 403 (a), and issued by such 
insurance company, such amount shall be treated as an amount 
received under the contract. 
"(5) 
PENALTIES APPLICABLE TO CERTAIN AMOUNTS RECEIVED BY 
OWNER-EMPLOYEES. 
"(A) This paragraph shall apply— 
" (i) to amounts (other than any amount received by an 
individual in his capacity as a policyholder of an annu-
ity, endowment, or life insurance contract which is in 
the nature of a dividend or similar distribution) which 
are received from a qualified trust described in section 
401(a) or under a plan described in section 403(a) and 
which are received by an individual, who is, or has been, 
an owner-employee, before such individual attains the 
age of 593^ years, for any reason other than the indi-
vidual's becoming disabled (within the meaning of sec-
tion 213 (g) (3)), but only to the extent that such amounts 
72 stat. le 14. 
are attributable to contributions paid on behalf of such 
^^ "®^ ^^^' 
individual (whether or not paid by him) while he was 
an owner-employee, 
"(ii) to amounts which are received from a qualified 
trust described in section 401(a) or under a plan de-
scribed in section 403(a) at any time by an individual 
who is, or has been, an owner-employee, or by the suc-
cessor of such individual, but only to the extent that such 
amounts are determined, under regulations prescribed by 
the Secretary or his delegate, to exceed the benefits pro-
vided for such individual under the plan formula, and 
"(iii) to amounts which are received, by an individual 
who is, or has been, an owner-employee, by reason of the 
distribution under the provisions of section 401(e)(2) 
(E) of his entire interest in all qualified trusts described 
Ante, p.sn. 
in section 401(a) and in all plans described in section 
403(a). 
"(B) (i) If the aggregate of the amounts to which this 
paragraph applies received by any person in his taxable year 
equals or exceeds $2,500, the increase in his tax for the taxable 
year in which such amounts are received and attributable to 
such amounts shall not be less than 110 percent of the aggre-
gate increase in taxes, for the taxable yeai: and the 4 immedi-
ately preceding taxable years, which would have resulted if 
such amounts had been included in such person's gross income 
ratably over such taxable years. 
824 
PUBLIC L
A
W 87-792-OCT. 10, 1962 
[76 STAT. 
26 use 404. 
" (ii) If deductions have been allowed under section 404 for 
contributions paid on behalf of the individual while he is an 
owner-employee for a number of prior taxable years less than 
4, clause (i) shall be applied by taking into account a number 
of taxable years immediately preceding the taxable year in 
which the amount was so received equal to such lesser number. 
"(C) If subparagraph (B) does not apply to a person for 
the taxable year, the increase in tax of such person for the 
taxable year attributable to the amounts to which this para-
graph applies shall be 110 percent of such increase (com-
puted without regard to this subparagraph). 
"(D) Subparagraph (A) (ii) of this paragraph shall not 
26 use 402. 
apply to any amount to which section 402(a) (2) or 403(a) 
*03- 
(2) applies. 
"(E) For special rules for computation of taxable income 
for taxable years to which this paragraph applies, see sub-
Poat, p. 825. 
section (n)(3). 
"(6) OWNER-EMPLOYEE DEFINED.—For purposes of this subsec-
tion, the term.'owner-employee' has the meaning assigned to it by 
Ante, p. 812. 
sectiou 401 (c) (3). 
"(n) TREATMENT OF CERTAIN DISTRIBUTIONS W I T H RESPECT TO CON-
TRIBUTIONS B
Y SELF-EMPLOYED iNDIVIDUiVLS. 
"(1) APPLICATION OF SUBSECTION.— 
"(A) DISTRIBUTIONS BY EMPI.OYFJS' TRUST.—Subject to the 
provisions of subparagraph (C), this subsection shall apply 
to amounts distributed to a distributee, in the case oi an 
26 use 401. 
employees' triist described in section 401(a) which is exempt 
26 use 501. 
from tax under section 501 (a), if the total distributions pay-
able to the distributee with respect to an employee are paid 
to the distributee within one taxable year of the distributee— 
"(i) on account of the employee's death, 
"(ii) after the employee has attained the age of 591/2 
years, or 
"(iii) after the employee has become disabled (within 
72 Stat. 1614. 
the meaning of section 213(g) (3)). 
26 use 213. 
"(B) ANNUITY PLANS.—Subject to the provisions of sub-
paragraph (C), this subsection shall apply to amounts paid 
to a payee, in the case of an annuity plan described in section 
403(a), if the total amounts payable to the payee with respect 
to an employee are paid to the payee within one taxable year 
of the payee— 
"(i) on account of the employee's deathj 
"(ii) after the employee has attained the age of 591/^ 
years, or 
"(iii) after the employee has become disabled (within 
the meaning of section 213(g) (3)). 
"(C) LIMITATIONS AND EXCEPTIONS.—This subsection shall 
apply— 
• 
"(i) only with respect to so much of any distribution 
or payment to which (without regard to this subpara-
graph) subparagraph (A) or (B) applies as is attrib-
utable to contributions made on behalf of an employee 
while he was an employee within the meaning of section 
Ante, p. 811. 
401 (c) (1), and 
"(ii) if the recipient is the employee on whose behalf 
such contributions were made, only if contributions 
which were allowed as a deduction under section 404 have 
been made on behalf of such employee while he was an 
employee within the meaning of section 401(c) (1) for 
76 STAT.] 
PUBLIC L
A
W 87-792-OCT. 10, 1962 
825 
5 or more taxable years prior to the taxable year in which 
the total distributions payable or total amounts payable, 
as the case may be, are paid. 
This subsection shall not apply to amounts described in 
clauses (ii) and (iii) of subparagraph (A) of subsection (m) 
(5) (but, in the case of amounts described in clause (ii) of 
Ante, p. 823. 
such subparagraph, only to the extent that subsection (m) 
(5) applies to such amounts). 
"(2) LIMITATION OF TAX.—In any case to which this subsection 
applies, the tax attributable to the amounts to which this sub-
• section applies for the taxable year in which such amounts are 
received shall not exceed whichever of the following is the 
greater: 
" (A) 5 times the increase in tax which would result from 
the inclusion in gross income of the recipient of 20 percent of 
so much of the amount so received as is includible in gross 
income, or 
"(B) 5 times the increase in tax which would result if the 
taxable income of the recipient for such taxable year equaled 
20 percent of the amount of the taxable income of the recipi-
ent for such taxable year determined under paragraph 
"(3) 
DETERMINATION OF TAXABLE INCOME.—Notwithstanding 
section 63 (relating to definition of taxable income), for purposes 
26 use 63. 
only of computing the tax under this chapter attributable to 
amounts to which this subsection or subsection (m) (5) applies 
and which are includible in gross income— 
"(A) the taxable income of the recipient for the taxable 
year of receipt shall be treated as being not less than the 
amount by which (i) the aggregate of such amounts so includ-
ible in gross income exceeds (ii) the amount of the deductions 
allow^ed for such taxable year under section 151 (relating to 
26 use isi. 
deductions for personal exemptions); and 
"(B) in making ratable inclusion computations under 
paragraph (5) (B) of subsection (m), the taxable income of 
the recipient for each taxable year involved in such ratable 
inclusion shall be treated as being not less than the amount 
required by such paragraph (5) (B) to be treated as includ-
ible in gross income for such taxable year. 
In any case in w^hich the preceding sentence results in an increase 
in taxable income for any taxable year, the resulting increase in 
the taxes imposed by section 1 or 3 for such taxable year shall not 
26 use i, 3. 
be reduced by any credit under part IV of subchapter A (other 
than section 31 thereof) which, but for this sentence, would be 
26 use 3i. 
allowable." 
(c) 
CAPITAL GAINS TREATMENT OF CERTAIN EMPLOYEES' TRUST 
DISTRIBUTIONS.—Section 402(a) (2) of the Internal Revenue Code of 
1954 (relating to capital gains treatment for certain distributions) is 
amended by adding at the end thereof the following new sentence: 
"This paragraph shall not apply to distributions paid to any distribu-
tee to the extent such distributions are attributable to contributions 
made on behalf of the employee while he was an employee within the 
meaningof section 401(c) (1)." 
Ante, p.sii. 
(d) CAPITAL GAINS TREATMENT OF CERTAIN EMPLOYEES' ANNUITY 
PAYMENTS.—Section 403(a) of the Internal Revenue Code of 1954 
26 use 403. 
(relating to taxability of a beneficiary under a qualified annuity plan) 
is amended— 
(1) by striking out in paragraph (2) (A) (i) "which meets the 
requirements of section 401 (a) (3), (4), (5), and (6)" and insert-
ing ill lieu thereof "described in paragraph (1)"; 
i 
826 
PUBUC L
A
W 87-792-OCT. 10, 1962 
[76 STAT. 
(2) by adding at the end of paragraph (2) (A) the following 
new sentence: "This subparagraph shall not apply to amounts 
paid to any payee to the extent such amounts are attributable to 
contributions made on behalf of the employee while he was an 
Ante, p. 811. 
employee within the meaning of section 401 (c) (1)."; and 
(3) by adding after paragraph (2) the following new para-
graph : 
"(3) SELF-EMPLOYED INDIVIDUALS.—For purposes of this sub-
section, the term 'employee' includes an individual who is an em-
ployee within the meaning of section 401 (c) (1), and the employer 
of such individual is the person treated as his employer under 
section 401(c) (4)." 
SEC. 5. PLANS FOR PURCHASE OF UNITED STATES BONDS. 
(a) QUALIFIED BOND PURCHASE PLANS.—Part I of subchapter D 
26 use 401-404. of chapter 1 of the Internal Revenue Code of 1954 (relating to deferred 
compensation, etc.) is amended by adding at the end thereof the follow-
ing new section: 
"SEC. 405. QUALIFIED BOND PURCHASE PLANS. 
"(a) REQUIREMENTS FOR QUALIFICATION.—A plan of an employer 
for the purchase for and distribution to his employees or their benefi-
ciaries of United States bonds described in subsection (b) shall consti-
tute a qualified bond purchase plan under this section if— 
26 use 401. 
" (1) the plan meets the requirements of section 401 (a) (3), (4), 
^nte, pp.810- 
(5), (6), (7), and (8) and, if applicable, the requirements of sec-
tion 401 (a) (9) and (10) and of section 401 (d) (other than para-
graphs (1), (5) (B),and (8)) ;and 
"(2) contributions under the plan are used solely to purchase 
for employees or their beneficiaries United States bonds described 
in subsection (b). 
"(b) 
BONDS TO W H I C H APPLICABLE.— 
" (1) CHARACTERISTICS OF BONDS.—This section shall apply only 
40 Stat. 288. 
to a bond issued under the Second Liberty Bond Act, as amended, 
31 use 774. 
which by its terms, or by regulations prescribed by the Secretary 
under such Act— 
" (A) provides for payment of interest, or investment yield, 
only upon redemption; 
"(B) may be purchased only in the name of an individual; 
"(C) ceases to bear interest, or provide investment ^ield, not 
later than 5 years after the death of the individual in whose 
name it is purchased; 
"(D) may be redeemed before the death of the individual in 
whose name it is purchased only if such individual— 
" (i) has attained the age of 59i/^ years, or 
"(ii) has become disabled (within the meaning of 
72 Stat. 1614. 
scction 213(g) (3)); and 
26 use 213. 
"(E) is nontransferable. 
"(2) MUST BE PURCHASED IN NAME OF EMPLOYEE.—This section 
shall apply to a bond described in paragraph (1) only if it is pur-
chased in the name of the employee. 
"(c) 
DEDUCTION FOR CONTRIBUTIONS TO BOND PURCHASE PLANS.— 
Contributions paid by an employer to or under a qualified bond pur-
chase plan shall be allowed as a deduction in an amount determined 
26 use 404,401, Under section 404 in the same manner and to the same extent as if such 
501- 
contributions were made to a trust described in section 401(a) which 
is exempt from tax under section 501(a). 
76 STAT. ] 
PUBLIC LAW 87-792-OCT. 10, 1962 
827 
"(d) TAXABILITY OF BENEFICIARY OF QUALIFIED BOND PURCHASE 
PLAN.— 
"(1) GROSS INCOME NOT TO INCLUDE BONDS AT TIME OF DISTRI-
BUTION.—For purposes of this chapter, in the case of a distributee 
of a bond described in subsection (b) under a qualified bond pur-
chase plan, or from a trust described in section 401(a) which is 
26 use 401,501. 
exempt from tax under section 501(a), gross income does not 
include any amount attributable to the receipt of such bond. 
Upon redemption of such bond, the proceeds shall be subject to 
taxation under this chapter, but the provisions of section 72 (relat- 
26 use 72. 
ing to annuities, etc.) and section 1232 (relating to bonds and 
26 use 1232. 
other evidences of indebtedness) shall not apply. 
"(2) BASIS.—The basis of any bond received by a distributee 
under a qualified bond purchase plan— 
"(A) if such bond is distributed to an employee, or with 
respect to an employee, who at the time of purchase of the 
bond, was an employee other than an employee within the 
meaning of section 401(c)(1), shall be the amount of the 
Ante, p. sn. 
contributions by the employee which were used to purchase 
the bond, and 
"(B) if such bond is distributed to an employee, or with 
respect to an employee, who, at the time of purchase of the 
bond, was an employee within the meaning of section 401 (c) 
(1), shall be the amount of the contributions used to purchase 
the bond which were made on behalf of such employee and 
were not allowed as a deduction under subsection (c). 
The basis of any bond described in subsection (b) received by a 
distributee from a trust described in section 401(a) which is 
exempt from tax under section 501(a) shall be determined under 
regulations prescribed by the Secretary or his delegate. 
"(e) CAPITAL GAINS TREATMENT NOT TO APPLY TO BONDS DIS-
TRIBUTED BY TRUSTS.—Section 402(a) (2) shall not apply to any bond 
26 use 402. 
described in subsection (b) distributed to any distributee and, for 
purposes of applying such section, any such bond distributed to any 
distributee and any such bond to the credit of any employee shall not 
be taken into account. 
"(f) EMPLOYEE DEFINED.—For purposes of this section, the term 
'employee' includes an individual who is an employee within the mean-
ing of section 401 (c)(1), and the employer of such individual shall be 
the person treated as his employer under section 401 (c)(4). 
Ante, p. 812. 
"(g) PROOF OF PURCHASE.—At the time of purchase of any bond to 
which this section applies, proof of such purchase shall be furnished 
in such form as will enable the purchaser, and the employee in whose 
name such bond is purchased, to comply with the provisions of this 
section. 
"(h) REGULATIONS.—The Secretary or his delegate shall prescribe 
such regulations as may be necessary to carry out the provisions of this 
section." 
(b) CLERICAL AMENDMENT.—The table of sections for such part is 
amended by adding at the end thereof the following new item: 
"Sec. 405. Qualified bond purchase plans." 
SEC. 6. PROHIBITED TRANSACTIONS. 
Section 503 of the Internal Revenue Code of 1954 (relating to pro- 
26 use 503. 
hibited transactions) is amended by adding at the end thereof the 
following new subsection: 
"(j) TRUSTS BENEFITING CERTAIN OWNER-EMPLOYEES.— 
" (1) PROHIBITED TRANSACTIONS.—In the case of a trust described 
in section 401 (a) which is part of a plan providing contributions 
or benefits for employees some or all of whom are owner-employees 
(as defined in section 401(c) (3)) who control (within the mean-
ing of section 401(d) (9) (B)) the trade or business with respect 
Ante, p. sis. 
828 
PUBLIC L
A
W 87-792-OCT. 10, 1962 
[76 STAT. 
to which the plan is established, the term 'prohibited transaction' 
also means any transaction in which such trust, directly or indi-
rectly— 
" (A) lends any part of the corpus or income of the trust to; 
"(B) pays any coriipensation for personal services rendered 
to the trust to; 
" (C) makfes any part of its services available on a preferen-
tial basis to; or 
"(D) acquires for the trust any property from, or sells any 
property to; 
any person described in subsection (o) or to any such owner-
employee, a member of the family (as defined in section 267(c) 
26 use 267. 
(4)) of any such owner-employee, or a corporation controlled 
by any such owner-employee through the ownership, directly or 
indirectly, of 50 percent or more of the total combined voting 
power of all classes of stock entitled to vote or 50 percent or more 
of the total value of shares of all classes of stock of the corporation. 
"(2) SPECIAL RULE F
O
R LOANS.—For purposes of the application 
of paragraph (1) (A), the following rules shall apply with respect 
to a loan made before the date of the enactment of this subsection 
which would be a prohibited transaction if made in a taxable year 
beginning after December 31,1962: 
"(A) If any part of the loan is repayable prior to Decem-
ber 31,1965, the renewal of such part of the loan for a period 
not extending beyond December 31, 1965, on the same terms, 
shall not be considered a prohibited transaction. 
"(B) If the loan is repavable on demand, the continuation 
of the loan beyond December 31, 1965, shall be considered a 
prohibited transaction." 
SEC. 7. OTHER SPECIAL RULES, TECHNICAL CHANGES, AND ADMIN-
ISTRATIVE PROVISIONS. 
(a) 
RETIREMENT INCOME CREDIT.—Section 37(c) (1) of the Internal 
26 use 37. 
Revenue Code of 1954 (relating to definition of retirement income) is 
amended— 
(1) 
by striking out subparagraph (A) and inserting in lieu 
thereof the following: 
"(A) pensions and annuities (including, in the case of an 
individual who is, or has been, an employee within the mean-
Ante, p. 811. 
ing of section 401 (c) (1), distributions by a trust described in 
26 use 401,501. 
section 401(a) which is exempt from tax under section 501 
(aj),"; and 
(2) by striking out "and" at the end of subparagraph (C), by 
striking out "or" at the end of subparagraph (D) and inserting in 
lieu thereof "and", and by adding after subparagraph (D) the 
following new subparagraph: 
Ante, p. 826. 
"(E) bonds descHbed in section 405(b)(1) which are 
received under a qualified bond purchase plan described in 
section 405(a) or in a distribution from a trust described in 
section 401 (a) which is exempt from tax under section 501 (a), 
or". 
(b) ADJUSTED GROSS INCOME.—Section 62 of the Internal Revenue 
26 use 62. 
Code of 1954 (relating to the definition of adjusted gross income) is 
amended by inserting after paragraph 
(6) the following new 
paragraph: 
"(7) 
PENSION, PROFIT-SHARING, ANNUITY, AND BOND PURCHASE 
PLANS OF SELF-EMPLOYED INDIVIDUALS.—^lu the casc of an indi-
vidual who is an employee within the meaning of section 401 
26 use 404. 
(c) (1), the deductions allowed by section 404 and section 405(c) 
Ante. p. 826. 
to the extent attributable to contributions made on behalf of such 
individual." 
76 STAT.] 
P U B U C LAW 87-792-OCT. 10, 1%2 
829 
(c) DEATH BENEFITS.—Section 101(b) of the Internal Kevenue 
Code of 1954 (relating to employees' death benefits) is amended— 
26 use loi. 
(1) by striking out clause (ii) of paragraph (2) (B) and insert-
ing in lieu thereof the following: 
. 
"(ii) under an annuity contract under a plan described in 
section 403(a), or"; and 
26 use 403. 
(2) by adding at the end thereof the following new paragraph: 
"(3) 
SELF-EMPLOYED 
INDIVIDUAL 
NOT 
CONSIDERED 
AN 
EM-
PLOYEE.—For purposes of this subsection, the term 'employee' does 
not include an individual who is an employee within the meaning 
of section 401(c)(1) (relating to self-employed individuals)." 
Ante. p. sii. 
(d) 
AMOUNTS RECEIVED THROUGH ACCIDENT OR HEALTH 
INSUR-
ANCE.—Section 104(a) of the Internal Revenue Code of 1954 (relating 
26 use 104. 
to compensation for injuries or sickness) is amended by adding at the 
end thereof the following new sentence: 
"For purposes of paragraph (3), in the case of an individual who is, or 
has been, an employee within the meaning of section 401 (c) (1) (relat-
ing to self-employed individuals), contributions made on behalf of 
such individual while he was such an employee to a trust described in 
section 401(a) which is exempt from tax under section 501(a), or 
26 use 401,501, 
under a plan described in section 403(a), shall, to the extent allowed 
as deductions under section 404, be treated as contributions by the 
26 use 404. 
employer which were not includible in the gross income of the 
employee." 
(e) 
A M O U N T S RECEIVED UNDER ACCIDENT AND H E A L T H 
P L A N S . — 
Section 105 of the Internal Revenue Code of 1954 (relating to amounts 
26 use 105. 
received under accident and health plans) is amended by adding at the 
end thereof the following new subsection: 
"(g) SELF-EMPLOYED iNDivrouAL NOT CoNsmERED AN EMPLOYEE.— 
For purposes of this section, the term 'employee' does not include an 
individual who is an employee within the meaning of section 401 
(c) (1) (relating to self-employed individuals)." 
(f) 
NET OPERATING Loss DEDUCTION.—Section 172(d)(4) of the 
26 use 172. 
Internal Revenue Code of 1954 (relating to nonbusiness deductions of 
taxpayers other than corporations) is amended— 
(1) by striking out "and" at the end of subparagraph ( B ) ; 
(2) by striking out the period at the end of subparagraph (C) 
and inserting "; and"; and 
(3) by adding after subparagraph (C) the following new sub-
paragraph : 
"(D) any deduction allowed under section 404 or section 
405(c) to the extent attributable to contributions which are 
Ante, p. 826. 
made on behalf of an individual who is an employee within 
the meaning of section 401(c)(1) shall not be treated as 
attributable to the trade or business of such individual." 
(g) CERTAIN LIFE INSURANCE RESERVES.—Section 805(d) (1) of the 
Internal Revenue Code of 1954 (relating to pension plan reserves) is 
26 use sos. 
amended— 
(1) by striking out in subparagraph (B) "meeting the require-
ments of section 401 (a) (3), (4), (5), and (6) or" and inserting in 
26 use 401. 
lieu thereof "described in section 403(a), or plans meeting"; and 
26 use 403. 
(2) by striking out in subparagraph (C) "and (6)" and insert-
ing in lieu thereof "(6), (7), and (8)". 
(h) 
UNINCORPORATED 
BUSINESSES 
ELECTING 
To 
B E 
TAXED 
AS 
CORPORATIONS.—Section 1361(d) of the Internal Revenue Code of 
1954 (relating to unincorporated business enterprises electing to be 
26 use isei. 
taxed as domestic corporations) is amended by inserting before the 
period at the end thereof the following: "other than an employee 
within the meaning of section 401(c) (1) (relating to self-employed 
830 
PUBLIC LAW 87-792-OCT. 10, 1%2 
[76 STAT. 
Ante, p. 826. 
26 use 2039. 
26 use 401. 
26 use 403. 
Ante, p. 811. 
26 use 2517. 
26 use 3306. 
Ante, p. 826. 
26 use 3401. 
26 use 6041-
6046. 
Ante, p. 812. 
individuals), or for purposes of section 405 (relating to qualified bond 
purchase plans) other than an employee described in section 405(f)". 
(i) ESTATE TAX EXEMPTION OF EMPLOYEES' ANNUITIES.—Section 
2039 of the Internal Revenue Code of 1954 (relating to exemption 
from the gross estate of annuities- under certain trusts and plans) is 
amended— 
(1) by striking out in subsection (c) (2) "met the requirements 
of section 401(a) (3), (4), (5), and (6)" and inserting "was a 
plan described in section 403(a)"; and 
(2) by adding at the end of subsection (c) the following new 
sentence: "For purposes of this subsection, contributions or pay-
ments on behalf of the decedent while he was an employee within 
the meaning of section 401(c)(1) made under a trust or plan 
described in paragraph (1) or (2) shall be.considered to be contri-
butions or payments made by the decedent." 
(j) GIFT TAX EXEMPTION OF EMPLOYEES' ANNUITIES.—Section 2517 
of the Internal Revenue Code of 1954 (relating to exclusion from gift 
tax in case of certain annuities under qualified plans) is amended— 
(1) by striking out in subsection (a) (2) "met the requirements 
of section 401(a) (3), (4), (5), and (6)" and inserting in lieu 
thereof "was a plan described in section 403(a)"; and 
(2) by adding at the end of subsection (b) the following new 
sentence: "For purposes of this subsection, payments or contribu-
tions on behalf of an individual while he was an employee within 
the meaning of section 401(c) (1) made under a trust or plan 
described in subsection (a) (1) or (2) shall be considered to be 
payments or contributions made by the employee," 
(k) FEDERAL UNEMPLOYMENT TAX ACT.—Section 3306(b) (5) of the 
Internal Revenue Code of 1954 (relating to definition of wages) is 
amended by striking out subparagraph (B) and inserting in lieu there-
of the following new subparagraphs: 
"(B) under or to an annuity plan which, at the time of such 
payment, is a plan described in section 403(a), or 
"(C) under or to a bond purchase plan which, at the time of 
such payment, is a qualified bond purchase plan described in 
section 405(a) ;". 
(1) WITHHOLDING OF INCOME TAX.—Section 3401(a) (12) of the 
Internal Revenue Code of 1954 (relating to definition of wages) is 
amended by striking out subparagraph (B) and inserting in lieu there-
of the following new subparagraphs: 
" (B) under or to an annuity plan which, at the time of such 
payment, is a plan described in section 403 (a); or 
"(C) under or to a bond purchase plan which, at the time 
of such payment, is a qualified bond purchase plan described 
in section 405(a)." 
(m) INFORMATION REQUIREMENTS.— 
(1) I N GENERAL.—Subpart B of part I I I of subchapter A of 
chapter 61 of the Internal Revenue Code of 1954 (relating to 
information concerning transactions with other persons) is 
amended by adding after section 6046 the following new section: 
"SEC. 6047. INFORMATION RELATING TO CERTAIN TRUSTS AND 
ANNUITY AND BOND PURCHASE PLANS. 
"(a) TRUSTEES AND INSURANCE COMPANIES.—The trustee of a trust 
described in section 401(a) which is exempt from tax under section 
501(a) to which contributions have been paid under a plan on behalf 
of any owner-employee (as defined in section 401(c) (^)), and each 
insurance company or other person which is the issuer of a contract 
purchased by such a trust, or purchased under a plan described in 
section 403(a), contributions for which have been paid on behalf of 
76 STAT.] 
PUBLIC LAW 87-792-OCT. 10, 1%2 
831 
any owner-employee, shall file such returns (in such form and at 
such times), keep such records, make such identification of contracts 
and funds (and accounts within such funds), and supply such informa-
tion, as the Secretary or his delegate shall by forms or regulations 
prescribe. 
"(b) OWNER-EMPLOYEES.—Every individual on whose behalf con-
tributions have been paid as an owner-employee (as defined in section 
401(C)(3))— 
Ante. p. 812. 
"(1) to a trust described in section 401(a) which is exempt 
26 usc4oi.5oi. 
from tax under section 501(a), or 
"(2) to an insurance company or other person under a plan 
described in section 403(a), 
26 use 403. 
shall furnish the trustee, insurance company, or other person, as the 
case may be, such information at such times and in such form and 
manner as the Secretary or his delegate shall prescribe by forms or 
regulations. 
"(c) EMPLOYEES UNDER QUALIFIED BOND PURCHASE PLANS.—Every 
individual in whose name a bond described in section 405(b) (1) is 
Ante, p. 826. 
P
urchased by his employer under a qualified bond purchase plan 
escribed in section 405(a), or by a trust described in section 401(a) 
which is exempt from tax under section 501(a), shall furnish— 
" (1) to his employer or to such trust, and 
"(2) to the Secretary (or to such person as the Secretary may 
by regulations prescribe), 
such information as the Secretary or his delegate shall by forms or 
regulations prescribe. 
"(d) 
CROSS REFERENCE.— 
"For criminal penalty for furnishing fraudulent information, see 
section 7207." 
intra. 
(2) CLERICAL AMENDMENT.—The table of sections for such sub-
part B is amended by adding after the reference to section 6046 
tlie following: 
"Sec. 6047. Information relating to certain trusts and annuity and 
bond purchase plans." 
(3) PENALTY.—Section 7207 of the Internal Eevenue Code of 
1954 (relating to fraudulent returns, statements, or other docu-
ments) is amended by adding at the end thereof the following new 
sentence: "Any person required pursuant to section 6047 (b) or 
Ante. p. 830. 
(c) to furnish any information to the Secretary or any other 
person who willfully furnishes to the Secretary or such other 
person any information known by him to be fraudulent or to be 
false as to any material matter shall be fined not more than $1,000, 
or imprisoned not more than 1 year, or both." 
SEC. 8. EFFECTIVE DATE. 
The amendments made by this Act shall apply to taxable yeai-s 
beginning after December 31,1962. 
Approved October 10, 1962.