text:
Page:United States Statutes at Large Volume 100 Part 3.djvu/633

 PUBLIC LAW 99-514—OCT. 22, 1986

100 STAT. 2441

"(A) The plan benefits at least 70 percent of employees who are not highly compensated employees. "(B) The plan benefits— "(i) a percentage of employees who are not highly compensated employees which is at least 70 percent of "(ii) the percentage of highly compensated employees benefiting under the plan. "(C) The plan meets the requirements of paragraph (2). '(2) AVERAGE BENEFIT PERCENTAGE TEST.—

"(A) IN GENERAL.—A plan shall be treated as meeting the requirements of this paragraph if— "(i) the plan benefits such employees as qualify under a classification set up by the employer and found by the Secretary not to be discriminatory in favor of highly compensated employees, and "(ii) the average benefit percentage for employees who are not highly compensated employees is at least 70 percent of the average benefit percentage for highly compensated employees. "(B) AVERAGE BENEFIT PERCENTAGE.—For purposes of this paragraph, the term 'average benefit percentage' means, with respect to any group, the average of the benefit percentages calculated separately with respect to each employee in such group (whether or not a participant in any plan). "(C) BENEFIT PERCENTAGE.—For purposes of this paragraph— "(i) IN GENERAL.—The term 'benefit percentage' means the employer-provided contribution or benefit of an employee under all qualified plans maintained by the employer, expressed as a percentage of such employee's compensation (within the meaning of section 414(s)). "(ii)

PERIOD FOR COMPUTING PERCENTAGE.—At

the

election of an employer, the benefit percentage for any plan year shall be computed on the basis of contributions or benefits for— "(I) such plan year, or "(II) any consecutive plan year period (not greater than 3 years) which ends with such plan year and which is specified in such election. An election under this clause, once made, may be revoked or modified only with the consent of the Secretary. "(D) EMPLOYEES TAKEN INTO ACCOUNT.—For purposes of determining who is an employee for purposes of determining the average benefit percentage under subparagraph (B)"(i) except as provided in clause (ii), paragraph (4)(A) shall not apply, or "(ii) if the employer elects, paragraph (4)(A) shall be applied by using the lowest age and service requirements of all qualified plans maintained by the employer. "(E) QUALIFIED PLAN.—For purposes of this paragraph, the term 'qualified plan' means any plan which (without regard to this subsection) meets the requirements of section 401(a).

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text:
Page:United States Statutes at Large Volume 100 Part 3.djvu/634

 100 STAT. 2442

PUBLIC LAW 99-514—OCT. 22, 1986

J- - V "(3) EXCLUSION OF CERTAIN EMPLOYEES.—For purposes of this subsection, there shall be excluded from consideration— "(A) employees who are included in a unit of employees covered by an agreement which the Secretary of Labor finds to be a collective bargaining agreement between employee representatives and one or more employers, if there is evidence that retirement benefits were the subject of ^ good faith bargaining between such employee representatives and such employer or employers, iitu «(g) jjj Yie case of a trust established or maintained pursuant to an agreement which the Secretary of Labor finds to be a collective bargaining agreement between air pilots represented in accordance with title II of the Railway Labor Act and one or more employers, all employees not covered by such agreement, and , •'* "(C) employees who are nonresident aliens and who receive no earned income (within the meaning of section 911(d)(2)) from the employer which constitutes income from ^,.> sources within the United States (within the meaning of section 861(a)(3)). Subparagraph (A) shall not apply with respect to coverage of employees under a plan pursuant to an agreement under such subparagraph. Subparagraph (B) shall not apply in the case of a plan which provides contributions or benefits for employees whose principal duties are not customarily performed aboard aircraft in flight. "(4) EXCLUSION OF EMPLOYEES NOT MEETING AGE AND SERVICE REQUIREMENTS.— ?,:.^ir "(A) IN GENERAL.—If a plan—

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"(i) prescribes minimum age and service requirements as a condition of participation, and "(ii) excludes all employees not meeting such requirements from participation, then such employees shall be excluded from consideration for purposes of this subsection. "(B) REQUIREMENTS MAY BE MET SEPARATELY WITH RESPECT TO EXCLUDED GROUP.—If employees do not meet the mini-

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mum age or service requirements of subsection (a)(1) (without regard to subparagraph (B) thereof) and are covered under a plan of the employer which meets the requirements of paragraph (1) separately with respect to such employees, such employees may be excluded from consideration in determining whether any plan of the employer meets the requirements of paragraph (1). "(5) LINE OF BUSINESS EXCEPTION.—

"(A) IN GENERAL.—If, under section 414(r), an employer is treated as operating separate lines of business for a year, the employer may apply the requirements of this subsection for such year separately with respect to employees in each separate line of business. "(B) PLAN MUST BE NONDISCRIMINATORY.—Subparagraph

(A) shall not apply with respect to any plan maintained by an employer unless such plan benefits such employees as qualify under a classification set up by the employer and found by the Secretary not to be discriminatory in favor of highly compensated employees.

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license: Creative Commons - Attribution Share-Alike - https://creativecommons.org/licenses/by-sa/4.0/


text:
Page:United States Statutes at Large Volume 100 Part 3.djvu/635

 PUBLIC LAW 99-514-OCT. 22, 1986

100 STAT. 2443

"(6) DEFINITIONS AND SPECIAL RULES.—For purposes of this subsection— "(A) HIGHLY COMPENSATED EMPLOYEE.—The term 'highly compensated employee' has the meaning given such term HI • i by section 414(q). "(B) AGGREGATION RULES.—An employer may elect to designate— "(i) 2 or more trusts, "(ii) 1 or more trusts and 1 or more annuity plans, or "(iii) 2 or more annuity plans, as part of 1 plan intended to qualify under section 401(a) to determine whether the requirements of this subsection are aili ' met with respect to such trusts or annuity plans. If an employer elects to treat any trusts or annuity plans as 1 plan under this subparagraph, such trusts or annuity plans -^ shall be treated as 1 plan for purposes of section 401(a)(4). "(C) SPECIAL RULES FOR CERTAIN DISPOSITIONS OR ACQUISITIONS.—

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,

"(i) IN GENERAL.—If a person becomes, or ceases to be, a member of a group described in subsection (b), (c), (m), or (o) of section 414, then the requirements of this subsection shall be treated as having been met during the transition period with respect to any plan covering employees of such person or any other member of such group if— "(I) such requirements were met immediately before each such change, and "(II) the coverage under such plan is not signiflcantly changed during the transition period (other than by reason of the change in members of a group). "(ii) TRANSITION PERIOD.—For purposes of clause (i),

the term 'transition period' means the period— "(I) beginning on the date of the change in memhers of a group, and "(II) ending on the last day of the 1st plan year beginning after the date of such change. "(D) SPECIAL RULE FOR CERTAIN EMPLOYEE STOCK OWNERSHIP PLANS.—A trust which is part of a tax credit employee

stock ownership plan which is the only plan of an employer intended to qualify under section 401(a) shall not be treated as not a qualified trust under section 401(a) solely because it fails to meet the requirements of this subsection if— "(i) such plan benefits 50 percent or more of all the employees who are eligible under a nondiscriminatory j^^ •, classification under the plan, and "(ii) the sum of the amounts allocated to each participant's account for the year does not exceed 2 percent of l-t^-^..^,. the compensation of that participant for the year. "(E) ELIGIBILITY TO CONTRIBUTE.—In the case of contributions which are subject to section 401(k) or 401(m), employees who are eligible to contribute (or elect to have contributions made on their behalf) shall be treated as benefiting under the plan (other than for purposes of paragraph (2)(A)(ii)).

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text:
Page:United States Statutes at Large Volume 100 Part 3.djvu/636

 100 STAT. 2444

PUBLIC LAW 99-514—OCT. 22, 1986

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"(F) REGULATIONS.—The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this subsection." (b) ADDITIONAL PARTICIPATION REQUIREMENTS.—Section 401(a) (relating to qualification requirements) is amended by adding at the end thereof the following new paragraph: "(26) ADDITIONAL PARTICIPATION REQUIREMENTS.—

"(A) IN GENERAL.—A trust shall not constitute a qualified trust under this subsection unless such trust is part of a plan which on each day of the plan year benefits the lesser of— "(i) 50 employees of the employer, or "(ii) 40 percent or more of all employees of the employer. "(B) TREATMENT OF EXCLUDABLE EMPLOYEES.—

"(i) IN GENERAL.—A plan may exclude from consider. ation under this paragraph employees described in paragraphs (3) and (4)(A) of section 410(b).

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"(ii) S E P A R A T E APPLICATION FOR CERTAIN EXCLUDABLE

EMPLOYEES.—If employees described in section 410(b)(4)(B) are covered under a plan which meets the requirements of subparagraph (A) separately with respect to such employees, such employees may be ex;- >;• eluded from consideration in determining whether any plan of the employer meets such requirements if^ I ' "(I) the benefits for such employees are provided under the same plan as benefits for other em. ployees, f'jri ' ' •. "(II) the benefits provided to such employees are

not greater than comparable benefits provided to other employees under the plan, and . ^j.. "(Ill) no highly compensated employee (within the meaning of section 414(q)) is included in the group of such employees for more than 1 year. "(C) ELIGIBILITY TO PARTICIPATE.—In the case of contribu"< -/'i •. tions under section 401(k) or 401(m), employees who are eligible to contribute (or may elect to have contributions ?; made on their behalf) shall be treated as benefiting under the plan. "(D) SPECIAL RULE FOR COLLECTIVE BARGAINING UNITS.—

Except to the extent provided in regulations, a plan cover• ing only employees described in section 4100t))(3)(A) may exclude from consideration any employees who are not included in the unit or units in which the covered employees are included. "(E)

PARAGRAPH

NOT

TO

APPLY

TO MULTIEMPLOYER

• "r- PLANS.—Except to the extent provided in regulations, this 10: paragraph shall not apply to employees in a multiemployer plan (within the meaning of section 414(f)) who are covered by collective bargaining agreements. "(F) REGULATIONS.—The Secretary may by regulation provide that any separate benefit structure, any separate trust, or any other separate arrangement is to be treated as a separate plan for purposes of applying this paragraph." (c) PLANS FAILING TO MEET REQUIREMENTS OF SECTION 410(b).—

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text:
Page:United States Statutes at Large Volume 100 Part 3.djvu/637

 PUBLIC LAW 99-514—OCT. 22, 1986

100 STAT. 2445

(1) IN GENERAL.—Subsection (b) of section 402 (relating to taxability of beneficiary of nonexempt trust) is amended by adding at the end thereof the following new paragraph: "(2) FAILURE TO MEET REQUIREMENTS OF SECTION 4i0(b).—

"(A) IN GENERAL.—In the case of a trust which is not exempt from tax under section 501(a) solely because such trust is part of a plan which fails to meet the requirements of section 410(b)— "(i) such trust shall be treated as exempt from tax under section 501(a) for purposes of applying paragraph (1) to employees who are not highly compensated employees, and "(ii) paragraph (1) shall be applied to the vested accrued benefit (other than employee contributions) of any highly compensated employee as of the close of the employer's taxable year described in paragraph (1) (rather than contributions made during such year). "(B) FAILURE IN MORE THAN i YEAR.—If a plan fails to meet the requirements of section 410(b) for more than 1 taxable year, any portion of the vested accrued benefit to which subparagraph (A) applies shall be included in gross income only once. "(C) HIGHLY COMPENSATED EMPLOYEE.—For purposes of

this paragraph, the term 'highly compensated employee' has the meaning given such term by section 414(q)." (2) CONFORMING AMENDMENT.—The heading for section 402(b)

is amended to read as follows: "(b) TAXABILITY OF BENEFICIARY OF NONEXEMPT TRUST.— "(1) IN GENERAL.—". (d) TECHNICAL AND CONFORMING AMENDMENTS.—

(1) Section 401(k)(3)(A) is amended by striking out "subparagraph (A) or (B) o f before "section 410(b)(1)". (2) Section 404(a)(2) is amended by striking out "and (22)" and inserting in lieu thereof "(22), and (26)". (3) Sections 4060t))(l) and 4070t))(l) are each amended by striking out "(without regard to paragraph (1)(A) thereof)' after "section 410(b)". (4) Section 818(a)(3) is amended by striking out "and (22)" and inserting in lieu thereof "(22), and (26)". (e) EFFECTIVE DATES.—

(1) IN GENERAL.—The amendments made by this section shall apply to plan years beginning after December 31, 1988. (2) SPECIAL RULE FOR COLLECTIVE BARGAINING AGREEMENTS.—

In the case of a plan maintained pursuant to 1 or more collective bargaining agreements between employee representatives and 1 or more employers ratified before March 1, 1986, the amendments made by this section shall not apply to employees covered by any such agreement in plan years beginning before the earlier of— (A) the later of— (i) January 1, 1989, or •I (ii) the date on which the last of such collective • bargaining agreement terminates (determined without regard to any extension thereof after February 28, 1986), or (B) January 1, 1991. (3) WAIVER OF EXCISE TAX ON REVERSIONS.—

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text:
Page:United States Statutes at Large Volume 100 Part 3.djvu/638

 100 STAT. 2446 ^ ^ ^n.ir>. K

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PUBLIC LAW 99-514—OCT. 22, 1986 (A) IN GENERAL.

If

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(i) a plan is in existence on August 16, 1986, (ii) such plan would fail to meet the requirements of section 401(a)(26) of the Internal Revenue Code of 1986 (as added by subsection (b)) if such section were in effect for the plan year including August 16, 1986, and (iii) there is no transfer of assets to or liabilities from a plan or merger or spinoff or merger involving such plan after August 16, 1986, then no tax shall be imposed under section 4980 of such Code on any employer reversion by reason of the termination or merger of such plan before the 1st year to which the amendment made by subsection 0^) applies. (B) DETERMINATION OF AMOUNT OF REVERSION.—For purposes of the Internal Revenue Code of 1986, in determining the present value of the accrued benefit of any highly compensated employee (within the meaning of section 414(q) of such Code) on the termination or merger of any plan to which subparagraph (A) applies, the plan shall use the highest interest rate which may be used for calculating present value under section 41 l(a)(ll)(B) of such Code. (C) SPECIAL RULE FOR PLANS WHICH MAY NOT TERMINATE.—

To the extent provided in regulations prescribed by the Secretary of the Treasury or his delegate, if a plan is ^ _ prohibited from terminating under title IV of the Employee ' Retirement Income Security Act of 1974 before the 1st year to which the amendment made by subsection (b) applies, subparagraph (A) shall be applied by substituting "the 1st year in which the plan is able to terminate" for "the 1st r. ^. year to which the amendment made by subsection (b) applies. SEC. 1113. MINIMUM VESTING STANDARDS. (a) IN GENERAL.—Paragraph (2) of section 411(a) (relating to minimum vesting standards) is amended to read as follows: "(2) EMPLOYER CONTRIBUTIONS.—A plan satisfies the requirej^^g ments of this paragraph if it satisfies the requirements of subparagraph (A), (B), or (C). "(A) 5-YEAR VESTING.—A plan satisfies the requirements rr.,,.. j^ of this subparagraph if an employee who has completed at least 5 years of service has a nonforfeitable right to 100 «.., percent of the employee's accrued benefit derived from employer contributions. "(B) 3 TO 7 YEAR VESTING.—A plan Satisfies the requirements of this subparagraph if an employee has a nonforfeitable right to a percentage of the employee's accrued benefit derived from employer contributions determined under the s;7V«following table: "Years of service: 3

,.<(-.•

4 5 ,...;, 6 7 or more "(C) MULTIEMPLOYER PLANS.—A

ments of this subparagraph if—

The nonforfeitable percentage is: 20

40 60 80 100.

plan satisfies the require-

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text:
Page:United States Statutes at Large Volume 100 Part 3.djvu/639

 PUBLIC LAW 99-514—OCT. 22, 1986

j &:, ' >^\ •. i

100 STAT. 2447

"(i) the plan is a multiemployer plan (within the meaning of section 414(f)), and "(ii) under the plan— "(I) an employee who is covered pursuant to a collective bargaining agreement described in section 414(f)(1)(B) and who has completed at least 10 years of service has a nonforfeitable right to 100 percent of the employee's accrued benefit derived from employer contributions, and "(II) the requirements of subparagraph (A) or (B) are met with respect to employees not described in subclause (I)."

(b) REPEAL OF CLASS YEAR VESTING.—Paragraph (4) of section

411(d) (relating to class year vesting) is hereby repealed. (c) MODIFICATION OF MINIMUM PARTICIPATION STANDARDS.—Clause

(i) of section 410(a)(1)(B) (relating to special rules for certain plans) is amended by striking out "3 years" each place it appears and inserting in lieu thereof "2 years". (d) CONFORMING AMENDMENTS.—

(A) The heading for section 410(a)(5)(B) is amended by striking out "3-year" and inserting in lieu thereof "2-year". (B) Section 411(a)(10)(B) is amended by striking out "5 years" and inserting in lieu thereof "3 years". (e) AMENDMENTS TO ERISA.—

(1) IN GENERAL.—Paragraph (2) of section 203(a) of the Employee Retirement Income Security Act of 1974 (29 U.S.C. 1053(a)(2)) is amended to read as follows: "(2) A plan satisfies the requirements of this paragraph if it satisfies the following requirements of subparagraph (A), (B), or (C). "(A) A plan satisfies the requirements of this subparagraph if an employee who has completed at least 5 years of service has a nonforfeitable right to 100 percent of the employee's accrued benefit derived from employer contributions. "(B) A plan satisfies the requirements of this subparaai 'i graph if an employee has a nonforfeitable right to a percentage of the employee's accrued benefit derived from ^s^ employer contributions determined under the following table: 0fI9 »i..

"Years of service: 3 4

5

'.'.

6 7 or more

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Z

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Z

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Z".

The nonforfeitable percentage is: 20 40

ZZ..

80 100.

60

"(C) A plan satisfies the requirements of this subparagraph if— "(i) the plan is a multiemployer plan (within the m e a n i n g of section 3(37)), and "(ii) under the plan— "(I) a n employee w h o is covered pursuant to a collective b a r g a i n i n g a g r e e m e n t described in section 414(fKl)(B) and w h o has completed a t least 10 year s of service has a nonforfeitable right to 100 percent of the employee's accrued benefit derived from employer contributions, and

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text:
Page:United States Statutes at Large Volume 100 Part 3.djvu/640

 100 STAT. 2448

PUBLIC LAW 99-514—OCT. 22, 1986

.HI «?t /,,;i;

"(11) the requirements of subparagraph (A) or (B) are met with respect to employees not described in subclause (I)."

(2) REPEAL OP CLASS YEAR VESTING.—Subsection (c) of section

203 of such Act is amended by striking out paragraph (3). (3) MINIMUM PARTICIPATION STANDARDS.—Section 202(B)(i) of

such Act is amended by striking out "3 years" each place it appears and inserting in lieu thereof "2 years". (4) CONFORMING AMENDMENTS.— (A) MINIMUM VESTING STANDARDS.—Section 203(c)(1)(B) of

such Act is amended by striking out "5 years" and inserting in lieu thereof "3 years". (B) BENEFIT ACCRUAL REQUIREMENTS.—Subsection (i) of

section 204 of such Act (29 U.S.C. 1054(i)) is amended to read as follows: "(i) CROSS REFERENCE.— "For special rules relating to plan provisions adopted to preclude discrimination, see section 203(c)(2).". (e) EFFECTIVE DATES.—

(1) IN GENERAL.—Except as provided in paragraph (2), the amendments made by this section shall apply to plan years ? beginning after December 31, 1988. (2) SPECIAL RULE FOR COLLECTIVE BARGAINING AGREEMENTS.—

In the case of a plan maintained pursuant to 1 or more collective bargaining agreements between employee representatives and 1 or more employers ratified before March 1, 1986, the amendments made by this section shall not apply to employees Ji covered by any such agreement in plan years beginning before ic the earlier of— •-'••• c:---.-- -^ -:^(A) the later of— ' (i) January 1, 1989, or (ii) the date on which the last of such collective bargaining agreements terminates (determined without ' regard to any extension thereof after February 28, 1986), or •^ (B) January 1, 1991. B (3) PARTICIPATION REQUIRED.—The amendments made by this section shall not apply to any employee who does not have 1 «•' hour of service in any plan year to which the amendments made by this section apply. SEC. 1114. DEFINITION OF HIGHLY COMPENSATED EMPLOYEE.

(a) GENERAL RULE.—Section 414 is amended by adding at the end thereof the following new subsection: "(q) HIGHLY COMPENSATED EMPLOYEE.—

"(1) IN GENERAL.—The term 'highly compensated employee' K means any employee who, during the year or the preceding year— if; "(A) was at any time a 5-percent owner, "(B) received compensation from the employer in excess of $75,000, ., < t "(C) received compensation from the employer in excess of $50,000 and was in the top-paid group of employees for such year, or » "(D) was at any time an officer and received compensa> - ,•-- tion greater than 150 percent of the amount in effect under H section 415(c)(l)(A) for such year.

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text:
Page:United States Statutes at Large Volume 100 Part 3.djvu/641

 PUBLIC LAW 99-514—OCT. 22, 1986

100 STAT. 2449

"(2) SPECIAL RULE FOR CURRENT YEAR.—In the case of the year for which the relevant determination is being made, an employee not described in subparagraph (B), (C), or (D) of paragraph (1) for the preceding year (without regard to this paragraph) shall not be treated as described in subparagraph (B), (C), or (D) of paragraph (1) unless such employee is a member of the group consisting of the 100 employees paid the greatest compensation during the year for which such determination is being made. "(3) 5-PERCENT OWNER.—An employee shall be treated as a 5percent owner for any year if at any time during such year such employee was a 5-percent owner (as defined in section 416(i)(l)) of the employer. "(4) TOP-PAID GROUP.—An employee is in the top-paid group of employees for any year if such employee is in the group consisting of the top 20 percent of the employees when ranked on the basis of compensation paid during such year. "(5) SPECIAL RULES FOR TREATMENT OF OFFICERS.— "(A) NOT MORE THAN 50 OFFICERS TAKEN INTO ACCOUNT.—

For purposes of paragraph (1)(D), no more than 50 employees (or, if lesser, the greater of 3 employees or 10 percent of the employees) shall be treated as officers. •'

"(B) AT LEAST i OFFICER TAKEN INTO ACCOUNT.—If for

any

year no officer of the employer is described in paragraph (1)(D), the highest paid officer of the employer for such year shall be treated as described in such paragraph. "(6) TREATMENT OF CERTAIN FAMILY MEMBERS.—

"(A) IN GENERAL.—If any individual is a member of the family of a 5-percent owner or of a highly compensated employee in the group consisting of the 10 highly compensated employees paid the greatest compensation during the year, then— "(i) such individual shall not be considered a separate employee, and "(ii) any compensation paid to such individual (and any applicable contribution or benefit on behalf of such A individual) shall be treated as if it were paid to (or on behalf of) the 5-percent owner or highly compensated employee. "(B) FAMILY.—For purposes of subparagraph (A), the term 'family' means, with respect to any employee, such employee's spouse and lineal ascendants or descendants and the spouses of such lineal ascendants or descendants. "(7) COMPENSATION.—For purposes of this subsection— "(A) IN GENERAL.—The term 'compensation' means compensation within the meaning of section 415(c)(3). >

"(B) CERTAIN PROVISIONS NOT TAKEN INTO ACCOUNT.—The

determination under subparagraph (A) shall be made— "(i) without regard to sections 125, 402(a)(8), and 402(h)(1)(B), and "(ii) in the case of employer contributions made pursuant to a salary reduction agreement, without regard to section 403(b). "(8) EXCLUDED EMPLOYEES.—For purposes of subsection (r) and for purposes of determining the number of employees in the toppaid group under paragraph (4), the following employees shall be excluded—

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text:
Page:United States Statutes at Large Volume 100 Part 3.djvu/642

 100 STAT. 2450

PUBLIC LAW 99-514—OCT. 22, 1986

J ^,,

"(A) employees who have not completed 6 months of service, "(B) employees who normally work less than 11 Vz hours per week, "(C) employees who normally work during not more than .^ 6 months during any year, .,^ "(D) employees who have not attained age 21, Jr* "(E) except to the extent provided in regulations, employees who are included in a unit of employees covered by an agreement which the Secretary of Labor finds to be a j, > collective bargaining agreement between employee representatives and the employer, and "(F) employees who are nonresident aliens and who receive no earned income (within the meaning of section 911(d)(2)) from the employer which constitutes income from sources within the United States (within the meaning of section 861(a)(3)). The employer may elect to apply subparagraph (A), (B), (C), or (D) by substituting a shorter period of service, smaller number ..,. of hours or months, or lower age for the period of service, •\r number of hours or months, or age (as the Case may be) than that specified in such subparagraph. "(9) FORMER EMPLOYEES.—A former employee shall be treated as a highly compensated employee if— ,^t;, "(A) such employee was a highly compensated employee when such employee separated from service, or "(B) such employee was a highly compensated employee ijii '• at any time after attaining age 55. If

"(10) COORDINATION WITH OTHER PROVISIONS.—Subsections (b),

(c), (m), (n), and (o) shall be applied before the application of this •4. section." -•: (b) CONFORMING AMENDMENTS.—

e'

(1) Section 1060t))(l) is amended by striking out "highly compensated individual (within the meaning of section 105(h)(5))" b and inserting in lieu thereof "highly compensated employee (within the meaning of section 414(q))". (2) Section 117(d)(3), as amended by section 123 of this Act, is amended— (A) by striking out "officer, owner, or", .t (B) by striking out "officers, owners, or", and r' (C) by inserting at the end thereof the following new sentence: "For purposes of this paragraph, the term 'highly compensated employee' has the meaning given such term by section 414(q).' -•; '•• (3)(A) Section 120(c)(1) is amended by striking out "officers, shareholders, self-employed individuals, or highly compensated" 9 and inserting in lieu thereof "highly compensated employees (within the meaning of section 414(q))". r (B) Section 120(d)(1) is amended— (i) by striking out "The term 'self-employed individual' <^br.fimeans, and the" and inserting in lieu thereof "The", and u- ,

(ii) by striking out "SELF-EMPLOYED INDIVIDUAL;" in

the

heading thereof. h (4) Sections 127(b)(2) and 129(d)(2) are each amended by strik< ing out "officers, owners, or highly compensated," and inserting Vi- in lieu thereof "highly compensated employees (within the •eaning of section 414(q))".

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text:
Page:United States Statutes at Large Volume 100 Part 3.djvu/643

 PUBLIC LAW 99-514—OCT. 22, 1986

100 STAT. 2451

(5)(A) Sections 132(e)(2) and (h)(1) are each amended— (i) by striking out "officer, owner, or", and (ii) by striking out "officers, owners, or". (B) Section 132(h) is amended by adding at the end thereof the following new paragraph: "(7) HIGHLY COMPENSATED EMPLOYEE.—For purposes of this section, the term 'highly compensated employee' has the meaning given such term by section 414(q)." (6) Section 274(e)(5) is amended by striking out "officers, shareholders or other owners, or highly compensated employees" and inserting in lieu thereof "highly compensated employees (within the meaning of section 414(q))". (7) Section 401(a)(4) is amended to read as follows: "(4) if the contributions or benefits provided under the plan do not discriminate in favor of highly compensated employees (within the meaning of section 414(q)). For purposes of this paragraph, there shall be excluded from consideration employees described in section 410(b)(3)(A) and (C)." (8) Section 404A(g)(l)(A) is amended by striking out "an officer, shareholder, or highly compensated" and inserting in lieu thereof "a highly compensated employee (within the meaning of section 414(q))". (9)(A) Section 406(b)(1)(A) is amended by striking out "an officer, shareholder, or person whose principal duties consist of supervising the work of other employees of a foreign affiliate of such American employer" and insert in lieu thereof "a highly compensated employee (within the meaning of section 414(q))". (B) Section 407(b)(1)(A) is amended by striking out "an officer, shareholder, or person whose principal duties consist of supervising the work of other employees of a domestic subsidiary" and insert in lieu thereof "a highly compensated employee (within the meaning of section 414(q))". (C) Sections 406(b)(1)(B) and 407(b)(1)(B) are each amended by inserting "(as so defined)" after "employee". (10) Subparagraphs (A) and (B) of section 411(d)(1) are each amended by striking out "officers, shareholders, or highly compensated" and inserting in lieu thereof "highly compensated employees (within the meaning of section 414(q))". (11) Clause (ii) of section 414(m)(2)(B) is amended by striking out "officers, highly compensated employees, or owners" and inserting in lieu thereof "highly compensated employees (within the meaning of section 414(q))". (12) Section 415(c)(3)(C)(ii) is amended by striking out "an officer, owner, or highly compensated" and inserting in lieu thereof "a highly compensated employee (within the meaning of section 414(q))". (13) Section 4230t))(4)(D) is amended by striking out "officers, persons whose principal duties consist of supervising the work of other employees, or highly compensated employees" and inserting in lieu thereof "highly compensated employees (within the meaning of section 414(q))". (14) Clauses (ii) and (iii) of section 501(c)(17) and subparagraphs (B) and (C) of section 501(c)(18) are each amended by striking out "officers, shareholders, persons whose principal duties consists of supervising the work of other employees, or highly compensated employees" and inserting in lieu thereof

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Page:United States Statutes at Large Volume 100 Part 3.djvu/644

 100 STAT. 2452

PUBLIC LAW 99-514—OCT. 22, 1986

"highly compensated employees (within the meaning of section 414(q))". (15)(A) Section 4975(d)(1)(B) is amended by striking out f; it "highly compensated employees, officers, or shareholders" and inserting in lieu thereof "highly compensated employees (within the meaning of section 414(q))". (B) Section 408(b)(1)(B) of the Employee Retirement Income Security Act of 1974 (29 U.S.C. 1108(b)(1)) is amended by striking out "highly compensated employees, officers, or shareholders" and inserting in lieu thereof "highly compensated employees i (within the meaning of section 414(q) of the Internal Revenue Code of 1986)". (16) Paragraph (5) of section 5O50t)) is amended to read as ,.;. follows: "(5) HIGHLY COMPENSATED INDIVIDUAL.—For purposes of this subsection, the determination as to whether an individual is a .jj.^ highly compensated individual shall be made under rules similar to the rules for determining whether an individual is a highly compensated employee (within the meaning of section 414(q))." (c) EFFECTIVE DATE.—

(1) IN GENERAL.—Except as provided in this subsection, the .J, amendment made by this section shall apply to years beginning •" after December 31, 1986. (2) CONFORMING AMENDMENTS TO EMPLOYEE BENEFIT PROVI-

SIONS.—The amendments made by paragraphs (2), (3), (4), (5), and (16) of subsection (b) shall apply to years beginning after December 31, 1987. (3) CONFORMING AMENDMENTS TO PENSION PROVISIONS.—The

amendments made by paragraphs (7), (8), (9), (10), (11), (12), and (15) of subsection (b) shall apply to years beginning after December 31, 1988. (4)

^'

.

SPECIAL RULE FOR DETERMINING HIGHLY COMPENSATED

EMPLOYEES.—For purposes of sections 401(k) and 401(m) of the Internal Revenue Code of 1986, in the case of an employer incorporated on December 15, 1924, if more than 50 percent of its employees in the top-paid group (within the meaning of section 414(q)(4) of such Code) earn less than $25,000 (indexed at the same time and in the same manner as under section 415(d) of such Code), then the highly compensated employees shall include employees described in section 414(q)(l)(C) of such Code determined without regard to the level of compensation of such employees.

SEC. 1115. SEPARATE LINES OF BUSINESS; COMPENSATION.

>

(a) IN GENERAL.—Section 414 is amended by adding at the end thereof the following new subsections: "(r) SPECIAL RULES FOR SEPARATE LINE OF BUSINESS.—

(1) IN GENERAL.—For purposes of sections 89 and 410(b), an employer shall be treated as operating separate lines of business during any year if the employer for bona fide business reasons operates separate lines of business. i"" "(2) LINE OF BUSINESS MUST HAVE 50 EMPLOYEES, ETC.—A line of business shall not be treated as separate under paragraph (1) unless— 1' "(A) such line of business has at least 50 employees who Im are not excluded under subsection (q)(8).

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Page:United States Statutes at Large Volume 100 Part 3.djvu/645

 PUBLIC LAW 99-514—OCT. 22, 1986

100 STAT. 2453

"(B) the employer notifies the Secretary that such line of business is being treated as separate for purposes of paragraph (1), and "(C) such line of business meets guidelines prescribed by the Secretary or the employer receives a determination from the Secretary that such line of business may be treated as separate for purposes of paragraph (1). "(3) SAFE HARBOR RULE.—The requirements of subparagraph (C) of paragraph (2) shall not apply to any line of business if the highly compensated employee percentage with respect to such line of business is— "(A) not less than one-half, and "(B) not more than twice, the percentage which highly compensated employees are of all employees of the employer. An employer shall be treated as meeting the requirements of subparagraph (A) if at least 10 percent of all highly compensated employees of the employer perform services solely for such line of business. "(4) HIGHLY COMPENSATED EMPLOYEE PERCENTAGE DEFINED.—

For purposes of this subsection, the term 'highly compensated employee percentage' means the percentage which highly compensated employees performing services for the line of business are of all employees performing services for the line of business. "(5) ALLOCATION OF BENEFITS TO LINE OF BUSINESS.—For purposes of this subsection, benefits which are attributable to services provided to a line of business shall be treated as provided by such line of business. "(6) HEADQUARTERS PERSONNEL, ETC.—The Secretary shall prescribe rules providing for— "(A) the allocation of headquarters personnel among the lines of business of the employer, and "(B) the treatment of other employees providing services for more than 1 line of business of the employer or not in lines of business meeting the requirements of paragraph (2). "(7) SEPARATE OPERATING UNITS.—For purposes of this subsection, the term 'separate line of business includes an operating unit in a separate geographic area separately operated for a bona fide business reason. "(8) AFFIUATED SERVICE GROUPS.—This subsection shall not apply in the case of any affiliated service group (within the meaning of section 414(m)). '(s) COMPENSATION.—For purposes of this part— "(1) IN GENERAL.—The term 'compensation' means compensation for service performed for an employer which (taking into account the provisions of this chapter) is currently includible in gross income. "(2) SELF-EMPLOYED INDIVIDUALS.—The Secretary shall prescribe regulations for the determination of the compensation of an employee who is a self-employed individual (within the meaning of section 401(c)(1)) which are based on the principles of paragraph (1). "(3) EMPLOYER MAY ELECT TO TREAT CERTAIN DEFERRALS AS

COMPENSATION.—An employer may elect to include as compensation any amount which is contributed by the employer pursuant to a salary reduction agreement and which is not includible in the gross income of an employee under section 125, 402(a)(8), 402(h), or 4030)).

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Page:United States Statutes at Large Volume 100 Part 3.djvu/646

 100 STAT. 2454

PUBLIC LAW 99-514—OCT. 22, 1986

to «

"(4)

ALTERNATIVE DETERMINATION OF COMPENSATION.—The

determining compensation which may be used by an employer, except that such regulations shall provide that an employer may not use an alternative method if the use of such method discriminates in favor of highly compensated employees (within the meaning of subsection (q))." (b) EFFECTIVE DATES.—The amendment made by subsection (a) shall apply to years beginning after December 31, 1986. Subpart B—Other Provisions
 * i i Secretary shall by regulation provide for alternative methods of

SEC. 1116. CASH OR DEFERRED ARRANGEMENTS.

(a) GENERAL RULE.—Subparagraph (A) of section 401(k)(3) (relating to application of participation and discrimination standards) is amended— (1) by striking out "1.5" in clause (ii)(I) and inserting in lieu .. thereof "1.25", (2) by striking out "3 percentage points" in clause (ii)(II) and inserting in lieu thereof "2 percentage points", and (3) by striking out "2.5" in clause (ii)(II) and inserting in lieu thereof "2". (b) WITHDRAWAL AND OTHER RESTRICTIONS.—

(1) WITHDRAWALS.—Paragraph (2)(B) of section 401(k) (defln.^- J ing qualified cash or deferred arrangement) is amended to read as follows: ..3^Q "(B) under which— "(i) amounts held by the trust which are attributable mii Bit i. fi; *o employer contributions made pursuant to the employee's election may not be distributable to partici^^r,n,i=^o r pants or other beneficiaries earlier than— "(I) separation from service, death, or disability, "(II) termination of the plan without establishment of a successor plan, "(III) the date of the sale by a corporation of u:. >it.t substantially all of the assets (within the meaning of section 409(d)(2)) used by such corporation in a >-.. . trade or business of such corporation with respect ..^4 to an employee who continues employment with the corporation acquiring such assets, "(IV) the date of the sale by a corporation of such corporation's interest in a subsidiary (within the meaning of section 409(d)(3)) with respect to an employee who continues employment with such subsidiary, ^•,,i ',:;," "(V) in the case of a profit-sharing or stock bonus plan, the attainment of age 59 ¥2, or "(VI) in the case of contributions to a profit81^ ^i-.„ = . sharing or stock bonus plan to which section _ 402(a)(8) applies, upon hardship of the employee, 8A > and
 * i

"(ii) amounts will not be distributable merely by • reason of the completion of a stated period of participation or the lapse of a fixed number of years; and". An^l

(2) N O T MORE THAN 1 YEAR O F SERVICE MAY BE REQUIRED.—

Paragraph (2) of section 401(k) is amended by striking out "and"

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Page:United States Statutes at Large Volume 100 Part 3.djvu/647

 PUBLIC LAW 99-514—OCT. 22, 1986

100 STAT. 2455

at the end of subparagraph (B), by striking out the period at the end of subparagraph (C) and inserting in lieu thereof ", and", and by adding at the end thereof the following new subparagraph: "(D) which does not require, as a condition of participation in the arrangement, that an employee complete a period of service with the employer (or employers) maintaining the plan extending beyond the period permitted under section 410(a)(1) (determined without regard to subparagraph (B)(i) thereof)." (3) OTHER REQUIREMENTS.—Subsection (k) of section 401 is

amended by redesignating paragraphs (4), (5), and (6) as paragraphs (5), (6), and (7), respectively, and by inserting after paragraph (3) the following new paragraph: "(4) OTHER REQUIREMENTS.— "(A) BENEFITS (OTHER THAN MATCHING CONTRIBUTIONS) MUST NOT B E C O N T I N G E N T ON ELECTION TO DEFER.—A Cash Or

deferred arrangement of any employer shall not be treated as a qualified cash or deferred arrangement if any other benefit provided by such employer is conditioned (directly or indirectly) on the employee electing to have the employer make or not make contributions under the arrangement in lieu of receiving cash. The preceding sentence shall not apply to any matching contribution (as defined in section 401(m)) made by reason of such an election. "(B)

STATE AND LOCAL GOVERNMENTS AND TAX-EXEMPT

ORGANIZATIONS NOT ELIGIBLE.—A cash or deferred arrangement shall not be treated as a qualified cash or deferred arrangement if it is part of a plan maintained by— "(i) a State or local government or political subdivision thereof, or any agency or instrumentality thereof, or "(ii) any organization exempt from tax under this subtitle. "(C) COORDINATION WITH OTHER PLANS.—Except as

pro-

USi '

vided in section 401(m), any employer contribution made pursuant to an employee's election under a qualified cash ' or deferred arrangement shall not be taken into account for purposes of determining whether any other plan meets the requirements of section 401(a) or 410(b). This subparagraph shall not apply for purposes of determining whether a plan meets the average benefit requirement of section 410(b)(2)(A)(ii)." (4) AGGREGATION RULE.—The last sentence of subparagraph (A) of section 401(k)(3) (relating to application of participation and discrimination standards) is amended by striking out "any employee" and inserting in lieu thereof "any highly compensated employee".

(c) PLAN NOT DISQUALIFIED IF EXCESS CONTRIBUTIONS DISTRIBUTED BEFORE THE END OF FOLLOWING PLAN YEAR.—

(1) IN GENERAL.—Subsection (k) of section 401 is amended by adding at the end thereof the following new paragraph: "(8) ARRANGEMENT NOT DISQUALIFIED IF EXCESS CONTRIBUTIONS DISTRIBUTED.—

"(A) IN GENERAL.—A cash or deferred arrangement shall not be treated as failing to meet the requirements of clause

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Page:United States Statutes at Large Volume 100 Part 3.djvu/648

 100 STAT. 2456

PUBLIC LAW 99-514—OCT. 22, 1986 / '" • ' '•''••

(ii) of paragraph (3)(A) for any plan year if, before the close of the following plan year— "(i) the amount of the excess contributions for such plan year (and any income allocable to such contribu" ^ tions) is distributed, or "(ii) to the extent provided in regulations, the employee elects to treat the amount of the excess contributions as an amount distributed to the employee and then contributed by the employee to the plan. Any distribution of excess contributions (and income) may be made without regard to any other provision of law. "(B) EXCESS CONTRIBUTIONS.—For purposes of subpara-

<^*'p

graph (A), the term 'excess contributions' means, with respect to any plan year, the excess of— "(i) the aggregate amount of employer contributions -•• actually paid over to the trust on behalf of highly compensated employees for such plan year, over "(ii) the maximum amount of such contributions permitted under the limitations of clause (ii) of paragraph (3)(A) (determined by reducing contributions made on behalf of highly compensated employees in order of the actual deferral percentages beginning with the highest of such percentages). "(C) METHOD OF DISTRIBUTING EXCESS CONTRIBUTIONS.—

Any distribution of the excess contributions for any plan year shall be made to highly compensated employees on the basis of the respective portions of the excess contributions attributable to each of such employees. "(D) ADDITIONAL TAX UNDER SECTION 72(t) NOT TO APPLY.—

i' • •' *

No tax shall be imposed under section 72(t) on any amount required to be distributed under this paragraph. "(E) CROSS REFERENCE.—

.,,

"For excise tax on certain excess contributions, see section 4979." (2) TECHNICAL AMENDMENT.—Clause (ii) of section 401(k)(3)(A)

is amended by striking out "paragraph (4)" and inserting in lieu thereof "paragraph (5)". (d) DEFINITIONS OF HIGHLY COMPENSATED EMPLOYEE AND COMPENSATION.— (1) HIGHLY COMPENSATED EMPLOYEE.—Paragraph (5) of section

401(k), as redesignated by this Act, is amended to read as ^, follows: "(5) HIGHLY COMPENSATED EMPLOYEE.—For purposes of this subsection, the term 'highly compensated employee' has the meaning given such term by section 414(q)." (2) COMPENSATION.—Section 401(k), as amended by this Act, is amended by adding at the end thereof the following new paragraph: "(9) COMPENSATION.—For purposes of this subsection, the (3) CONFORMING AMENDMENT.—Subparagraph (B) of section
 * "^ term 'compensation' has the meaning given such term by sec_>, tion414(s)/'

401(k)(3) is amended by striking out the last sentence thereof. (e) NONDISCRIMINATION STANDARDS.—Section 401(k)(3) is amended

by adding at the end thereof the following new subparagraph: "(C) For purposes of subparagraph (B), the employer contributions on behalf of any employee—

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Page:United States Statutes at Large Volume 100 Part 3.djvu/649

 PUBLIC LAW 99-514—OCT. 22, 1986

100 STAT. 2457

"(i) shall include any employer contributions made pursuant to the employee's election under paragraph (2), and "(ii) under such rules as the Secretary may prescribe, may, at the election of the employer, include— "(I) matching contributions (as defined in 401(m)(4)(A)) which meets the requirements of paragraph (2)(B) and (C), and "(II) qualified nonelective contributions (within the meaning of section 401(m)(4)(C))." (f) EFFECTIVE DATES.—

(1) IN GENERAL.—Except as provided in this subsection, the amendments made by this section shall apply to years beginning after December 31, 1988. (2) NONDISCRIMINATION RULES.—

(A) IN GENERAL.—Except as provided in subparagraph (B), the amendments made by subsections (a), (b)(4), and (d), and the provisions of section 401(k)(4)(B) of the Internal Revenue Code of 1986 (as added by this section), shall apply to years beginning after December 31, 1986. (B) TRANSITION RULES FOR CERTAIN GOVERNMENTAL AND

TAX-EXEMPT PLANS.—Subparagraph (B) of section 401(k)(4) of the Internal Revenue Code of 1986 (relating to governments and tax-exempt organizations not eligible for cash or deferred arrangements), as added by this section, shall not apply to any cash or deferred arrangement adopted by— (i) a State or local government (or political subdivision thereof) before May 6, 1986, or (ii) a tax-exempt organization before July 2, 1986. In the case of an arrangement described in clause (i), the amendments made by subsections (a), (b)(4), and (d) shall apply to years beginning after December 31, 1988. (3) AGGREGATION AND EXCESS CONTRIBUTIONS.—The amend-

ments made by subsections (c) and (e) shall apply to years beginning after December 31, 1986. (4) COLLECTIVE BARGAINING AGREEMENTS.—

(A) IN GENERAL.—In the case of a plan maintained pursuant to 1 or more collective bargaining agreements between employee representatives and 1 or more employers ratified before March 1, 1986, the amendments made by this section shall not apply to years beginning before the earlier of— (i) the later o^ f— (I) January 1, 1989, or (II) the date on which the last of such collective bargaining agreements terminates (determined without regard to any extension thereof after February 28, 1986), or (ii) January 1, 1991.

,

(B) SPECIAL RULE FOR NONDISCRIMINATION RULES.—In the

case of a plan described in subparagraph (A), the amendments and provisions described in paragraph (2) shall not apply to years beginning before the earlier of— (i) the date determined under subparagraph (A)(i)(II), or (ii) January 1, 1989. ,

(5) SPECIAL RULE FOR QUALIFIED OFFSET ARRANGEMENTS.—

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Page:United States Statutes at Large Volume 100 Part 3.djvu/650

 100 STAT. 2458

PUBLIC LAW 99-514—OCT. 22, 1986

fjDS'.! ^^ ^. rS'^i'

! ^^) jj^ GENERAL.—A cash or deferred arrangement shall not be treated as failing to meet the requirements of section 401(k)(4) of the Internal Revenue Code of 1986 (as added by ^jj|g section) to the extent such arrangement is part of a qualified offset arrangement consisting of such cash or „*" deferred arrangement and a defined benefit plan. ^^' (B) QUALIFIED OFFSET ARRANGEMENT.—For purposes of subparagraph (A), a cash or deferred arrangement is part of ^^^a qualified offset arrangement with a defined benefit plan to the extent such offset arrangement satisfies each of the following conditions with respect to the employer maintain* • ing the arrangement on April 16, 1986, and at all times '-*« thereafter: (i) The benefit under the defined benefit plan is, directly and uniformly conditioned on the initial elec- J.u J ^j^g deferrals (up to 4 percent of compensation). (ii) The benefit provided under the defined benefit plan (before the offset) is at least 60 percent of an A t,-uiMt . employee's cumulative elective deferrals (up to 4 percent of compensation). (iii) The benefit under the defined benefit plan is reduced by the benefit attributable to the employee's elective deferrals under the plan (up to 4 percent of compensation) and the income allocable thereto. The ^•' interest rate used to calculate the reduction shall not " "/:" exceed the greater of the rate under section •;iH5; 411(a)(ll)(B)(ii) of such Code or the interest rate ap,.,,, plicable under section 411(c)(2)(C)(iii) of such Code, <;. n*: i taking into account section 411(c)(2)(D) of such Code. For purposes of applying section 401(k)(3) of such Code to the cash or deferred arrangement, the benefits under the defined benefit plan conditioned on initial elective deferrals j^^' may be treated as matching contributions under such rules ''*' as the Secretary of the Treasury or his delegate may prescribe. The Secretary shall provide rules for the application of this paragraph in the case of successor plans. (C) DEFINITION OF EMPLOYER.—For purposes of this paragraph, the term "employer" includes any research and development center which is federally funded and engaged in cancer research, but only with respect to employees of contractor-operators whose salaries are reimbursed as direct costs against the operator's contract to perform work at such center. S--U

(g) WITHDRAWALS ON SALE OF ASSETS.—Subclauses (II), (III),

and (IV) of section 401(k)(2)(B)(i) of the Internal Revenue Code of 1986 (as added by subsection (b)(1)) shall apply to distributions after December 31, 1984. (7) DISTRIBUTIONS BEFORE PLAN AMENDMENT.—

.o« „^.^^ ' •'

(A) IN GENERAL.—If a plan amendment is required to allow a plan to make any distribution described in section 401(k)(8) of the Internal Revenue Code of 1986, any such distribution which is made before the close of the 1st plan year for which such amendment is required to be in effect under section 1140, shall be treated as made in accordance with the provisions of such plan. (B) DISTRIBUTIONS PURSUANT TO MODEL AMENDMENT.—

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Page:United States Statutes at Large Volume 100 Part 3.djvu/651

 PUBLIC LAW 99-514—OCT. 22, 1986

100 STAT. 2459

(i) SECRETARY TO PRESCRIBE AMENDMENT.—The Secretary of the Treasury or his delegate shall prescribe an amendment which allows a plan to make any distribution described in section 401(k)(8) of such Code. (ii) ADOPTION BY PLAN.—If a plan adopts the amendment prescribed under clause (i) and makes a distribution in accordance with such amendment, such distribution shall be treated as made in accordance with the provisions of the plan. SEC. 1117. NONDISCRIMINATION REQUIREMENTS FOR EMPLOYER M A T C H I N G CONTRIBUTIONS AND EMPLOYEE CONTRIBUTIONS.

(a) GENERAL RULE.—Section 401 (relating to qualified pension, profit-sharing, and stock bonus plans) is amended by redesignating subsections (m) and (n) as subsections (n) and (o), respectively, and by inserting after subsection (1) the following new subsection: "(m) NONDISCRIMINATION TEST FOR MATCHING CONTRIBUTIONS AND EMPLOYEE CONTRIBUTIONS.—

"(1) IN GENERAL.—A plan shall be treated as meeting the requirements of subsection (a)(4) with respect to the amount of any matching contribution or employee contribution for any plan year only if the contribution percentage requirement of paragraph (2) of this subsection is met for such plan year.

'

"(2) REQUIREMENTS.— "(A) CONTRIBUTION PERCENTAGE REQUIREMENT.—A plan

1 -i fiof' ^ [ 1 -OH a

meets the contribution percentage requirement of this paragraph for any plan year only if the contribution percentage for eligible highly compensated employees does not exceed the greater of— "(i) 125 percent of such percentage for all other eligible employees, or "(ii) the lesser of 200 percent of such percentage for all other eligible employees, or such percentage for all other eligible employees plus 2 percentage points. "(B) MULTIPLE PLANS TREATED AS A SINGLE PLAN.—If two

2V 1 ^ i !• 1:

I. i!

or more plans of an employer to which matching contributions, employee contributions, or elective deferrals are made are treated as one plan for purposes of section 410(b), such plans shall be treated as one plan for purposes of this subsection. If a highly compensated employee participates in two or more plans of an employer to which such contributions are made, all such contributions shall be aggregated for purposes of this subsection. "(3) CONTRIBUTION PERCENTAGE.—For purposes of paragraph

(2), the contribution percentage for a specified group of employees for a plan year shall be the average of the ratios (calculated separately for each employee in such group) of— "(A) the sum of the matching contributions and employee contributions paid under the plan on behalf of each such employee for such plan year, to "(B) the employee's compensation (within the m e a n i n g of section 414(s)) for such plan year.

Under regulations, an employer may elect to take into account (in computing the contribution percentage) elective deferrals and qualified nonelective contributions under the plan or any other plan of the employer.

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Page:United States Statutes at Large Volume 100 Part 3.djvu/652

 PUBLIC LAW 99-514—OCT. 22, 1986

100 STAT. 2460 n

"(4) DEFINITIONS.—For purposes of this subsection— "(A) MATCHING CONTRIBUTION.—The term 'matching contribution' means— "(i) any employer contribution made to the plan on behalf of an employee on account of an employee con; tribution made by such employee, and i _ / "(ii) any employer contribution made to the plan on fil V. behalf of an employee on account of an employee's elective deferral. "(B) ELECTIVE DEFERRAL.—The term 'elective deferral' means any employer contribution described in section - • 402(g)(3)(A). "(C) QUALIFIED NONELECTIVE CONTRIBUTIONS.—The term , 'qualified nonelective contribution' means any employer contribution (other than a matching contribution) with respect to which— "(i) the employee may not elect to have the contribuciMA'>-; tion paid to the employee in cash instead of being contributed to the plan, and '^n-'i f' "(ii) the requirements of subparagraphs (B) and (C) of subsection (k)(2) are met. "(5) EMPLOYEES TAKEN INTO CONSIDERATION.—

-r ri f J; 'i6\ i'

"(A) IN GENERAL.—Any employee who is eligible to make an employee contribution (or, if the employer takes elective contributions into account, elective contributions) or to receive a matching contribution under the plan being tested under paragraph (1) shall be considered an eligible employee for purposes of this subsection. "(B) CERTAIN NONPARTICIPANTS.—If an employee contribution is required as a condition of participation in the plan, any employee who would be a participant in the plan if such employee made such a contribution shall be treated as an eligible employee on behalf of whom no employer contributions are made. "(6) PLAN NOT DISQUAUFIED IF EXCESS AGGREGATE CONTRIBUTIONS DISTRIBUTED BEFORE END OF FOLLOWING PLAN YEAR.—

"(A) IN GENERAL.—A plan shall not be treated as failing to meet the requirements of paragraph (1) for any plan year if, before the close of the following plan year, the amount of the excess aggregate contributions for such plan year (and any income allocable to such contributions) is distributed (or, if forfeitable, is forfeited). Such contributions (and such i income) may be distributed without regard to any other provision of law. "(B) EXCESS AGGREGATE CONTRIBUTIONS.—For purposes of subparagraph (A), the term 'excess aggregate contributions' means, with respect to any plan year, the excess of— "(i) the aggregate amount of the matching contribus«', tions and employee contributions (and any qualified AofM u i; nonelective contribution or elective contribution taken into account in computing the contribution percentage) 'k--^-:AC.'-''::' actually made on behalf of highly compensated employees for such plan year, over ' (ii) the maximum amount of such contributions permitted under the limitations of paragraph (2)(A) (deterYn VJ mined by reducing contributions made on behalf of highly compensated employees in order of their con-

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Page:United States Statutes at Large Volume 100 Part 3.djvu/653

 PUBLIC LAW 99-514—OCT. 22, 1986 if -fc.

tribution percentages beginning with the highest of such percentages). "(C)

"(D)

• • ' -"^ -

^, 4

^ t '

METHOD OF DISTRIBUTING EXCESS CONTRIBUTIONS.—

Any distribution of the excess aggregate contributions for any plan year shall be made to highly compensated employees on the basis of the respective portions of such amounts attributable to each of such employees. Forfeitures of excess aggregate contributions may not be allocated to participants whose contributions are reduced under this paragraph.

^«'

"

100 STAT. 2461

'

COORDINATION WITH SUBSECTION (k)

AND 402(g).—

The determination of the amount of excess aggregate contributions with respect to a plan shall be made after— "(i) first determining the excess deferrals (within the meaning of section 402(g)), and "(ii) then determining the excess contributions under subsection (k). "(7) TREATMENT OF DISTRIBUTIONS.— "(A) ADDITIONAL TAX OF SECTION 72(t) NOT APPLICABLE.—

No tax shall be imposed under section 72(t) on any amount required to be distributed under paragraph (8). "(B) EXCLUSION OF EMPLOYEE CONTRIBUTIONS.—Any distribution attributable to employee contributions shall not be included in gross income except to the extent attributable to income on such contributions. "(8) HIGHLY COMPENSATED EMPLOYEE.—For purposes of this subsection, the term 'highly compensated employee' has the meaning given to such term by section 414(q). "(9) REGULATIONS.—The Secretary shall prescribe such regulations as may be necessary to carry out the purposes of this subsection and subsection (k) including— "(A) such regulations as may be necessary to prevent the multiple use of the alternative limitation with respect to any highly compensated employee, and "(B) regulations permitting appropriate aggregation of plans and contributions. For purposes of the preceding sentence, the term 'alternative limitation' means the limitation of section 401(k)(3)(A)(ii)(II) and the limitation of paragraph (2)(A)(ii) of this subsection. "(10) CROSS REFERENCE.— "For excise tax on certain excess contributions, see section 4979." (b) EXCISE TAX ON EXCESS CONTRIBUTIONS.—

a

(1) IN GENERAL.—Chapter 43 (relating to qualified pension, etc. plans) is amended by adding at the end thereof the following new section:

"SEC. 4979. TAX ON CERTAIN EXCESS CONTRIBUTIONS.

"(a) GENERAL RULE.—In the case of any plan, there is hereby imposed a tax for the taxable year equal to 10 percent of the sum of. "(1) any excess contributions under a cash or deferred f arrangement which is part of such plan for the plan year ending in such taxable year, and ^. "(2) any excess aggregate contributions under the plan for the plan year ending in such taxable year.

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Page:United States Statutes at Large Volume 100 Part 3.djvu/654

 100 STAT. 2462

PUBLIC LAW 99-514—OCT. 22, 1986

"(b) LIABILITY FOR TAX.—The tax imposed by subsection (a) shall be paid by the employer. "(c) EXCESS CONTRIBUTIONS.—For purposes of this section, the term 'excess contributions' has the meaning given such term by sections 401(k)(8)(B), 403(b), 408(k)(8)(B), and 501(c)(18). "(d) EXCESS AGGREGATE CONTRIBUTION.—For purposes of this section, the term 'excess aggregate contribution' has the meaning given to such term by section 401(m)(6)(B). "(e) PLAN.—For purposes of this section, the term 'plan' means— "(1) a plan described in section 401(a) which includes a trust exempt from tax under section 501(a), ,: "(2) any annuity plan described in section 403(a), "(3) any annuity contract described in section 4030)), "(4) a simplified employee pension of an employer which satisfies the requirements of section 408(k), and "(5) a plan described in section 501(c)(18). Such term includes any plan which, at any time, has been determined by the Secretary to be such a plan. "(f) No TAX WHERE EXCESS DISTRIBUTED WITHIN 2y2 MONTHS OF CLOSE OF YEAR.—

i ^. "^/^, ^'

"(1) IN GENERAL.—No tax shall be imposed under this section on any excess contribution or excess aggregate contribution, as the case may be, to the extent such contribution (together with any income allocable thereto) is distributed (or, if forfeitable, is forfeited) before the close of the first 2y2 months of the following plan year. "(2) INCLUDED IN PRIOR YEAR.—Any amount distributed as provided in paragraph (1) shall be treated as received and earned by the recipient in his taxable year for which such contribution was made." (2) CLERICAL AMENDMENT.—The table of sections for chapter 43 is amended by adding at the end thereof the following new item: "Sec. 4979. Tax on certain excess contributions."

(c) TECHNICAL AMENDMENT.—Paragraph (2) of section 414(k) (relating to certain plans) is amended by striking out "and 415 (relating to limitations on benefits and contributions under qualified plans)" and inserting in lieu thereof ", 415 (relating to limitations on benefits and contributions under qualified plans), and 401(m) (relating to nondiscrimination tests for matching requirements and employee contributions)". (d) EFFECTIVE DATE.— •>/-><. ^ i (1) IN GENERAL.—The amendments made by this section shall •^' apply to plan years beginning after December 31, 1986. ^^'^ (2) COLLECTIVE BARGAINING AGREEMENTS.—In the case of a plan maintained pursuant to 1 or more collective bargaining agreements between employee representatives and 1 or more employers ratified before March 1, 1986, the amendments made by this section shall not apply to plan years beginning before the earlier of— (A) January 1, 1989, or 1. ' jl T (B) the date on which the last of such collective bargainj» ihi-^ ing agreements terminates (determined without regard to any extension thereof after February 28, 1986). i^ (3) ANNUITY CONTRACTS.—In the case of an annuity contract under section 403(b) of the Internal Revenue Code of 1986—

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Page:United States Statutes at Large Volume 100 Part 3.djvu/655

 PUBLIC LAW 99-514—OCT. 22, 1986

100 STAT. 2463

u

(A) the amendments made by this section shall apply to plan years beginning after December 31, 1988, and (B) in the case of a collective bargaining agreement described in paragraph (2), the amendments made by this section shall not apply to years beginning before the earlier of— .i?.^i li ^, J (i) the later of— (I) January 1, 1989, or f.r •» (II) the date determined under paragraph (2)(B), •niix or ii;' (ii) January 1, 1991. SEC. 1118. BENEFITS TREATED AS ACCRUING RATABLY FOR PURPOSES OF DETERMINING WHETHER PLAN IS TOP-HEAVY.

(a) GENERAL RULE.—Paragraph (4) of section 416(g) (defining topheavy plan) is amended by adding at the end thereof the following new subparagraph: "(F) ACCRUED BENEFITS TREATED AS ACCRUING RATABLY.—

" «' " ^

The accrued benefit of any employee (other than a key employee) shall be determined— "(i) under the method which is used for accrual puj.pQggg fQj. QJJ plans of the employer, or ,,, "(ii) if there is no method described in clause (i), as if I! -aa such benefit accrued not more rapidly than the slowest accrual rate permitted under section 411(b)(1)(C)." (b) EFFECTIVE DATE.—The amendment made by subsection (a) shall apply to plan years beginning after December 31, 1986. SEC. 1119. MODIFICATION OF RULES FOR BENEFIT FORFEITURES.

(a) GENERAL RULE.—Paragraph (8) of section 401(a) (relating to qualified pension, profit-sharing, and stock bonus plans) is amended by striking out "pension plan" and inserting in lieu thereof "defined benefit plan". (b) EFFECTIVE DATE.—The amendment made by subsection (a) shall apply to plan years beginning after December 31, 1985. SEC. 1120. NONDISCRIMINATION REQUIREMENTS FOR TAX-SHELTERED ANNUITIES.

(a) GENERAL RULE.—Paragraph (1) of section 403(b) is amended by striking out "and" at the end of subparagraph (B), by inserting "and" at the end of subparagraph (C), and by inserting after subparagraph (C) the following new subparagraph: "(D) except in the case of a contract purchased by a church, such contract is purchased under a plan which meets the nondiscrimination requirements of paragraph (10).". (b) NONDISCRIMINATION REQUIREMENTS.—Subsection (b) of section

403 is amended by adding at the end thereof the following new paragraph: "(10) NONDISCRIMINATION REQUIREMENTS.—

'

'« •

"(A) IN GENERAL.—For purposes of paragraph (1)(D), a plan meets the nondiscrimination requirements of this paragraph if— "(i) with respect to contributions not made pursuant to a salary reduction agreement, such plan meets the requirements of paragraphs (4), (5), and (26) of section

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Page:United States Statutes at Large Volume 100 Part 3.djvu/656

 100 STAT. 2464

«

PUBLIC LAW 99-514—OCT. 22, 1986

oj;iqcjj '•-:- 401(a) and section 410(b) in the same manner as if such plan were described in section 401(a), and <.;; • "(ii) all employees of the organization may elect to ^1,1 have the employer make contributions of more than i^fi r;, $200 pursuant to a salary reduction agreement if any employee of the organization may elect to have the organization make contributions for such contracts pursuant to such agreement. .v| ^ For purposes of clause (ii), there may be excluded any employee who is a participant in an eligible deferred compensation plan (within the meaning of section 457) or a qualified cash or deferred arrangement of the organization riiSffv for another annuity contract described in this subsection. Any nonresident alien described in section 410(b)(3)(C) may also be excluded. For purposes of this subparagraph, students who normally work less than 20 hours per week may (subject to the conditions applicable under section 410(b)(4)) ., be excluded. "(B) CHURCH.—For purposes of paragraph (1)(D), the term 'church' has the meaning given to such term by section .,.. 3121(w)(3)(A). Such term shall include any qualified churchcontrolled organization (as defined in section 3121(w)(3)(B))." (c) EFFECTIVE DATE.—The amendments made by this section shall apply to years beginning after December 31, 1988.

PART III—TREATMENT OF DISTRIBUTIONS SEC. 1121. MINIMUM DISTRIBUTION REQUIREMENTS.

''

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•

(a) EXCISE TAX ON FAILURE To DISTRIBUTE.—

(1) IN GENERAL.—Section 4974 is amended to read as follows: "SEC. 4974. EXCISE TAX ON CERTAIN ACCUMULATIONS IN QUALIFIED RETIREMENT PLANS.

"(a) GENERAL RULE.—If the amount distributed during the taxable year of the payee under any qualified retirement plan or any eligible deferred compensation plan (as defined in section 457(b)) is less than the minimum required distribution for such taxable year, there is hereby imposed a tax equal to 50 percent of the amount by which such minimum required distribution exceeds the actual amount distributed during the taxable year. The tax imposed by this section shall be paid by the payee. "(b) MINIMUM REQUIRED DISTRIBUTION.—For purposes of this section, the term 'minimum required distribution' means the minimum amount required to be distributed during a taxable year under section 401(a)(9), 403(b)(10), 408(a)(6), 408(b)(3), or 457(d)(2), as the case may be, as determined under regulations prescribed by the Secretary. "(c) QUALIFIED RETIREMENT PLAN.—For purposes of this section, the term 'qualified retirement plan' means— "(1) a plan described in section 401(a) which includes a trust Ei= exempt from tax under section 501(a), "(2) an annuity plan described in section 403(a), + "(3) an annuity contract described in section 403(b), "(4) an individual retirement account described in section
 * , 408(a), or

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Page:United States Statutes at Large Volume 100 Part 3.djvu/657

 PUBLIC LAW 99-514—OCT. 22, 1986

100 STAT. 2465

"(5) an individual retirement annuity described in section 408(b). Such term includes any plan, contract, account, or annuity which, at any time, has been determined by the Secretary to be such a plan, contract, account, or annuity. "(d) WAIVER OF TAX IN CERTAIN CASES.—If the taxpayer establishes to the satisfaction of the Secretary that— "(1) the shortfall described in subsection (a) in the amount distributed during any taxable year was due to reasonable error, and "(2) reasonable steps are being taken to remedy the shortfall, the Secretary may waive the tax imposed by subsection (a) for the taxable year." (2) CLERICAL AMENDMENT.—The table of sections for chapter 43 is amended by striking out the item relating to section 4974 and inserting in lieu thereof the following: "Sec. 4974. Excise tax on certain accumulations in qualified retirement plans." (b) UNIFORM REQUIRED BEGINNING DATE.—Subparagraph (C) of

section 401(a)(9) (defining required beginning date) is amended to read as follows: "(C) REQUIRED BEGINNING DATE.—For purposes of this paragraph, the term 'required beginning date' means April J 1 of the calendar year following the calendar year in which the employee attains age 70V2." (c) CONFORMING AMENDMENTS.—

(1) Subparagraph (F) of section 402(a)(5) is amended to read as follows: ^^

,^ ' !

"(F) TRANSFER TREATED AS ROLLOVER CONTRIBUTION UNDER SECTION 408.—For purposes of this title, a transfer described

in subparagraph (A) to an eligible retirement plan described in subclause (I) or (II) of subparagraph (E)(iv) shall be treated as a rollover contribution described in section 408(d)(3)." (2) Clause (ii) of section 408(d)(3)(A) is amended by striking out the third and fourth parenthetical phrases. (d) EFFECTIVE DATES.—

(1) IN GENERAL.—Except as provided in this subsection, the amendments made by this section shall apply to years beginning after December 31, 1988. (2) SUBSECTION (C).—The amendments made by subsection (c) shall apply to years beginning after December 31, 1986. (3) COLLECTIVE BARGAINING AGREEMENTS.—In the case of a plan maintained pursuant to 1 or more collective bargaining " agreements between employee representatives and 1 or more employers ratified before March 1, 1986, the amendments made by this section shall not apply to distributions to individuals covered by such agreements in plan years beginning before the earlier of— « (A) the later of— (i) the date on which the last of such collective "•' • ~ bargaining agreements terminates (determined without regard to any extension thereof after February 28, 1986), or (ii) January 1, 1989, or (B) January 1, 1991.

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Page:United States Statutes at Large Volume 100 Part 3.djvu/658

 100 STAT. 2466 J

PUBLIC LAW 99-514—OCT. 22, 1986 (4) TRANSITION RULES.—

(A) The amendments made by subsections (a) and (b) shall f . not apply with respect to any benefits with respect to which ,,., a designation is in effect under section 242(b)(2) of the Tax Equity and Fiscal Responsibility Act of 1982. rv, (B)(i) Except as provided in clause (ii), the amendment made by subsection (b) shall not apply in the case of any individual who has attained age lOVz before January 1, 1988. (ii) Clause (i) shall not apply to any individual who is a 5,i ]:. percent owner (as defined in section 416(i) of the Internal sti '• Revenue Code of 1986), at any time during— (I) the plan year ending with or within the calendar year in which such owner attains age 66 V2, and (II) any subsequent plan year. SEC. 1122. TAXATION OF DISTRIBUTIONS.

' '* '

(a) LIMITATIONS ON SPECIAL AVERAGING PROVISIONS.— (1) AVERAGING PROVISIONS LIMITED TO 1 LUMP SUM DISTRIBU-

TION AFTER AGE 59 y2.—Subparagraph (B) of section 402(e)(4) (relating to election of lump sum treatment) is amended to read as follows: "(B) AVERAGING TO APPLY TO i LUMP SUM DISTRIBUTION

AFTER AGE 59¥2. —Paragraph (1) shall apply to a lump sum distribution with respect to an employee under subparagraph (A) only if— "(i) such amount is received on or after the taxpayer ' ' ' has attained age 59 y2, and "(ii) the taxpayer elects for the taxable year to have '/'' all such amounts received during such taxable year so treated. Not more than 1 election may be made under this subparagraph by any taxpayer with respect to any employee. No election may be made under this subparagraph by any J taxpayer other than an individual, an estate, or a trust. In ' • * the case of a lump sum distribution made with respect to an employee to 2 or more trusts, the election under this subparagraph shall be made by the personal representative of the taxpayer." (2)

5-YEAR AVERAGING IN UEU OF 10-YEAR AVERAGING.—

^^. Subparagraph (C) of section 402(e)(1) (relating to initial separate tax) is amended— (A) by striking out "10 times" and inserting in lieu thereof "5 times", and (B) by striking out "one-tenth" and inserting in lieu thereof" 1/5". (h) REPEAL OF CAPITAL GAINS TREATMENT.—

(1) IN GENERAL.—The following provisions are hereby repealed: (A) Paragraph (2) of section 402(a) (relating to capital gains treatment for portion of lump sum distribution). (B) Paragraph (2) of section 403(a) (relating to capital gains treatment for certain distributions). (2) TECHNICAL AMENDMENTS.—

(A) Clause (iii) of section 402(a)(5)(D) is amended to read as follows:

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Page:Petition of E. Cady Stanton, Susan B. Anthony, Lucy Stone, and others (1865).jpg

To the Senate and House of Representatives:

The undersigned, Women of the United States, respectfully ask an amendment of the Constitution that shall prohibit the several States from disfranchising any of their citizens on the ground of sex.

In making our demand for Suffrage, we would call your attention to the fact that we represent fifteen million people—one half of the entire population of the country—intelligent, virtuous, native-born American citizens; and yet stand outside the pale of political recognition.

The Constitution classes us as "free people," and counts us whole persons in the basis of representation; and yet are we governed without our consent, compelled to pay taxes without appeal, and punished for violations of law without choice of judge or juror.

The experience of all ages, the Declarations of the Fathers, the Statute Laws of our own day, and the fearful revolution through which we have just passed, all prove the uncertain tenure of life, liberty and property so long as the ballot—the only weapon of self-protection—is not in the hand of every citizen.

Therefore, as you are now amending the Constitution, and, in harmony with advancing civilization, placing new safeguards round the individual rights of four millions of emancipated slaves, we ask that you extend the right of Suffrage to Woman—the only remaining class of disfranchised citizens—and thus fulfill your Constitutional obligation "to Guarantee to every State in the Union a Republican form of Government."

As all partial application of Republican principles must ever breed a complicated legislation as well as a discontented people, we would pray your Honorable Body, in order to simplify the machinery of government and ensure domestic tranquillity, that you legislate hereafter for persons, citizens, tax-payers, and not for class or caste.

For justice and equality your petitioners will ever pray.


text:
Page:United States Statutes at Large Volume 100 Part 3.djvu/659

 PUBLIC LAW 99-514—OCT. 22, 1986

100 STAT. 2467

"(iii) DENIAL OF IO-YEAR AVERAGING FOR SUBSEQUENT DISTRIBUTIONS.—If an election under clause (i) is made with respect to any partial distribution paid to any employee, paragraphs (1) and (3) of subsection (e) shall not apply to any distribution (paid after such partial distribution) of the balance to the credit of such employee under the plan under which such partial distribution was made (or under any other plan which, under subsection (e)(4)(C), would be aggregated with such plan)." (B) Paragraph (1) of section 402(e) is amended— (i) by striking out subparagraph (B) and by redesignating subparagraphs (C), (D), and (E) as subparagraphs (B), (C), and (D), respectively, and (ii) by striking out "The initial separate tax" in subparagraph (B) (as so redesignated) and inserting in lieu thereof "The amount of tax imposed by subparagraph (A)", and (iii) by striking out "INITIAL SEPARATE" in the head' '•' ing of subparagraph (B) (as so redesignated) and inserting in lieu thereof "AMOUNT OF TAX". (C) Paragraph (3) of section 402(e) is amended by striking out "the ordinary income portion" and inserting in lieu thereof "total taxable amount". (D) Paragraph (4) of section 402(e) is amended by striking out subparagraph (E). (E) Subparagraph (H) of section 402(e)(4) is amended by striking out "(but not for purposes of subsection (a)(2) or section 403(a)(2)(A))". (c) AMENDMENTS TO SECTION 72.— (1) REPEAL OF SPECIAL RULE FOR EMPLOYEES' ANNUITIES.—

Subsection (d) of section 72 (relating to employee's annuities where employee's contributions recoverable in 3 years) is hereby repealed. (2) AMOUNT EXCLUDED UNDER EXCLUSION RATIO LIMITED TO EMPLOYEE'S INVESTMENT IN THE CONTRACT.—Subsection (b) of

section 72 (relating to exclusion ratio) is amended to read as follows: "(b) EXCLUSION RATIO.—

"(1) IN GENERAL.—Gross income does not include that part of any amount received as an annuity under an annuity, endowment, or life insurance contract which bears the same ratio to such amount as the investment in the contract (as of the annuity starting date) bears to the expected return under the contract (as of such date). "(2) EXCLUSION LIMITED TO INVESTMENT.—The portion of any amount received as an annuity which is excluded from gross income under paragraph (1) shall not exceed the unrecovered investment in the contract immediately before the receipt of such amount. "(3) DEDUCTION WHERE ANNUITY PAYMENTS CEASE BEFORE ENTIRE INVESTMENT RECOVERED.— "(A) IN GENERAL.—If—

"(i) after the annuity starting date, payments as an annuity under the contract cease by reason of the death of an annuitant, and

,

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text:
Page:United States Statutes at Large Volume 100 Part 3.djvu/660

 100 STAT. 2468

PUBLIC LAW 99-514—OCT. 22, 1986

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"(ii) as of the date of such cessation, there is unrecovered investment in the contract, the amount of such unrecovered investment (in excess of any amount specified in subsection (e)(5) which was not included in gross income) shall be allowed as a deduction to the annuitant for his last taxable year. "(B) PAYMENTS TO OTHER PERSONS.—In the case of any contract which provides for payments meeting the requirements of subparagraphs (B) and (C) of subsection (c)(2), the deduction under subparagraph (A) shall be allowed to the person entitled to such payments for the taxable year in which such payments are received.

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"(C) N E T OPERATING LOSS DEDUCTIONS PROVIDED.—For pur-

poses of section 172, a deduction allowed under this para^j graph shall be treated as if it were attributable to a trade or business of the taxpayer. ,j,,, "(4) UNRECOVERED INVESTMENT.—For purposes of this subsection, the unrecovered investment in the contract as of any date ^,.t.. i s —

^ < ^ ^••^^

title." (3) AMOUNTS NOT RECEIVED AS ANNUITIES ALLOCATED ON A PRO RATA BASIS.—

(A) IN GENERAL.—Subsection (e) of section 72 is amended by adding at the end thereof the following new paragraphs: "(8) EXTENSION OF PARAGRAPH (2)(b) TO QUALIFIED PLANS.— "(A) IN GENERAL.—Notwithstanding any other provision of this subsection (other than paragraph (7)), in the case of any amount received before the annuity starting date from a trust or contract described in paragraph (5)(D), paragraph (2)(B) shall apply to such amounts.

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'

"(B) ALLOCATION OF AMOUNT RECEIVED.—For purposes of

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^

'-*''"

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-

"(A) the investment in the contract as of the annuity starting date, reduced by "(B) the aggregate amount received under the contract on or after such annuity starting date and before the date as of which the determination is being made, to the extent such amount was excludable from gross income under this sub-

paragraph (2)(B), the amount allocated to the investment in the contract shall be the portion of the amount described in subparagraph (A) which bears the same ratio to such amount as the investment in the contract bears to the account balance. The determination under the preceding sentence shall be made as of the time of the distribution or at such other time as the Secretary may prescribe. "(C) TREATMENT OF FORFEITABLE RIGHTS.—If an employee does not have a nonforfeitable right to any amount under any trust or contract to which subparagraph (A) applies, such amount shall not be treated as part of the account balance. "(D) INVESTMENT IN THE CONTRACT BEFORE 1987.—In the

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case of a plan which on May 5, 1986, permitted withdrawal of any employee contributions before separation from service, subparagraph (A) shall apply only to the extent that amounts received before the annuity starting date (when increased by amounts previously received under the contract after December 31, 1986) exceed the investment in the contract as of December 31, 1986.

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Page:United States Statutes at Large Volume 100 Part 3.djvu/661

 PUBLIC LAW 99-514—OCT. 22, 1986 '

r

"(9)

100 STAT. 2469

TREATMENT OF EMPLOYEE CONTRIBUTIONS AS SEPARATE

CONTRACT.—Any employee contributions (and any income allocable thereto) under a defined contribution plan shall be treated as a separate contract for purposes of this subsection." (B) CONFORMING AMENDMENT.—Subparagraph (D) of section 72(e)(5) is amended by striking out "paragraph (7)" and inserting in lieu thereof "paragraphs (7) and (8)".

(d) BENEFICIARY OF QUALIFIED ANNUITIES TAXED ONLY WHEN AMOUNTS ACTUALLY RECEIVED.—

-'

,

(1) Paragraph (1) of section 403(a) (relating to taxability of beneficiary under a qualified annuity plan) is amended to read as follows: "(1) DISTRIBUTEE TAXABLE UNDER SECTION 72.—If an annuity contract is purchased by an employer for an employee under a plan which meets the requirements of section 404(a)(2) (whether or not the employer deducts the amounts paid for the contract under such section), the amount actually distributed to any distributee under the contract shall be taxable to the distributee (in the year in which so distributed) under section 72 (relating to annuities)." (2) The second sentence of section 4030t))(l) (relating to taxability of beneficiary under annuity purchased by section 501(c)(3) organization or public school) is amended to read as follows: "The amount actually distributed to any distributee under such contract shall be taxable to the distributee (in the year in which so distributed) under section 72 (relating to annuities)." (3) The last sentence of section 403(c) (relating to taxability of beneficiary under nonqualified annuities or under annuities purchased by exempt organizations) is amended to read as follows: "In the case of any portion of any contract which is attributable to premiums to which this subsection applies, the amount actually paid or made available under such contract to any beneficiary which is attributable to such premiums shall be taxable to the beneficiary (in the year in which so paid or made available) under section 72 (relating to annuities)." (e) SPECIAL RULES FOR ROLLOVER DISTRIBUTIONS.— (1) PARTIAL ROLLOVERS.—Clause (i) of section

402(a)(5)(D) (relating to requirements for partial distributions) is amended to read as follows: X "(i) REQUIREMENTS.—Subparagraph (A) shall apply to a partial distribution only if the employee elects to f,. v. ^ have subparagraph (A) apply to such distribution and such distribution would be a lump sum distribution if I subsection (e)(4)(A) were applied— "(I) by substituting '50 percent of the balance to the credit of an employee' for 'the balance to the ,,; y credit of an employee', "(II) without regard to clause (ii) thereof, the sr I- / second sentence thereof, and subparagraph (B) of subsection (e)(4). Any distribution described in section 401(a)(28)(B)(ii) shall be treated as meeting the requirements of this i clause." (2) EXTENSION OF ROLLOVER PERIOD FOR FROZEN DEPOSITS —

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Page:United States Statutes at Large Volume 100 Part 3.djvu/662

 100 STAT. 2470

PUBLIC LAW 99-514—OCT. 22, 1986 (A) IN GENERAL.—Section 402(a)(6) (relating to special rollover rules) is amended by adding a t the end thereof the following new subparagraph: "(H) SPECIAL RULE FOR FROZEN DEPOSITS.—

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j ,-..., —«

"(i) IN GENERAL.—The 60-day period described in paragraph (5)(C) shall not— "(I) include any period during which the a m o u n t transfer r e d to the employee is a frozen deposit, or "(II) end earlier than 10 days after such a m o u n t ceases to be a frozen deposit. "(ii) FROZEN DEPOSIT.—For purposes of t h i s subparagraph, the term 'frozen deposit' means any deposit which may not be w i t h d r a w n because of— "(I) the b a n k r u p t c y or insolvency of any financial institution, or "(II) any requirement imposed by the State in which such institution is located by reason of the b a n k r u p t c y or insolvency (or t h r e a t thereof) of 1 or more financial institutions in such State. " ^g^

INDIVIDUAL

RETIREMENT

PLANS.—Section

408(d)(3)

(relating to rollover contribution) is amended by adding a t the end thereof the following n e w subparagraph: "(F) FROZEN DEPOSITS.—For purposes of this paragraph, rules similar to the rules of section 402(a)(6)(H) (relating to frozen deposits) shall apply." (g) N E T UNREALIZED APPRECIATION.—Section 402(e)(4)(J) (relating to unrealized appreciation of employer securities) is amended by adding a t the end thereof the following new sentence: "To the e x t e n t provided by the Secretary, a tax p a y e r may elect before any distribution not to h a v e this paragraph apply with respect to such distribution." (h) EFFECTIVE D A T E S. —

(1) IN GENERAL.—Except as otherwise provided in this subsection, the amendments m a d e by this section shall apply to a m o u n t s distributed after December 31, 1986, in tax a b l e year s ending after such date. (2) SUBSECTION (c).—

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(A) SUBSECTION (C)(1).—The amendment tion (c)(1) shall apply to individuals whose date is after July 1, 1986. (B) SUBSECTION (C)(2).—The amendment tion (c)(2) shall apply to individuals whose date is after December 31, 1986.

m a d e by subsecannuity starting m a d e by subsecannuity starting

(C) SPECIAL RULE FOR AMOUNTS NOT RECEIVED AS A N N U -

'^;* '^

ITIES.—In the case of any plan not described in section 72(e)(8)(D) of the I n t e r n a l Revenue Code of 1986 (as added by subsection (c)(3)), the amendments m a d e by subsection (c)(3) shall apply to a m o u n t s received after July 1, 1986. (3) SPECIAL RULE FOR INDIVIDUALS W H O ATTAINED AGE SO BEFORE J A N U A R Y 1, 1986. —

(A) IN GENERAL.—In the case of a l u m p s u m distribution to which this paragraph applies— (i) the existing capital gains provisions shall continue to apply, and (ii) the requirement of subparagraph (B) of section ••''•-• 402(e)(4) of the I n t e r n a l Revenue Code of 1986 (as

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Page:United States Statutes at Large Volume 100 Part 3.djvu/663

 PUBLIC LAW 99-514—OCT. 22, 1986 T.-,

100 STAT. 2471

amended by subsection (a)) that the distribution be received after attaining age 59 ¥2 shall not apply. (B) COMPUTATION OF TAX.—If subparagraph (A) applies to

any lump sum distribution of any taxpayer for any taxable year, the tax imposed by section 1 of the Internal Revenue Code of 1986 on such taxpayer for such taxable year shall be equal to the sum of— (i) the tax imposed by such section 1 on the taxable income of the taxpayer (reduced by the portion of such lump sum distribution to which clause (ii) applies), plus (ii) 20 percent of the portion of such lump sum distribution to which the existing capital gains provisions continue to apply by reason of this paragraph.

f (]

(C) LUMP SUM DISTRIBUTIONS TO WHICH PARAGRAPH AP-

.*! 5<, "

m^A,

PLIES.—This paragraph shall apply to any lump sum distribution if— (i) such lump sum distribution is received by an individual who has attained age 50 before January 1, 1986, and (ii) the taxpayer makes an election under this paragraph. Not more than 1 election may be made under this paragraph with respect to an employee. An election under this subparagraph shall be treated as an election under section 402(e)(4)(B) of such Code with respect to any other lump sum distribution. (4) 5-YEAR P H A S E - O U T OF CAPITAL GAINS TREATMENT.—

(A) Notwithstanding the amendment made by subsection (b), if the taxpayer elects the application of this paragraph with respect to any distribution after December 31, 1986, and before January 1, 1992, the phase-out percentage of the amount which would have been treated, without regard to this subparagraph, as long-term capital gain under the existing capital gains provisions shall be treated as longterm capital gain. (B) For purposes of this paragraph—

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iei/< Sfi' 5. i^ '^•^'^^ -:•-':--•

In the case of distributions during calendar year: 1987 1988 1989 1990 1991

The phase-out percentage is: 100 95 75 50 25.

(C) No more than 1 election may be made under this paragraph with respect to an employee. An election under this paragraph shall be treated as an election under section 402(e)(4)(B) of the Internal Revenue Code of 1986 with respect to any other lump sum distribution. (5) ELECTION OF IO-YEAR AVERAGING.—An individual who has attained age 50 before January 1, 1986, and elects the application of paragraph (3) or section 402(e)(1) of the Internal Revenue Code of 1986 (as amended by this Act) may elect to have such section applied by substituting "10 times" for "5 times" and "Vio" for "Vs" in subparagraph (B) thereof. For purposes of the preceding sentence, section 402(e)(1) of such Code shall be applied by using the rate of tax in effect under section 1 of the

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Page:United States Statutes at Large Volume 100 Part 3.djvu/664

 100 STAT. 2472

PUBLIC LAW 99-514—OCT. 22, 1986 Internal Revenue Code of 1954 for taxable years beginning during 1986. (6) EXISTING CAPITAL GAIN PROVISIONS.—For purposes of paragraphs (3) and (4), the term 'existing capital gains provisions' means the provisions of paragraph (2) of section 402(a) of the Internal Revenue Code of 1954 (as in effect on the day before the date of the enactment of this Act) and paragraph (2) of section 403(a) of such Code (as so in effect). (7) SUBSECTION (d).—The amendments made by subsection (d) shall apply to taxable years beginning after December 31, 1985. (8) FROZEN DEPOSITS.—The amendments made by subsection (e)(2) shall apply to amounts transferred to an employee before, on, or after the date of the enactment of this Act, except that in the case of an amount transferred on or before such date, the 60-day period referred to in section 402(a)(5)(C) of the Internal Revenue Code of 1986 shall not expire before the 60th day after the date of the enactment of this Act.

SEC. 1123. UNIFORM ADDITIONAL TAX ON EARLY DISTRIBUTIONS FROM QUALIFIED RETIREMENT PLANS.

(a) IN GENERAL.—Section 72 (relating to annuities; certain proceeds of endowment and life insurance contracts) is amended by redesignating subsection (t) as subsection (u) and by inserting after subsection (s) the following new subsection: "(t) 10-PERCENT ADDITIONAL TAX ON EARLY DISTRIBUTIONS FROM QUALIFIED RETIREMENT PLANS.—

"(1) IMPOSITION OF ADDITIONAL TAX.—If any taxpayer receives

any amount from a qualified retirement plan (as defined in section 4974(c)), the taxpayer's tax under this chapter for the taxable year in which such amount is received shall be increased by an amount equal to 10 percent of the portion of such amount which is includible in gross income. "(2) SUBSECTION NOT TO APPLY TO CERTAIN DISTRIBUTIONS.—

Except as provided in paragraphs (3) and (4), paragraph (1) shall not apply to any of the following distributions: "(A) IN GENERAL.—Distributions which are— "(i) made on or after the date on which the employee
 * ...ffKi

attains age 59y2, '••i^'•• "(ii) made to a beneficiary (or to the estate of the employee) on or after the death of the employee, "(iii) attributable to the employee's being disabled ft,; within the meaning of subsection (m)(7), "(iv) part of a series of substantially equal periodic payments (not less frequently than annually) made for the life (or life expectancy) of the employee or the joint lives (or joint life expectancies) of such employee and his beneficiary, "(v) made to an employee after separation from service on account of early retirement under the plan after '" attainment of age 55, or "(vi) dividends paid with respect to stock of a corporation which are described in section 404(k). "(B) MEDICAL EXPENSES.—Distributions made to the em^ ployee (other than distributions described in subparagraph (A) or (O) to the extent such distributions do not exceed the amount allowable as a deduction under section 213 to the employee for amounts paid during the taxable year for

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Page:United States Statutes at Large Volume 100 Part 3.djvu/665

 P U B L I C L A W 9 9 - 5 1 4 — O C T. 22, 1986

100 S T A T. 2473

medical care (determined without regard to w h e the r the employee itemizes deductions for such taxable year). "(C) CERTAIN PLANS.—

^ ^.'i;

"(i) IN GENERAL.—Except as provided in clause (ii), any distribution m a d e before January 1, 1990, to a n employee from a n employee stock ownership plan defined in section 4975(e)(7) to the e x t e n t that, on average, a majority of assets in the plan h a v e been invested in employer securities (as defined in section 409(1)) for the 5-plan-year period preceding the plan year in which the distribution is made. "(ii) B E N E F I T S DISTRIBUTED MUST BE INVESTED I N EM-

PLOYER SECURITIES FOR 5 YEARS.—Clause (i) shall not apply to any distribution which is a t t r i b u t a b l e to assets which have not been invested in employer securities a t all times during the period referred to in clause (i). "(D) P A Y M E N T S TO ALTERNATE PAYEES PURSUANT TO QUALI-

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FiED DOMESTIC RELATIONS ORDERS.—Any distribution to a n a l t e r n a t e payee pursuant to a qualified domestic relations order (within the m e a n i n g of section 414(p)(l)). "(3) LIMITATIONS.— "(A)

J

CERTAIN EXCEPTIONS NOT TO APPLY TO INDIVIDUAL

RETIREMENT P L A N S. — Subparagraph s (A)(v), (B), and (C) of

paragraph (2) shall not apply to distributions from individual retirement plan. "(B)

an

PERIODIC PAYMENTS UNDER QUALIFIED PLANS MUST

BEGIN AFTER SEPARATION.—Paragraph (2)(A)(iv) shall not apply to any a m o u n t paid from a t r u s t described in section 401(a) which is exempt from tax under section 501(a) or from a contract described in section 72(e)(5)(D)(ii) unless the series of payments begins after the employee s e p a r a t e s from service. "(4) C H A N G E I N SUBSTANTIALLY EQUAL PAYMENTS.— "(A) IN GENERAL.—If—

"(i) paragraph (1) does not apply to a distribution by reason of paragraph (2)(A)(iv), and "(ii) the series of payments under such paragraph a r e subsequently modified (other than by reason of death or disability)— , "(I) before the close of the 5-year period begin''' • • ning with the date of the first payment and after the employee a t t a i n s age 59 y2, or "(II) before the employee a t t a i n s age 59 V2, the tax p a y e r ' s tax for the 1st taxable year in which such modification occurs shall be increased by a n a m o u n t, determined under regulations, equal to the tax which (but for paragraph (2)(A)(iv)) would have been imposed, plus interest for the deferral period. "(B) DEFERRAL PERIOD.—For purposes of this paragraph, the term 'deferral period' means the period beginning w i t h the taxable year in which (without regard to paragraph (2)(A)(iv)) the distribution would h a v e been includible in gross income and ending with the taxable year in which the modification described in subparagraph (A) occurs. "(5) EMPLOYEE.—For purposes of this subsection, the term 'employee' includes any participant, and in the case of a n

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