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 88 STAT. ]

PUBLIC LAW 93-406-SEPT. 2, 1974

965

Second Liberty Bond Act, as amended, which by its terms, or by ^i use 774. regulations prescribed by the Secretary or his delegate under such Act— "(1) provides for payment of interest, or investment yield, only on redemption; "(2) provides that no interest, or investment yield, is payable if the bond is redeemed within 12 months after the date of its issuance; "(3) provides that it ceases to bear interest, or provide investment yield on the earlier of— " (A) the date on which the individual in whose name it is purchased (hereinafter in this section referred to as the 'registered owner') attains age 701/2; or " (B) 5 years after the date on which the registered owner dies, but not later than the date on which he would have attained the age 70i/^ had he lived; "(4) provides that, except in the case of a rollover contribution described in subsection (b)(3)(C) or in section 402(a)(5), ^J^°«''p^^^^^i, 403(a)(4), or 408(d)(3) the registered owner may not contribute ^°^i| p.* 959.' for the purchase of such bonds in excess of $1,500 in any taxable year; and "(5) is not transferable. " (b) INCOME T A X TREATMENT OF BONDS.—

"(1) IN GENERAL.—Except as otherwise provided in this subsection, on the redemption of a retirement bond the entire proceeds shall be included in the gross income of the taxpayer entitled to the proceeds on redemption. If the registered owner has not tendered it for redemption before the close of the taxable year in which he attains age 701^, such individual shall include in his gross income for such taxable year the amount of proceeds he would have received if the bond had been redeemed at age 701^. The provisions of section 72 (relating to annuities) and section ^^ "^^ ^21232 (relating to bonds and other evidences of indebtedness) shall not apply to a retirement bond. " (2) BASIS.—The basis of a retirement bond is zero. " (3) EXCEPTIONS.— " (A) REDEMPTION WITHIN

12 MONTHS.—If a retirement bond is redeemed within 12 months after the date of its issuance, the proceeds are excluded from gross income if no deduction is allowed under section 219 on account of the ^"*^' P- ^^^• purchase of such bond. " (B) REDEMPTION AFTER AGE 70i.—If a retirement bond is redeemed after the close of the taxable year in which the registered owner attains age 701/^, the proceeds from the redemption of the bond are excluded from the gross income of the registered owner to the extent that such proceeds were includible in his gross income for such taxable year. " (C) ROLLOVER INTO AN INDIVIDUAL RETIREMENT ACCOUNT O ANNUITY OR A QUALIFIED PLAN.—If a retirement bond is R

redeemed at any time before the close of the taxable year in which the registered owner attains age 70i/^, and the registered owner transfers the entire amount of the proceeds from the redemption of the bond to an individual retirement account described in section 408(a) or to an individual retire- Ante, p. 959. ment annuity described in section 408(b) (other than an endowment contract) which is maintained for the benefit of the registered owner of the bond, or to an employees' trust described in section 401(a) which is exempt from tax under 26 USC 401, 26 section 501(a), or an annuity plan described in section 403(a) 403. u s e 501,

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 966

26 USC 403.

26 USC 401,

PUBLIC LAW 93-406-SEPT. 2, 1974

[88 STAT.

for the benefit of the registered owner, on or before the 60th day after the day on which he received the proceeds of such redemption, then the proceeds shall be excluded from gross income and the transfer shall be treated as a rollover contributJQj^ described in section 403(d)(3). This subparagraph does not apply in the case of a transfer to such an employees' trust or such an annuity plan unless no part of the value of such proceeds is attributable to any source other than a rollover contribution from such an employees' trust or annuity plan (other than an annuity plan or a trust forming part of a plan under which the individual was an employee within the meaning of section 401(c)(1) at the time contributions were made on his behalf under the plan). " (c) ADDITIONAL TAX ON CERTAIN REDEMPTIONS BEFORE AGE 591/^.— "(1) EARLY REDEMPTION or BOND.—If a retirement bond is

26 USC 72.

redeemed by the registered owner before he attains age 591^, his tax under this chapter for the taxable year in which the bond is redeemed shall be increased by an amount equal to 10 percent of the amount of the proceeds of the redemption includible in his gross income for the taxable year. "(2) DISABILITY CASES.—Paragraph (1) does not apply for any taxable year during which the retirement bond is redeemed if, for that taxable year, the registered owner is disabled within the meaning of section 72(m)(7). "(3) REDEMPTION WITHIN ONE YEAR.—Paragraph (1) does not apply if the registered owner tenders the bond for redemption within 12 months after the date of its issuance.", (d) EXCISE TAX ON EXCESS CONTRIBUTIONS.—Chapter 43 (relating

26 USC 4973.

to qualified pension, etc., plans) is amended by inserting after section 4972 the following new section: «gj,(. 4973 rp^^ ON EXCESS CONTRIBUTIONS TO INDIVIDUAL RETIREMENT ACCOUNTS, CERTAIN SECTION 403(b) CONTRACTS, CERTAIN INDIVIDUAL RETIREMENT ANNUITIES, AND CERTAIN RETIREMENT BONDS. " (a) TAX IMPOSED.—In the case of—

^n.e.p. 959. Ante, p. 940. Ante, p. 964.

"(1) an individual retirement account (within the meaning of section 4p8 (a)), "(2) an individual retirement annuity (within the meaning of section 408(b)), a custodial account treated as an annuity con|.j.g^^^ under section 403(b)(7)(A) (relating to custodial accounts for regulated investment company stock), or u (^^>^ ^ retirement bond (within the meaning of section 409), established for the benefit of any individual, there is imposed for each taxable year a tax in an amount equal to 6 percent of the amount of the excess contributions to such individual's accounts, annuities, or bonds (determined as of the close of the taxable year). The amount of such tax for any taxable year shall not exceed 6 percent of the value of the account, annuity, or bond (determined as of the close of the taxable year). I n the case of an endowment contract described in section 408(b), the tax imposed by this section does not apply to any amount allocable to life, health, accident, or other insurance under such contract. The tax imposed by this subsection shall be paid by such individual, "(b) EXCESS CONTRIBUTIONS.—For purposes of this section, in the case of individual retirement accounts, individual retirement annuities, or bonds, the term 'excess contributions' means the sum of— "(1) the excess (if any) of—

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


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 88 STAT. ]

PUBLIC LAW 93-406-SEPT. 2, 1974

967

" (A) the amount contributed for the taxable year to the accounts or for the annuities or bonds (other than a rollover contribution described in section 402(a)(5), 403(a)(4), 408 ^°«;. PP. 99I. (d)(3)),or409(b)(3)(C),over _ 959; g e t " ' " " (B) the amount allowable as a deduction under section 219 for such contributions, and "(2) the amount determined under this subsection for the preceding taxable year, reduced by the excess (if any) of the maximum amount allowable as a deduction under section 219 for the ^"'^' P- ^^^• taxable year over the amount contributed to the accounts or for the annuities or bonds for the taxable year and reduced by the sum of the distributions out of the account (for all prior taxable years) which were included in the gross income of the payee under section 408(d)(1). For purposes of this paragraph, any contribution which is distributed out of the individual retirement account, individual retirement annuity, or bond in a distribution to which section 408(d)(4) applies shall be treated as an amount not contributed. "(c) SECTION 403(b) CONTRACTS.—For purposes of this section, in "Excess conthe case of a custodial account referred to in subsection (a)(3), the tributions." term 'excess contributions' means the sum of— "(1) the excess (if any) of the amount contributed for the taxable year to such account, over the lesser of the amount excludable from gross income under section 403(b) or the amount permitted 26 USC 403. to be contributed under the limitations contained in section 415 ^osf, p. 979. (or under whichever such section is applicable, if only one is applicable), and "(2) the amount determined under this subsection for the preceding taxable year, reduced by— " (A) the excess (if any) of the lesser of (i) the amount excludable from gross income under section 403(b) or (ii) the amount permitted to be contributed under the limitations contained in section 415 over the amount contributed to the account for the taxable year (or under whichever such section is applicable, if only one is applicable), and " (B) the sum of the distributions out of the account (for all prior taxable years) which are included in gross income under section 72(e)." 26 USC 72. (e)

EXCISE TAX ON EXCESSIVE ACCUMULATIONS.—Chapter 43

is

amended by inserting after section 4973 the following new section: "SEC. 4974. EXCISE TAX ON CERTAIN ACCUMULATIONS IN INDIVIDUAL RETIREMENT ACCOUNTS OR ANNUITIES. " (a) IMPOSITION OF TAX.—If, in the case of an individual retirement account or individual retirement annuity, the amount distributed during the taxable year of the payee is less than the minimum amount required to be distributed under section 408(a)(6) or (7), or 408(b) (3) or (4) during such year, there is imposed a tax equal to 50 percent of the amount by which the minimum amount required to be distributed during such year exceeds the amount actually distributed during the year. The tax imposed by this section shall be paid by such payee. "(b) REGULATIONS.—For purposes of this section, the minimum amount required to be distributed during a taxable year under section 408(a)(6) or (7) or 408(b)(3) or (4) shall be determined under regulations prescribed by the Secretary or his delegate.". (f)

PENALTY FOR FAILURE To

PROVIDE REPORTS ON INDIVIDUAL

RETIREMENT ACCOUNTS.—Subchapter B of chapter 68 (relating to assessable penalties) is amended by adding at the end thereof the followins: new section:

26 USC 4974.

"*"'*' P" ^^^'

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 968

PUBLIC LAW 93-406-SEPT. 2, 1974

26 USC 6693. An"e/*p.' 959.

/

«SEC. 6693. FAILURE TO PROVIDE REPORTS ON INDIVIDUAL RETIREMENT ACCOUNTS OR ANNUITIES. " (^) The persoii required by section 408(i) to file a report regarding an individual retirement account or individual retirement annuity at the time and in the manner required by section 408(i) shall pay a penalty of $10 for each failure unless it is shown that such failure is due to reasonable cause. "(b)

26 USC 6211.

26 USC 46. 50A. tT:^os,V^'

Post, p. 987.

26 USC 901.

26 USC 56. 26 USC 402.

26 USC 401 26 USC 501

DEFICIENCY PROCEDURES NOT To APPLY.—Subchapter B of

chapter 63 (relating to deficiency procedures for income, estate, gift, and certain excise taxes) does not apply to the assessment or collection of any penalty imposed by subsection (a).". (g)

26 USC 37.

[88 STAT.

CONFORMING AMENDMENTS.—

(2) Section 37(c)(1) (defining retirement income) is amended— (A) by striking out "and" at the end of subparagraph (D), (B) by adding at the end of subparagraph (E) the following: "retirement bonds described in section 409, and", and (C) by adding at the end thereof the following new paragraph: " (F) an individual retirement account described in section 408(a) or an individual retirement annuity described in section 408(b), or". (2) The second sentence of section 46(a)(3) and the second sentence of section 50A(a)(3), as each is amended by sections 2001 (g)(2)(B) and 2005(c)(4) of this Act, are each amended by inserting after "owner-employees)," the following: "section 408 (e) (relating to additional tax on income fiom certain retirement accounts),". (3) The third sentence of section 901(a), as amended by section 2005(c)(5) of this Act, is amended by inserting "against the tax imposed for the taxable year by section 408(f) (relating to additional tax on income from certain retirement accounts)," before "against the tax imposed by section 531". ^^.'j Subparagraph (A) of section 56(a)(2) and paragraph (1) of section 56(c) are each amended by striking out "531" and inserting in lieu thereof "408(f), 531,". (5) Section 402(a) (relating to taxability of beneficiary of exempt trust), as amended by section 2005(c)(2) of this Act, is amended by inserting after paragraph (5) the following new paragraph: "(5) ROLLOVER AMOUNTS.—In the case of an employees' trust described in section 401(a) which is exempt from tax under section 501(a), if— " (A) the balance to the credit of an employee is paid to him on one or more distributions which constitute a lump sum distribution within the meaning of subsection (e)(4)(A) (determined without reference to subsection (e)(4)(B)), " (B)(i) the employee transfers all the property he receives in such distribution to an individual retirement account described in section 408(a), an individual retirement annuity described in section 408(b) (other than an endowment contract), or a retirement bond described in section 409, on or before the 60th day after the day on which he received such property, to the extent the fair market value of such property exceeds the amount referred to in subsection (e)(4)

(D)Oi),or

"(ii) the employee transfers all the property he receives in such distribution to an employees' trust described in section 401(a) which is exempt from tax under section 501(a),

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 88 STAT. ]

PUBLIC LAW 93-406-SEPT. 2, 1974

or to an annuity plan described in section 403(a) on or before the 60th day after the day on which he received such property, to the extent the fair market value of such property exceeds the amount referred to in subsection (e)(4)(D)(i), and " (C) the amount so transferred consists of the property (other than money) distributed, to the extent that the fair market value of such property does not exceed the amount required to be transferred pursuant to subparagraph (B), then such distributions are not includible in gross income for the year in which paid. For purposes of this title, a transfer described in subparagraph (B)(i) shall be treated as a rollover contribution as described in section 4 0 8 (d)(3). Subparagraph (B) (ii) does not apply in the case of a transfer to an employees' trust, or annuity plan if any part of the lump sum distribution described in subparagraph (A) is attributable to a trust forming part of a plan under which the employee was an employee within the meaning of section 401(c)(1) at the time contributions were made on his behalf under the plan." (6) Section 403(a) (relating to taxation of employee annuities) is amended by adding after paragraph (3) the following new paragraph: "(4) ROLLOVER AMOUNTS.—In the case of an employee annuity described in 403 (a), if— " (A) the balance to the credit of an employee is paid to him in one or more distributions which constitute a lump sum distribution within the meaning of section 4 0 2 (e)(4)(A) determined without reference to section 402(e)(4)(B), " (B)(i) the employee transfers all the property he receives in such distribution to an individual account described in section 408(a), an individual retirement annuity described in section 408(b) (other than an endowment contract), or a retirement bond described in section 409, on or before the 60th day after the day on which he received such property to the extent the fair market value of such property exceeds the amount referred to in section 402(e)(4)(D)(i),or "(ii) the employee transfers all the property he receives in such distribution to an employees' trust described in section 401(a) which is exempt from tax under section 601(a), or to an annuity plan described in subsection (a) on or before the 60th day after the day on which he received such property to the extent the fair market value of such property exceeds the amount referred to in section 402(e)(4)(D)(i), and " (C) the amount so transferred consists of the property distributed to the extent that the fair market value of such property does not exceed the amount required to be transferred pursuant to subparagraph (B), then such distribution is not includible in gross income for the year in which paid. For purposes of this title, a transfer described in subparagraph (B)(i) shall be treated as a rollover contribution described in section 408(d)(3). Subparagraph (B) (ii) does not apply in the case of a transfer to an employees' trust, or annuity plan if any part of the lump sum distribution described in subparagraph (A) is attributable to an annuity plan under which the employee was an employee within the meaning of section 401(c)(1) at the time contributions were made on his behalf under the plan.".

969 26 USC 403.

^"'e. P-959.

26 USC 402.

'*"'^' ^' ^^'*'

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 970 ^^ "^^ ^'*°Ante, p. 958.

26 USC 6047.

Ante, p. 959. ferves°" '''^" 26 USC 805.

26 USC 72.

26 USC 801.

PUBLIC LAW 93-406-SEPT. 2, 1974

[88 STAT.

(Y) Section 3401(a) (12) (relating to exemption from collection of income tax at source on certain wages) is amended by adding at the end thereof the following new subparagraph: " (D) for a pajmcut described in section 219(a) if, at the time of such payment, it is reasonable to believe that the employee will be entitled to a deduction under such section for payment; or", (8) Section 6047 (relating to information relating to certain trusts and annuity and bond purchase plans) is amended by redesignating subsection (d) as subsection (e) and by inserting after subsection (c) the following new subsection: " (d) OTHER PROGRAMS.—To the extent provided by regulations prescribed by the Secretary or his delegate, the provisions of this section apply with respect to any payment described in section 219(a) g^j^^j ^Q trausactious of any trust described in section 408(a) or under an individual retirement annuity described in section 408(b).". (9) Section 805(d)(1) (relating to definition of pension plan reserves) is amended by striking out "or" at the end of subparagraph (C), by striking out "foregoing." at the end of subparagraph (D) and inserting in lieu thereof "foregoing; or", and by adding at the end thereof the following new subparagraph: " (E) purchased under contracts entered into with trusts which (at the time the contracts were entered into) were individual retirement accounts described in section 408(a) or under contracts entered into with individual retirement annuities described in section 408(b)." ^iQ^ Section 72 (relating to annuities) is amended— (A) by inserting after "501 (a) " in subsection (m)(4)(A) ", an individual retirement amount described in section 408(a), an individual retirement annuity described in section 408(b)"._ (B) by striking out at the end of subsection (m)(6) "401 (c)(3) " and inserting in lieu thereof "401 (c)(3) and includes an individual for whose benefit an individual retirement account or annuity described in section 408(a) or (b) is maintained". (11) Section 801(g)(7) (relating to basis of assets held for qualified pension plan contracts) is amended by striking out "or (D) " and inserting in lieu thereof " (D), or (E) ". (h)

CLERTCAL AMENDMENTS.—

(1) The table of sections for part VII of subchapter B of chapter 1 is amended by striking out the item relating to section 219 and inserting in lieu thereof the following: "Sec. 219. Retirement savings. "Sec. 220. Cross references.'". (2) The table of sections for subpart A of part I of subchapter D of chapter 1 is amended by adding at the end thereof the following: "Sec. 408. Individual retirement accounts. "Sec. 409. Retirement bonds.". (3) The table of sections for chapter 43 is amended by inserting afte^" the item relating to section 4972 the following new items: "Sec. 4973. Tax on excess contributions to individual retirement accounts, certain 403(b) contracts, certain individual retirement annuities, and certain retirement bonds. "Sec. 4974. Tax on certain accumulations in individual retirement accounts. "Sec. 4975. Tax on prohibited transactions.".

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 88 STAT. ]

PUBLIC LAW 93-406-SEPT. 2, 1974

971

(4) The table of sections for subchapter B of chapter 68 is amended by adding at the end thereof the following new item: "Sec. 6693. Failure to provide reports on individual accounts or annuities.".

retirement

(i) EFFECTIVE D A T E S. —

26

219

(1) The amendments made by subsections (a), (b), and (c) note, use apply to taxable years beginning after December 31, 1974. 26 (2) The amendments made by subsections (d) through (h) note, use 4973 except subsection (g)(5) and (6) shall take effect on January 1, 1975. 26 (3) The amendments made by subsection (g)(5) and (6) note, use 4 02 shall apply on and after the date of enactment of this Act with respect to contributions to an employees' trust described in section 401(a) of the Internal Revenue Code of 1954 which is exempt from tax under section 501(a) of such Code or an annuity plan described in section 403(a) of such Code.

SEC. 2003. PROHIBITED TRANSACTIONS. (a) EXCISE TAX ON PROHIBITED TRANSACTIONS.—Chapter 43 (relat-

ing to qualified pension, etc., plans) is amended by adding after section 4974 the following new section: "SEC. 4975. TAX ON PROHIBITED TRANSACTIONS. " (a) INITIAL TAXES ON DISQUALIFIED PERSON.—There is hereby

imposed a tax on each prohibited transaction. The rate of tax shall be equal to 5 percent of the amount involved with respect to the prohibited transaction for each year (or part thereof) in the taxable period. The tax imposed by this subsection shall be paid by any disqualified person who participates in the prohibited transaction (other than a fiduciary acting only as such). " (b) ADDITIONAL TAXES ON DISQUALIFIED PERSON.—In any case in which an initial tax is imposed by subsection (a) on a prohibited transaction and the transaction is not corrected within the correction period, there is hereby imposed a tax equal to 100 percent of the amount involved. The tax imposed by this subsection shall be paid by any disqualified person who participated in the prohibited transaction (other than a fiduciary acting only as such). " (c) PROHIBITED TRANSACTION.— "(1) GENERAL RULE.—For purposes of this section, the term

'prohibited transaction' means any direct or indirect— " (A) sale or exchange, or leasing, of any property between a plan and a disqualified person; " (B) lending of money or other extension of credit between a plan and a disqualified person; " (C) furnishing of goods, services, or facilities between a plan and a disqualified person; " (D) transfer to, or use by or for the benefit of, a disqualified person of the income or assets of a plan; " (E) act by a disqualified person who is a fiduciary whereby he deals with the income or assets of a plan in his own interest or for his own account; or " (F) receipt of any consideration for his own personal account by any disqualified person who is a fiduciary from any party dealing with the plan in connection with a transaction involving the income or assets of the plan. "(2) SPECIAL EXEMPTION.—The Secretary or his delegate shall establish an exemption procedure for purposes of this subsection. Pursuant to such procedure, he may grant a conditional or unconditional exemption of any disqualified person or transaction,

26 USC 4975.

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Page:United States Statutes at Large Volume 88 Part 1.djvu/1016

 972

Exemption.

ti<^°in''Fedemi'^^" Regis'ter.^ ^^^

Ante, p. 883.

PUBLIC LAW 93-406-SEPT. 2, 1974

[88 STAT.

orders of disqualified persons or transaxjtions, from all or part of the restrictions imposed by paragraph (1) of this subsection. Action under this subparagraph may be taken only after consultation and coordination with the Secretary of Labor. The Secretary or his delegate may not grant an exemption under this paragraph unless he finds that such exemption is— " (A) administratively feasible, " (B) in the interests of the plan and of its participants and beneficiaries, and " (C) protective of the rights of participants and beneficiaries of the plan. Before granting an exemption under this paragraph, the Secretary or his delegate shall require adequate notice to be given to interested persons and shall publish notice in the Federal Register of the pendency of such exemption and shall afford interested persons an opportunity to present views. No exemption may be granted under this paragraph with respect to a transaction described in subparagraph (E) or (F) of paragraph (1) unless the Secretary or his delegate affords an opportunity for a hearing and makes a determination on the record with respect to the findings required under subparagraphs (A), (B), and (C) of this paragraph, except that in lieu of such hearing the Secretary or his delegate may accept any record made b j the Secretary of Labor with respect to an application for exemption under section 408(a) of title I of the Employee Retirement Income Security Act of 1974. "(3)

SPECIAL RULE FOR INDIVIDUAL RETIREMENT ACCOUNTS.—An

individual for whose benefit an individual retirement account is established and his beneficiaries shall be exempt for the tax imposed by this section with respect to any transaction concerning such account (which would otherwise be taxable under this section) if, with respect to such transaction, the account ceases to be an individual retirement account by reason of the application of section 408(e)(2)(A) or if section 408(e)(4) applies to such account. " (d) EXEMPTIONS.—The prohibitions provided in subsection (c) shall not apply to— " (1) any loan made by the plan to a disqualified person who is a participant or beneficiary of the plan if such loan— " (A) is available to all such participants or beneficiaries on a reasonably equivalent basis, " (B) is not made available to highly compensated employees, officers, or shareholders in an amount greater than the amount made available to other employees, " (C) is made in accordance with specific provisions regarding such loans set forth in the plan, " (D) bears a reasonable rate of interest, and " (E) is adequately secured; "(2) any contract, or reasonable arrangement, made with a disqualified person for office space, or legal, accounting, or other services necessary for the establishment or operation of the plan, if no more than reasonable compensation is paid therefor; "(3) any loan to an employee stock ownership plan (as defined in subsection (e)(7)),if— " (A) such loan is primarily for the benefit of participants and beneficiaries of the plan, and " (B) such loan is at a reasonable rate of interest, and any collateral which is given to a disqualified person by the plan consists only of qualifying employer securities (as defined in subsection (e)(8));

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 88 STAT. ]

PUBLIC LAW 93-406-SEPT. 2, 1974

"(4) the investment of all or part of a plan's assets in deposits which bear a reasonable interest rate in a bank or similar financial institution supervised by the United States or a State, if such bank or other institution is a fiduciary of such plan and if— " (A) the plan covers only employees of such bank or other institution and employees of affiliates of such bank or other institution, or " (B) such investment is expressly authorized by a provision of the plan or by a fiduciary (other than such bank or institution or affiliates thereof) who is expressly empowered by the plan to so instruct the trustee with respect to such investment; "(5) any contract for life insurance, health insurance, or annuities with one or more insurers which are qualified to do business in a State if the plan pays no more than adequate consideration, and if each such insurer or insurers is— " (A) the employer maintaining the plan, or " (B) a disqualified person which is wholly owned (directly or indirectly) by the employer establishing the plan, or by any person which is a disqualified person with respect to the plan, but only if the total premiums and annuity considerations written by such insurers for life insurance, health insurance, or annuities for all plans (and their employers) with respect to which such insurers are disqualified persons (not including premiums or annuity considerations written by the employer maintaining the plan) do not exceed 5 percent of the total premiums and annuity considerations written for all lines of insurance in that year by such insurers (not including premiums or annuity considerations written by the employer maintaining the p l a n); "(6) the provision of any ancillary service by a bank or similar financial institution supervised by the United States or a State, if such service is provided at not more than reasonable compensation, if such bank or other institution is a fiduciary of such plan, and if— " (A) such bank or similar financial institution has adopted adequate internal safeguards which assure that the provision of such ancillary service is consistent with sound banking and financial practice, as determined by Federal or State supervisory authority, and " (B) the extent to which such ancillary service is provided is subject to specific guidelines issued by such bank or similar financial institution (as determined by the Secretary or his delegate after consultation with Federal and State supervisory authority), and under such guidelines the bank or similar financial institution does not provide such ancillary service— " (i) in an excessive or unreasonable manner, and "(ii) in a manner that would be inconsistent with the best interests of participants and beneficiaries of employee benefit plans; "(7) the exercise of a privilege to convert securities, to the extent provided in regulations of the Secretary or his delegate, but only if the plan receives no less than adequate consideration pursuant to such conversion; " (8) any transaction between a plan and a common or collective trust fund or pooled investment fund maintained by a disqualified person which is a bank or trust company supervised by a State or

973

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 974

Post, p. 1025. 26 USC 406. Ante, p. 959.

26 USC 267.

26 USC 1379.

PUBLIC LAW 93-406-SEPT. 2, 1974

[88 STAT.

Federal agency or between a plan and a pooled investment fund of an insurance company qualified to do business in a State if— " (A) the transaction is a sale or purchase of an interest in the fund, " (B) the bank, trust company, or insurance company receives not more than reasonable compensation, and " (C) such transaction is expressly permitted by the instrument under which the plan is maintained, or by a fiduciary (other than the bank, trust company, or insurance company, or an affiliate thereof) who has authority to manage and control the assets of the plan; " (9) receipt by a disqualified person of any benefit to which he may be entitled as a participant or beneficiary in the plan, so long as the benefit is computed and paid on a basis which is consistent with the terms of the plan as applied to all other participants and beneficiaries; "(10) receipt by a disqualified person of any reasonable compensation for services rendered, or for the reimbursement of expenses properly and actually incurred, in the performance of his duties with the plan, but no person so serving who already receives full-time pay from an employer or an association of employers, whose employees are participants in the plan or from an employee organization whose members are participants in such plan shall receive compensation from such fund, except for reimbursement of expenses properly and actually incurred; " (11) service by a disqualified person as a fiduciary in addition to being an officer, employee, agent, or other representative of a disqualified person; "(12) the making by a fiduciary of a distribution of the assets of the trust in accordance with the terms of the plan if such assets are distributed in the same manner as provided under section 4044 of title IV of the Employee Retirement Income Security Act of 1974 (relating to allocation of assets); or "(13) any transaction which is exempt from section 406 of such ^^^ j^y yg^son of section 408(e) of such Act (or which would be so exempt if such section 406 applied to such transaction). The exemptions provided by this subsection (other than paragraphs (9) and (12) shall not apply to any transaction with respect to a trust described in section 401(a) which is part of a plan providing contributions or benefits for employees some or all of whom are owneremployees (as defined in section 401(c)(3)) in which a plan directly or indirectly lends any part of the corpus or income of the plan to, pays any compensation for personal services rendered to the plan to, or acquires for the plan any property from or sells any property to, any such owner-employee, a member of the family (as defined in section 267(c)(4)) of any such owner-employee, or a corporation controlled by any such owner-employee through the ownership, directly or indirectly, of 50 percent or more of the total combined voting power of all classes of stock entitled to vote or 50 percent or more of the total value of shares of all classes of stock of the corporation. For purposes of the preceding sentence, a shareholder-employee (as defined in section 1379), a participant or beneficiary of an individual retirement account, individual retirement annuity, on an individual retirement bond (as defined in section 408 or 409), and an employer or association of employees which establishes such an account or annuity under section 408(c) shall be deemed to be an owner-employee. "(e)

DEFINITIONS.—

" (1) PLAN.—For purposes of this section, the term 'plan' means a trust described in section 401(a) which forms a part of a plan.

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or a plan described in section 403(a) or 405(a), which trust or ^6 USC'/o^5!' plan is exempt from tax under section 501(a), an individual retirement account described in section 408(a) or an individual retire- ^"*^> p- ^59. ment annuity described in section 408(b) or a retirement bond described in section 409 (or a trust, plan, account, annuity, or bond Ante, p, 9 6 4. which, at any time, has been determined by the Secretary or his delegate to be such a trust, plan, account, or bond). "(^) DISQUALIFIED PERSON.—For purposes of this section, the term 'disqualified person' means a person who is— " (A) a fiduciary; " (B) a person providing services to the plan; " (C) an employer any of whose employees are covered by the plan; " (D) an employee organization any of whose members are covered by the plan; " (E) an owner, direct or indirect, of 50 percent or more of— " (i) the combined voting power of all classes of stock, entitled to vote or the total value of shares of all classes of stock of a corporation, "(ii) the capital interest or the profits interest of a partnership, or "(iii) the beneficial interest of a trust or unincorporated enterprise, which is an employer or an employee organization described in subparagraph (C) or (D); " (F) a member of the family (as defined in paragraph (6)) of any individual described in subparagraph (A), (B), (G) a corporation, partnership, or trust or estate of which (or in which) 50 percent or more of— "(i) the combined voting power of all classes of stock entitled to vote or the total value of shares of all classes of stock of such corporation, "(ii) the capital interest or profits interest of such partnership, or "(iii) the beneficial interest of such trust or estate, is owned directly or indirectly, or held by persons described in subparagraph (A), (B), (C), (D), or (E); " (H) an officer, director (or an individual having powers or responsibilities similar to those of officers or directors), a 10 percent or more shareholder, or a highly compensated employee (earning 10 percent or more of the yearly wages of an employer) of a person described in subparagraph (C), (D),(E),o/(G);or " (I) a 10 percent or more (in capital or profits) partner or ioint venturer of a person described in subparagraph (C), (D),(E),or(G). The Secretary, after consultation and coordination with the Secretary of Labor or his delegate, may by regulation prescribe a percentage lower than 50 percent for subparagraphs (E) and (G) and lower than 10 percent for subparagraphs (H) and (I). " (3) FIDUCIARY.—For purposes of this section, the term 'fiduciary' means any person who— " (A) exercises any discretionary authority or discretionary control respecting management of such plan or exercises any authority or control respecting management or disposition of its assets.

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[88 STAT.

" (B) renders investment advice for a fee or other compensation, direct or indirect, with respect to any moneys or other property of such plan, or has any authority or responsibility to do so, or " (C) has any discretionary authority or discretionary responsibility in the administration of such plan. Such term includes any person designated under section 405(c) (1)(B) of the Employee Retirement Income Security Act of Ante, p. 878.

26 USC 267.

1974

^

^

"^

"^

" (4) STOCKHOLDINGS.—For purposes of paragraphs (2)(E)(i) and (G)(i) there shall be taken into account indirect stockhold-j^gg -^i^i(.}j would bc takcu into account under section 267(c), except that, for purposes of this paragraph, section 267(c)(4) shall be treated as providing that the members of the family of an individual are the members within the meaning of paragraph (6). "(5) PARTNERSHIPS; TRUSTS.—For purposes of paragraphs (2) (E) (ii) and (iii), (G) (ii) and (iii), and (I) the ownership of profits or beneficial interests shall be determined in accordance with the rules for constructive ownership of stock provided in section 267(c) (other than paragraph (3) thereof), except that section 267(c)(4) shall be treated as providing that the members of the family of an individual are the members within the meaning of paragraph (6). " (6) MEMBER OF FAMILY.—For purposes of paragraph (2)(F),

Ante, p. 953.

26 USC 503.

15 USC 80a-51,

the family of any individual shall include his spouse, ancestor, lineal descendant, and any spouse of a lineal descendant. "(7) EMPLOYEE STOCK OWNERSHIP PLAN.—The term 'employee stock ownership plan' means a defined contribution plan— " (A) which is a stock bonus plan which is qualified, or a stock bonus and a money purchase plan both of which are qualified under section 401(a), and which are designed to invest primarily in qualifying employer securities; and " (B) which is otherwise defined in regulations prescribed by the Secretary or his delegate. "(8) QUALIFYING EMPLOYER SECURITY.—The term 'qualifying employer security' means an employer security which is— " (A) stock or otherwise an equity security, or " (B) a bond, debenture, note, or certificate or other evidence of indebtedness which is described in paragraphs (1), (2), and (3) of section 503(e). If any moneys or other property of a plan are invested in shares of an investment company registered under the Investment Company Act of 1940, the investment shall not cause that investment company or that investment company's investment adviser or principal underwriter to be treated as a fiduciary or a disqualified person for purposes of this section, except when an investment company or its investment adviser or principal underwriter acts in connection with a plan covering employees of the investment company, its investment adviser, or its principal underwriter. "(f)

OTHER DEFINITIONS AND SPECIAL RULES.—For purposes of

this section— "(1) JOINT AND SEVERAL LIABILITY.—If more than one person is liable under subsection (a) or (b) with respect to any one prohibited transaction, all such persons shall be jointly and severally liable under such subsection with respect to such transaction. "(2) TAXABLE PERIOD.—The term 'taxable period' means, with respect to any prohibited transaction, the period beginning with

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the date on which the prohibited transaction occurs and ending on the earlier of— " (A) the date of mailing of a notice of deficiency pursuant to section 6212, with respect to the tax imposed by subsec- 26 USC 6212. tion (a), or " (B) the date on which correction of the prohibited transaction is completed. "(3) SALE OR EXCHANGE; ENCUMBERED PROPERTY.—A transfer of real or personal property by a disqualified person to a plan shall be treated as a sale or exchange if the property is subject to a mortgage or similar lien which the plan assumes or if it is subject to a mortgage or similar lien which a disqualified person placed on the property within the 10-year period ending on the date of the transfer. "(4) AMOUNT INVOLVED.—The term 'amount involved' means, with respect to a prohibited transaction, the greater of the amount of money and the fair market value of the other property given or the amount of money and the fair market value of the other property received; except that, in the case of services described in paragraphs (2) and (10) of subsection (d) the amount involved shall be only the excess compensation. For purposes of the preceding sentence, the fair market value— ^^ir market " (A) in the case of the tax imposed by subsection (a), "^ "^* shall be determined as of the date on which the prohibited transaction occurs; and " (B) in the case of the tax imposed by subsection (b), shall be the highest fair market value during the correction period. "(5) CORRECTION.—The terms 'correction' and 'correct' mean, with respect to a prohibited transaction, undoing the transaction to the extent possible, but in any case placing the plan in a financial position not worse than that in which it would be if the disqualified person were acting under the highest fiduciary standards. "(6) CORRECTION PERIOD.—The term 'correction period' means, with respect to a prohibited transaction, the period beginning with the date on which the prohibited transaction occurs and ending 90 days after the date of mailing of a notice of deficiency with respect to the tax imposed by subsection (b) under section 6212, extended by— " (A) any period in which a deficiency cannot be assessed under section 6213(a), and " (B) any other period which the Secretary or his delegate determines is reasonable and necessary to bring about the correction of the prohibited transaction. " (g) APPLICATION OF SECTION.—This section shall not apply— "(1) in the case of a plan to which a guaranteed benefit policy (as defined in section 401(b)(2)(B) of the Employee Retirement Income Security Act of 1974) is issued, to any assets of the insur^"^^' P- ^74. ance company, insurance service, or insurance organization merely because of its issuance of such policy; "(2) to a governmental plan (within the meaning of section 4 1 4 (d)); or Ante, p. 925. "(3) to a church plan (within the meaning of section 414(e)) with respect to which the election provided by section 410(d) has ^"'^' P- ^^^• not been made. In the case of a plan which invests in any security issued by an investment company registered under the Investment Company Act of 1940, ^ ^ "^^"^ soa-si the assets of such plan shall be deemed to include such security but shall not, by reason of such investment, be deemed to include any assets of such company.

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text: The Eurypterida of New York/Volume 1/Mode of life


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PUBLIC LAW 93-406-SEPT. 2, 1974

[88 STAT.

" (h) NOTIFICATION OF SECRETARY OF LABOR.—Before sending a notice of deficiency with respect to the tax imposed by subsection (a) or (b), the Secretary or his delegate shall notify the Secretary of Labor and provide him a reasonable opportunity to obtain a correction of the prohibited transaction or to comment on the imposition of such tax. " (i) CROSS KEFERENCE.— "For provisions concerning coordination procedures between Secretary of Labor and Secretary of Treasury with respect to application of tax imposed by this section and for authority to waive imposition of the tax imposed by subsection (b), see section 3003 of the Employee Retirement Income Security Act of 1974.". 26 USC 503.

26 USC 4975 note.

Anfe, p. 935. 26 USC 501,

Ante, p. 971.

Regulations.

(b) AMENDMENT OF SECTION 503.—Section 503 (relating to requirements for exemption) is amended— (1) by striking out "or (18)" in subsection (a)(1)(A), (2) by amending subsection (a)(1)(B) by inserting "which is referred to in section 4975(g)(2) or (3) " after "described in section 401(a) ", (3) by striking out "or section 401" in subsection (a)(2) and inserting in lieu thereof "or paragraph (1)(B) ", (4) by striking out "or section 401" in subsection (c) and inserting in lieu thereof "or subsection (a)(1)(B) ", and (5) by striking out subsection (g). (c) EFFECTIVE DATE AND SAVINGS PROVISIONS.—

(1)(A) The amendments made by this section shall take effect on January 1, 1975. (B) If, before the amendments made by this section take effect, an organization described in section 401(a) of the Internal Revenue Codc of 1954 is denied exemption under section 501(a) of such Code by reason of section 503 of such Code, the denial of such exemption shall not apply if the disqualified person elects (in such manner and at such time as the Secretary or his delegate shall by regulations prescribe) to pay, with respect to the prohibited transaction (within the meaning of section 503(b) or (g)) which resulted in such denial of exemption, a tax in the amount and in the manner provided with respect to the tax imposed under section 4975 of such Code. An election made under ^j^jg Subparagraph, once made, shall be irrevocable. The Secretary of the Treasury or his delegate shall prescribe such regulations as may be necessary to carry out the purposes of this subparagraph. (2) Section 4975 of the Internal Revenue Code of 1954 (relating to tax on prohibited transactions) shall not apply to— (A) a loan of money or other extension of credit between a plan and a disqualified person under a binding contract in effect on July 1, 1974 (or pursuant to renewals of such a contract), until June 30, 1984, if such loan or other extension of credit remains at least as favorable to the plan as an arm'slength transaction with an unrelated party would be, and if the execution of the contract, the making of the loan, or the extension of credit was not, at the time of such execution, making, or extension, a prohibited transaction (within the meaning of section 503(b) of such Code or the corresponding provisions of prior law); (B) a lease or joint use of property involving the plan and a disqualified person pursuant to a binding contract in effect on July 1, 1974 (or pursuant to renewals of such a contract), until June 30, 1984, if such lease or joint use remains at least as favorable to the plan as an arm's-length transaction with an unrelated party would be and if the execution of the contract was not, at the time of such execution, a prohibited

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transaction (within the meaning of section 503(b) of such Code) or the corresponding provisions of prior law; ^^ ^^^ ^°3. (C) the sale, exchange, or other disposition of property described in subparagraph (B) between a plan and a disqualified person before June 30, 1984, if— (i) in the case of a sale, exchange, or other disposition of the property by the plan to the disqualified person, the plan receives an amount which is not less than the fair market value of the property at the time of such disposition; and (ii) in the case of the acquisition of the property by the plan, the plan pays an amount which is not in excess of the fair market value of the property at the time of such acquisition; (D) Until June 30, 1977, the provision of services to which subparagraphs (A), (B), and (C) do not apply between a plan and a disqualified person (i) under a binding contract in effect on July 1, 1974 (or pursuant to renewals of such contract), or (ii) if the disqualified person ordinarily and customarily furnished such services on June 30, 1974, if such provision of services remains at least as favorable to the plan as an arm's-length transaction with an unrelated party would be and if the provision of services was not, at the time of such provision, a prohibited transaction (within the meaning of section 503(b) of such Code) or the corresponding provisions of prior law; or (E) the sale, exchange, or other disposition of property which is owned by a plan on June 30, 1974, and all times thereafter, to a disqualified person, if such plan is required to dispose of such property in order to comply with the provisions of section 407(a)(2)(A) (relating to the prohibition against holding excess employer securities and employer real property) of the Employee Retirement Income Security Act of 1974, and if the plan receives not less than adequate ^"'e, p. sso. consideration. For the purposes of this paragraph, the term "disqualified person" has the meaning provided by section 4975(e)(2) of the Internal Revenue Code of 1954. Ante, p. 971. SEC. 2004. LIMITATIONS ON BENEFITS AND CONTRIBUTIONS. (a) P L A N REQUIREMENTS.—

(1) Section 401(a) (relating to requirements for qualification) is amended by inserting after paragraph (15) the following new ^"^^> P- 938. paragraph: "(16) A trust shall not constitute a qualified trust under this section if the plan of which such trust is a part provides for benefits or contributions which exceed the limitations of section 415." infra. (2) Subpart B of part I of subchapter D of chapter 1 is amended by inserting after section 414 the following new section: "SEC. 415. LIMITATIONS ON BENEFITS AND CONTRIBUTION UNDER 26 USC 415. QUALIFIED PLANS. "(a)

GENERALRuiiE.—

"(1) TRUSTS.—A trust which is a part of a pension, profitsharing, or stock bonus plan shall not constitute a qualified trust under section 401(a) if— " (A) in the case of a defined benefit plan, the plan provides for the payment of benefits with respect to a participant which exceed the limitation of subsection (b), " (B) in the case of a defined contribution plan, contributions and other additions under the plan with respect to any

^"'^' P- ^^S.

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[88 STAT.

participant for any taxable year exceed the limitation of subsection (c), or " (C) in any case in which an individual is a participant in both a defined benefit plan and a defined contribution plan maintained by the employer, the trust has been disqualified under subsection (g). " (2) SECTION APPLIES TO CERTAIN ANNUITIES AND ACCOUNTS.— Ante,

p. 969.

26 USC 4 0 3.

Ante,

p. 959.

26 USC 4 0 5.

^"'^•p-Ante. p. 959.

in the case of— " (A) an employee annuity plan described in section 403 " (B) an annuity contract described in section 403(b), " (C) an individual retirement account described in section 408(a), " (D) an individual retirement annuity described in section 408(b), " (E) a plan described in section 405(a), or " (F) a retirement bond described in section 409, such contract, annuity plan, account, annuity, plan, or bond shall not be considered to be described in section 403(a), 403 (b), 405 (a), 408(a), 408(b), or 409, as the case may be, unless it satisfies the requirements of subparagraph (A) or subparagraph (B) of paragraph (1), whichever is appropriate, and has not been disqualified under subsection (g). I n the case of an annuit}" contract described in section 403(b), the preceding sentence shall apply only to the portion of the annuity contract which exceeds the limitation of subsection (b) or the limitation of subsection (c), whichever is appropriate, and the amount of the contribution for such portion shall reduce the exclusion allowance as provided in section 403 (b)(2). " (b) LIMITATION FOR DEFINED BENEFIT P L A N S. —

" (1) IN GENERAL.—Benefits with respect to a participant exceed the limitation of this subsection if, when expressed as an annual benefit (within the meaning of paragraph (2)), such annual benefit is greater than the lesser of— " (A) $75,000,or " (B) 100 percent of the participant's average compensation for his high 3 years. " (2) ANNUAL BENEFIT.—

Ante, 969.

p p. 968,

" (A) IN GENERAL.—For purposes of paragraph (1), the term 'annual benefit' means a benefit payable annually in the form of a straight life annuity (with no ancillary benefits) under a plan to which employees do not contribute and under which no rollover contributions (as defined in sections 402 (a)(5), 403(a)(4), 408(d)(3), and 409(b)(3)(C) are made. " (B) ADJUSTMENT FOR CERTAIN OTHER FORMS or BENEFIT.—

If the benefit under the plan is payable in any form other than the form described in subparagraph (A), or if the employees contribute to the plan or make rollover contributions (as defined in sections402(a)(5),403(a)(4),408(d)(3) and 409 (b)(3)(C)), the determinations as to whether the limitation described in paragraph (1) has been satisfied shall be made, in accordance with regulations prescribed by the Secretary or his delegate, by adjusting such benefit so that it is equivalent to the benefit described in subparagraph (A). For purposes of this subparagraph, any ancillary benefit which is not directly related to retirement income benefits shall not be taken into account; and that portion of any joint and survivor annuity which constitutes a qualified joint and

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981

survivor annuity (as defined in section 401(a) (11)(H) (iii)) shall not be taken into account.

^"'^' P* ^^S.

"(C)

ADJUSTMENT TO $75,000 LIMIT WHERE BENEFIT BEGINS BEFORE AGE 5 5.—If the retirement income benefit under

the plan begins before age 55, the determination as to whether the $75,000 limitation set forth in paragraph (1)(A) has been satisfied shall be made, in accordance with regulations prescribed by the Secretary or his delegate, by adjusting such benefit so that it is equivalent to such a benefit beginning at age 55. "(3)

AVERAGE

COMPENSATION

FOR

HIGH

3

YEARS.—For

purposes of paragraph (1), a participant's high 3 years shall be the period of consecutive calendar years (not more than 3) during which the participant both was an active participant in the plan and had the greatest aggregate compensation from the employer. I n the case of an employee within the meaning of section 401 (c)(1), the preceding sentence shall be applied by substituting for 'compensation from the employer' the following: 'the participant's earned income (within the meaning of section 401(c)(2) but determined without regard to any exclusion under section 911)'. "(4)

26 USC 4oi.

26 USC 911. TOTAL ANNUAL BENEFITS NOT I N EXCESS OF $IO,OOO.—Not-

withstanding the preceding provisions of this subsection, the benefits payable with respect to a participant under any defined benefit plan shall be deemed not to exceed the limitation of this subsection if— " (A) the retirement benefits payable with respect to such participant under such plan and under all other defined benefit plans of the employer do not exceed $10,000 for the plan year, or for any prior plan year, and " (B) the employer has not at any time maintained a defined contribution plan in which the participant participated. "(5)

REDUCTION FOR SERVICE LESS THAN

lo YEARS.—In

the

case of an employee who has less than 10 years of service with the employer, the limitation referred to in paragraph (1), and the limitation referred to in paragraph (4), shall be the limitation determined under such paragraph (without regard to this paragraph), multiplied by a fraction, the numerator of which is the number of years (or part thereof) of service with the employer and the denominator of which is 10. ' (6)

COMPUTATION

OF BENEFITS

AND

CONTRIBUTIONS.—The

computation of— " (A) benefits under a defined contribution plan, for purposes of section 401(a)(4), " (B) contributions made on behalf of a participant in a defined benefit plan, for purposes of section 401(a)(4), and " (C) contributions and benefits provided for a participant in a plan described in section 414(k), for purposes of this section shall not be made on a basis inconsistent with regulations prescribed by the Secretary or his delegate. "(c)

LIMITATION FOR DEFINED CONTRIBUTION PLANS.—

"(1) IN GENERAL.—Contributions and other additions with respect to a participant exceed the limitation of this subsection if. when expressed as an annual addition (within the meaning of

38-194 O - 76 - 65 Pt. 1

^"^^' p- ^38.

Ante, p. 925.

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[88 STAT.

(paragraph (2)) to the participant's account, such annual addition is greater than the lesser of— " (A) $25,000, or " (B) 25 percent of the participant's compensation. "(2) ANNUAL ADDITION.—For purposes of paragraph (1), the

„.^"'^'PP-^/^' ' '

26 USC 401.

term 'annual addition' means the sum for any year of— " (A) employer contributions, " (B) the lesser of— "(i) the amount of the employee contributions in excess of 6 percent of his compensation, or "(ii) one-half of the employee contributions, and " (C) forfeitures. For the purposes of this paragraph, employee contributions under subparagraph (B) are determined without regard to any rollover contributions (as defined in sections 402fa)(5), 403(a)(4), 408(d)(3), and 4 0 9 (b)(3)(C)). "(3) PARTICIPANT'S COMPENSATION.—For purposes of paragraph (1), the term 'participant's compensation' means the compensation of the participant from the employer for the year. In YiQ case of an employee within the meaning of section 401(c)(1), the preceding sentence shall be applied by substituting for 'compensation of the participant from the employer' the following: 'the participant's earned income (within the meaning of section 401(c)(2) but determined without regard to any exclusion under section 911)'. "(4)

SPECIAL

ELECTION

FOR SECTION

403(b)

CONTRACTS

PUR-

C H A S E D BY E D U C A T I O N A L INSTITUTIONS, HOSPITALS, AND HOME HEALTH SERVICE AGENCIES.—

26 USC 403.

Post, p. 986.

" (A) I n the case of amounts contributed for an annuity contract described in section 403(b) for the year in which occurs a participant's separation from the service with an educational institution, a hospital, or a home health service agency, at the election of the participant there is substituted for the amount specified in paragraph (1)(B) the amount of the exclusion allowance which would be determined under section 403(b)(2) (without regard to this section) for the participant's taxable year in which such separation occurs if the participant's years of service were computed only by taking into account his service for the employer during the period of years (not exceeding ten) ending on the date of such separation. " (B) I n the case of amounts contributed for an annuity contract described in section 403(b) for any year in the case of a participant who is an employee of an educational institution, a hospital, or a home health service agency, at the election of the participant there is substituted for the amount specified in paragraph (1)(B) the least of— "(i) 25 percent of the participant's includible compensation (as defined in section 403(b)(3)) plus $4,000, "(ii) the amount of the exclusion allowance determined for the year under section 403(b)(2), or "(iii) $15,000. " (C) I n the case of amounts contributed for an annuity contract described in section 403(b) for any year for a participant who is an employee of an educational institution, a hospital, or a home health service agency, a t the election of the participant the provisions of section 403(b)(2)(A) shall not apply.

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" (D)(i) The provisions of this paragraph apply only if the participant elects its application at the time and in the manner provided under regulations prescribed by the Secretary or his delegate. Not more than one election may be made under subparagraph (A) by any participant, A participant who elects to have the provisions of subparagraph (A), (B), or (C) of this paragraph apply to him may not elect to have any other subparagraph of this paragraph apply to him. Any election made under this paragraph is irrevocable. 'Educational " (ii) For purposes of this paragraph the term 'educational institution." institution' means an educational institution as defined in section 151(e)(4). 26 USC 151. "(iii) For purposes of this paragraph the term 'home "Home health health service agency' means an organization described in ^^'"^^ agency.' subsection 501(c)(3) which is exempt from tax under section 26 USC soi. 501(a) and which has been determined by the Secretary of Health, Education, and Welfare to be a home health agency (as defined in section 1861(o) of the Social Security Act). "^^ ^^^ isgsx. " (d) CosT-OF-LiviNG ADJUSTMENTS. —

"(1) IN GENERAL.—The Secretary or his delegate shall adjust annually— " (A) the $75,000 amount in subsection (b)(1)(A), " (B) the $25,000 amount in subsection (c)(1)(A), and "(C) in the case of a participant who is separated from service, the amount taken into account under subsection (b) for increases m the cost of living in accordance with regulations prescribed by the Secretary or his delegate. Such regulations shall provide for adjustment procedures which are similar to the procedures used to adjust primary insurance amounts under section 215 (i)(2)(A) of the Social Security Act. 42 USC 4i5. "(2) BASE PERIODS.—The base period taken into account— " (A) for purposes of subparagraphs (A) and (B) of paragraph (1) is the calendar quarter beginning October 1, 1974, and " (B) for purposes of subparagraph (C) of paragraph (1) is the last calendar quarter of the calendar year before the calendar year in which the participant is separated from service. " (e) LIMITATION I N CASE OF DEFINED BENEFIT P L A N AND DEFINED CONTRIBUTION P L A N FOR SAME EMPLOYEE.—

"(1) IN GENERAL.—In any case in which an individual is a participant in both a defined benefit plan and a defined contribution plan maintained by the same employer, the sum of the defined benefit plan fraction and the defined contribution plan fraction for any year may not exceed 1.4. "(2) DEFINED BENEFIT PLAN FRACTION.—For purposes of this subsection, the defined benefit plan fraction for any year is a fraction— " (A) the numerator of which is the projected annual benefit of the participant under the plan (determined as of the close of the year), and " (B) the denominator of which is the projected annual benefit of the participant under the plan (determined as of the close of the year) if the plan provided the maximum benefit allowable under subsection (b). " (3) DEFINED CONTRIBUTION PLAN FRACTION.—For

purposes

of this subsection, the defined contribution plan fraction for any year is a fraction—

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PUBLIC LAW 93-406-SEPT. 2, 1974

[88 STAT.

" (A) the numerator of which is the sum of the annual additions to the participant's account as of the close of the year, and " (B) the denominator of which is the sum of the maximum amount of annual additions to such account which could have been made under subsection (c) for such year and for each prior year of service with the employer. "(4)

Tnti^'^ '^gs^g

Ante,

p. 925.

SPECIAL TRANSITION RULES FOR DEFINED CONTRIBUTION

FRACTION.—In applying paragraph (3) with respect to years beginning before January 1, 1976— " (A) the aggregate amount taken into account under paragraph (3)(A) may not exceed the aggregate amount taken into account under paragraph (3)(B), and " (B) the amount taken into account under subsection (c) (2)(B)(i) for any year concerned is an amount equal to— "(i) the excess of the aggregate amount of employee contributions for all years beginning before January 1, 1976, during which the employee was an active participant of the plan, over 10 percent of the employee's aggregate compensation for all such years, multiplied by "(ii) a fraction the numerator of which is 1 and the denominator of which is the number of years beginning before January 1, 1976, during which the employee was an active participant in the plan. Employee contributions made on or after October 2, 1973, shall be taken into account under subparagraph (B) of the preceding sentence only to the extent that the amount of such contributions does not exceed the maximum amount of contributions permissible under the plan as in effect on October 2, 1973. " (^) SPECIAL RULES FOR SECTIONS 403 (b) and 408.—For purposes of this subsection, any annuity contract described in section 403 (b) (except in the case of a participant who has elected under subsection (c)(4)(D) to have the provisions of subsection (c) (4)(C) apply), any individual retirement account described in section 408(a), any individual retirement annuity described in section 408(b), and any retirement bond described in section 409, for the benefit of a participant shall be treated as a defined contribution plan maintained by each employer with respect to which the participant has the control required under subsection (b) or (c) of section 414 (as modified by subsection (h)). I n the case of any annuity contract described in section 403(b), the amount of the contribution disqualified by reason of subsection (g) shall reduce the exclusion allowance as provided in section 403(b)(2). "(f)

COMBINING OF PLANS.—

" (1) IN GENERAL.—For purposes of applying the limitations of subsections (b), (c),and (e) — " (A) all defined benefit plans (whether or not terminated) of an employer are to be treated as one defined benefit plan, and " (B) all defined contribution plans (whether or not terminated) of an employer are to be treated as one defined contribution plan. "(2) A N N U A L COMPENSATION TAKEN INTO ACCOUNT FOR DEFINED BENEFIT PLANS.—If the employer has more th^n one defined benefit

plan— " (A) subsection (b)(1)(B) shall be applied separately with respect to each such plan, but

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PUBLIC LAW 93-406-SEPT. 2, 1974

985

" (B) ill applying subsection (b)(1)(B) to the aggregate of such defined benefit plans for purposes of this subsection, the high 3 years of compensation taken into account shall be the period of consecutive calendar years (not more than 3) during which the individual had the greatest aggregate compensation from the employer. " (g) AGGREGATION or PLANS,—The Secretary or his delegate, in

applying the provisions of this section to benefits or contributions under more than one plan maintained by the same employer, and to any trusts, contracts, accounts, or bonds referred to in subsection (a)(2), with respect to which the participant has the control required under section 414(b) or (c), as modified by subsection (h), shall, under regulations prescribed by the Secretary or his delegate, disqualify one or more trusts, plans, contracts, accounts, or bonds, or any combination thereof until such benefits or contributions do not exceed the limitations contained in this section. I n addition to taking into account such other factors as may be necessary to carry out the purposes of subsections (e) and (f), the regulations prescribed under this paragraph shall provide that no plan which has been terminated shall be disqualified until all other trusts, plans, contracts, accounts, or bonds have been disqualified. " (h) 50 PERCENT CONTROL.—For purposes of applying subsections (b) and (c) of section 414 to this section, the phrase 'more than 50 percent' shall be substituted for the phrase 'at least 80 percent' each place it appears in section 1563(a)(1). "(i)

RECORDS NOT AVAILABLE FOR PAST PERIODS.—Where for

Ante, p. 925.

26 USC isea.

the

period before January 1, 1976, or (if later) the first day of the first plan year of the plan, the records necessary for the application of this section are not available, the Secretary or his delegate may by regulations prescribe alternative methods lor determining the amounts to be taken into account for such period. "(j)

REGULATIONS; DEFINITION OF YEAR.—The Secretary or

his

delegate shall prescribe such regulations as may be necessary to carry out the purposes of this section, including, but not limited to, regulations defining the term 'year' for purposes of any provision of this section, "(k)

SPECIAL RULES.— " (1) DEFINED BENEFIT PLAN AND DEFINED CONTRIBUTION PLAN.—

For purposes of this title, the term 'defined contribution plan' or 'defined benefit plan' means a defined contribution plan (within the meaning of section 414(i)) or a defined benefit plan (within the meaning of section 414(j)), whichever applies, which is— " (A) a plan described in section 401(a) which includes a trust which is exempt from tax under section 501(a), " (B) an annuity plan described in section 403(a), " (C) a qualified bond purchase plan described in section 405(a), " (D) an annuity a contract described in section 403(b), " (E) an individual retirement account described in section 408(a), " (F) an individual retirement annuity described in section 408(b), or " (G) an individual retirement bond described in section 409.". (3) S P E C I A L RULE FOR CERTAIN PLANS I N EFFECT O N DATE OF

26 USC 401. 26 USC 501. 26 USC 403. 26 USC 405. Ante. p. 959.

Ante, p. 964. 26 USC 415

ENACTMENT.—In any case in which, on the date of enactment of "°*^* this Act, an individual is a participant in both a defined benefit

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 986

26 USC 401.

Ante, p. 979. 26 USC 404.

PUBLIC LAW 93-406-SEPT. 2, 1974

plan and a defined contribution plan maintained by the same employer, and the sum of the defined benefit plan fraction and the defined contribution plan fraction for the year during which such date occurs exceeds 1.4, the sum of such fractions may continue to exceed 1.4 if— (A) the defined benefit plan fraction is not increased, by amendment of the plan or otherwise, after the date of enactment of this Act, and (B) no contributions are made under the defined contribution plan after such date. A trust which is part of a pension, profit-sharing, or stock bonus plan described in the preceding sentence shall not be treated as not constituting a qualified trust under section 401(a) of the Internal Revenue Code of 1954 on account of the provisions of section 415(e) of such Code, as long as it is described in the preceding sentence of this subsection. (b) L I M I T ON EMPLOYER DEDUCTIONS.—The second sentence of sec^[Q^ 4 0 4 (a)(3)(A) (relating to limits on deductible contributions) is amended by striking out "beneficiaries under the plan.'^ and inserting in lieu thereof "beneficiaries under the plan, but the amount so deductible under this sentence in any one succeeding taxable year together with the amount so deductible under the first sentence of this subparagraph shall not exceed 25 percent of the compensation otherwise paid or accrued during such taxable year to the beneficiaries under the plan.". (c)

26 USC 805.

26 USC 403.

[88 STAT.

CERTAIN A N N U I T Y AND BOND PURCHASE P L A N S. —

(1) Section 404(a)(2) (relating to the general rule for deduction for employee annuities) is amended by striking out " ( 1 5) " and inserting in lieu thereof "(15), (16), and (19)" and by striking out " (a)(9) and (10)" and inserting in lieu thereof " (a)(9), (10), (17),and (18)". (2) Section 405(a)(1) (relating to requirements for qualified bond purchase plans) is amended by striking out "and (8)," and inserting in lieu thereof " (8), (16), and (19)". (3) Section 805(d)(1)(C) (relating to pension plan reserves) is amended by striking out "and (15)" and inserting in lieu thereof "(15), (16), and (19)". (4) Section 403(b)(2) (relating to exclusion allowance) is amended to read as follows: "(2)

EXCLUSION ALLOWANCE.—

" (A) IN GENERAL.—For purposes of this subsection, the exclusion allowance for any employee for the taxable year is an amount equal to the excess, if any, of— " (i) the amount determined by multiplying 20 percent of his includible compensation by the number of years of service, over " (ii) the aggregate of the amounts contributed by the employer for annuity contracts and excludible from the gross income of the employee for any prior taxable year. " (B) ELECTION TO HAVE ALLOWANCE DETERMINED UNDER SECTION 415 RULES.—In the case of an employee who makes an

election under section 415(c)(4)(D) to have the provisions of section 4 1 5 (c)(4)(C) (relating to special rule for section 403(b) contracts purchased by educational institutions, hospitals, and home health service agencies) apply, the exclusion allowance for any such employee for the taxable year is the amount which could be contributed (under section 415) by his employer under a plan described in section 403(a) if the

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 88 STAT. ]

PUBLIC LAW 93-406-SEPT. 2, 1974

98^

annuity contract for the benefit of such employee were treated as a defined contribution plan maintained by the employer.", (d) EFFECTIVE DATE.— note."^"" " ' ' (1) GENERAL RULE.—The amendments made by this section shall apply to years beginning after December 31, 1975. The Secretary of the Treasury shall prescribe such regulations as may be necessary to carry out the provisions of this paragraph. (2)

TRANSITION RULE FOR DEFINED BENEFIT PLANS.—In

the

case of an individual who was an active participant in a defined benefit plan before October 3, 1973, if— (A) the annual benefit (within the meaning of section 415(b)(2) of the Internal Revenue Code of 1954) payable to such participant on retirement does not exceed 100 percent of his annual rate of compensation on the earlier of (i) October 2, 1973, or (ii) the date on which he separated from the service of the employer, (B) such annual benefit is no greater than the annual benefit which would have been payable to such participant on retirement if (i) all the terms and conditions of such plan in existence on such date had remained in existence until such retirement, and (ii) his compensation taken into account for any period after October 2, 1973, had not exceeded his annual rate of compensation on such date, and (C) in the case of a participant who separated from the service of the employer prior to October 2, 1973, such annual benefit is no greater than his vested accrued benefit as of the date he separated from the service, then such annual benefit shall be treated as not exceeding the limitation of subsection (b) of section 415 of the Internal Revenue Code of 1954. SEC. 2005. TAXATION OF CERTAIN LUMP SUM DISTRIBUTIONS. (a) TREATMENT OF TOTAL DISTRIBUTIONS.—Section 402(e) (relat-

ing to certain plan terminations) is amended to read as follows: "'(e) TAX ON L U M P S U M DISTRIBUTIONS.— (1) IMPOSITION OF SEPARATE TAX ON LUMP SUM DISTRIBUTIONS.— " (A) SEPARATE TAX.—There is hereby imposed a tax (in

the amount determined under subparagraph (B)) on the ordinary income portion of a lump sum distribution. " (B) AMOUNT OF TAX.—The amount of tax imposed by

subparagraph (A) for any taxable year shall be an amount equal to the amount of the initial separate tax for such taxable year multiplied by a fraction, the numerator of which is the ordinary income portion of the lump sum distribution for the taxable year and the denominator of which is the total taxable amount of such distribution for such year. " (C) INITIAL SEPARATE TAX.—The initial separate tax for any taxable year is an amount equal to 10 times the tax which would be imposed by subsection (c) of section 1 if the recipient were an individual referred to in such subsection and the taxable income were an amount equal to one-tenth of the excess of— " (i) the total taxable amount of the lump sum distribution for the taxable year, over " (ii) the minimum distribution allowance.

Ante. ^.919.

^^ ^^^ '^^'^•

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Page:United States Statutes at Large Volume 88 Part 1.djvu/1032

 988

PUBLIC LAW 93-406-SEPT. 2, 1974

[88 STAT.

" (D) MINIMUM DISTRIBUTION ALLOWANCE.—For purposes

of this paragraph, the minimum distribution allowance for the taxable year is an amount equal to— " (i) the lesser of $10,000 or one-half of the total taxable amount of the lump sum distribution for the taxable year, reduced (but not below zero) by "(ii) 20 percent of the amount (if any) by which such total taxable amount exceeds $20,000. '' (E) LIABILITY FOR TAX,—The recipient shall be liable for the tax imposed by this paragraph. " (2) MULTIPLE DISTRIBUTIONS AND DISTRIBUTIONS or ANNUITY

26 USC 401. 26 USC 671,

Regulations.

CONTRACTS.—In the case of any recipient of a lump sum distribution for the taxable year with respect to whom during the 6-taxable-year period ending on the last day of the taxable year there has been one or more other lump sum distributions after December 31, 1973, or if the distribution (or any part thereof) is an annuity contract, in computing the tax imposed by paragraph (1) (A), the total taxable amounts of all such distributions during such 6-taxable-year period shall be aggregated, but the amount of tax so computed shall be reduced (but not below zero) by the sum of— " (A) the amount of the tax imposed by paragraph (1)(A) paid with respect to such other distributions, plus " (B) that portion of the tax on the aggregated total taxable amounts which is attributable to annuity contracts. For purposes of this paragraph, a beneficiary of a trust to which a lump sum distribution is made shall be treated as the recipient of such distribution if the beneficiary is an employee (including ^j^ employee within the meaning of section 401(c)(1)) with respect to the plan under which the distribution is made or if the beneficiary is treated as the owner of such trust for purposes of subpart E of part I of subchapter J. I n the case of the distribution of an annuity contract, the taxable amount of such distribution shall be deemed to be the current actuarial value of the contract, determined on the date of such distribution. I n the case of a lump sum distribution with respect to any individual which is made only to two or more trusts, the tax imposed by paragraph (1)(A) shall be computed as if such distribution was made to a single trust, but the liability for such tax shall be apportioned among such trusts according to the relative amounts received by each. The Secretary or his delegate shall prescribe such regulations as may be necessary to carry out the purposes of this paragraph. "(3) AxiLOWANCE or DEDUCTION,—The ordinary income portion of a lump sum distribution for the taxable year shall be allowed as a deduction from gross income for such taxable year, but only to the extent included in the taxpayer's gross income for such taxable year. " (4) DEFINITIONS AND SPECIAL RULES.— " (A) L U M P SUM DISTRIBUTION.—For

26 USC 403.

purposes of this section and section 403, the term 'lump sum distribution' means the distribution or payment within one taxable year of the recipient of the balance to the credit of an employee which becomes payable to the recipient— " (i) on account of the employee's death, " (ii) after the employee attains age 591^, "(iii) on account of the employee's separation from the service, or

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 88 STAT. ]

PUBLIC LAW 93-406-SEPT. 2, 1974

"(iv) after the employee has become disabled (within the meaning of section 72(m)(7)) from a trust which forms a part of a plan described in section 401(a) and which is exempt from tax under section 501 or from a plan described in section 403(a). Clause (iii) of this subparagraph shall be applied only with respect to an individual who is an employee without regard to section 401 (c)(1), and clause (iv) shall be applied only with respect to an employee within the meaning of section 401(c)(1). For purposes of this subparagraph, a distribution of an annuity contract from a trust or annuity plan referred to in the first sentence of this subparagraph shall be treated as a lump sum distribution. For purposes of this subparagraph, a distribution to two or more trusts shall be treated as a distribution to one recipient.

989

26

use

26

use 4 0 1,

72.

501. 26

use 4 0 3.

" (B) ELECTION OF LUMP SUM TREATMENT.—For purposes

of this section and section 403, no amount which is not an annuity contract may be treated as a lump sum distribution under subparagraph (A) unless the taxpayer elects for the taxable year to have all such amounts received during such year so treated at the time and in the manner provided under regulations prescribed by the Secretary or his delegate. Not more than one election may be made under this subparagraph with respect to any individual after such individual has attained age 591/^. No election may be made under this subparagraph by any taxpayer other than an individual, an estate, or a trust. I n the case of a lump sum distribution made with respect to an employee to two or more trusts, the election under this subparagraph shall be made by the personal representative of the employee. " (C) AGGREGATION OF CERTAIN TRUSTS AND PLANS.—For

purposes of determining the balance to the credit of an employee under subparagraph (A) — " (i) all trusts which are part of a plan shall be treated as a single trust, all pension plans maintained by the employer shall be treated as a single plan, all profitsharing plans maintained by the employer shall be treated as a single plan, and all stock bonus plans maintained by the employer shall be treated as a single plan, and "(ii) trusts which are not qualified trusts under section 401(a) and annuity contracts which do not satisfy the requirements of section 404(a)(2) shall not be taken 26 USC 404. into account. " (D) TOTAL TAXABLE AMOUNT.—For purposes of this section and section 403, the term 'total taxable amount' means, with respect to a lump sum distribution, the amount of such distribution which exceeds the sum of— " (i) the amounts considered contributed by the employee (determined by applying section 7 2 (f)), which employee contributions shall be reduced by any amounts theretofore distributed to him which were not includible in gross income, and "(ii) the net unrealized appreciation attributable to that part of the distribution which consists of the securities of the employer corporation so distributed. " (E) ORDINARY INCOME PORTION.—For purposes of this section, the term 'ordinary income portion' means, with

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 990

PUBLIC LAW 93-406-SEPT. 2, 1974

26 USC 401.

26 USC 403.

[88 STAT.

respect to a lump sum distribution, so much of the total taxable amount of such distribution as is equal to the product of such total taxable amount multiplied by a fraction— " (i) the numerator of which is the number of calendar years of active participation by the employee in such plan after December 31, 1973, and "(ii) the denominator of which is the number of calendar years of active participation by the employee in such plan. " (F) EMPLOYEE.—For purposes of this subsection and subsection (a)(2), except as otherwise provided in subparagraph (A), the term 'employee' includes an individual who jg j^jj employee within the meaning of section 401(c)(1) and the employer of such individual is the person treated as his employer under section 401(c)(4). " (G) COMMUNITY PROPERTY LAWS.—The provisions of this subsection, other than paragraph (3), shall be applied without regard to Community property laws. " (H) MINIMUM PERIOD or SERVICE.—For purposes of this subsection (but not for purposes of subsection (a)(2) or sec^JQjj 403(a)(2)(A)), no amount distributed to an employee from or under a plan may be treated as a lump sum distributed under subparagraph (A) unless he has been a participant in the plan for 5 or more taxable years before the taxable year in which such amounts are distributed. " (I) AMOUNTS SUBJECT TO PENALTY.—This subsection shall not apply to amounts described in clause (ii) of subparagraph (A) of section 72(m)(5) to the extent that section 72 (m)(5) applies to such amounts. "(J)

UNREALIZED

APPRECIATION

OF

EMPLOYER

SECURI-

TIES.—In the case of any distribution including securities of the employer corporation which, without regard to the requirement of subparagraph (H), would be treated as a lump sum distribution under subparagraph (A), there shall be excluded from gross income the net unrealized appreciation attributable to that part of the distribution which consists of securities of the employer corporation so distributed. In the case of any such distribution or any lump sum distribution including securities of the employer corporation, the amount of net unrealized appreciation of such securities and the resulting adjustments to the basis of such securities shall be determined under regulations prescribed by the Secretary or his delegate. " (K) SECURITIES.—For purposes of this subsection, the terms 'securities' and 'securities of the employer corporation' have the respective meanings provided by subsection (a)(3)." (b) PHASEOUT OF CAPITAL GAINS TREATMENT.—

26 USC 402.

^2^ IN GENERAL.—Section 402(a)(2) (relating to capital gains treatment for certain distributions) is amended to read as follows: "(2)

26 USC 4 0 1, 501. Ante,

p. 987.

CAPITAL GAINS TREATMENT FOR PORTION or

LUMP SUM

DISTRIBUTIONS.—lu the casc of an employee trust described in section 401(a), which is exempt from tax under section 501(a), so much of the total taxable amount (as defined in subparagraph (D) of subsection (e)(4)) of a lump sum distribution as is equal to the product of such total taxable amount multiplied by a fraction— " (A) the numerator of which is the number of calendar years of active participation by the employee in such plan before January 1, 1974, and

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Page:United States Statutes at Large Volume 88 Part 1.djvu/1035

 88 STAT. ]

PUBLIC LAW 93-406-SEPT. 2, 1974

" (B) the denominator of which is the number of calendar years of active participation by the employee in such plan, shall be treated as a gain from the sale or exchange of a capital asset held for more than 6 months. For purposes of computing the fraction described in this paragraph and the fraction under subsection (e)(4)(E), the Secretary or his delegate may prescribe regulations under which plan years may be used in lieu of calendar years. For purposes of this paragraph, in the case of an individual who is an employee without regard to section 401(c) (1), determination of whether or not any distribution is a lump sum distribution shall be made without regard to the requirement that an election be made under subsection (e)(4)(B), but no distribution to any taxpayer other than an individual, estate, or trust may be treated as a lump sum distribution under this paragraph." (2) AMENDMENT or SECTION 4 03.—That part of paragraph (2) of section 403(a) which follows clause (ii) of subparagraph (A) thereof is amended to read as follows: "(iii) a lump sum distribution (as defined in section 402(e)(4)(A)) is paid to the recipient, so much of the total taxable amount (as defined in section 402(e)(4)(D)) of such distribution as is equal to the product of such total taxable amount multiplied by the fraction described in section 402(a)(2) shall be treated as a gain from the sale or exchange of a capital asset held for more than 6 months. For purposes of this paragraph, in the case of an individual who is an employee without regard to section 401 (c)(1), determination of whether or not any distribution is a lump sum distribution shall be made without regard to the requirement that an election be made under subsection (e) (4)(B) of section 402, but no distribution to any taxpayer other than an individual, estate, or trust may be treated as a lump sum distribution under this paragraph.

991

Regulations. Ante, p. 987.

26 USC 401.

^6 USC 403. Ante, p. 987.

^"^^' P- ^^°- r;i.

" (B) CROSS REFERENCE.—

"For imposition of separate tax on ordinary income portion of lump sum distribution, see section 402(e).". (c) CONFORMING AMENDMENTS. —

(1) Subparagraph (C) of section 402(a)(3) is repealed. (2) Paragraph (5) (as in effect on December 31, 1973) of section 402(a) is repealed. (3) Section 72 is amended by striking out subsection (n) thereof and by redesignating subsections (o) and (p) as (n) and (o), respectively. (4) The second sentence of section 4 6 (a)(3) and the second sentence of section 50A(a)(3) are each amended by inserting after "tax preferences)," the following: "section 402(e) (relating to tax on lump sum distributions),". (5) The third sentence of section 901(a) is amended by inserting "against the tax imposed by section 402(e) (relating to tax on lump sum distributions)," before "against the tax imposed by section 531". ' (6) Subsection _ 1304(b)(2) (relating to special rules) is amended by striking out paragraph (2) and by redesignating paragraphs (3), (4), (5), and (6) as paragraphs (2), (3), (4), and (5), respective! y. (7) Subparagraph (A) of section 56(a)(2) and paragraph (1) of section 56(c) are each amended by inserting before "531" the following: "402(e),".

^e^ uTc%02. 26 USC 72. 26 USC 46. 26 USC so. ^^ "^^ ^°^26 USC S3i. 26 USC i304.

^^ "^"^ ^*^'

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Page:United States Statutes at Large Volume 88 Part 1.djvu/1036

 992 26 USC 871, Ante. p. 987. Ante, p. 959.

PUBLIC LAW 93-406-SEPT. 2, 1974

(8) Sections 871(b)(1) and 877(b) are each amended by insertIng",402(e)(1),"after"section 1". (9) Section 62 (defining adjusted gross income), is amended by inserting after paragraph (10) the following new paragraph: "(11)

26 USC 122. 26 USC 405.

26 USC 406.

26 USC 407.

26 USC 1348.

26 USC 101.

26 USC 402 note.

26 USC 401 note.

[88 STAT.

CERTAIN PORTION or LUMP-SUM DISTRIBUTIONS FROM PEN-

SION PLANS TAXED UNDER SECTION 402 (e).—The deduction allowed by section 402(e)(3)." (10) Section 122(b)(2) (relating to consideration for the contract) is amended by striking out "72(o)" and inserting "72(n)". (11) Section 405(e) (relating to capital gains treatment and limitation of tax not to apply to bonds distributed by trusts) is amended by striking out "Section 72(n) and section 402(a)(2) " and inserting "Subsections (a)(2) and (e) of section 402". (12) Section 406(c) (relating to termination of status as deemed employee, etc.) is amended by striking out "section 72(n), section 402(a)(2) " and inserting "subsections (a)(2) and (e) of section 402". (13) Section 407(c) (relating to termination of status as deemed employee, etc.) is amended by striking out "section 72(n), section 402(a)(2) " and inserting "subsections (a)(2) and (e) of section 402". (14) Section 1348(b)(1) (relating to earned income) is amended by striking out "72(n), 402(a)(2) " and inserting "402 (a)(2), 402(e)". (15) Section 101(b)(2)(B) is amended by striking out "total distributions payable (as defined in section 402(a)(3)) which are paid to a distributee within one taxable year of the distributee by reason of the employee's death" and inserting in lieu thereof "a lump sum distribution (as defined in section 4 0 2 (e)(4)) ". (d) EFFECTIVE DATE.—The amendments made by this section shall apply only with respect to distributions or payments made after December 31, 1973, in taxable years beginning after such date. SEC. 2006. SALARY REDUCTION REGULATIONS. (a) INCLUSION OF CERTAIN CONTRIBUTIONS I N INCOME.—Except in

403^ 405^ ^°^' 26 USC 501.

the case of plans or arrangements in existence on June 27, 1974, a contribution made before January 1, 1977, to an employees' trust described in section 401(a), 403 (a), or 405 (a) of the Internal Revenue Code of 1954 which is exempt from tax under section 501(a) of such Code, or under an arrangement which, but for the fact that it was not in existence on June 27, 1974, would be an arrangement described in subsection (b)(2) of this section, shall be treated as a contribution made by an employee if the contribution is made under an arrangement under which the contribution will be made only if the employee elects to receive a reduction in his compensation or to forego an increase in his compensation. (b) ADMINISTRATION I N THE CASE OF CERTAIN QUALIFIED PENSION O PROFIT-SHARING PLANS, E T C., I N EXISTENCE ON J U N E 27, 1974.— R

No salary reduction regulations may be issued by the Secretary of the Treasury in final form before January 1, 1977, with respect to an arrangement which was in existence on June 27, 1974, and which, on that date— (1) provided for contributions to an employees' trust described in section 401(a), 403(a), or 405 (a) of the Intemaf Revenue Code of 1954 which is exempt from tax under section 501(a) of such Code, or (2) was maintained as part of an arrangement under which an

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Page:United States Statutes at Large Volume 88 Part 1.djvu/1037

 88 STAT. ]

PUBLIC LAW 93-406-SEPT. 2, 1974

employee was permitted to elect to receive part of his compensation in one or more alternative forms if one of such forms results in the inclusion of amounts in income under the Internal Revenue Code of 1954. (c) ADMINISTRATION OF LAW W I T H RESPECT TO CERTAIN P L A N S. — (1) ADMINISTRATION I N THE CASE OF PLANS DESCRIBED I N SUBSECTION (b).—Until salary reduction regulations have been

993

26 USC i et ^^^'

issued in final form, the law with respect to plans or arrangements described in subsection (b) shall be administered— (A) without regard to the proposed salary reduction regulations (37 F R 25938) and without regard to any other proposed salary reduction regulations, and (B) in the manner in which such law was administered before January 1, 1972. (2) ADMINISTRATION I N THE CASE OF QUALIFIED PROFIT-SHARING

PLANS.—In the case of plans or arrangements described in subsection (b), in applying this section to the tax treatment of contributions to qualified profit-sharing plans where the contributed amounts are distributable only after a period of deferral, the law shall be administered in a manner consistent with— (A) Revenue Ruling 56-497 (1956—2 C.B. 284), (B) Revenue Ruling 63-180 (1963—2 C.B. 189), and (C) Revenue Ruling 68-89 (1968—1 C.B. 402). (d)

LIMITATION ON RETROACTIVITY OF F I N A L

REGULATIONS.—In

the case of any salary reduction regulations which become final after December 31, 1976— (1) for purposes of chapter 1 of the Internal Revenue Code of 1954 (relating to normal taxes and surtaxes), such regulations ^6 USC i. shall not apply before January 1, 1977; and (2) for purposes of chapter 21 of such Code (relating to Federal Insurance Contributions Act) and for purposes of chapter 24 26 USC 3101. of such Code (relating to collection of income tax at source on 26 USC 3401. wages), such regulations shall not apply before the day on which such regulations are issued in final form. (e) SALARY REDUCTION REGULATIONS DEFINED.—For purposes of this section, the term "salary reduction regulations" means regulations dealing with the includibility in gross income (at the time of contribution) of amounts contributed to a plan which includes a trust that qualifies under section 401(a), or a plan described in section 403(a) ^^26 USC 401, or 405 (a), including plans or arrangements described in subsection (b) 26 USC 405. (2), if the contribution is made under an arrangement under which the contribution will be made only if the employee elects to receive a reduction in his compensation or to forego an increase in his compensation, or under an arrangement under which the employee is permitted to elect to receive part of his compensation in one or more alternative forms (if one of such forms results in the inclusion of amounts in income under the Internal Revenue Code of 1954). SEC. 2008. CERTAIN ARMED FORCES SURVIVOR ANNUITIES. (a)

TREATMENT OF CERTAIN PARTICIPANTS I N THE PLAN.—Section

404(c) (relating to certain negotiated plans) is amended by inserting after the first sentence the following new sentences: "For purposes of this chapter and subtitle B, in the case of any individual who before July 1, 1974, was a participant in a plan described in the preceding sentence—

26 USC 404.

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