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Page:United States Statutes at Large Volume 100 Part 3.djvu/599

 PUBLIC LAW 99-514—OCT. 22, 1986

100 STAT. 2407

policyholder to a mutual fire insurance company described in subparagraph (C) or (D) of paragraph (1)." (4) Paragraph (5) of section 832(c) is amended by striking out "section 822(b)" and inserting in lieu thereof "section 834(b)". (5) Paragraph (11) of section 832(c) is amended— (A) by striking out "section 831(a)(3)(A)" and inserting in lieu thereof "subsection (b)(l)(C)", and (B) by striking out "section 831(a)(3)(B)" and inserting in lieu thereof "subsection (b)(l)(D)". (6) Section 832 is amended by adding at the end thereof the following new subsection: "(f) INTERINSURERS.—In the case of a mutual insurance company which is an interinsurer or reciprocal underwriter— "(1) there shall be allowed as a deduction the increase for the taxable year in savings credited to subscriber accounts, or "(2) there shall be included as an item of gross income the decrease for the taxable year in savings credited to subscriber accounts. For purposes of the preceding sentence, the term 'savings credited to subscriber accounts' means such portion of the surplus as is credited to the individual accounts of subscribers before the 16th day of the 3rd month following the close of the taxable year, but only if the company would be obligated to pay such amount promptly to such subscriber if he terminated his contract at the close of the company's taxable year. For purposes of determining his taxable income, the subscriber shall treat any such savings credited to his account as a dividend paid or declared.' (7) Subsection (a) of section 834 (as redesignated by subsection (a)) is amended to read as follows: "(a) GENERAL RULE.—For purposes of section 831(b), the term 'taxable investment income' means the gross investment income, minus the deductions provided in subsection (c)." (8) Subsection (d) of section 834 (as so redesignated) is amended— (A) by striking out "section 821" each place it appears and inserting in lieu thereof "section 831", and (B) by inserting before the period at the end of the last sentence of paragraph (2) the following: "except in the case of discount which is original issue discount (as defined in section 1273)". (9) Section 835 (as redesignated by subsection (a)) is amended— (A) by striking out subsection (d) and by redesignating subsections (e), (f), (g), and (h) as subsections (d), (e), (0, and (g), respectively, and (B) by amending subsection (e) (as so redesignated) to read as follows: "(e) BENEFITS OF GRADUATED RATES DENIED.—Any increase in the taxable income of a reciprocal attributable to the limits provided in subsection (b) shall be taxed at the highest rate of tax specified in section 11(b)." (10) Section 841 is amended— (A) by striking out "section 801, 821, or 831" and inserting in lieu thereof "section 801 or 831", (B) by inserting "and" at the end of paragraph (1), (C) by striking out paragraph (2), and (D) by redesignating paragraph (3) as paragraph (2).

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Page:United States Statutes at Large Volume 100 Part 3.djvu/600

 100 STAT. 2408

PUBLIC LAW 99-514—OCT. 22, 1986 (11) Section 842 is amended by striking out "part I, II, or III" and inserting in lieu thereof "part I or 11". (12) Section 844 is amended by striking out subsections (a) and (b) and inserting in lieu thereof the following: "(a) GENERAL RULE.—If an insurance company—

"(1) is subject to the tax imposed by part I or II of this subchapter for the taxable year, and "(2) was subject to the tax imposed by a different part of this subchapter for the taxable year, then any operations loss carryover under section 810 (or the corresponding provisions of prior law) or net operating loss carryover under section 172 (as the case may be) arising in such prior taxable year shall be included in its operations loss deduction under section 810(a) or net operating loss deduction under section 832(c)(10), as the case may be. "(b) LIMITATION.—The amount included under section 810(a) or 832(c)(10) (as the case may be) by reason of the application of subsection (a) shall not exceed the amount that would have constituted the loss carryover under such section if for all relevant taxable years the company had been subject to the tax imposed by the part referred to in subsection (a)(1) rather than the part referred to in subsection (a)(2). For purposes of applying the preceding sentence, section 810(b)(1)(C) (relating to additional years to which losses may be carried by new life insurance companies) shall not apply." (13) Section 891 is amended by striking out "821,". (14) Subsection (a) of section 1201 is amended by striking out "821(a) or (c) and 831(a)" and inserting in lieu thereof "831(a) or

0))".

(15) Paragraph (2) of section 1504flt>) is amended by striking out "or 821'" (16) Paragraph (2)(A) of section 1504(c) is amended by striking out "or 821". (17) Subparagraph (D) of section 1563(b)(2) is amended by striking out "or section 821". (18) The table of sections for part II of subchapter L of chapter 1 (as redesignated by subsection (a)) is amended by adding at the end thereof the following new items: "Sec. 834. Determination of taxable investment income. "Sec. 835. Election by reciprocal." (d) TRANSITIONAL RULES.— (1) TREATMENT OF AMOUNTS IN PROTECTION AGAINST LOSS AC-

COUNT.—In the case of any insurance company which had a protection against loss account for its last taxable year beginning before January 1, 1987, there shall be included in the gross income of such company for any taxable year beginning after December 31, 1986, the amount which would have been included in gross income for such taxable year under section 824 of the Internal Revenue Code of 1954 (as in effect on the day before the date of the enactment of this Act). For purposes of the preceding sentence, no addition to such account shall be made for any taxable year beginning after December 31, 1986. (2) TRANSITIONAL RULE FOR UNUSED LOSS CARRYOVER UNDER SECTION 825.—Any unused loss carryover under section 825 of

the Internal Revenue Code of 1954 (as in effect on the day before the date of the enactment of this Act) which—

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Page:United States Statutes at Large Volume 100 Part 3.djvu/601

 PUBLIC LAW 99-514—OCT. 22, 1986

100 STAT. 2409

(A) is from a taxable year beginning before January 1, 1987, and (B) could have been carried under such section to a taxable year beginning after December 31, 1986, but for the repeal made by subsection (a)(1), shall be included in the net operating loss deduction under section 832(c)(10) of such Code without regard to the limitations of section 844(b) of such Code. (e) EFFECTIVE DATE.—The amendments made by this section (and the provisions of subsection (d)) shall apply to taxable years beginning after December 31, 1986. SEC. 1025. STUDY OF TREATMENT OF PROPERTY AND CASUALTY INSURANCE COMPANIES.

The Secretary of the Treasury or his delegate shall conduct a study of^ (1) the treatment of policyholder dividends by mutual property and casualty insurance companies, (2) the treatment of property and casualty insurance companies under the minimum tax, and (3) the operation and effect of, and revenue raised by, the amendments made by this subtitle. Not later than January 1, 1989, such Secretary shall submit to the Committee on Ways and Means of the House of Representatives, the Committee on Finance of the Senate, and the Joint Committee on Taxation, the results of such study, together with such recommendations as he determines to be appropriate. The Secretary of the Treasury shall have authority to require the furnishing of such information as may be necessary to carry out the purposes of this section.

Subtitle D—Miscellaneous Provisions SEC. 1031. PHYSICIANS' AND SURGEONS' MUTUAL PROTECTION AND INTERINDEMNITY ARRANGEMENTS OR ASSOCIATIONS. (a) CERTAIN PHYSICIANS' AND SURGEONS' MUTUAL PROTECTION AND INTERINDEMNITY ARRANGEMENTS OR ASSOCIATIONS.— (1) TREATMENT OF ARRANGEMENTS OR ASSOCIATIONS.— (A) CAPITAL CONTRIBUTIONS.—There shall not be included

in the gross income of any eligible physicians' and surgeons' mutual protection and interindemnity arrangement or association any initial payment made during any taxable year to such arrangement or association by a member joining such arrangement or association which— (i) does not release such member from obligations to pay current or future dues, assessments, or premiums; and (ii) is a condition precedent to receiving benefits of membership. Such initial payment shall be included in the gross income of such arrangement or association for such taxable year if it is reasonable to expect that such payment will be deductible pursuant to paragraph (2) by any member of such arrangement or association. (B) RETURN OF CONTRIBUTIONS.—

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Page:United States Statutes at Large Volume 100 Part 3.djvu/602

 100 STAT. 2410

PUBLIC LAW 99-514—OCT. 22, 1986 (i) IN GENERAL.—The repayment to any member of any amount of any payment excluded under subparagraph (A) shall not be treated as policyholder dividend, and is not deductible by the arrangement or association. (ii) SOURCE OF RETURNS.—Except in the case of the termination of a member's interest in the arrangement or association, any amount distributed to any member shall be treated as paid out of surplus in excess of amounts excluded under subparagraph (A). (2) DEDUCTION FOR MEMBERS OF ELIGIBLE ARRANGEMENTS OR ASSOCIATIONS.— (A) P A Y M E N T AS TRADE OR BUSINESS ExtENSES.—To the

extent not otherwise allowable under this title, any member of any eligible arrangement or association may treat any initial payment made during a taxable year to such arrangement or association as an ordinary and necessary expense incurred in connection with a trade or business for purposes of the deduction allowable under section 162, to the extent such payment does not exceed the amount which would be payable to an independent insurance company for similar annual insurance coverage (as determined by the Secretary), and further reduced by any annual dues, assessments, or premiums paid during such taxable year. Such deduction shall not be allowable as to any initial payment made to an eligible arrangement or association by any person who is a member of any other eligible arrangement or association on or after the effective date of the Tax Reform Act of 1986. Any excess amount not allowed as a deduction for the taxable year in which such payment was made pursuant to the limitation contained in the 1st sentence of this subparagraph shall, subject to such limitation, be allowable as a deduction in any of the 5 succeeding taxable years, in order of time, to the extent not previously allowed as a deduction under this sentence. (B) REFUNDS OF INITIAL PAYMENTS.—Any amount attributable to any initial payment to such arrangement or association described in paragraph (1) which is later refunded for any reason shall be included in the gross income of the recipient in the taxable year received, to the extent a deduction for such payment was allowed. Any amount refunded in excess of such payment shall be included in gross income except to the extent otherwise excluded from income by this title. (3) ELIGIBLE ARRANGEMENTS OR ASSOCIATIONS.—The terms "eligible physicans' and surgeons' mutual protection and interindemnity arrangement or association" and "eligible arrangement or association" mean and are limited to any mutual protection and interindemnity arrangement or association that provides only medical malpractice liability protection for its members or medical malpractice liability protection in conjunction with protection against other liability claims incurred in the course of, or related to, the professional practice of a physician or surgeon and which— (A) was operative and was providing such protection, or had received a permit for the offer and sale of memberships, under the laws of any State before January 1, 1984,

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Page:United States Statutes at Large Volume 100 Part 3.djvu/603

 PUBLIC LAW 99-514—OCT. 22, 1986

100 STAT. 2411

(B) is not subject to regulation by any State insurance department, (C) has a right to make unlimited assessments against all members to cover current claims and losses, and (D) is not a member of, nor subject to protection by, any insurance guaranty plan or association of any State. (b) EFFECTIVE DATE.—The provisions of subsection (a) shall apply to payments made to and receipts of physicians' and surgeons' mutual protection and interindemnity arrangements or associations, and refunds of payments by such arrangements or associations, after the date of the enactment of this Act, in taxable years ending after such date.

TITLE XI—PENSIONS AND DEFERRED COMPENSATION; EMPLOYEE BENEFITS; EMPLOYEE STOCK OWNERSHIP PLANS Subtitle A—Pensions and Deferred Compensation PART I—LIMITATIONS ON TAX-DEFERRED SAVINGS Subpart A—Rules Applicable to IRAs SEC. 1101. LIMITATIONS ON IRA DEDUCTIONS FOR ACTIVE PARTICIPANTS IN CERTAIN PENSION PLANS. (a) LIMITATIONS ON DEDUCTIONS FOR ACTIVE PARTICIPANTS.—

(1) IN GENERAL.—Section 219 (relating to deduction for retirement savings) is amended by redesignating subsection (g) as subsection (h) and by adding after subsection (0 the following new subsection: "(g) LIMITATION ON DEDUCTION FOR ACTIVE PARTICIPANTS IN CERTAIN PENSION PLANS.—

"(1) IN GENERAL.—If (for any part of any plan year ending with or within a taxable year) an individual or the individual's spouse is an active participant, each of the dollar limitations contained in subsections (b)(1)(A) and (c)(2) for such taxable year shall be reduced (but not below zero) by the amount determined under paragraph (2). "(2) AMOUNT OF REDUCTION.—

"(A) IN GENERAL.—The amount determined under this paragraph with respect to any dollar limitation shall be the amount which bears the same ratio to such limitation as— "(i) the excess of— "(I) the taxpayer's adjusted gross income for such taxable year, over "(II) the applicable dollar amount, bears to "(ii) $10,000. "(B) N o REDUCTION BELOW $200 UNTIL COMPLETE PHASE-

OUT.—No dollar limitation shall be reduced below $200 under paragraph (1) unless (without regard to this subparagraph) such limitation is reduced to zero.

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Page:United States Statutes at Large Volume 100 Part 3.djvu/604

 100 STAT. 2412

PUBLIC LAW 99-514—OCT. 22, 1986 "(C) ROUNDING.—Any amount determined under this paragraph which is not a multiple of $10 shall be rounded to the next lowest $10. (3) ADJUSTED GROSS INCOME; APPLICABLE DOLLAR AMOUNT.—

For purposes of this subsection— "(A) ADJUSTED GROSS INCOME.—Adjusted gross income of any taxpayer shall be determined— "(i) after application of sections 86 and 469, and "(ii) without regard to section 911 or the deduction allowable under this section. "(B) APPLICABLE DOLLAR AMOUNT.—The term 'applicable dollar amount' means— "(i) in the case of a taxpayer filing a joint return, $40,000, "(ii) in the case of any other taxpayer (other than a married individual filing a separate return), $25,000, and "(iii) in the case of a married individual filing a separate return, zero. '(4)

SPECIAL RULE FOR MARRIED INDIVIDUALS FILING SEPA-

RATELY.—In the case of a married individual filing a separate return for any taxable year, paragraph (1) shall be applied without regard to whether such individual's spouse is an active participant for any plan year ending with or within such taxable year. "(5) ACTIVE PARTICIPANT.—For purposes of this subsection, the term 'active participant' means, with respect to any plan year, an individual— "(A) who is an active participant in— "(i) a plan described in section 401(a) which includes a trust exempt from tax under section 501(a), "(ii) an annuity plan described in section 403(a), "(iii) a plan established for its employees by the United States, by a State or political subdivision thereof, or by an agency or instrumentality of any of the foregoing, "(iv) an annuity contract described in section 403(b), or "(v) a simplified employee pension (within the meaning of section 408(k)), or "(B) who makes deductible contributions to a trust described in section 501(c)(18). The determination of whether an individual is an active participant shall be made without regard to whether or not such individual's rights under a plan, trust, or contract are nonforfeitable. An eligible deferred compensation plan (within the meaning of section 4570t))) shall not be treated as a plan described in subparagraph (A)(iii). "(6)

CERTAIN INDIVIDUALS NOT TREATED AS ACTIVE PARTICI-

PANTS.—For purposes of this subsection, any individual described in any of the following subparagraphs shall not be treated as an active participant for any taxable year solely because of any participation so described: "(A) MEMBERS OF RESERVE COMPONENTS.—Participation in

a plan described in subparagraph (A)(iii) of paragraph (5) by reason of service as a member of a reserve component of the Armed Forces (as defined in section 261(a) of title 10), unless

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Page:United States Statutes at Large Volume 100 Part 3.djvu/605

 PUBLIC LAW 99-514—OCT. 22, 1986

100 STAT. 2413

such individual has served in excess of 90 days on active duty (other than active duty for training) during the year. "(B) VOLUNTEER FIREFIGHTERS.—A volunteer firefighter— "(i) who is a participant in a plan described in subparagraph (A)(iii) of paragraph (5) based on his activity as a volunteer firefighter, and "(ii) whose accrued benefit as of the beginning of the taxable year is not more than an annual benefit of $1,800 (when expressed as a single life annuity commencing at age 65)." (2) CONFORMING AMENDMENT.—Section 219(0(3) is amended to

read as follows: "(3) TIME WHEN CONTRIBUTIONS DEEMED MADE.—For purposes

of this section, a taxpayer shall be deemed to have made a contribution to an individual retirement plan on the last day of the preceding taxable year if the contribution is made on account of such taxable year and is made not later than the time prescribed by law for filing the return for such taxable year (not including extensions thereof)." (b) REPEAL OF DEDUCTION FOR QUALIFIED VOLUNTARY EMPLOYEE CONTRIBUTIONS.—

(1) IN GENERAL.—Subsection (e) of section 219 (relating to defining retirement savings contributions) is amended to read as follows: "(e) QUALIFIED RETIREMENT CONTRIBUTION.—For purposes of this section, the term 'qualified retirement contribution' means— "(1) any amount paid in cash for the taxable year by or on behalf of an individual to an individual retirement plan for such , individual's benefit, and "(2) any amount contributed on behalf of any individual to a plan described in section 501(c)(18)." (2) CONFORMING AMENDMENTS.—

(A) Section 219(b) is amended by striking out paragraph (3). (B) Paragraph (3) of section 72(p) is amended to read as follows: "(3) QUALIFIED EMPLOYER PLAN, ETC.—For purposes of this subsection— "(A) QUALIFIED EMPLOYER PLAN.—

"(i) IN GENERAL.—The term 'qualified employer plan' means— "(I) a plan described in section 401(a) which includes a trust exempt from tax under section 501(a), "(II) an annuity plan described in section 403(a), and "(III) a plan under which amounts are contributed by an individual's employer for an annuity contract described in section 403(b). "(ii) SPECIAL RULES.—The term 'qualified employer plan'— "(I) shall include any plan which was (or was determined to be) a qualified employer plan or a government plan, but "(II) shall not include a plan described in subsection (e)(7).

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Page:United States Statutes at Large Volume 100 Part 3.djvu/606

 100 STAT. 2414

PUBLIC LAW 99-514—OCT. 22, 1986

"(B) GOVERNMENT PLAN.—The term 'government plan' means any plan, whether or not qualified, established and maintained for its employees by the United States, by a State or political subdivision thereof, or by an agency or instrumentality of any of the foregoing." (C) Paragraph (5) of section 72(o) is amended— (i) by inserting "and made for a taxable year beginning before January 1, 1987," after "date" in subparagraph (A), (ii) by striking out "section 219(e)(3)" in subparagraph (C) and inserting in lieu thereof "subsection (p)(3)(A)(i)", and (iii) by striking out "section 219(e)(4)" in subparagraph (D) and inserting in lieu thereof "subsection (p)(3)(B)". (c) EFFECTIVE DATE.—The amendments made by this section shall apply to contributions for taxable years beginning after December 31, 1986. SEC. 1102. NONDEDUCTIBLE CONTRIBUTIONS MAY BE MADE TO INDIVIDUAL RETIREMENT PLANS.

(a) IN GENERAL.—Section 408 (relating to individual retirement accounts) is amended by redesignating subsection (o) as subsection (p) and by inserting after subsection (n) the following new subsection: "(o) DEFINITIONS AND RULES RELATING TO NONDEDUCTIBLE CONTRIBUTIONS TO INDIVIDUAL RETIREMENT PLANS.—

"(1) IN GENERAL.—Subject to the provisions of this subsection, designated nondeductible contributions may be made on behalf of an individual to an individual retirement plan. "(2) LIMITS ON AMOUNTS WHICH MAY BE CONTRIBUTED.—

"(A) IN GENERAL.—The amount of the designated nondeductible contributions made on behalf of any individual for any taxable year shall not exceed the nondeductible limit for such taxable year. "(B) NONDEDUCTIBLE LIMIT.—For purposes of this paragraph— "(i) IN GENERAL.—The term 'nondeductible limit' means the excess of— "(I) the amount allowable as a deduction under section 219 (determined without regard to section 219(g)), over "(II) the amount allowable as a deduction under section 219 (determined with regard to section 219(g)). "(ii) TAXPAYER MAY ELECT TO TREAT DEDUCTIBLE CON-

TRIBUTIONS AS NONDEDUCTIBLE.—If a taxpayer elects not to deduct an amount which (without regard to this clause) is allowable as a deduction under section 219 for any taxable year, the nondeductible limit for such taxable year shall be increased by such amount. "(C) DESIGNATED NONDEDUCTIBLE CONTRIBUTIONS.—

"(i) IN GENERAL.—For purposes of this paragraph, the term 'designated nondeductible contribution' means any contribution to an individual retirement plan for the taxable year which is designated (in such manner

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Page:United States Statutes at Large Volume 100 Part 3.djvu/607

 PUBLIC LAW 99-514—OCT. 22, 1986

100 STAT. 2415

as the Secretary may prescribe) as a contribution for which a deduction is not allowable under section 219. "(ii) DESIGNATION.—Any designation under clause (i) shall be made on the return of tax imposed by chapter 1 for the taxable year. "(3) TIME WHEN CONTRIBUTIONS MADE.—In determining for which taxable year a designated nondeductible contribution is made, the rule of section 219(f)(3) shall apply. "(4) INDIVIDUAL REQUIRED TO REPORT AMOUNT OF DESIGNATED NONDEDUCTIBLE CONTRIBUTIONS.—

"(A) IN GENERAL.—Any individual who— "(i) makes a designated nondeductible contribution to any individual retirement plan for any taxable year, or "(ii) receives any amount from any individual retirement plan for any taxable year, shall include on his return of the tax imposed by chapter 1 for such taxable year and any succeeding taxable year (or on such other form as the Secretary may prescribe for any such taxable year) information described in subparagraph (B). "(B) INFORMATION REQUIRED TO BE SUPPUED.—The following information is described in this subparagraph: "(i) The amount of designated nondeductible contributions for the taxable year, "(ii) The amount of distributions from individual retirement plans for the taxable year, "(iii) The excess (if any) of— "(I) the aggregate amount of designated nondeductible contributions for all preceding taxable years, over "(II) the aggregate amount of distributions from individual retirement plans which was excludable from gross income for such taxable years. "(iv) The aggregate balance of all individual retireu ment plans of the individual as of the close of the calendar year with or within which the taxable year ends. "(v) Such other information as the Secretary may prescribe. "(C) PENALTY FOR REPORTING CONTRIBUTIONS NOT MADE.—

"For penalty where individual reports designated nondeductible contributions not made, see section 6693(b)." (b) EXCESS CONTRIBUTIONS.— (1) APPLICATION OF TAX.—Section 4973(b) (defining excess con-

tributions) is amended by adding at the end thereof the following new sentence: "For purposes of paragraphs (1)(B) and (2)(C), the amount allowable as a deduction under section 219 (after application of section 408(o)(2)(B)(ii)) shall be increased by the nondeductible limit under section 408(o)(2)(B). (2) RETURN OF EXCESS CONTRIBUTIONS.—Paragraph (5) of section 408(d) (relating to tax treatment of distributions) is amended by adding at the end thereof the following new sentence: For purposes of this paragraph, the amount allowable as a deduction under section 219 (after application of section 408(o)(2)(B)(ii)) shall be increased by the nondeductible limit under section 408(o)(2)(B)."

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Page:United States Statutes at Large Volume 100 Part 3.djvu/608

 100 STAT. 2416

PUBLIC LAW 99-514—OCT. 22, 1986

(c) TREATMENT OF DISTRIBUTIONS.—Paragraphs (1) and (2) of section 408(d) (relating to tax treatment of distributions) are amended to read as follows: "(1) IN GENERAL.—Except as otherwise provided in this subsection, any amount paid or distributed out of an individual retirement plan shall be included in gross income by the payee or distributee, as the case may be, in the manner provided under section 72. "(2) SPECIAL RULES FOR APPLYING SECTION 72.—For purposes of applying section 72 to any amount described in paragraph (1)— "(A) all individual retirement plans shall be treated as 1 contract, "(B) all distributions during any taxable year shall be treated as 1 distribution, and "(C) the value of the contract, income on the contract, and investment in the contract shall be computed as of the close of the calendar year with or within which the taxable year ends. For purposes of subparagraph (C), the value of the contract shall be increased by the amount of any distributions during the calendar year." (d) PENALTY FOR REPORTING NONDEDUCTIBLE CONTRIBUTIONS NOT MADE.—

(1) IN GENERAL.—Section 6693 (relating to failure to provide reports on individual retirement accounts or annuities) is amended by redesignating subsection (b) as subsection (c) and by inserting after subsection (a) the following new subsection: "(b) OVERSTATEMENT OF DESIGNATED NONDEDUCTIBLE CONTRIBU-

TIONS.—Any individual who— "(1) is required to furnish information under section 408(o)(4) as to the amount of designated nondeductible contributions made for any taxable year, and "(2) overstates the amount of such contributions made for such taxable year, shall pay a penalty of $100 for each such overstatement unless it is shown that such overstatement is due to reasonable cause." (2) CONFORMING AMENDMENTS.—

(A) Section 6693(c), as redesignated by paragraph (1), is amended by striking out "subsection (a)" and inserting in lieu thereof "this section". (B) The heading for section 6693 is amended by inserting "; OVERSTATEMENT OF DESIGNATED NONDEDUCTIBLE CONTRIBUTIONS" after " A N N U I T I E S ".

(C) The item relating to section 6693 in the table of sections for subchapter B of chapter 68 is amended by inserting "; overstatement of designated nondeductible contributions" after "annuities". (e) SPECIAL RULES RELATING TO REQUIREMENTS OF TRUSTEES OF INDIVIDUAL RETIREMENT PLANS.—

(1) WITHHOLDING.—Subparagraph (B) of section 3405(d)(1) (relating to exceptions) is amended by adding at the end thereof the following new flush sentence: "For purposes of clause (ii), any distribution or payment from or under an individual retirement plan shall be treated as includible in gross income." (2)

TIME FOR REPORTING INFORMATION WITH RESPECT TO INDIVIDUAL RETIREMENT PLANS.—The last sentence of section

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Page:United States Statutes at Large Volume 100 Part 3.djvu/609

 PUBLIC LAW 99-514—OCT. 22, 1986

100 STAT. 2417

408(i) (relating to reports) is amended to read as follows: "The reports required by this subsection— "(1) shall be filed at such time and in such manner as the Secretary prescribes in such regulations, and "(2) shall be furnished to individuals— "(A) not later than January 31 of the calendar year following the calendar year to which such reports relate, and "(B) in such manner as the Secretary prescribes in such regulations." (f) CONFORMING AMENDMENT.—Section 219(f) (relating to definitions and special rules) is amended by adding at the end thereof the following new paragraph: "(7) ELECTION NOT TO DEDUCT CONTRIBUTIONS.— "For election not to deduct contributions to individual retirement plans, see section 408(o)(2)(B)(ii)." (g) EFFECTIVE DATE.—The amendments made by this section shall

apply to contributions and distributions for taxable years beginning after December 31, 1986. SEC. 1103. SPOUSAL DEDUCTION ALLOWED WHERE SPOUSE HAS SMALL AMOUNT OF EARNED INCOME.

(a) IN GENERAL.—Subparagraph (B) of section 219(c)(l) (relating to special rules for certain married individuals) is amended to read as follows: "(B) whose spouse— "(i) has no compensation (determined without regard to section 911) for the taxable year, or "(ii) elects to be treated for purposes of subsection (b)(l)(B) as having no compensation for the taxable year," (b) EFFECTIVE DATE.—The amendment made by this section shall apply to taxable years beginning before, on, or after December 31, 1985. Subpart B—Other Provisions SEC. 1105. $7,000 LIMITATION ON ELECTIVE DEFERRALS.

(a) GENERAL RULE.—Section 402 (relating to taxability of beneficiary of employees' trust) is amended by adding at the end thereof the following new subsection: "(g) LIMITATION ON EXCLUSION FOR ELECTIVE DEFERRALS.—

"(1) IN GENERAL.—Notwithstanding subsections (a)(8) and (h)(l)(B), the elective deferrals of any individual for any taxable year shall be included in such individual's gross income to the extent the amount of such deferrals for the taxable year exceeds $7,000. "(2) REQUIRED DISTRIBUTION OF EXCESS DEFERRALS.—

"(A) IN GENERAL.—If any amount (hereinafter in this paragraph referred to as 'excess deferrals') is included in the gross income of an individual under paragraph (1) for any taxable year— "(i) not later than the 1st March 1 following the close of the taxable year, the individual may allocate the amount of such excess deferrals among the plans under which the deferrals were made and may notify each such plan of the portion allocated to it, and

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Page:United States Statutes at Large Volume 100 Part 3.djvu/610

 100 STAT. 2418

PUBLIC LAW 99-514—OCT. 22, 1986

ar'T* •jiit

- •

"(ii) not later than the 1st April 15 following the close of the taxable year, each such plan may distribute to the individual the amount allocated to it under clause (i) (and any income allocable to such amount). The distribution described in clause (ii) may be made notwithstanding any other provision of law. "(B)

TREATMENT

OF

DISTRIBUTION

UNDER

SECTION

401 (k).—Except to the extent provided under rules prescribed by the Secretary, notwithstanding the distribution of any portion of an excess deferral from a plan under subparagraph (A)(ii), such portion shall, for purposes of applying section 401(k)(3)(A)(ii), be treated as an employer contribution. "(C) TAXATION OF DISTRIBUTION.—In the case of a distribution to which subparagraph (A) applies— "(i) except as provided in clause (ii), such distribution shall not be included in gross income (and no tax shall be imposed under section 72(t)), and "(ii) any income on the excess deferral shall, for purposes of this chapter, be treated as earned and received in the taxable year in which such excess deferral is made. "(3) ELECTIVE DEFERRALS.—For purposes of this paragraph, the term 'elective deferrals' means, with respect to any taxable year, the sum of— "(A) any employer contribution under a qualified cash or deferred arrangement (as defined in section 401(k)) to the extent not includible in gross income for the taxable year under subsection (a)(8) (determined without regard to this subsection), "(B) any employer contribution to the extent not includible in gross income for the taxable year under subsection (h)(1)(B) (determined without regard to this subsection), and "(C) any employer contribution to purchase an annuity contract under section 403(b) under a salary reduction agreement (within the meaning of section 3121(a)(5)(D)). "(4)

INCREASE IN LIMIT FOR AMOUNTS CONTRIBUTED UNDER

SECTION 403 (b) CONTRACTS.—The limitation under paragraph (1) shall be increased (but not to an amount in excess of $9,500) by the amount of any employer contributions for the taxable year described in paragraph (3)(C). "(5) COST-OF-LIVING ADJUSTMENT.—The Secretary shall adjust the $7,000 amount under paragraph (1) at the same time and in the same manner as under section 415(d). "(6) DISREGARD OF COMMUNITY PROPERTY LAWS.—This subsection shall be applied without regard to community property laws. "(7) COORDINATION WITH SECTION 72.—For purposes of applying section 72, any amount includible in gross income for any taxable year under this subsection but which is not distributed from the plan during such taxable year shall not be treated as investment in the contract. "(8) SPECIAL RULE FOR CERTAIN ORGANIZATIONS.—

"(A) IN GENERAL.—In the case of a qualified employee of a qualified organization, with respect to employer contributions described in paragraph (3)(C) made by such organiza-

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Page:United States Statutes at Large Volume 100 Part 3.djvu/611

 PUBLIC LAW 99-514—OCT. 22, 1986

100 STAT. 2419

tion, the limitation of paragraph (1) for any taxable year shall be increased by whichever of the following is the least: "(i) $3,000, "(ii) $15,000 reduced by amounts not included in gross income for prior taxable years by reason of this paragraph, or "(iii) the excess of $5,000 multiplied by the number of years of service of the employee with the qualified organization over the employer contributions described in paragraph (3) made by the organization on behalf of such employee for prior taxable years. "(B) QUALIFIED ORGANIZATION.—For purposes of this paragraph, the term 'qualified organization' means any educational organization, hospital, home health service agency, health and welfare service agency, church, or convention or association of churches. Such term includes any organization described in section 414(e)(3)(B)(ii). Terms used in this subparagraph shall have the same meaning as when used in section 415(c)(4). "(C) QUALIFIED EMPLOYEE.—For purposes of this paragraph, the term 'qualified employee' means any employee who has completed 15 years of service with the qualified organization.' (b) REPORTING REQUIREMENTS.—Section 6051(a) (relating to requirements of receipts for employees) is amended by striking "and" at the end of paragraph (6), by striking the period at the end of paragraph (7), and by inserting after paragraph (7) the following new paragraph: "(8) the total amount of elective deferrals (within the meaning of section 402(g)(3)) and compensation deferred under section 457." (c) EFFECTIVE DATES.—

(1) IN GENERAL.—Except as provided in this subsection, the amendment made by subsection (a) shall apply to taxable years beginning after December 31, 1986. (2) DEFERRALS UNDER COLLECTIVE BARGAINING AGREEMENTS.—

In the case of a plan maintained pursuant to 1 or more collective bargaining agreements between employee representatives and 1 or more employers ratified before March 1, 1986, the amendment made by subsection (a) shall not apply to contributions made pursuant to such an agreement for taxable years beginning before the earlier of— (A) the date on which the last of such collective bargaining agreements terminates (determined without regard to any extension thereof after February 28, 1986), or (B) January 1, 1989. Such contributions shall be taken into account for purposes of applying the amendment made by this section to other plans. (3) DISTRIBUTIONS MADE BEFORE PLAN AMENDMENT.—

(A) IN GENERAL.—If a plan amendment is required to allow the plan to make any distribution described in section 402(g)(2)(A)(ii) of the Internal Revenue Code of 1986, any such distribution which is made before the close of the 1st plan year for which such amendment is required to be in effect under section 1140 shall be treated as made in accordance with the provisions of such plan. (B) DISTRIBUTIONS PURSUANT TO MODEL AMENDMENT.—

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Page:United States Statutes at Large Volume 100 Part 3.djvu/612

 100 STAT. 2420

PUBLIC LAW 99-514—OCT. 22, 1986

-r

(i) SECRETARY TO PRESCRIBE AMENDMENT.—The Secretary of the Treasury or his delegate shall prescribe an amendment which allows a plan to make any distribution described in section 402(g)(2)(A)(ii) of such Code. (ii) ADOPTION BY PLAN.—If a plan adopts the amendment prescribed under clause (i) and makes a distribution in accordance with such amendment, such distribution shall be treated as made in accordance with the provisions of the plan. (4) SPECIAL RULE FOR TAXABLE YEARS OF PARTNERSHIPS WHICH INCLUDE JANUARY 1, 1987.—In the case of the taxable year of

any partnership which begins before January 1, 1987, and ends after January 1, 1987, elective deferrals (within the meaning of section 402(g)(3) of the Internal Revenue Code of 1986) made on behalf of a partner for such taxable year shall, for purposes of section 402(g)(3) of such Code, be treated as having been made ratably during such taxable year. (5) CASH OR DEFERRED ARRANGEMENTS.—The amendments made by this section shall not apply to employer contributions made during 1987 and attributable to services performed during 1986 under a qualified cash or deferred arrangement (as defined in section 401(k) of the Internal Revenue Code of 1986) if, under the terms of such arrangement as in effect on August 16, 1986— (A) the employee makes an election with respect to such contribution before January 1, 1987, and (B) the employer identifies the amount of such contribution before January 1, 1987. SEC. 1106. ADJUSTMENTS TO LIMITATIONS ON CONTRIBUTIONS AND BENEFITS UNDER QUALIFIED PLANS. (a) ADJUSTMENT OF ANNUAL CONTRIBUTION LIMITS.—Subpara-

graph (A) of section 415(c)(1) (relating to limitation for defined contribution plans) is amended to read as follows: "(A) $30,000 (or, if greater, V^, of the dollar limitation in effect under subsection (b)(l)(A)), or". (b) ADJUSTMENT OF DEFINED BENEFIT PLAN LIMITS.— (1) USE OF SOCIAL SECURITY RETIREMENT AGE.—

(A) IN GENERAL.—Subparagraphs (C) and (D) of section 415(b)(2) are each amended— (i) by striking out "age 62" and "age 65" each place they appear and inserting in lieu thereof "the social security retirement age", and (ii) by striking out the last sentence of subparagraph (C) and inserting in lieu thereof the following: "The reduction under this subparagraph shall be made in such manner as the Secretary may prescribe which is consistent with the reduction for old-age insurance benefits commencing before the social security retirement age under the Social Security Act." (B) DEFINITION OF SOCIAL SECURITY RETIREMENT AGE.—

Section 415(b) is amended by adding at the end thereof the following new paragraph: "(8) SOCIAL SECURITY RETIREMENT AGE DEFINED.—For purposes

~

of this subsection, the term 'social security retirement age' means the age used as the retirement age under section 216(1) of

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Page:United States Statutes at Large Volume 100 Part 3.djvu/613

 PUBLIC LAW 99-514—OCT. 22, 1986

100 STAT. 2421

the Social Security Act, except that such section shall be applied— "(A) without regard to the age increase factor, and "(B) as if the earlv retirement age under section 216(1)(2) of such Act were 62.' (2) SPECIAL RULES FOR GOVERNMENTAL AND TAX-EXEMPT PLANS AND QUALIFIED POUCE AND FIREFIGHTERS.—Paragraph (2) of sec-

i

5

tion 415(b) (relating to annual benefit) is amended by adding at the end thereof the following new subparagraphs:

I

"(F) PLANS MAINTAINED BY GOVERNMENTS AND TAXEXEMPT ORGANIZATIONS.—In the case of a governmental

I

plan (within the meaning of section 414(d)), a plan maintained by an organization (other than a governmental unit) exempt from tax under this subtitle, or a qualified merchant marine plan— "(i) subparagraph (G) shall be applied— "(I) by substituting 'age 62' for 'social security retirement age' each place it appears, and "(II) as if the last sentence thereof read as follows: 'The reduction under this subparagraph shall not reduce the limitation of paragraph (1)(A) below (i) $75,000 if the benefit begins at or after age 55, or (ii) if the benefit begins before age 55, the equivalent of the $75,000 limitation for age 55.', and "(ii) subparagraph (D) shall be applied by substituting 'age 65' for 'social security retirement age' each place it appears. For purposes of this subparagraph, the term 'qualified merchant marine plan' means a plan in existence on January 1, 1986, the participants in which are merchant marine officers holding licenses issued by the Secretary of Transportation under title 46, United States Code.

> i,^ X a

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, • f E M.<:.

m.oir

' '

lol in if ii J

p} f

 * .* f

"(G) SPECIAL LIMITATION FOR QUALIFIED POLICE OR FIRE-

FIGHTERS.—In the case of a qualified participant— "(i) subparagraph (G) shall not reduce the limitation of paragraph (I)(A) to an amount less than $50,000, and "(ii) the rules of subparagraph (F) shall apply. The Secretary shall adjust the $50,000 amount in clause (i) at the same time and in the same manner as under section 415(d). "(H) QUALIFIED PARTICIPANT DEFINED.—For purposes of

subparagraph (G), the term 'qualified participant' means a participant— "(i) in a defined benefit plan which is maintained by a State or political subdivision thereof, "(ii) with respect to whom the period of service taken into account in determining the amount of the benefit under such defined benefit plan includes at least 20 years of service of the participant— "(I) as a full-time employee of any police department or fire department which is organized and operated by the State or political subdivision maintaining such defined benefit plan to provide police protection, firefighting services, or emergency medical services for any area within the jurisdiction of such State or political subdivision, or

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Page:United States Statutes at Large Volume 100 Part 3.djvu/614

 100 STAT. 2422 tjci

PUBLIC LAW 99-514—OCT. 22, 1986 » '>

• —

"(II) as a member of the Armed Forces of the United States." (3) TREATMENT OF AIRLINE PILOTS.—Subsection O> of section t) I;' 415 (relating to limitation for defined benefit plans) is amended by adding at the end thereof the following new paragraph: "(9) SPECIAL RULE FOR COMMERCIAL AIRLINE PILOTS.—

"(A) IN GENERAL.—Except as provided in subparagraph Ift, f (B), in the case of any participant who is a commercial airline pilot— XAT "(i) the r u l e of paragraph (2)(F)(i)(II) shall apply, and = "(ii) if, as of the time of the participant's retirement, regulations prescribed by the Federal Aviation Administration require an individual to separate from •^&ir> b-service as a commercial airline pilot after attaining any age occurring on or after age 60 and before the social security retirement age, paragraph (2)(C) (after ¥Ji'>y V application of clause (i)) shall be applied by substituting such age for the social security retirement age. "(B) INDIVIDUALS WHO SEPARATE FROM SERVICE BEFORE AGE

60.—If a participant described in subparagraph (A) separates from service before age 60, the rules of paragraph (2)(F) shall apply." (4) SPECIAL ELECTIONS FOR SECTION 403(b) CONTRACTS.—Subparagraphs (A), (B), and (C) of section 415(c)(4) are each amended by inserting "a health and welfare service agency," after "a home health service agency,". (c) CONTRIBUTIONS TO COST-OF-LIVING DEFINED BENEFIT PLANS.—

ARRANGEMENTS

UNDER

(1) IN GENERAL.—Section 415(k) (relating to special rules for limitations on benefits and contributions under qualified plans) is amended by adding at the end thereof the following new paragraph: -35!

"(2) CONTRIBUTIONS TO PROVIDE COST-OF-LIVING PROTECTION UNDER D E F I N E D BENEFIT PLANS.—

f; ttfii -.

"(A) IN GENERAL.—In the case of a defined benefit plan which maintains a qualified cost-of-living arrangement— "(i) any contribution made directly by an employee under such arrangement— "(I) shall not be treated as an annual addition for purposes of subsection (c), but ••-• ',c r. ' "(II) shall be so treated for purposes of subsection . (e), and "(ii) any benefit under such arrangement which is \-c!f; • '., allocable to an employer contribution which was transferred from a defined contribution plan and to which the requirements of subsection (c) were applied shall, ^, for purposes of subsection (b), be treated as a benefit %M JaB*^! derived from an employee contribution (and subsections (c) and (e) shall not again apply to such contribu.jjf: tion by reason of such transfer). "(B) QUALIFIED COST-OF-UVING ARRANGEMENT DEFINED.—

^fij jiQu

For purposes of this paragraph, the term 'qualified cost-ofliving arrangement' means an arrangement under a defined benefit plan which— "(i) provides a cost-of-living adjustment to a benefit .t'i provided under such plan or a separate plan subject to the requirements of section 412, and

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 PUBLIC LAW 99-514—OCT. 22, 1986 .,^„

100 STAT. 2423

"(ii) meets the requirements of subparagraphs (C), (D), (E), and (F) and such other requirements as the Secretary may prescribe. "(C)

DETERMINATION

OF

AMOUNT

OF

BENEFIT.—An

arrangement meets the requirement of this subparagraph only if the cost-of-living adjustment of participants is based— "(i) on increases in the cost-of-living after the annuity starting date, and "(ii) on average cost-of-living increases determined by reference to 1 or more indexes prescribed by the Secretary, except that the arrangement may provide that the increase for any year will not be less than 3 percent of the retirement benefit (determined without regard to the arrangement).

^.

"(D)

ARRANGEMENT ELECTIVE; TIME FOR ELECTION.—An

arrangement meets the requirements of this subparagraph only if it is elective, it is available under the same terms to all participants, and it provides that such election may be made in— "(i) the year in which the participant— "(I) attains the earliest retirement age under the defined benefit plan (determined without regard to any requirement of separation from service), or "(II) separates from service, or "(ii) both such years. •%mi

"^E) NONDISCRIMINATION

REQUIREMENTS.—An

arrange-

ment shall not meet the requirements of this subparagraph if the Secretary finds that a pattern of discrimination exists with respect to participation.

^c, .^\.

"(F) SPECIAL RULES FOR KEY EMPLOYEES.—

"(i) IN GENERAL.—An arrangement shall not meet the requirements of this paragraph if any key employee is eligible to participate. "(ii) KEY EMPLOYEE.—For purposes of this subparagraph, the term 'key employee' has the meaning given such term by section 416(i)(l), except that in the case of a plan other than a top-heavy plan (within the meaning of section 416(g)), such term shall not include an individual who is a key employee solely by reason of section 416(i)(l)(A)(i)." (2) CERTAIN TRANSFERS TO DEFINED BENEFIT PLANS NOT TAKEN INTO ACCOUNT FOR PURPOSES OF LUMP SUM DISTRIBUTION.—SEC-

tion 402(e)(4) (relating to special rules for lump sum distributions) is amended by adding at the end thereof the following new subparagraph: "(N)

3" -

TRANSFERS TO COST-OF-LIVING ARRANGEMENT NOT

TREATED AS DISTRIBUTION.—For purposes of this subsection, the balance to the credit of an employee under a defined contribution plan shall not include any amount transferred from such defined contribution plan to a qualified cost-ofliving arrangement (within the meaning of section 415(k)(2)) under a defined benefit plan."

(d) LIMITATION ON AMOUNT OF ANNUAL COMPENSATION WHICH MAY B E TAKEN INTO ACCOUNT.—

(1) IN GENERAL.—Subsection (a) of section 401 (relating to qualified pension, profit-sharing, and stock bonus plans) is

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Page:United States Statutes at Large Volume 100 Part 3.djvu/616

 100 STAT. 2424

PUBLIC LAW 99-514—OCT. 22, 1986 amended by inserting after paragraph (16) the following new paragraph: "(17) A trust shall not constitute a qualified trust under this section unless, under the plan of which such trust is a part, the annual compensation of each employee taken into account under the plan for any year does not exceed $200,000. The Secretary shall adjust the $200,000 amount at the same time and in the same manner as under section 415(d)." (2) DEDUCTION FOR EMPLOYER CONTRIBUTIONS.—Section 404

(relating to deduction for contributions of employers to plans) is amended by adding at the end thereof the following new subsection: "(1) LIMITATION ON AMOUNT OF ANNUAL COMPENSATION TAKEN INTO ACCOUNT.—For purposes of applying the limitations of this

section, the amount of annual compensation of each employee taken into account under the plan for any year shall not exceed $200,000. The Secretary shall adjust the $2(30,000 amount at the same time and in the same manner as under section 415(d)." ,.

fff

(3) CONFORMING AMENDMENTS.—

(A) Subsection (a) of section 416 is amended by inserting "and" at the end of paragraph (1), by striking out ", and" at the end of paragraph (2) and inserting in lieu thereof a period, and by striking out paragraph (3). (B)(i) Subsection (d) of section 416 is hereby repealed. (ii) Section 416(c)(2)(B) is amended by striking out clause (ii) and by redesignating clause (iii) as clause (ii). (C) Paragraph (3) of section 818(a) is amended by inserting "(17)," after "(16),".

(e) TREATMENT OF EMPLOYEE CONTRIBUTIONS FOR PURPOSES OF DETERMINING ANNUAL ADDITION.—

(1) IN GENERAL.—Subparagraph (B) of section 415(c)(2) (defining annual addition) is amended to read as follows: "(B) the employee contributions, and". (2) ANNUAL COMPENSATION LIMIT NOT TO APPLY TO CONTRIBUTIONS FOR POST-RETIREMENT MEDICAL BENEFITS.—Section 415(c)(2)

is amended by adding at the end thereof the following new sentence: "Subparagraph (B) of paragraph (1) shall not apply to any contribution for medical benefits (within the meaning of section 419A(f)(2)) after separation from service which is treated as an annual addition." (f) PHASE-IN OF LIMITATION FOR DEFINED BENEFIT PLANS BASED ON YEARS OF PARTICIPATION.—Paragraph (5) of section 415(b) (relating

to reduction for service less than 10 years) is amended to read as follows: "(5) REDUCTION FOR PARTICIPATION OR SERVICE OF LESS THAN lo YEARS.—

f:, ^

"(A) DOLLAR LIMITATION.—In the case of an employee who has less than 10 years of participation in a defined benefit plan, the limitation referred to in paragraph (1)(A) shall be the limitation determined under such paragraph (without regard to this paragraph) multiplied by a fraction— "(i) the numerator of which is the number of years (or part thereof) of participation in the defined benefit ' plan of the employer, and "(ii) the denominator of which is 10. "(B)

COMPENSATION

AND BENEFITS

LIMITATIONS.—The

provisions of subparagraph (A) shall apply to the limita-

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Page:United States Statutes at Large Volume 100 Part 3.djvu/617

 PUBLIC LAW 99-514—OCT. 22, 1986 t,

,

100 STAT. 2425

tions under paragraphs dXB) and (4), except that such subparagraph shall be applied with respect to years of service with an employer rather than years of participation in a plan. "(C) LIMITATION ON REDUCTION.—In no event shall subparagraph (A) or (B) reduce the limitations referred to in paragraphs (1) and (4) to an amount less than Vio of such limitation (determined without regard to this paragraph). "(D) APPLICATION TO CHANGES IN BENEFIT STRUCTURE.—To

the extent provided in regulations, this paragraph shall be applied separately with respect to each change in the benefit structure of a plan." (g) CONFORMING AMENDMENTS.—

(1) Paragraph (1) of section 415(d) is amended by inserting "and" at the end of subparagraph (A), by striking out subparagraph (B), and by redesignating subparagraph (C) as paragraph (B). (2) Paragraph (2) of section 415(d) is amended— (A) by striking out "subparagraphs (A) and (B)" and inserting in lieu thereof "subparagraph (A)", and (B) by striking out "subparagraph (C)" and inserting in lieu thereof "subparagraph (B)". (3) Paragraph (3) of section 415(d) is amended by striking out "subparagraph (A) or (B)" and inserting in lieu thereof "subparagraph (A)". (h) PLANS MAY INCORPORATE SECTION 415 LIMITATIONS BY REF-

ERENCE.—Notwithstanding any other provision of law, except as provided in regulations prescribed by the Secretary of the Treasury or his delegate, a plan may incorporate by reference the limitations under section 415 of the Internal Revenue Code of 1986. (i) EFFECTIVE DATES.—

(1) IN GENERAL.—Except as provided in this subsection, the amendments made by this section shall apply to years beginning after December 31, 1986. (2) COLLECTIVE BARGAINING AGREEMENTS.—In the case of a plan maintained pursuant to 1 or more collective bargaining agreements between employee representatives and 1 or more employers ratified before March 1, 1986, the amendments made by this section (other than subsection (d)) shall not apply to contributions or benefits pursuant to such agreement in years beginning before the earlier of— (A) the date on which the last of such collective bargaining agreements terminates (determined without regard to any extension thereof after February 28, 1986), or (B) January 1, 1989. (3) RIGHT TO HIGHER ACCRUED DEFINED BENEFIT PRESERVED.—

(A) IN GENERAL.—In the case of an individual who is a participant (as of the 1st day of the 1st year to which the amendments made by this section apply) in a defined benefit plan which is in existence on May 6, 1986, and with respect to which the requirements of section 415 of the Internal Revenue Code of 1986 have been met for all plan years, if such individual's current accrued benefit under the plan exceeds the limitation of subsection (b) of section 415 of such Code (as amended by this section), then (in the case of such plan), for purposes of subsections (b) and (e) of such section, the limitation of such subsection (b)(1)(A) with re-

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Page:United States Statutes at Large Volume 100 Part 3.djvu/618

 100 STAT. 2426

PUBLIC LAW 99-514—OCT. 22, 1986

i^ry'

spect to such individual shall be equal to such current accrued benefit. (B) CURRENT ACCRUED BENEFIT DEFINED.—

(i) IN GENERAL.—For purposes of this paragraph, the '' ' term "current accrued benefit" means the individual's accrued benefit (at the close of the last year to which the amendments made by this section do not apply) when expressed as an annual benefit (within the meaning of section 415(b)(2) of such Code). (ii) SPECIAL RULE.—For purposes of determining the amount of any individual's current accrued benefit— (I) no change in the terms and conditions of the ^.,,,•.fi plan after May 5, 1986, and '* '" (II) no cost-of-living adjustment occurring after May 5, 1986, ' shall be taken into account. For purposes of subclause (I), any change in the terms and conditions of the plan pursuant to a collective bargaining agreement ratified before May 6, 1986, shall be treated as a change made SIS; before May 6, 1986. (4) TRANSITION RULE W H E R E THE S U M O F DEFINED CONTRIBUTION AND DEFINED BENEFIT PLAN FRACTIONS EXCEEDS 1.0.—In the
 * j0,

case of a plan which satisfied the requirements of section 415 of the Internal Revenue Code of 1986 for its last year beginning before January 1, 1987, the Secretary of the Treasury or his delegate shall prescribe regulations under which an amount is subtracted from the numerator of the defined contribution plan fraction (not exceeding such numerator) so that the sum of the defined benefit plan fraction and the defined contribution plan fraction computed under section 415(e)(1) of such Code does not exceed 1.0 for such year. (5) EFFECTIVE DATE FOR SUBSECTION (d).—

,,

- f ,

uf .

(A) IN GENERAL.—Except as provided in subparagraph (B), the amendment made by subsection (d) shall apply to benefits accruing in years beginning after December 31, 1988. (B) COLLECTIVE BARGAINING AGREEMENTS.—In the case of a plan described in paragraph (2), the amendments made by subsection (d) shall apply to benefits accruing in years beginning on or after the earlier of— (i) the later of— (I) the date determined under paragraph (2)(A), or (II) January 1, 1989, or (ii) January 1, 1991. (6) SPECIAL RULE FOR AMENDMENT MADE BY SUBSECTION

(e).—

The amendment made by subsection (e) shall not require the recomputation, for purposes of section 415(e) of the Internal Revenue Code of 1986, of the annual addition for any year beginning before 1987. SEC. 1107. MODIFICATIONS OF SECTION 457. (a) GENERAL RULE.—Section 457 (relating to deferred compensa-

tion plans with respect to service for State and local governments) is amended to read as follows:

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Page:United States Statutes at Large Volume 100 Part 3.djvu/619

 PUBLIC LAW 99-514—OCT. 22, 1986

100 STAT. 2427

"SEC. 457. DEFERRED COMPENSATION PLANS OF STATE AND LOCAL GOVERNMENTS AND TAX-EXEMPT ORGANIZATIONS.

"(a) YEAR OF INCLUSION IN GROSS INCOME.—In the case of a participant in an eligible deferred compensation plan, any amount of compensation deferred under the plan, and any income attributable to the amounts so deferred, shall be includible in gross income only for the taxable year in which such compensation or other income is paid or otherwise made available to the participant or other beneficiary. "(b) ELIGIBLE DEFERRED COMPENSATION PLAN DEFINED.—For purposes of this section, the term 'eligible deferred compensation plan' means a plan established and maintained by an eligible employer— "(1) in which only individuals who perform service for the employer may be participants, ^ ^ "(2) which provides that (except as provided in paragraph (3)) the maximum amount which may be deferred under the plan for the taxable year shall not exceed the lesser of— - — "(A) $7,500, or "(B) 33 V percent of the participant's includible comb pensation, ^ ' "(3) which may provide that, for 1 or more of the participant's last 3 taxable years ending before he attains normal retirement age under the plan, the ceiling set forth in paragraph (2) shall be the lesser of— "(A) $15,000, or "(B) the sum of— "(i) the plan ceiling established for purposes of para'* ~ graph (2) for the taxable year (determined without regard to this paragraph), plus ^"" ' "(ii) so much of the plan ceiling established for purposes of paragraph (2) for taxable years before the taxable year as has not previously been used under paragraph (2) or this paragraph, "(4) which provides that compensation will be deferred for any calendar month only if an agreement providing for such deferral has been entered into before the beginning of such month, "(5) which meets the distribution requirements of subsection ^' "(6) which provides that— "(A) all amounts of compensation deferred under the
 * • (d), and

" t "' ^•

plan,

"(B) all property and rights purchased with such amounts, and «£!'3 "(C) all income attributable to such amounts, property, or rights, ^ shall remain (until made available to the participant or other ^ beneficiary) solely the property and rights of the employer (without being restricted to the provision of benefits under the plan), subject only to the claims of the employer's general creditors. A plan which is established and maintained by an employer which is described in subsection (e)(l)(A) and which is administered in a manner which is inconsistent with the requirements of any of -he preceding paragraphs shall be treated as not meeting the requirements of such paragraph as of the 1st plan year beginning more

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Page:United States Statutes at Large Volume 100 Part 3.djvu/620

 100 STAT. 2428

PUBLIC LAW 99-514—OCT. 22, 1986

than 180 days after the date of notification by the Secretary of the inconsistency unless the employer corrects the inconsistency before the 1st day of such plan year. "(c) INDIVIDUALS WHO ARE PARTICIPANTS IN MORE THAN 1 PLAN.—

"(1) IN GENERAL.—The maximum amount of the compensation of any one individual which may be deferred under subsection (a) during any taxable year shall not exceed $7,500 (as modified by any adjustment provided under subsection (b)(3)). "(2) COORDINATION WITH CERTAIN OTHER DEFERRALS.—In apply^ ing paragraph (1) of this subsection and paragraphs (2) and (3) of subsection (b)— "(A) any amount excluded from gross income under secar. ~,.t tion 4030?) for the taxable year, and "(B) any amount— /. X. "(i) excluded from gross income under section ',..'^' ^ 402(a)(8) or section 402(h)(1)(B) for the taxable year, or '' ' "" "(ii) with respect to which a deduction is allowable by reason of a contribution to an organization described in section 501(c)(18) for the taxable year, shall be treated as an amount deferred under subsection (a). In ^,,^, applying section 402(g)(8)(A)(iii) or 403(b)(2)(A)(ii), an amount deferred under subsection (a) for any year of service shall be taken into account as if described in section 402(g)(3)(C) or 4030t))(2)(A)(ii), respectively. Subparagraph (B) shall not apply in the case of a participant in a rural electric cooperative plan (as defined in section 401(k)(7)). "(d) DISTRIBUTION REQUIREMENTS.—

^.j "(1) IN GENERAL.—For purposes of subsection (b)(5), a plan ""'^ meets the distribution requirements of this subsection if— "(A) the plan provides that amounts payable under the plan will be made available to participants or other bene^^_,. ficiaries not earlier than when the participant is separated from service with the employer or is faced with an un,^ ^,, foreseeable emergency (determined in the manner pre' ^* scribed by the Secretary by regulation), and "(B) the plan meets the minimum distribution requirements of paragraph (2). "(2) MINIMUM DISTRIBUTION REQUIREMENTS.—A plan meets the minimum distribution requirements of this paragraph if such plan meets the requirements of subparagraphs (A), (B), and "(A) APPLICATION OF SECTION 401(a)(9).—A plan meets the ^,, j„ requirements of this subparagraph if the plan meets the requirements of section 401(a)(9). •c ¥ r r f> '^^^ ADDITIONAL DISTRIBUTION REQUIREMENTS.—A plan meets the requirements of this subparagraph if— ,;,j \j,, "(i) in the case of a distribution beginning before the " * ^ death of the participant, such distribution will be made in a form under which— "(I) at least % of the total amount payable with respect to the participant will be paid during the life expectancy of such participant (determined as of the commencement of the distribution), and "(II) any amount not distributed to the participant during his life will be distributed after the ^, death of the participant at least as rapidly as

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Page:United States Statutes at Large Volume 100 Part 3.djvu/621

 PUBLIC LAW 99-514—OCT. 22, 1986

100 STAT. 2429

under the method of distributions being used under subclause (I) as of the date of his death, or "(ii) in the case of a distribution which does not begin before the death of the participant, the entire amount payable with respect to the participant will be paid during a period not to exceed 15 years (or the life expectancy of the surviving spouse if such spouse is the beneficiary). 1 "(C) NoNiNCREASiNG BENEFITS.—A plan meets the lrequirements of this subparagraph if any distribution payable over a period of more than 1 year can only be made in substantially nonincreasing amounts (paid not less frequently than annually). "(e) OTHER DEFINITIONS AND SPECIAL RULES.—For purposes of this section— "(1) ELIGIBLE EMPLOYER.—The term 'eligible employer' means— "(A) a State, political subdivision of a State, and any agency or instrumentality of a State or political subdivision of a State, and, ^^, "(B) any other organization (other than a governmental unit) exempt from tax under this subtitle. "(2) PERFORMANCE OF SERVICE.—The performance of service

i

includes performance of service as an independent contractor and the person (or governmental unit) for whom such services are performed shall be treated as the employer, "(3) PARTICIPANT.—The term 'participant' means an individual who is eligible to defer compensation under the plan. "(4) BENEFICIARY.—The term 'beneficiary' means a beneficiary of the participant, his estate, or any other person whose interest in the plan is derived from the participant. "(5) INCLUDIBLE COMPENSATION.—The term 'includible compensation' means compensation for service performed for the employer which (taking into account the provisions of this section and other provisions of this chapter) is currently includible in gross income. "(6) COMPENSATION TAKEN INTO ACCOUNT AT PRESENT VALUE.—

Compensation shall be taken into account at its present value. "(7) COMMUNITY PROPERTY LAWS.—The amount of includible compensation shall be determined without regard to any community property laws. "(8) INCOME ATTRIBUTABLE.—Gains from the disposition of property shall be treated as income attributable to such property. ' (9) BENEFITS NOT TREATED AS MADE AVAILABLE BY REASON OF CERTAIN ELECTIONS.—If^

e

"(A) the total amount payable to a participant under the plan does not exceed $3,500, and "(B) no additional amounts may be deferred under the plan with respect to the participant, the amount payable to the participant under the plan shall not be treated as made available merely because such participant may elect to receive a lump sum payable within 60 days of the election. "(10) TRANSFERS BETWEEN PLANS.—A participant shall not be required to include in gross income any portion of the entire amount payable to such participant solely by reason of the

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Page:United States Statutes at Large Volume 100 Part 3.djvu/622

 100 STAT. 2430

PUBLIC LAW 99-514—OCT. 22, 1986

""''^ transfer of such portion from 1 eligible deferred compensation plan to another eligible deferred compensation plan. "(f) TAX TREATMENT OF PARTICIPANTS WHERE PLAN OR ARRANGEMENT OF EMPLOYER IS NOT ELIGIBLE.—

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"(1) IN GENERAL.—In the case of a plan of an eligible employer providing for a deferral of compensation, if such plan is not an eligible deferred compensation plan, then— "(A) the compensation shall be included in the gross income of the participant or beneficiary for the 1st taxable year in which there is no substantial risk of forfeiture of the rights to such compensation, and "(B) the tax treatment of any amount made available under the plan to a participant or beneficiary shall be determined under section 72 (relating to annuities, etc.). "(2) EXCEPTIONS.—Paragraph (1) shall not apply to— "(A) a plan described in section 401(a) which includes a trust exempt from tax under section 501(a), "(B) an annuity plan or contract described in section 403, "(C) that portion of any plan which consists of a transfer of property described in section 83, and "(D) that portion of any plan which consists of a trust to which section 4O20t>) applies. "(3) DEFINITIONS.—For purposes of this subsection— "(A) PLAN INCLUDES ARRANGEMENTS, ETC.—The term ' * '• 'plan' includes any agreement or arrangement. "(B) SUBSTANTIAL RISK OF FORFEITURE.—The rights of a

-bK

person to compensation are subject to a substantial risk of forfeiture if such person's rights to such compensation are conditioned upon the future performance of substantial services by any individual." (b) CLERICAL AMENDMENT.—The table of sections for subpart B of part II of subchapter E of chapter 1 is amended by striking out the item relating to section 457 and inserting in lieu thereof the following: "Sec. 457. Deferred compensation plans of State and local governments and tax-exempt organizations." (c) EFFECTIVE DATE.—

(1) IN GENERAL.—Except as provided in this subsection, the amendments made by this section shall apply to taxable years beginning after December 31, 1988. (2) TRANSFERS AND CASH-OUTS.—Paragraphs (9) and (10) of

section 457(e) of the Internal Revenue Code of 1986 (as amended by this section) shall apply to taxable years beginning after December 31, 1986. (3) APPLICATION TO TAX-EXEMPT ORGANIZATIONS.—

ftri •:i:ts 1

(A) IN GENERAL.—Except as provided in subparagraph (B), the application of section 457 of the Internal Revenue Code of 1986 by reason of the amendments made by this section to eligible deferred compensation plans established and maintained by organizations exempt from tax shall apply to taxable years beginning after December 31, 1986. (B) EXISTING DEFERRALS AND ARRANGEMENTS.—Section

457 of such Code shall not apply to amounts deferred under • 1 > a plan described in subparagraph (A) which— (i) were deferred from taxable years beginning before i *j January 1, 1987, or

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Page:United States Statutes at Large Volume 100 Part 3.djvu/623

 PUBLIC LAW 99-514—OCT. 22, 1986

100 STAT. 2431

(ii) are deferred from taxable years beginning after December 31, 1986, pursuant to an agreement which— (I) was in writing on August 16, 1986, (II) on such date provides for a deferral for each taxable year covered by the agreement of a fixed amount or of an amount determined pursuant to a fixed formula. Clause (ii) shall not apply to any taxable year ending after the date on which any modification to the amount or formula described in subclause (II) is effective. Amounts described in the first sentence shall be taken into account for applying section 457 to other amounts deferred under any eligible deferred compensation plan.

T te c: 28 ' s-'^

(4) DEFERRED COMPENSATION PLANS FOR STATE JUDGES.—The

amendments made by this section shall not apply to any qualiin fied State judicial plan (as defined in section 131(c)(3)(B) of the Revenue Act of 1978 as amended by section 252 of the Tax Equity and Fiscal Responsibility Act of 1982). (5)

SPECIAL RULE

FOR CERTAIN

DEFERRED COMPENSATION

PLANS.—The amendments made by this section shall not apply ^'f to employees on August 16, 1986, of— w (A) a deferred compensation plan of a nonprofit corporation organized under the laws of the State of Alabama with •fissm respect to which the Internal Revenue Service issued a ruling dated March 17, 1976, that the plan would not affect ' the tax-exempt status of the corporation, or t:. (B) to a deferred compensation plan with respect to which a letter dated November 6, 1975, submitted the original plan to the Internal Revenue Service, an amendment was submitted on November 19, 1975, and the Internal Revenue Service responded with a letter dated December 24, 1975, but only with respect to deferrals under such plan. SEC. 1108. SPECIAL RULES FOR SIMPLIFIED EMPLOYEE PENSIONS. (a) SALARY REDUCTION ARRANGEMENTS PERMITTED.—Section 408(k)

(relating to simplified employee pension defined) is amended by inserting after paragraph (5) the following new paragraph: "(6) EMPLOYEE MAY ELECT SALARY REDUCTION ARRANGEMENT.—

"(A) IN GENERAL.—A simplified employee pension shall Lf • not fail to meet the requirements of this subsection for a year merely because, under the terms of the pension— n "(i) an employee may elect to have the employer ii, make payments— ft3 V "(I) as elective employer contributions to the simplified employee pension on behalf of the employee, or "(II) to the employee directly in cash, "(ii) an election described in clause (i)(I) is made or is •r * ' in effect with respect to not less than 50 percent of the employees of the employer, and "(iii) the deferral percentage for such year of each highly compensated employee eligible to participate is not more than the product derived by multiplying the average of the deferral percentages for such year of all employees (other than highly compensated employees) eligible to participate by 1.25.

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Page:United States Statutes at Large Volume 100 Part 3.djvu/624

 100 STAT. 2432

PUBLIC LAW 99-514—OCT. 22, 1986

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"(B) EXCEPTION WHERE MORE THAN 25 EMPLOYEES.—This

paragraph shall not apply with respect to any year in the case of a simplified employee pension maintained by an employer with more than 25 employees at any time during the preceding year.

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"(C) DISTRIBUTIONS OF EXCESS CONTRIBUTIONS.—

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"(i) IN GENERAL.—Rules similar to the rules of section 401(k)(8) shall apply to any excess contribution under this paragraph. Any excess contribution under a simplified employee pension shall be treated as an excess contribution for purposes of section 4979. "(ii) EXCESS CONTRIBUTION.—For purposes of clause

(i), the term 'excess contribution' means, with respect 'J '^ • to a highly compensated employee, the excess of elective employer contributions under this paragraph over the maximum amount of such contributions allowable . ' under subparagraph (A)(iii). "(D) DEFERRAL PERCENTAGE.—For purposes of this para.' graph, the deferral percentage for an employee for a year I'.»shall be the ratio of— "(i) the amount of elective employer contributions " tf\-^.'-.. actually paid over to the simplified employee pension ' on behalf of the employee for the year, to "(ii) the employee's compensation (within the meaning of section 414(s)) for the year. "(E) EXCEPTION FOR STATE AND LOCAL AND TAX-EXEMPT

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PENSIONS.—This paragraph shall not apply to a simplified employee pension maintained by— "(i) a State or local government or political subdivision thereof, or any agency or instrumentality thereof, or "(ii) an organization exempt from tax under this title. "(F) HIGHLY COMPENSATED EMPLOYEE.—For purposes of

this paragraph, the term 'highly compensated employee' has the meaning given such term by section 414(q)." (b) EXCLUSION FROM GROSS INCOME.—Section 402 (relating to teixability of beneficiary of employees' trust), as amended by section 1105(a), is amended by inserting at the end thereof the following new subsection: "(h) SPECIAL RULES FOR SIMPUFIED EMPLOYEE PENSIONS.—For purposes of this chapter— "(1) IN GENERAL.—Except as provided in paragraph (2), contributions made by an employer on behalf of an employee to an b'» individual retirement plan pursuant to a simplified employee T pension (as defined in section 408(k))— "(A) shall not be treated as distributed or made available to the employee or as contributions made by the employee,
 * '»'f'v and

t''' >• "(B) if such contributions are made pursuant to an arrangement under section 408(k)(6) under which an emi^uir ployee may elect to have the employer make contributions to the simplified employee pension on behalf of the employee, shall not be treated as distributed or made available or as contributions made by the employee merely because ' " the simplified employee pension includes provisions for such election.

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Page:United States Statutes at Large Volume 100 Part 3.djvu/625

 PUBLIC LAW 99-514—OCT. 22, 1986 "(2)

,4

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100 STAT. 2433

LIMITATIONS ON EMPLOYER CONTRIBUTIONS.—Contribu-

tions made by an employer to a simplified employee pension with respect to an employee for any year shall be treated as distributed or made available to such employee and as contributions made by the employee to the extent such contributions exceed the lesser of— ., "(A) 15 percent of the compensation (within the meaning of section 414(s)) from such employer includible in the employee's gross income for the year (determined without regard to the employer contributions to the simplified employee pension), or "(B) the limitation in effect under section 415(c)(1)(A), reduced in the case of any highly compensated employee (within the meaning of section 414(q)) by the amount taken into account with respect to such employee under section 408(k)(3)(D). "(3) DISTRIBUTIONS.—Any amount paid or distributed out of an individual retirement plan pursuant to a simplified employee pension shall be included in gross income by the payee or distributee, as the case may be, in accordance with the provisions of section 408(d)."

(c) DEDUCTIBILITY OF CONTRIBUTIONS.—Subparagraphs (A) and (B)

of section 404(h)(1) (relating to special rules for simplified employee pensions) are amended to read as follows: "(A) Contributions made for a year are deductible— "(i) in the case of a simplified employee pension maintained on a calendar year basis, for the taxable year with or within which the calendar year ends, or t,.r "(ii) in the case of a simplified employee pension .,. which is maintained on the basis of the taxable year of the employer, for such taxable year. "(B) Contributions shall be treated for purposes of this subsection as if they were made for a taxable year if such ( contributions are made on account of such taxable year and are made not later than the time prescribed by law for filing the return for such taxable year (including extensions thereof)." (d) PARTICIPATION REQUIREMENTS.—Paragraph (2) of section 408(k) (relating to participation requirements) is amended to read as follows: "(2) PARTICIPATION REQUIREMENTS.—This paragraph is satisfied with respect to a simplified employee pension for a year only if for such year the employer contributes to the simplified ^ employee pension of each employee who— i^, jj^^ "(A) has attained age 21, "(B) has performed service for the employer during at least 3 of the immediately preceding 5 years, and "(C) received at least $300 in compensation (within the meaning of section 414(q)(7)) from the employer for the year. ,, For purposes of this paragraph, there shall be excluded from consideration employees described in subparagraph (A) or (C) of section 410(b)(3). For purposes of any arrangement described in subsection (k)(6), any employee who is eligible to have employer contributions made on the employee's behalf under such arrangement shall be treated as if such a contribution was made.'

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Page:United States Statutes at Large Volume 100 Part 3.djvu/626

 100 STAT. 2434

PUBLIC LAW 99-514—OCT. 22, 1986

(e) CoST-OF-LiviNG ADJUSTMENTS.—Section 408(k) is amended by adding at the end thereof the following new paragraph: "(8) COST-OF-LIVING ADJUSTMENT.—The Secretary shall adjust the $300 amount in paragraph (2)(C) and the $200,000 amount in paragraph (3)(C) at the same time and in the same manner as under section 415(d)." (f) COMPUTATION PERIOD.—Section 408(k)(7) is amended by adding

at the end thereof the following new subparagraph: "(C) YEAR.—The term 'year' means— me OJi "(i) the calendar year, or "(ii) if the employer elects, subject to such terms and ,j\ I conditions as the Secretary may prescribe, to maintain the simplified employee pension on the basis of the employer's taxable year." (g) CONFORMING AMENDMENTS.—

(1) Section 408(k)(3) (relating to nondiscrimination requirements) is amended— m (A) by striking out all that follows "in favor o f in subparagraph (A) and inserting in lieu thereof "any highly •i-f compensated employee (within the meaning of section 414(q)).", (S: tir (B) in subparagraph (O— » •>*•!;• ' (i) by inserting "and except as provided in subparagraph (D)," after "subparagraph (A),", (ii) by inserting "(other than contributions under an arrangement described in paragraph (6))" after "employer contributions to simplified employee pensions", and ' ' (iii) by striking out the last sentence thereof, and (C) by striking out subparagraphs (D) and (E) and inserting in lieu thereof: ' •+ "(D) PERMITTED DISPARITY.—For purposes of subpara' graph (C), the rules of section 401(1)(2) shall apply to con' '• • tributions to simplified employee pensions (other than contributions under an arrangement described in para-t graph (6))." (2) Paragraph (2) of section 219(b) is amended to read as follows: "(2) SPECIAL RULE FOR EMPLOYER CONTRIBUTIONS UNDER SIMPLIFIED EMPLOYEE PENSIONS.—This section shall not apply with

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respect to an employer contribution to a simplified employee pension." (3) Section 219(c)(2)(B) is amended by striking out "(determined without regard to so much of the employer contributions to a simplified employee pension as is allowable by reason of paragraph (2) of subsection (b))". (4) Section 408(k)(3)(A) is amended by striking out "calendar". (5) Section 415(c)(2) is amended by striking out "allowable as a deduction under section 219(a), and without regard to deductible employee contributions within the meaning of section 72(o)(5)" and inserting in lieu thereof "which are excludable from gross income under section 408(k)(6)". (6) Section 408(k), as amended by subsection (e), is amended by adding at the end thereof the following new paragraph: "(9) CROSS REFERENCE.— "For excise tax on certain excess contributions, see section 4979."

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Page:United States Statutes at Large Volume 100 Part 3.djvu/627

 PUBLIC LAW 99-514—OCT. 22, 1986

100 STAT. 2435

(7) Section 3121(a)(5) is amended by striking out subparagraph (C) and inserting in lieu thereof the following subparagraph: "(C) under a simplified employee pension (as defined in section 408(k)(l)), other than any contributions described in section 408(k)(6),". (8) Section 3306(b)(5) is amended by striking out subparagraph (C) and inserting in lieu thereof the following subparagraph: J "(C) under a simplified employee pension (as defined in section 408(k)(l)), other than any contributions described in section 408(k)(6),". (h) EFFECTIVE DATE.—The amendments made by this section shall apply to years beginning after December 31, 1986. SEC. 1109. DEDUCTIBLE CONTRIBUTIONS PERMITTED UNDER SECTION 501(c)(18)PLAN.

(a) IN GENERAL.—Section 501(c)(18) is amended by striking out "and" at the end of subparagraph (B), by striking out the period at the end of subparagraph (C) and inserting in lieu thereof ", and" and by adding at the end thereof the following new subparagraph: "(D) in the case of a plan under which an employee may designate certain contributions as deductible— ^^' ' "(i) such contributions do not exceed the amount with respect to which a deduction is allowable under ^ section 219(b)(3), "(ii) requirements similar to the requirements of section 401(k)(3)(A)(ii) are met with respect to such elective ,y contributions, and [' "(iii) such contributions are treated as elective deferrals for purposes of section 402(g) (other than paragraph (4) thereof). For purposes of subparagraph (D)(ii), rules similar to the rules of section 401(k)(8) shall apply. For purposes of section 4979, any excess contribution under clause (ii) shall be treated as an excess contribution under a cash or deferred arrangement." (b) LIMITATION ON DEDUCTION.—Section 219(b), as amended by

section 1101(b), is amended by adding at the end thereof the following new paragraph: "(3) PLANS UNDER SECTION SOKCXIS).—Notwithstanding paragraph (1), the amount allowable as a deduction under subsection (a) with respect to any contributions on behalf of an employee to a plan described in section 501(c)(18) shall not exceed the lesser of"(A) $7,000, or "(B) an amount equal to 25 percent of the compensation ifiiii (gg defined in section 415(c)(3)) includible in the individual's gross income for such taxable year." (c) EFFECTIVE DATE.—The amendments made by this section shall apply to taxable years beginning after December 31, 1986. PART II—NONDISCRIMINATION REQUIREMENTS SEC. n i l. APPLICATION OF NONDISCRIMINATION RULES TEGRATED PLANS.

TO IN-

(a) IN GENERAL.—Section 401(1) (relating to nondiscriminatory coordination of defined contribution plans with OASDI) is amended to read as follows: "(1) PERMITTED DISPARITY IN PLAN CONTRIBUTIONS OR BENEFITS.—

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Page:United States Statutes at Large Volume 100 Part 3.djvu/628

 100 STAT. 2436

PUBLIC LAW 99-514-OCT. 22, 1986

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"(1) IN GENERAL.—The requirements of this subsection are met with respect to a plan if— "(A) in the case of a defined contribution plan, the t t>, - requirements of paragraph (2) are met, and "(B) in the case of a defined benefit plan, the requirements of paragraph (3) are met. "(2) DEFINED CONTRIBUTION PLAN.—

"(A) IN GENERAL.—A defined contribution plan meets the requirements of this paragraph if the excess contribution percentage does not exceed the base contribution percentage by more than the lesser of— "(i) the base contribution percentage, or ' • ' ' ' "(ii) the greater of— "(I) 5.7 percentage points, or "(II) the percentage equal to the portion of the ' ' rate of tax under section 3111(a) (in effect as of the ' beginning of the year) which is attributable to oldage insurance. "(B) CONTRIBUTION PERCENTAGES.—For purposes of this paragraph— "(i) EXCESS CONTRIBUTION PERCENTAGE.—The term •i ' ' ' •' 'excess contribution percentage' means the percentage '- ' of compensation which is contributed under the plan with respect to that portion of each participant's com- .<; s pensation in excess of the integration level. "(ii) BASE CONTRIBUTION PERCENTAGE.—The term 'base contribution percentage' means the percentage of compensation contributed under the plan with respect to that portion of each participant's compensation not in excess of the integration level. "(3) DEFINED BENEFIT PLAN.—A defined benefit plan meets the requirements of this paragraph if— "(A) EXCESS PLANS.—

"(i) IN GENERAL.—In the case of a plan other than an offset plan— "(I) the excess benefit percentage does not exceed the base benefit percentage by more than the ' *^ maximum excess allowance, "(II) any optional form of benefit, preretirement benefit, actuarial factor, or other benefit or feature '• provided with respect to compensation in excess of the integration level is provided with respect to compensation not in excess of such level, and V-^^ i'^^ "(III) benefits are based on average annual •' " - ' compensation. "(ii) BENEFIT PERCENTAGES.—For purposes of this ii.'.rt'i ':•• subparagraph, the excess and base benefit percentages shall be computed in the same manner as the excess and base contribution percentages under paragraph •(2)(B), except that such determination shall be made on ^ the basis of benefits rather than contributions. ''"• "(B) OFFSET PLANS.—In the case of an offset plan, the plan provides that— "(i) a participant's accrued benefit attributable to employer contributions (within the meaning of section 411(c)(l)) may not be reduced (by reason of the offset) by 8f« 4?i more than the maximum offset allowance, and

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Page:United States Statutes at Large Volume 100 Part 3.djvu/629

 PUBLIC LAW 99-514—OCT. 22, 1986 "(ii) benefits compensation.

are based

100 STAT. 2437

on average

annual

"(4) DEFINITIONS RELATING TO PARAGRAPH (3).—For purposes of paragraph (3)— "(A)

EXCESS

ALLOWANCE.—The

maximum

excess allowance is equal to— "(i) in the case of benefits attributable to any year of service with the employer taken into account under the plan, % of a percentage point, and "(ii) in the case of total benefits, % of a percentage point, multiplied by the participant's years of service (not in excess of 35) with the employer taken into account under the plan. In no event shall the maximum excess allowance exceed the base benefit percentage. "(B) MAXIMUM OFFSET ALLOWANCE.—The maximum offset allowance is equal to— "(i) in the case of benefits attributable to any year of service with the employer taken into account under the plan, % percent of the participant's final average compensation, and "(ii) in the case of total benefits, % percent of the participant's final average compensation, multiplied by the participant's years of service (not in excess of 35) with the employer taken into account under the plan. In no event shall the maximum offset allowance exceed 50 percent of the benefit which would have accrued without regard to the offset reduction.

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MAXIMUM

.

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"(C) REDUCTIONS.—

"(i) IN GENERAL.—The Secretary shall prescribe regulations requiring the reduction of the % percentage factor under subparagraph (A) or (B)— "(I) in the case of a plan other than an offset plan which has an integration level in excess of covered compensation, or "(II) with respect to any participant in an offset plan who has final average compensation in excess of covered compensation.

i

"(ii) BASIS OF REDUCTIONS.—Any reductions under

clause (i) shall be based on the percentages of compensation replaced by the employer-derived portions of primary insurance amounts under the Social Security Act for participants with compensation in excess of covered compensation. "(D) OFFSET PLAN.—The term 'offset plan' means any plan with respect to which the benefit attributable to employer contributions for each participant is reduced by an amount specified in the plan.

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"(5) OTHER DEFINITIONS AND SPECIAL RULES.—For purposes of

this subsection— "(A) INTEGRATION LEVEL.—

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"(i) IN GENERAL.—The term 'integration level' means the amount of compensation specified under the plan (by dollar amount or formula) at or below which the rate at which contributions or benefits are provided (expressed as a percentage) is less than such rate above such amount.

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Page:United States Statutes at Large Volume 100 Part 3.djvu/630

 100 STAT. 2438

PUBLIC LAW 99-514—OCT. 22, 1986

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"(ii) LIMITATION.—The integration level for any year may not exceed the contribution and benefit base in i.'"-.'..;^>jc -. effect under section 230 of the Social Security Act for such year. . ' frr

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"(iii) LEVEL TO APPLY TO ALL PARTICIPANTS.—A plan's

integration level shall apply with respect to all participants in the plan. "(iv) MULTIPLE INTEGRATION LEVEUS.—Under rules prescribed by the Secretary, a defined benefit plan may specify multiple integration levels. "(B) COMPENSATION.—The term 'compensation' has the meaning given such term by section 414(s). "(C) AVERAGE ANNUAL COMPENSATION.—The term 'average annual compensation' means the greater of— "(i) the participant's final average compensation (determined without regard to subparagraph (D)(ii)), or "(ii) the participant's highest average annual compensation for any other period of at least 3 consecutive years. "(D) F I N A L AVERAGE COMPENSATION.—

"(i) IN GENERAL.—The term 'final average compensa(s? r •. tion' means the participant's average annual compensation for— "(I) the 3-consecutive year period ending with the current year, or "(II) if shorter, the participant's full period of .•JO i !V'.,; service. "(ii) LIMITATION.—A participant's final average compensation shall be determined by not taking into ac.'-'•;:-. -r count in any year compensation in excess of the con'^ii^ji -' tribution and benefit base in effect under section 230 of the Social Security Act for such year. ^

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"(E) COVERED COMPENSATION.—

"(i) IN GENERAL.—The term 'covered compensation' means, with respect to an employee, the average of the contribution and benefit bases in effect under section 230 of the Social Security Act for each year in the 35year period ending with the year in which the employee attains age 65. "(ii) COMPUTATION FOR ANY YEAR.—For purposes of

clause (i), the determination for any year preceding the year in which the employee attains age 65 shall be made by sissuming that there is no increase in the bases described in clause (i) after the determination year and before the employee attains age 65. "(F) REGULATIONS.—The Secretary shall prescribe such regulations as are necessary or appropriate to carry out the purposes of this subsection, including— " B9r' i "(i) in the case of a defined benefit plan which provides for unreduced benefits commencing before the social security retirement age (as defined in section - ' 415(b)(8)), rules providing for the reduction of the maximum excess allowance and the maximum offset allowance, and "(ii) in the case of an employee covered by 2 or more --f"'''^ ' plans of the employer which fail to meet the requirements of subsection (a)(4) (without regard to this

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Page:United States Statutes at Large Volume 100 Part 3.djvu/631

 PUBLIC LAW 99-514—OCT. 22, 1986

100 STAT. 2439

subsection), rules preventing the multiple use of the disparity permitted under this subsection with respect to any employee. For purposes of clause (i), unreduced benefits shall not include benefits for disability (within the meaning of section 223(d) of the Social Security Act). "(6) SPECIAL RULE FOR PLAN MAINTAINED BY RAILROADS.—In

determining whether a plan which includes employees of a railroad employer who are entitled to benefits under the Railroad Retirement Act of 1974 meets the requirements of this subsection, rules similar to the rules set forth in this subsection shall apply. Such rules shall take into account the employerderived portion of the employees' tier 2 railroad retirement benefits and any supplemental annuity under the Railroad Retirement Act of 1974." (b) CONFORMING AMENDMENT.—Paragraph (5) of section 401(a) is

amended to read as follows: "(5) SPECIAL RULES RELATING TO NONDISCRIMINATION REQUIREMENTS.— "(A) SALARIED OR CLERICAL EMPLOYEES.—A classification

shall not be considered discriminatory within the meaning of paragraph (4) or section 410(b)(2)(A)(i) merely because it is limited to salaried or clerical employees. "(B) CONTRIBUTIONS AND BENEFITS MAY BEAR UNIFORM RELATIONSHIP TO COMPENSATION.—A plan shall not be

i

W' < —-

considered discriminatory within the meaning of paragraph (4) merely because the contributions or benefits of, or on behalf of, the employees under the plan bear a uniform relationship to the compensation (within the meaning of section 414(s)) of such employees. "(C) CERTAIN DISPARITY PERMITTED.—A plan shall not be considered discriminatory within the meaning of paragraph (4) merely because the contributions or benefits of, or on behalf of, the employees under the plan favor highly compensated employees (as defined in section 414(q)) in the manner permitted under subsection (1). "(D) INTEGRATED DEFINED BENEFIT PLAN.—

^ *

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"(i) IN GENERAL.—A defined benefit plan shall not be considered discriminatory within the meaning of paragraph (4) merely because the plan provides that the employer-derived accrued retirement benefit for any participant under the plan may not exceed the excess (if any) of— "(I) the participant's final pay with the employer, over "(II) the employer-derived retirement benefit created under Federal law attributable to service by the participant with the employer. For purposes of this clause, the employer-derived retirement benefit created under Federal law shall be treated as accruing ratably over 35 years. "(ii) FINAL PAY.—For purposes of this subparagraph, the participant's final pay is the compensation (as defined in section 414(q)(7)) paid to the participant by the employer for any year—

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Page:United States Statutes at Large Volume 100 Part 3.djvu/632

 100 STAT. 2440

PUBLIC LAW 99-514—OCT. 22, 1986

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'

'"• "(E)

"(I) which ends during the 5-year period ending with the year in which the participant separated from service for the employer, and "(II) for which the participant's total compensation from the employer was highest. 2 OR MORE PLANS TREATED AS SINGLE PLAN.—For

I

purposes of determining whether 2 or more plans of an employer satisfy the requirements of paragraph (4) when considered as a single plan— "(i) CONTRIBUTIONS.—If the amount of contributions i on behalf of the employees allowed as a deduction under section 404 for the taxable year with respect to such plans, taken together, bears a uniform relation(.,.;..1 • ship to the compensation (within the meaning of section 414(s)) of such employees, the plans shall not be I *i '*)^ considered discriminatory merely because the rights of employees to, or derived from, the employer contribuc. •rrt'^T 4 tions under the separate plans do not become nonforfeitable at the same rate. "(ii) BENEFITS.—If the employees' rights to benefits under the separate plans do not become nonforfeitable i at the same rate, but the levels of benefits provided by the separate plans satisfy the requirements of regula., tions prescribed by the Secretary to take account of the 4., differences in such rates, the plans shall not be considered discriminatory merely because of the difference in such rates." 1 (c) EFFECTIVE DATE.— T ^ (1) SUBSECTION (a).—The amendments made by subsection (a)

shall apply to benefits attributable to plan years beginning after December 31, 1988. (2) SUBSECTION (b).—The amendments made by subsection (b) shall apply to years beginning after December 31, 1988. (3) SPECIAL RULE FOR COLLECTIVE BARGAINING AGREEMENTS.—

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In the case of a plan maintained pursuant to 1 or more collective bargaining agreements between employee representatives and 1 or more employers ratified before March 1, 1986, the . amendments made by this section shall not apply to benefits pursuant to, and individuals covered by, any such agreement in plan years beginning before the earlier of— (A) the later of— (i) January 1, 1989, or (ii) the date on which the last of such collective bargaining agreements terminates (determined without regard to any extension thereof after February 28, 1986), or (B) January 1, 1991. SEC. 1112. MINIMUM COVERAGE REQUIREMENTS FOR QUALIFIED PLANS.

(a) IN GENERAL.—Subsection (b) of section 410 (relating to eligibility requirements) is amended to read as follows: "(b) MINIMUM COVERAGE REQUIREMENTS.—

"(1) IN GENERAL.—A trust shall not constitute a qualified trust under section 401(a) unless such trust is designated by the employer as part of a plan which meets 1 of the following requirements:

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