[House Report 107-84]
[From the U.S. Government Publishing Office]
107th Congress Report
1st Session HOUSE OF REPRESENTATIVES 107-84
_______________________________________________________________________
ECONOMIC GROWTH AND TAX RELIEF RECONCILIATION ACT OF 2001
__________
CONFERENCE REPORT
to accompany
H.R. 1836
[GRAPHIC] [TIFF OMITTED] TONGRESS.#13
May 26 (legislative day, May 25), 2001.--Ordered to be printed
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U.S. GOVERNMENT PRINTING OFFICE
72-575 WASHINGTON : 2001
107th Congress Report
HOUSE OF REPRESENTATIVES
1st Session 107-84
======================================================================
ECONOMIC GROWTH AND TAX RELIEF RECONCILIATION ACT OF 2001
_______
May 26 (legislative day, May 25), 2001.--Ordered to be printed
_______
Mr. Thomas, from the committee of conference, submitted the following
CONFERENCE REPORT
[To accompany H.R. 1836]
The committee of conference on the disagreeing votes of he
two Houses on the amendment of the Senate to the bill (H.R.
1836), to provide for reconciliation pursuant to section 104 of
the concurrent resolution on the budget for fiscal year 2002,
having met, after full and free conference, have agreed to
recommend and do recommend to their respective Houses as
follows:
That the House recede from its disagreement to the
amendment of the Senate and agree to the same with an amendment
as follows:
In lieu of the matter proposed to be inserted by the State
amendment, insert the following:
SECTION 1. SHORT TITLE; REFERENCES; TABLE OF CONTENTS.
(a) Short Title.--This Act may be cited as the ``Economic
Growth and Tax Relief Reconciliation Act of 2001''.
(b) Amendment of 1986 Code.--Except as otherwise expressly
provided, whenever in this Act an amendment or repeal is
expressed in terms of an amendment to, or repeal of, a section
or other provision, the reference shall be considered to be
made to a section or other provision of the Internal Revenue
Code of 1986.
(c) Table of Contents.--The table of contents of this Act
is as follows:
Sec. 1. Short title; references; table of contents.
TITLE I--INDIVIDUAL INCOME TAX RATE REDUCTIONS
Sec. 101. Reduction in income tax rates for individuals.
Sec. 102. Repeal of phaseout of personal exemptions.
Sec. 103. Phaseout of overall limitation on itemized deductions.
TITLE II--TAX BENEFITS RELATING TO CHILDREN
Sec. 201. Modifications to child tax credit.
Sec. 202. Expansion of adoption credit and adoption assistance programs.
Sec. 203. Refunds disregarded in the administration of Federal programs
and federally assisted programs.
Sec. 204. Dependent care credit.
Sec. 205. Allowance of credit for employer expenses for child care
assistance.
TITLE III--MARRIAGE PENALTY RELIEF
Sec. 301. Elimination of marriage penalty in standard deduction.
Sec. 302. Phaseout of marriage penalty in 15-percent bracket.
Sec. 303. Marriage penalty relief for earned income credit; earned
income to include only amounts includible in gross income;
simplification of earned income credit.
TITLE IV--AFFORDABLE EDUCATION PROVISIONS
Subtitle A--Education Savings Incentives
Sec. 401. Modifications to education individual retirement accounts.
Sec. 402. Modifications to qualified tuition programs.
Subtitle B--Educational Assistance
Sec. 411. Extension of exclusion for employer-provided educational
assistance.
Sec. 412. Elimination of 60-month limit and increase in income
limitation on student loan interest deduction.
Sec. 413. Exclusion of certain amounts received under the National
Health Service Corps Scholarship Program and the F. Edward
Hebert Armed Forces Health Professions Scholarship and
Financial Assistance Program.
Subtitle C--Liberalization of Tax-Exempt Financing Rules for Public
School Construction
Sec. 421. Additional increase in arbitrage rebate exception for
governmental bonds used to finance educational facilities.
Sec. 422. Treatment of qualified public educational facility bonds as
exempt facility bonds.
Subtitle D--Other Provisions
Sec. 431. Deduction for higher education expenses.
TITLE V--ESTATE, GIFT, AND GENERATION-SKIPPING TRANSFER TAX PROVISIONS
Subtitle A--Repeal of Estate and Generation-Skipping Transfer Taxes
Sec. 501. Repeal of estate and generation-skipping transfer taxes.
Subtitle B--Reductions of Estate and Gift Tax Rates
Sec. 511. Additional reductions of estate and gift tax rates.
Subtitle C--Increase in Exemption Amounts
Sec. 521. Increase in exemption equivalent of unified credit, lifetime
gifts exemption, and GST exemption amounts.
Subtitle D--Credit for State Death Taxes
Sec. 531. Reduction of credit for State death taxes.
Sec. 532. Credit for State death taxes replaced with deduction for such
taxes.
Subtitle E--Carryover Basis at Death; Other Changes Taking Effect With
Repeal
Sec. 541. Termination of step-up in basis at death.
Sec. 542. Treatment of property acquired from a decedent dying after
December 31, 2009.
Subtitle F--Conservation Easements
Sec. 551. Expansion of estate tax rule for conservation easements.
Subtitle G--Modifications of Generation-Skipping Transfer Tax
Sec. 561. Deemed allocation of GST exemption to lifetime transfers to
trusts; retroactive allocations.
Sec. 562. Severing of trusts.
Sec. 563. Modification of certain valuation rules.
Sec. 564. Relief provisions.
Subtitle H--Extension of Time for Payment of Estate Tax
Sec. 571. Increase in number of allowable partners and shareholders in
closely held businesses.
Sec. 572. Expansion of availability of installment payment for estates
with interests qualifying lending and finance businesses.
Sec. 572. Clarification of availability of installment payment.
Subtitle I--Other Provisions
Sec. 581. Waiver of statute of limitation for taxes on certain farm
valuations.
TITLE VI--PENSION AND INDIVIDUAL RETIREMENT ARRANGEMENT PROVISIONS
Subtitle A--Individual Retirement Accounts
Sec. 601. Modification of IRA contribution limits.
Sec. 602. Deemed IRAs under employer plans.
Subtitle B--Expanding Coverage
Sec. 611. Increase in benefit and contribution limits.
Sec. 612. Plan loans for subchapter S owners, partners, and sole
proprietors.
Sec. 613. Modification of top-heavy rules.
Sec. 614. Elective deferrals not taken into account for purposes of
deduction limits.
Sec. 615. Repeal of coordination requirements for deferred compensation
plans of State and local governments and tax-exempt
organizations.
Sec. 616. Deduction limits.
Sec. 617. Option to treat elective deferrals as after-tax Roth
contributions.
Sec. 618. Nonrefundable credit to certain individuals for elective
deferrals and IRA contributions.
Sec. 619. Credit for pension plan startup costs of small employers.
Sec. 620. Elimination of user fee for requests to IRS regarding pension
plans.
Sec. 621. Treatment of nonresident aliens engaged in international
transportation services.
Subtitle C--Enhancing Fairness for Women
Sec. 631. Catch-up contributions for individuals age 50 or over.
Sec. 632. Equitable treatment for contributions of employees to defined
contribution plans.
Sec. 633. Faster vesting of certain employer matching contributions.
Sec. 634. Modification to minimum distribution rules.
Sec. 635. Clarification of tax treatment of division of section 457 plan
benefits upon divorce.
Sec. 636. Provisions relating to hardship distributions.
Sec. 637. Waiver of tax on nondeductible contributions for domestic or
similar workers.
Subtitle D--Increasing Portability for Participants
Sec. 641. Rollovers allowed among various types of plans.
Sec. 642. Rollovers of IRAs into workplace retirement plans.
Sec. 643. Rollovers of after-tax contributions.
Sec. 644. Hardship exception to 60-day rule.
Sec. 645. Treatment of forms of distribution.
Sec. 646. Rationalization of restrictions on distributions.
Sec. 647. Purchase of service credit in governmental defined benefit
plans.
Sec. 648. Employers may disregard rollovers for purposes of cash-out
amounts.
Sec. 649. Minimum distribution and inclusion requirements for section
457 plans.
Subtitle E--Strengthening Pension Security and Enforcement
Part I--General Provisions
Sec. 651. Repeal of 160 percent of current liability funding limit.
Sec. 652. Maximum contribution deduction rules modified and applied to
all defined benefit plans.
Sec. 653. Excise tax relief for sound pension funding.
Sec. 654. Treatment of multiemployer plans under section 415.
Sec. 655. Protection of investment of employee contributions to 401(k)
plans.
Sec. 656. Prohibited allocations of stock in S corporation ESOP.
Sec. 657. Automatic rollovers of certain mandatory distributions.
Sec. 658. Clarification of treatment of contributions to multiemployer
plan.
Part II--Treatment of Plan Amendments Reducing Future Benefit Accruals
Sec. 659. Excise tax on failure to provide notice by defined benefit
plans significantly reducing future benefit accruals.
Subtitle F--Reducing Regulatory Burdens
Sec. 661. Modification of timing of plan valuations.
Sec. 662. ESOP dividends may be reinvested without loss of dividend
deduction.
Sec. 663. Repeal of transition rule relating to certain highly
compensated employees.
Sec. 664. Employees of tax-exempt entities.
Sec. 665. Clarification of treatment of employer-provided retirement
advice.
Sec. 666. Repeal of the multiple use test.
Subtitle G--Miscellaneous Provisions
Sec. 671. Tax treatment and information requirements of Alaska Native
Settlement Trusts.
TITLE VII--ALTERNATIVE MINIMUM TAX
Sec. 701. Increase in alternative minimum tax exemption.
TITLE VIII--OTHER PROVISIONS
Sec. 801. Time for payment of corporate estimated taxes.
Sec. 802. Expansion of authority to postpone certain tax-related
deadlines by reason of Presidentially declared disaster.
Sec. 803. No Federal income tax on restitution received by victims of
the Nazi regime or their heirs or estates.
TITLE IX--COMPLIANCE WITH CONGRESSIONAL BUDGET ACT
Sec. 901. Sunset of provisions of Act.
TITLE I--INDIVIDUAL INCOME TAX RATE REDUCTIONS
SEC. 101. REDUCTION IN INCOME TAX RATES FOR INDIVIDUALS.
(a) In General.--Section 1 (relating to tax imposed) is
amended by adding at the end the following new subsection:
``(i) Rate Reductions After 2000.--
``(1) 10-percent rate bracket.--
``(A) In general.--In the case of taxable
years beginning after December 31, 2000--
``(i) the rate of tax under
subsections (a), (b), (c), and (d) on
taxable income not over the initial
bracket amount shall be 10 percent, and
``(ii) the 15 percent rate of tax
shall apply only to taxable income over
the initial bracket amount but not over
the maximum dollar amount for the 15-
percent rate bracket.
``(B) Initial bracket amount.--For purposes
of this paragraph, the initial bracket amount
is--
``(i) $14,000 ($12,000 in the case
of taxable years beginning before
January 1, 2008) in the case of
subsection (a),
``(ii) $10,000 in the case of
subsection (b), and
``(iii) \1/2\ the amount applicable
under clause (i) (after adjustment, if
any, under subparagraph (C)) in the
case of subsections (c) and (d).
``(C) Inflation adjustment.--In prescribing
the tables under subsection (f) which apply
with respect to taxable years beginning in
calendar years after 2000--
``(i) the Secretary shall make no
adjustment to the initial bracket
amount for any taxable year beginning
before January 1, 2009,
``(ii) the cost-of-living
adjustment used in making adjustments
to the initial bracket amount for any
taxable year beginning after December
31, 2008, shall be determined under
subsection (f)(3) by substituting
`2007' for `1992' in subparagraph (B)
thereof, and
``(iii) such adjustment shall not
apply to the amount referred to in
subparagraph (B)(iii).
If any amount after adjustment under the
preceding sentence is not a multiple of $50,
such amount shall be rounded to the next lowest
multiple of $50.
``(D) Coordination with acceleration of 10
percent rate bracket benefit for 2001.--This
paragraph shall not apply to any taxable year
to which section 6428 applies.
``(2) Reductions in rates after june 30, 2001.--In
the case of taxable years beginning in a calendar
yearafter 2000, the corresponding percentage specified for such
calendar year in the following table shall be substituted for the
otherwise applicable tax rate in the tables under subsections (a), (b),
(c), (d), and (e).
------------------------------------------------------------------------
The corresponding percentages
shall be substituted for the
``In the case of taxable years following percentages:
beginning during calendar year: -----------------------------------
28% 31% 36% 39.6%
------------------------------------------------------------------------
2001................................ 27.5% 30.5% 35.5% 39.1%
2002 and 2003....................... 27.0% 30.0% 35.0% 38.6%
2004 and 2005....................... 26.0% 29.0% 34.0% 37.6%
2006 and thereafter................. 25.0% 28.0% 33.0% 35.0%
------------------------------------------------------------------------
``(3) Adjustment of tables.--The Secretary shall
adjust the tables prescribed under subsection (f) to
carry out this subsection.''.
(b) Acceleration of 10 Percent Rate Bracket Benefit for
2001.--
(1) In general.--Subchapter B of chapter 65
(relating to abatements, credits, and refunds) is
amended by adding at the end the following new section:
``SEC. 6428. ACCELERATION OF 10 PERCENT INCOME TAX RATE BRACKET BENEFIT
FOR 2001.
``(a) In General.--In the case of an eligible individual,
there shall be allowed as a credit against the tax imposed by
chapter 1 for the taxpayer's first taxable year beginning in
2001 an amount equal to 5 percent of so much of the taxpayer's
taxable income as does not exceed the initial bracket amount
(as defined in section 1(i)(1)(B)).
``(b) Limitation Based on Amount of Tax.--The credit
allowed by subsection (a) shall not exceed the excess (if any)
of--
``(1) the sum of the regular tax liability (as
defined in section 26(b)) plus the tax imposed by
section 55, over
``(2) the sum of the credits allowable under part
IV of subchapter A of chapter 1 (other than the credits
allowable under subpart C thereof, relating to
refundable credits).
``(c) Eligible Individual.--For purposes of this section,
the term `eligible individual' means any individual other
than--
``(1) any estate or trust,
``(2) any nonresident alien individual, and
``(3) any individual with respect to whom a
deduction under section 151 is allowable to another
taxpayer for a taxable year beginning in the calendar
year in which the individual's taxable year begins.
``(d) Special Rules.--
``(1) Coordination with advance refunds of
credit.--
``(A) In general.--The amount of credit
which would (but for this paragraph) be
allowable under this section shall be reduced
(but not below zero) by the aggregate refunds
and credits made or allowed to the taxpayer
under subsection (e). Any failure to so reduce
the credit shall be treated as arising out of a
mathematical or clerical error and assessed
according to section 6213(b)(1).
``(B) Joint returns.--In the case of a
refund or credit made or allowed under
subsection (e) with respect to a joint return,
half of such refund or credit shall be treated
as having been made or allowed to each
individual filing such return.
``(2) Coordination with estimated tax.--The credit
under this section shall be treated for purposes of
section 6654(f) in the same manner as a credit under
subpart A of part IV of subchapter A of chapter 1.
``(e) Advance Refunds of Credit Based on Prior Year Data.--
``(1) In general.--Each individual who was an
eligible individual for such individual's first taxable
year beginning in 2000 shall be treated as having made
a payment against the tax imposed by chapter 1 for such
first taxable year in an amount equal to the advance
refund amount for such taxable year.
``(2) Advance refund amount.--For purposes of
paragraph (1), the advance refund amount is the amount
that would have been allowed as a credit under this
section for such first taxable year if this section
(other than subsection (d) and this subsection) had
applied to such taxable year.
``(3) Timing of payments.--In the case of any
overpayment attributable to this subsection, the
Secretary shall, subject to the provisions of this
title, refund or credit such overpayment as rapidly as
possible and, to the extent practicable, before October
1, 2001. No refund or credit shall be made or allowed
under this subsection after December 31, 2001.
``(4) No interest.--No interest shall be allowed on
any overpayment attributable to this subsection.''.
(2) Clerical amendment.--The table of sections for
subchapter B of chapter 65 is amended by adding at the
end the following new item:
``Sec. 6428. Acceleration of 10 percent income tax rate bracket
benefit for 2001.''.
(c) Conforming Amendments.--
(1) Subparagraph (B) of section 1(g)(7) is amended
by striking ``15 percent'' in clause (ii)(II) and
inserting ``10 percent.''.
(2) Section 1(h) is amended--
(A) by striking ``28 percent'' both places
it appears in paragraphs (1)(A)(ii)(I) and
(1)(B)(i) and inserting ``25 percent'', and
(B) by striking paragraph (13).
(3) Section 15 is amended by adding at the end the
following new subsection:
``(f) Rate Reductions Enacted by Economic Growth and Tax
Relief Reconciliation Act of 2001.--This section shall not
apply to any change in rates under subsection (i) of section 1
(relating to rate reductions after 2000).''.
(4) Section 531 is amended by striking ``equal to''
and all that follows and inserting ``equal to the
product of thehighest rate of tax under section 1(c)
and the accumulated taxable income.''.
(5) Section 541 is amended by striking ``equal to''
and all that follows and inserting ``equal to the
product of the highest rate of tax under section 1(c)
and the undistributed personal holding company
income.''.
(6) Section 3402(p)(1)(B) is amended by striking
``7, 15, 28, or 31 percent'' and inserting ``7 percent,
any percentage applicable to any of the 3 lowest income
brackets in the table under section 1(c),''.
(7) Section 3402(p)(2) is amended by striking ``15
percent'' and inserting ``10 percent''.
(8) Section 3402(q)(1) is amended by striking
``equal to 28 percent of such payment'' and inserting
``equal to the product of the third lowest rate of tax
applicable under section 1(c) and such payment''.
(9) Section 3402(r)(3) is amended by striking ``31
percent'' and inserting ``the fourth lowest rate of tax
applicable under section 1(c)''.
(10) Section 3406(a)(1) is amended by striking
``equal to 31 percent of such payment'' and inserting
``equal to the product of the fourth lowest rate of tax
applicable under section 1(c) and such payment''.
(11) Section 13273 of the Revenue Reconciliation
Act of 1993 is amended by striking ``28 percent'' and
inserting ``the third lowest rate of tax applicable
under section 1(c) of the Internal Revenue Code of
1986''.
(d) Effective Dates.--
(1) In general.--Except as provided in paragraph
(2), the amendments made by this section shall apply to
taxable years beginning after December 31, 2000.
(2) Amendments to withholding provisions.--The
amendments made by paragraphs (6), (7), (8), (9), (10),
and (11) of subsection (c) shall apply to amounts paid
after the 60th day after the date of the enactment of
this Act. References to income brackets and rates of
tax in such paragraphs shall be applied without regard
to section 1(i)(1)(D) of the Internal Revenue Code of
1986.
SEC. 102. REPEAL OF PHASEOUT OF PERSONAL EXEMPTIONS.
(a) In General.--Paragraph (3) of section 151(d) (relating
to exemption amount) is amended by adding at the end the
following new subparagraphs:
``(E) Reduction of phaseout.--
``(i) In general.--In the case of
taxable years beginning after December
31, 2005, and before January 1, 2010,
the reduction under subparagraph (A)
shall be equal to the applicable
fraction of the amount which would (but
for this subparagraph) be the amount of
such reduction.
``(ii) Applicable fraction.--For
purposes of clause (i), the applicable
fraction shall be determined in
accordance with the following table:
``For taxable years beginning The applicable
in calendar year-- fraction is--
2006 and 2007..................................... \2/3\
2008 and 2009..................................... \1/3\.
``(F) Termination.--This paragraph shall
not apply to any taxable year beginning after
December 31, 2009.''.
(b) Effective Date.--The amendment made by this section
shall apply to taxable years beginning after December 31, 2005.
SEC. 103. PHASEOUT OF OVERALL LIMITATION ON ITEMIZED DEDUCTIONS.
(a) In General.--Section 68 is amended by adding at the end
the following new subsections:
``(f) Phaseout of Limitation.--
``(1) In general.--In the case of taxable years
beginning after December 31, 2005, and before January
1, 2010, the reduction under subsection (a) shall be
equal to the applicable fraction of the amount which
would (but for this subsection) be the amount of such
reduction.
``(2) Applicable fraction.--For purposes of
paragraph (1), the applicable fraction shall be
determined in accordance with the following table:
``For taxable years beginning The applicable
in calendar year-- fraction is--
2006 and 2007..................................... \2/3\
2008 and 2009..................................... \1/3\.
``(g) Termination.--This section shall not apply to any
taxable year beginning after December 31, 2009.''.
(b) Effective Date.--The amendment made by this section
shall apply to taxable years beginning after December 31, 2005.
TITLE II--TAX BENEFITS RELATING TO CHILDREN
SEC. 201. MODIFICATIONS TO CHILD TAX CREDIT.
(a) Increase in Per Child Amount.--Subsection (a) of
section 24 (relating to child tax credit) is amended to read as
follows:
``(a) Allowance of Credit.--
``(1) In general.--There shall be allowed as a
credit against the tax imposed by this chapter for the
taxable year with respect to each qualifying child of
the taxpayer an amount equal to the per child amount.
``(2) Per child amount.--For purposes of paragraph
(1), the per child amount shall be determined as
follows:
``In the case of any taxable
year beginning in-- The per child amount is--
2001, 2002, 2003, or 2004............................. $ 600
2005, 2006, 2007, or 2008............................. 700
2009.................................................. 800
2010 or thereafter....................................
1,000.''.
(b) Credit Allowed Against Alternative Minimum Tax.--
(1) In general.--Subsection (b) of section 24
(relating to child tax credit) is amended by adding at
the end the following new paragraph:
``(3) Limitation based on amount of tax.--The
credit allowed under subsection (a) for any taxable
year shall not exceed the excess of--
``(A) the sum of the regular tax liability
(as defined in section 26(b)) plus the tax
imposed by section 55, over
``(B) the sum of the credits allowable
under this subpart (other than this section)
and section 27 for the taxable year.''.
(2) Conforming amendments.--
(A) The heading for section 24(b) is
amended to read as follows: ``Limitations.--''.
(B) The heading for section 24(b)(1) is
amended to read as follows: ``Limitation based
on adjusted gross income.--''.
(C) Section 24(d), as amended by subsection
(c), is amended--
(i) by striking ``section 26(a)''
each place it appears and inserting
``subsection (b)(3)'', and
(ii) in paragraph (1)(B) by
striking ``aggregate amount of credits
allowed by this subpart'' and inserting
``amount of credit allowed by this
section''.
(D) Paragraph (1) of section 26(a) is
amended by inserting ``(other than section
24)'' after ``this subpart''.
(E) Subsection (c) of section 23 is amended
by striking ``and section 1400C'' and inserting
``and sections 24 and 1400C''.
(F) Subparagraph (C) of section 25(e)(1) is
amended by inserting ``, 24,'' after ``sections
23''.
(G) Section 904(h) is amended by inserting
``(other than section 24)'' after ``chapter''.
(H) Subsection (d) of section 1400C is
amended by inserting ``and section 24'' after
``this section''.
(c) Refundable Child Credit.--
(1) In general.--So much of section 24(d) (relating
to additional credit for families with 3 or more
children) as precedes paragraph (2) is amended to read
as follows:
``(d) Portion of Credit Refundable.--
``(1) In general.--The aggregate credits allowed to
a taxpayer under subpart C shall be increased by the
lesser of--
``(A) the credit which would be allowed
under this section without regard to this
subsection and the limitation under section
26(a), or
``(B) the amount by which the amount of
credit allowed by this section (determined
without regard to this subsection) would
increase if the limitation imposed by section
26(a) were increased by the greater of--
``(i) 15 percent (10 percent in the
case of taxable years beginning before
January 1, 2005) of so much of the
taxpayer's earned income (within the
meaning of section 32) which is taken
into account in computing taxable
income for the taxable year as exceeds
$10,000, or
``(ii) in the case of a taxpayer
with 3 or more qualifying children, the
excess (if any) of--
``(I) the taxpayer's social
security taxes for the taxable
year, over
``(II) the credit allowed
under section 32 for the
taxable year.
The amount of the credit allowed under this subsection
shall not be treated as a credit allowed under this
subpart and shall reduce the amount of credit otherwise
allowable under subsection (a) without regard to
section 26(a).''.
(2) Inflation adjustment.--Subsection (d) of
section 24 is amended by adding at the end the
following new paragraph:
``(4) Inflation adjustment.--In the case of any
taxable year beginning in a calendar year after 2001,
the $10,000 amount contained in paragraph (1)(B) shall
be increased by an amount equal to--
``(A) such dollar amount, multiplied by
``(B) the cost-of-living adjustment
determined under section 1(f)(3) for the
calendar year in which the taxable year begins,
determined by substituting `calendar year 2000'
for `calendar year 1992' in subparagraph (B)
thereof.
Any increase determined under the preceding sentence
shall be rounded to the nearest multiple of $50.''
(3) Conforming amendment.--Section 32 is amended by
striking subsection (n).
(d) Elimination of Reduction of Credit to Taxpayer Subject
to Alternative Minimum Tax Provision.--Section 24(d) is
amended--
(1) by striking paragraph (2), and
(2) by redesignating paragraphs (3) and (4) as
paragraphs (2) and (3), respectively.
(e) Effective Dates.--
(1) In general.--Except as provided in paragraph
(2), the amendments made by this section shall apply to
taxable years beginning after December 31, 2000.
(2) Subsection (b).--The amendments made by
subsection (b) shall apply to taxable years beginning
after December 31, 2001.
SEC. 202. EXPANSION OF ADOPTION CREDIT AND ADOPTION ASSISTANCE
PROGRAMS.
(a) In General.--
(1) Adoption credit.--Section 23(a)(1) (relating to
allowance of credit) is amended to read as follows:
``(1) In general.--In the case of an individual,
there shall be allowed as a credit against the tax
imposed by this chapter--
``(A) in the case of an adoption of a child
other than a child with special needs, the
amount of the qualified adoption expenses paid
or incurred by the taxpayer, and
``(B) in the case of an adoption of a child
with special needs, $10,000.''.
(2) Adoption assistance programs.--Section 137(a)
(relating to adoption assistance programs) is amended
to read as follows:
``(a) In General.--Gross income of an employee does not
include amounts paid or expenses incurred by the employer for
adoption expenses in connection with the adoption of a child by
an employee if such amounts are furnished pursuant to an
adoption assistance program. The amount of the exclusion shall
be--
``(1) in the case of an adoption of a child other
than a child with special needs, the amount of the
qualified adoption expenses paid or incurred by the
taxpayer, and
``(2) in the case of an adoption of a child with
special needs, $10,000.''.
(b) Dollar Limitations.--
(1) Dollar amount of allowed expenses.--
(A) Adoption expenses.--Section 23(b)(1)
(relating to allowance of credit) is amended--
(i) by striking ``$5,000'' and
inserting ``$10,000'',
(ii) by striking ``($6,000, in the
case of a child with special needs)'',
and
(iii) by striking ``subsection
(a)'' and inserting ``subsection
(a)(1)(A)''.
(B) Adoption assistance programs.--Section
137(b)(1) (relating to dollar limitations for
adoption assistance programs) is amended--
(i) by striking ``$5,000'' and
inserting ``$10,000'', and
(ii) by striking ``($6,000, in the
case of a child with special needs)'',
and
(iii) by striking ``subsection
(a)'' and inserting ``subsection
(a)(1)''.
(2) Phase-out limitation.--
(A) Adoption expenses.--Clause (i) of
section 23(b)(2)(A) (relating to income
limitation) is amended by striking ``$75,000''
and inserting ``$150,000''.
(B) Adoption assistance programs.--Section
137(b)(2)(A) (relating to income limitation) is
amended by striking ``$75,000'' and inserting
``$150,000''.
(c) Year Credit Allowed.--Section 23(a)(2) (relating to
year credit allowed) is amended by adding at the end the
following new flush sentence:
``In the case of the adoption of a child with special
needs, the credit allowed under paragraph (1) shall be
allowed for the taxable year in which the adoption
becomes final.''.
(d) Repeal of Terminations.--
(1) Children without special needs.--Paragraph (2)
of section 23(d) (relating to definition of eligible
child) is amended to read as follows:
``(2) Eligible child.--The term `eligible child'
means any individual who--
``(A) has not attained age 18, or
``(B) is physically or mentally incapable
of caring for himself.''.
(2) Adoption Assistance Programs.--Section 137
(relating to adoption assistance programs) is amended
by striking subsection (f).
(e) Adjustment of Dollar and Income Limitations for
Inflation.--
(1) Adoption credit.--Section 23 (relating to
adoption expenses) is amended by redesignating
subsection (h) as subsection (i) and by inserting after
subsection (g) the following new subsection:
``(h) Adjustments for Inflation.--In the case of a taxable
year beginning after December 31, 2002, each of the dollar
amounts in subsection (a)(1)(B) and paragraphs (1) and
(2)(A)(i) of subsection (b) shall be increased by an amount
equal to--
``(1) such dollar amount, multiplied by
``(2) the cost-of-living adjustment determined
under section 1(f)(3) for the calendar year in which
the taxable year begins, determined by substituting
`calendar year 2001' for `calendar year 1992' in
subparagraph (B) thereof.''.
(2) Adoption assistance programs.--Section 137
(relating to adoption assistance programs), as amended
by subsection (d), is amended by adding at the end the
following new subsection:
``(f) Adjustments for Inflation.--In the case of a taxable
year beginning after December 31, 2002, each of the dollar
amounts in subsection (a)(2) and paragraphs (1) and (2)(A) of
subsection (b) shall be increased by an amount equal to--
``(1) such dollar amount, multiplied by
``(2) the cost-of-living adjustment determined
under section 1(f)(3) for the calendar year in which
the taxable year begins, determined by substituting
`calendar year 2001' for `calendar year 1992' in
subparagraph (B) thereof.''.
(f) Credit Allowed Against Alternative Minimum Tax.--
(1) In general.--Subsection (b) of section 23 is
amended by adding at the end the following new
paragraph:
``(4) Limitation based on amount of tax.--The
credit allowed under subsection (a) for any taxable
year shall not exceed the excess of--
``(A) the sum of the regular tax liability
(as defined in section 26(b)) plus the tax
imposed by section 55, over
``(B) the sum of the credits allowable
under this subpart (other than this section)
and section 27 for the taxable year.''
(2) Conforming amendments.--
(A) Section 23(c), as amended by section
201(b), is amended--
(i) by striking ``section 26(a)''
and inserting ``subsection (b)(4)'',
and
(ii) by striking ``reduced by the
sum of the credits allowable under this
subpart (other than this section and
sections 24 and 1400C)''.
(B) Section 24(b)(3)(B), as added by
section 201(b), is amended by striking ``this
section'' and inserting ``this section and
section 23''.
(C) Sections 26(a)(1), 904(h), and
1400C(d), as amended by section 201(b), are
each amended by striking ``section 24'' and
inserting ``sections 23 and 24''.
(g) Effective Date.--
(1) In general.--Except as provided in paragraph
(2), the amendments made by this section shall apply to
taxable years beginning after December 31, 2001.
(2) Subsection (a).--The amendments made by
subsection (a) shall apply to taxable years beginning
after December 31, 2002.
SEC. 203. REFUNDS DISREGARDED IN THE ADMINISTRATION OF FEDERAL PROGRAMS
AND FEDERALLY ASSISTED PROGRAMS.
Any payment considered to have been made to any individual
by reason of section 24 of the Internal Revenue Code of 1986,
as amended by section 201, shall not be taken into account as
income and shall not be taken into account as resources for the
month of receipt and the following month, for purposes of
determining the eligibility of such individual or any other
individual for benefits or assistance, or the amount or extent
of benefits or assistance, under any Federal program or under
any State or local program financed in whole or in part with
Federal funds.
SEC. 204. DEPENDENT CARE CREDIT.
(a) Increase in Dollar Limit.--Subsection (c) of section 21
(relating to expenses for household and dependent care services
necessary for gainful employment) is amended--
(1) by striking ``$2,400'' in paragraph (1) and
inserting ``$3,000'', and
(2) by striking ``$4,800'' in paragraph (2) and
inserting ``$6,000''.
(b) Increase in Applicable Percentage.--Section 21(a)(2)
(defining applicable percentage) is amended--
(1) by striking ``30 percent'' and inserting ``35
percent'', and
(2) by striking ``$10,000'' and inserting
``$15,000''.
(c) Effective Date.--The amendments made by this section
shall apply to taxable years beginning after December 31, 2002.
SEC. 205. ALLOWANCE OF CREDIT FOR EMPLOYER EXPENSES FOR CHILD CARE
ASSISTANCE.
(a) In General.--Subpart D of part IV of subchapter A of
chapter 1 (relating to business related credits), as amended by
section 619, is further amended by adding at the end the
following:
``SEC. 45F. EMPLOYER-PROVIDED CHILD CARE CREDIT.
``(a) In General.--For purposes of section 38, the
employer-provided child care credit determined under this
section for the taxable year is an amount equal to the sum of--
``(1) 25 percent of the qualified child care
expenditures, and
``(2) 10 percent of the qualified child care
resource and referral expenditures,
of the taxpayer for such taxable year.
``(b) Dollar Limitation.--The credit allowable under
subsection (a) for any taxable year shall not exceed $150,000.
``(c) Definitions.--For purposes of this section--
``(1) Qualified child care expenditure.--
``(A) In general.--The term `qualified
child care expenditure' means any amount paid
or incurred--
``(i) to acquire, construct,
rehabilitate, or expand property--
``(I) which is to be used
as part of a qualified child
care facility of the taxpayer,
``(II) with respect to
which a deduction for
depreciation (or amortization
in lieu of depreciation) is
allowable, and
``(III) which does not
constitute part of the
principal residence (within the
meaning of section 121) of the
taxpayer or any employee of the
taxpayer,
``(ii) for the operating costs of a
qualified child care facility of the
taxpayer, including costs related to
the training of employees, to
scholarship programs, and to the
providing of increased compensation to
employees with higher levels of child
care training, or
``(iii) under a contract with a
qualified child care facility to
provide child care services to
employees of the taxpayer.
``(B) Fair market value.--The term
`qualified child care expenditures' shall not
include expenses in excess of the fair market
value of such care.
``(2) Qualified child care facility.--
``(A) In general.--The term `qualified
child care facility' means a facility--
``(i) the principal use of which is
to provide child care assistance, and
``(ii) which meets the requirements
of all applicable laws and regulations
of the State or local government in
which it is located, including the
licensing of the facility as a child
care facility.
Clause (i) shall not apply to a facility which
is the principal residence (within the meaning
of section 121) of the operator of the
facility.
``(B) Special rules with respect to a
taxpayer.--A facility shall not be treated as a
qualified child care facility with respect to a
taxpayer unless--
``(i) enrollment in the facility is
open to employees of the taxpayer
during the taxable year,
``(ii) if the facility is the
principal trade or business of the
taxpayer, at least 30 percent of the
enrollees of such facility are
dependents of employees of the
taxpayer, and
``(iii) the use of such facility
(or the eligibility to use such
facility) does not discriminate in
favor of employees of the taxpayer who
are highly compensated employees
(within the meaning of section 414(q)).
``(3) Qualified child care resource and referral
expenditure.--
``(A) In general.--The term `qualified
child care resource and referral expenditure'
means any amount paid or incurred under a
contract to provide child care resource and
referral services to an employee of the
taxpayer.
``(B) Nondiscrimination.--The services
shall not be treated as qualified unless the
provision of such services (or the eligibility
to use such services) does not discriminate in
favor of employees of the taxpayer who are
highly compensated employees (within the
meaning of section 414(q)).
``(d) Recapture of Acquisition and Construction Credit.--
``(1) In general.--If, as of the close of any
taxable year, there is a recapture event with respect
to any qualified child care facility of the taxpayer,
then the tax of the taxpayer under this chapter for
such taxable year shall be increased by an amount equal
to the product of--
``(A) the applicable recapture percentage,
and
``(B) the aggregate decrease in the credits
allowed under section 38 for all prior taxable
years which would have resulted if the
qualified child care expenditures of the
taxpayer described in subsection (c)(1)(A) with
respect to such facility had been zero.
``(2) Applicable recapture percentage.--
``(A) In general.--For purposes of this
subsection, the applicable recapture percentage
shall be determined from the following table:
``If the recapture event The applicable recapture
occurs in: percentage is:
Years 1-3............................................. 100
Year 4................................................ 85
Year 5................................................ 70
Year 6................................................ 55
Year 7................................................ 40
Year 8................................................ 25
Years 9 and 10........................................ 10
Years 11 and thereafter............................... 0.
``(B) Years.--For purposes of subparagraph
(A), year 1 shall begin on the first day of the
taxable year in which the qualified child care
facility is placed in service by the taxpayer.
``(3) Recapture event defined.--For purposes of
this subsection, the term `recapture event' means--
``(A) Cessation of operation.--The
cessation of the operation of the facility as a
qualified child care facility.
``(B) Change in ownership.--
``(i) In general.--Except as
provided in clause (ii), the
disposition of a taxpayer's interest in
a qualified child care facility with
respect to which the credit described
in subsection (a) was allowable.
``(ii) Agreement to assume
recapture liability.--Clause (i) shall
not apply if the person acquiring such
interest in the facility agrees in
writing to assume the recapture
liability of the person disposing of
such interest in effect immediately
before such disposition. In the event
of such an assumption, the person
acquiring the interest in the facility
shall be treated as the taxpayer for
purposes of assessing any recapture
liability (computed as if there had
been no change in ownership).
``(4) Special rules.--
``(A) Tax benefit rule.--The tax for the
taxable year shall be increased under paragraph
(1) only with respect to credits allowed by
reason of this section which were used to
reduce tax liability. In the case of credits
not so used to reduce tax liability, the
carryforwards and carrybacks under section 39
shall be appropriately adjusted.
``(B) No credits against tax.--Any increase
in tax under this subsection shall not be
treated as a tax imposed by this chapter for
purposes of determining the amount of any
credit under subpart A, B, or D of this part.
``(C) No recapture by reason of casualty
loss.--The increase in tax under this
subsection shall not apply to a cessation of
operation of the facility as a qualified child
care facility by reason of a casualty loss to
the extent such loss is restored by
reconstruction or replacement within a
reasonable period established by the Secretary.
``(e) Special Rules.--For purposes of this section--
``(1) Aggregation rules.--All persons which are
treated as a single employer under subsections (a) and
(b) of section 52 shall be treated as a single
taxpayer.
``(2) Pass-thru in the case of estates and
trusts.--Under regulations prescribed by the Secretary,
rules similar to the rules of subsection (d) of section
52 shall apply.
``(3) Allocation in the case of partnerships.--In
the case of partnerships, the credit shall be allocated
among partners under regulations prescribed by the
Secretary.
``(f) No Double Benefit.--
``(1) Reduction in basis.--For purposes of this
subtitle--
``(A) In general.--If a credit is
determined under this section with respect to
any property by reason of expenditures
described in subsection (c)(1)(A), the basis of
such property shall be reduced by the amount of
the credit so determined.
``(B) Certain dispositions.--If, during any
taxable year, there is a recapture amount
determined with respect to any property the
basis of which was reduced under subparagraph
(A), the basis of such property (immediately
before the event resulting in such recapture)
shall be increased by an amount equal to such
recapture amount. For purposes of the preceding
sentence, the term `recapture amount' means any
increase in tax (or adjustment in carrybacks or
carryovers) determined under subsection (d).
``(2) Other deductions and credits.--No deduction
or credit shall be allowed under any other provision of
this chapter with respect to the amount of the credit
determined under this section.''.
(b) Conforming Amendments.--
(1) Section 38(b), as amended by section 619, is
amended by striking ``plus'' at the end of paragraph
(13), by striking the period at the end of paragraph
(14) and inserting ``, plus'', and by adding at the end
the following:
``(15) the employer-provided child care credit
determined under section 45F.''.
(2) The table of sections for subpart D of part IV
of subchapter A of chapter 1 is amended by adding at
the end the following:
``Sec. 45F. Employer-provided child care credit.''
(3) Section 1016(a) is amended by striking ``and''
at the end of paragraph (26), by striking the period at
the end of paragraph (27) and inserting ``, and'', and
by adding at the end the following:
``(28) in the case of a facility with respect to
which a credit was allowed under section 45F, to the
extent provided in section 45F(f)(1).''.
(c) Effective Date.--The amendments made by this section
shall apply to taxable years beginning after December 31, 2001.
TITLE III--MARRIAGE PENALTY RELIEF
SEC. 301. ELIMINATION OF MARRIAGE PENALTY IN STANDARD DEDUCTION.
(a) In General.--Paragraph (2) of section 63(c) (relating
to standard deduction) is amended--
(1) by striking ``$5,000'' in subparagraph (A) and
inserting ``the applicable percentage of the dollar
amount in effect under subparagraph (C) for the taxable
year'';
(2) by adding ``or'' at the end of subparagraph
(B);
(3) by striking ``in the case of'' and all that
follows in subparagraph (C) and inserting ``in any
other case.''; and
(4) by striking subparagraph (D).
(b) Applicable Percentage.--Section 63(c) (relating to
standard deduction) is amended by adding at the end the
following new paragraph:
``(7) Applicable percentage.--For purposes of
paragraph (2), the applicable percentage shall be
determined in accordance with the following table:
``For taxable years beginning The applicable
in calendar year-- percentage is--
2005.............................................. 174
2006.............................................. 184
2007.............................................. 187
2008.............................................. 190
2009 and thereafter............................... 200.''.
(c) Technical Amendments.--
(1) Subparagraph (B) of section 1(f)(6) is amended
by striking ``(other than with'' and all that follows
through ``shall be applied'' and inserting ``(other
than with respect to sections 63(c)(4) and
151(d)(4)(A)) shall be applied''.
(2) Paragraph (4) of section 63(c) is amended by
adding at the end the following flush sentence:
``The preceding sentence shall not apply to the amount
referred to in paragraph (2)(A).''.
(d) Effective Date.--The amendments made by this section
shall apply to taxable years beginning after December 31, 2004.
SEC. 302. PHASEOUT OF MARRIAGE PENALTY IN 15-PERCENT BRACKET.
(a) In General.--Section 1(f) (relating to adjustments in
tax tables so that inflation will not result in tax increases)
is amended by adding at the end the following new paragraph:
``(8) Phaseout of marriage penalty in 15-percent
bracket.--
``(A) In general.--With respect to taxable
years beginning after December 31, 2004, in
prescribing the tables under paragraph (1)--
``(i) the maximum taxable income in
the 15-percent rate bracket in the
table contained in subsection (a) (and
the minimum taxable income in the next
higher taxable income bracket in such
table) shall be the applicable
percentage of the maximum taxable
income in the 15-percent rate bracket
in the table contained in subsection
(c) (after any other adjustment under
this subsection), and
``(ii) the comparable taxable
income amounts in the table contained
in subsection (d) shall be \1/2\ of the
amounts determined under clause (i).
``(B) Applicable percentage.--For purposes
of subparagraph (A), the applicable percentage
shall be determined in accordance with the
following table:
``For taxable years beginning The applicable
in calendar year-- percentage is--
2005.............................................. 180
2006.............................................. 187
2007.............................................. 193
2008 and thereafter............................... 200.
``(C) Rounding.--If any amount determined
under subparagraph (A)(i) is not a multiple of
$50, such amount shall be rounded to the next
lowest multiple of $50.''.
(b) Technical Amendments.--
(1) Subparagraph (A) of section 1(f)(2) is amended
by inserting ``except as provided in paragraph (8),''
before ``by increasing''.
(2) The heading for subsection (f) of section 1 is
amended by inserting ``Phaseout of Marriage Penalty in
15-Percent Bracket;'' before ``Adjustments''.
(c) Effective Date.--The amendments made by this section
shall apply to taxable years beginning after December 31, 2004.
SEC. 303. MARRIAGE PENALTY RELIEF FOR EARNED INCOME CREDIT; EARNED
INCOME TO INCLUDE ONLY AMOUNTS INCLUDIBLE IN GROSS
INCOME; SIMPLIFICATION OF EARNED INCOME CREDIT.
(a) Increased Phaseout Amount.--
(1) In general.--Section 32(b)(2) (relating to
amounts) is amended--
(A) by striking ``Amounts.--The earned''
and inserting ``Amounts.--
``(A) In general.--Subject to subparagraph
(B), the earned'', and
(B) by adding at the end the following new
subparagraph:
``(B) Joint returns.--In the case of a
joint return filed by an eligible individual
and such individual's spouse, the phaseout
amount determined under subparagraph (A) shall
be increased by--
``(i) $1,000 in the case of taxable
years beginning in 2002, 2003, and
2004,
``(ii) $2,000 in the case of
taxable years beginning in 2005, 2006,
and 2007, and
``(iii) $3,000 in the case of
taxable years beginning after 2007.''.
(2) Inflation adjustment.--Paragraph (1)(B) of
section 32(j) (relating to inflation adjustments) is
amended to read as follows:
``(B) the cost-of-living adjustment
determined under section 1(f)(3) for the
calendar year in which the taxable year begins,
determined--
``(i) in the case of amounts in
subsections (b)(2)(A) and (i)(1), by
substituting `calendar year 1995' for
`calendar year 1992' in subparagraph
(B) thereof, and
``(ii) in the case of the $3,000
amount in subsection (b)(2)(B)(iii), by
substituting `calendar year 2007' for
`calendar year 1992' in subparagraph
(B) of such section 1.''.
(3) Rounding.--Section 32(j)(2)(A) (relating to
rounding) is amended by striking ``subsection (b)(2)''
and inserting ``subsection (b)(2)(A) (after being
increased under subparagraph (B) thereof)''.
(b) Earned Income To Include Only Amounts Includible in
Gross Income.--Clause (i) of section 32(c)(2)(A) (defining
earned income) is amended by inserting ``, but only if such
amounts are includible in gross income for the taxable year''
after ``other employee compensation''.
(c) Repeal of Reduction of Credit to Taxpayers Subject to
Alternative Minimum Tax.--Section 32(h) is repealed.
(d) Replacement of Modified Adjusted Gross Income With
Adjusted Gross Income.--
(1) In general.--Section 32(a)(2)(B) is amended by
striking ``modified''.
(2) Conforming amendments.--
(A) Section 32(c) is amended by striking
paragraph (5).
(B) Section 32(f)(2)(B) is amended by
striking ``modified'' each place it appears.
(e) Relationship Test.--
(1) In general.--Clause (i) of section 32(c)(3)(B)
(relating to relationship test) is amended to read as
follows:
``(i) In general.--An individual
bears a relationship to the taxpayer
described in this subparagraph if such
individual is--
``(I) a son, daughter,
stepson, or stepdaughter, or a
descendant of any such
individual,
``(II) a brother, sister,
stepbrother, or stepsister, or
a descendant of any such
individual, who the taxpayer
cares for as the taxpayer's own
child, or
``(III) an eligible foster
child of the taxpayer.''.
(2) Eligible foster child.--
(A) In general.--Clause (iii) of section
32(c)(3)(B) is amended to read as follows:
``(iii) Eligible foster child.--For
purposes of clause (i), the term
`eligible foster child' means an
individual not described in subclause
(I) or (II) of clause (i) who--
``(I) is placed with the
taxpayer by an authorized
placement agency, and
``(II) the taxpayer cares
for as the taxpayer's own
child.''.
(B) Conforming amendment.--Section
32(c)(3)(A)(ii) is amended by striking ``except
as provided in subparagraph (B)(iii),''.
(f) 2 or More Claiming Qualifying Child.--Section
32(c)(1)(C) is amended to read as follows:
``(C) 2 or more claiming qualifying
child.--
``(i) In general.--Except as
provided in clause (ii), if (but for
this paragraph) an individual may be
claimed, and is claimed, as a
qualifying child by 2 or more taxpayers
for a taxable year beginning in the
same calendar year, such individual
shall be treated as the qualifying
child of the taxpayer who is--
``(I) a parent of the
individual, or
``(II) if subclause (I)
does not apply, the taxpayer
with the highest adjusted gross
income for such taxable year.
``(ii) More than 1 claiming
credit.--If the parents claiming the
credit with respect to any qualifying
child do not file a joint return
together, such child shall be treated
as the qualifying child of--
``(I) the parent with whom
the child resided for the
longest period of time during
the taxable year, or
``(II) if the child resides
with both parents for the same
amount of time during such
taxable year, the parent with
the highest adjusted gross
income.''.
(g) Expansion of Mathematical Error Authority.--Paragraph
(2) of section 6213(g) is amended by striking ``and'' at the
end of subparagraph (K), by striking the period at the end of
subparagraph (L) and inserting ``, and'', and by inserting
after subparagraph (L) the following new subparagraph:
``(M) the entry on the return claiming the
credit under section 32 with respect to a child
if, according to the Federal Case Registry of
Child Support Orders established under section
453(h) of the Social Security Act, the taxpayer
is a noncustodial parent of such child.''
(h) Clerical Amendment.--Subparagraph (E) of section
32(c)(3) is amended by striking ``subparagraphs (A)(ii) and
(B)(iii)(II)'' and inserting ``subparagraph (A)(ii)''.
(i) Effective Dates.--
(1) In general.--Except as provided in paragraph
(2), the amendments made by this section shall apply to
taxable years beginning after December 31, 2001.
(2) Subsection (g).--The amendment made by
subsection (g) shall take effect on January 1, 2004.
TITLE IV--AFFORDABLE EDUCATION PROVISIONS
Subtitle A--Education Savings Incentives
SEC. 401. MODIFICATIONS TO EDUCATION INDIVIDUAL RETIREMENT ACCOUNTS.
(a) Maximum Annual Contributions.--
(1) In general.--Section 530(b)(1)(A)(iii)
(defining education individual retirement account) is
amended by striking ``$500'' and inserting ``$2,000''.
(2) Conforming amendment.--Section 4973(e)(1)(A) is
amended by striking ``$500'' and inserting ``$2,000''.
(b) Modification of AGI Limits To Remove Marriage
Penalty.--Section 530(c)(1) (relating to reduction in permitted
contributions based on adjusted gross income) is amended--
(1) by striking ``$150,000'' in subparagraph
(A)(ii) and inserting ``$190,000'', and
(2) by striking ``$10,000'' in subparagraph (B) and
inserting ``$30,000''.
(c) Tax-Free Expenditures for Elementary and Secondary
School Expenses.--
(1) In general.--Section 530(b)(2) (defining
qualified higher education expenses) is amended to read
as follows:
``(2) Qualified education expenses.--
``(A) In general.--The term `qualified
education expenses' means--
``(i) qualified higher education
expenses (as defined in section
529(e)(3)), and
``(ii) qualified elementary and
secondary education expenses (as
defined in paragraph (4)).
``(B) Qualified state tuition programs.--
Such term shall include any contribution to a
qualified State tuition program (as defined in
section 529(b)) on behalf of the designated
beneficiary (as defined in section 529(e)(1));
but there shall be no increase in the
investment in the contract for purposes of
applying section 72 by reason of any portion of
such contribution which is not includible in
gross income by reason of subsection (d)(2).''.
(2) Qualified elementary and secondary education
expenses.--Section 530(b) (relating to definitions and
special rules) is amended by adding at the end the
following new paragraph:
``(4) Qualified elementary and secondary education
expenses.--
``(A) In general.--The term `qualified
elementary and secondary education expenses'
means--
``(i) expenses for tuition, fees,
academic tutoring, special needs
services in the case of a special needs
beneficiary, books, supplies, and other
equipment which are incurred in
connection with the enrollment or
attendance of the designated
beneficiary of the trust as an
elementary or secondary school student
at a public, private, or religious
school,
``(ii) expenses for room and board,
uniforms, transportation, and
supplementary items and services
(including extended day programs) which
are required or provided by a public,
private, or religious school in
connection with such enrollment or
attendance, and
``(iii) expenses for the purchase
of any computer technology or equipment
(as defined in section 170(e)(6)(F)(i))
or Internet access and related
services, if such technology,
equipment, or services are to be used
by the beneficiary and the
beneficiary's family during any of the
years the beneficiary is in school.
Clause (iii) shall not include expenses for
computer software designed for sports, games,
or hobbies unless the software is predominantly
educational in nature.
``(B) School.--The term `school' means any
school which provides elementary education or
secondary education (kindergarten through grade
12), as determined under State law.''.
(3) Conforming amendments.--Section 530 is
amended--
(A) by striking ``higher'' each place it
appears in subsections (b)(1) and (d)(2), and
(B) by striking ``higher'' in the heading
for subsection (d)(2).
(d) Waiver of Age Limitations for Children With Special
Needs.--Section 530(b)(1) (defining education individual
retirement account) is amended by adding at the end the
following flush sentence:
``The age limitations in subparagraphs (A)(ii) and (E),
and paragraphs (5) and (6) of subsection (d), shall not
apply to any designated beneficiary with special needs
(as determined under regulations prescribed by the
Secretary).''.
(e) Entities Permitted To Contribute to Accounts.--Section
530(c)(1) (relating to reduction in permitted contributions
based on adjusted gross income) is amended by striking ``The
maximum amount which a contributor'' and inserting ``In the
case of a contributor who is an individual, the maximum amount
the contributor''.
(f) Time When Contributions Deemed Made.--
(1) In general.--Section 530(b) (relating to
definitions and special rules), as amended by
subsection (c)(2), is amended by adding at the end the
following new paragraph:
``(5) Time when contributions deemed made.--An
individual shall be deemed to have made a contribution
to an education individual retirement account 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).''.
(2) Extension of time to return excess
contributions.--Subparagraph (C) of section 530(d)(4)
(relating to additional tax for distributions not used
for educational expenses) is amended--
(A) by striking clause (i) and inserting
the following new clause:
``(i) such distribution is made
before the first day of the sixth month
of the taxable year following the
taxable year, and'', and
(B) by striking ``due date of return'' in
the heading and inserting ``certain date''.
(g) Coordination With Hope and Lifetime Learning Credits
and Qualified Tuition Programs.--
(1) In general.--Section 530(d)(2)(C) is amended to
read as follows:
``(C) Coordination with hope and lifetime
learning credits and qualified tuition
programs.--For purposes of subparagraph (A)--
``(i) Credit coordination.--The
total amount of qualified higher
education expenses with respect to an
individual for the taxable year shall
be reduced--
``(I) as provided in
section 25A(g)(2), and
``(II) by the amount of
such expenses which were taken
into account in determining the
credit allowed to the taxpayer
or any other person under
section 25A.
``(ii) Coordination with qualified
tuition programs.--If, with respect to
an individual for any taxable year--
``(I) the aggregate
distributions during such year
to which subparagraph (A) and
section 529(c)(3)(B) apply,
exceed
``(II) the total amount of
qualified education expenses
(after the application of
clause (i)) for such year,
the taxpayer shall allocate such
expenses among such distributions for
purposes of determining the amount of
the exclusion under subparagraph (A)
and section 529(c)(3)(B).''.
(2) Conforming amendments.--
(A) Subsection (e) of section 25A is
amended to read as follows:
``(e) Election Not To Have Section Apply.--A taxpayer may
elect not to have this section apply with respect to the
qualified tuition and related expenses of an individual for any
taxable year.''.
(B) Section 135(d)(2)(A) is amended by
striking ``allowable'' and inserting
``allowed''.
(C) Section 530(d)(2)(D) is amended--
(i) by striking ``or credit'' and
inserting ``, credit, or exclusion'',
and
(ii) by striking ``credit or
deduction'' in the heading and
inserting ``deduction, credit, or
exclusion''.
(D) Section 4973(e)(1) is amended by adding
``and'' at the end of subparagraph (A), by
striking subparagraph (B), and by redesignating
subparagraph (C) as subparagraph (B).
(h) Effective Date.--The amendments made by this section
shall apply to taxable years beginning after December 31, 2001.
SEC. 402. MODIFICATIONS TO QUALIFIED TUITION PROGRAMS.
(a) Eligible Educational Institutions Permitted To Maintain
Qualified Tuition Programs.--
(1) In general.--Section 529(b)(1) (defining
qualified State tuition program) is amended--
(A) by inserting ``or by 1 or more eligible
educational institutions'' after ``maintained
by a State or agency or instrumentality thereof
'' in the matter preceding subparagraph (A),
and
(B) by adding at the end the following new
flush sentence:
``Except to the extent provided in regulations, a
program established and maintained by 1 or more
eligible educational institutions shall not be treated
as a qualified tuition program unless such program
provides that amounts are held in a qualified trust and
such program has received a ruling or determination
that such program meets the applicable requirements for
a qualified tuition program. For purposes of the
preceding sentence, the term `qualified trust' means a
trust which is created or organized in the United
States for the exclusive benefit of designated
beneficiaries and with respect to which the
requirements of paragraphs (2) and (5) of section
408(a) are met.''.
(2) Private qualified tuition programs limited to
benefit plans.--Clause (ii) of section 529(b)(1)(A) is
amended by inserting ``in the case of a program
established and maintained by a State or agency or
instrumentality thereof,'' before ``may make''.
(3) Additional tax on nonqualified withdrawals.--
Section 529 is amended--
(A) by striking paragraph (3) of subsection
(b) and by redesignating paragraphs (4), (5),
(6), and (7) of such subsection as paragraphs
(3), (4), (5), and (6), respectively, and
(B) by adding at the end of subsection (c)
the following new paragraph:
``(6) Additional tax.--The tax imposed by section
530(d)(4) shall apply to any payment or distribution
from a qualified tuition program in the same manner as
such tax applies to a payment or distribution from an
education individual retirement account. This paragraph
shall not apply to any payment or distribution in any
taxable year beginning before January 1, 2004, which is
includible in gross income but used for qualified
higher education expenses of the designated
beneficiary.''.
(4) Conforming amendments.--
(A) Sections 72(e)(9), 135(c)(2)(C),
135(d)(1)(D), 529, 530(b)(2)(B), 4973(e), and
6693(a)(2)(C) are amended by striking
``qualified State tuition'' each place it
appears and inserting ``qualified tuition''.
(B) The headings for sections 72(e)(9) and
135(c)(2)(C) are amended by striking
``qualified state tuition'' each place it
appears and inserting ``qualified tuition''.
(C) The headings for sections 529(b) and
530(b)(2)(B) are amended by striking
``Qualified state tuition'' each place it
appears and inserting ``Qualified tuition''.
(D) The heading for section 529 is amended
by striking ``STATE''.
(E) The item relating to section 529 in the
table of sections for part VIII of subchapter F
of chapter 1 is amended by striking ``State''.
(b) Exclusion From Gross Income of Education Distributions
From Qualified Tuition Programs.--
(1) In general.--Section 529(c)(3)(B) (relating to
distributions) is amended to read as follows:
``(B) Distributions for qualified higher
education expenses.--For purposes of this
paragraph--
``(i) In-kind distributions.--No
amount shall be includible in gross
income under subparagraph (A) by reason
of a distribution which consists of
providing a benefit to the distributee
which, if paid for by the distributee,
would constitute payment of a qualified
higher education expense.
``(ii) Cash distributions.--In the
case of distributions not described in
clause (i), if--
``(I) such distributions do
not exceed the qualified higher
education expenses (reduced by
expenses described in clause
(i)), no amount shall be
includible in gross income, and
``(II) in any other case,
the amount otherwise includible
in gross income shall be
reduced by an amount which
bears the same ratio to such
amount as such expenses bear to
such distributions.
``(iii) Exception for institutional
programs.--In the case of any taxable
year beginning before January 1, 2004,
clauses (i) and (ii) shall not apply
with respect to any distribution during
such taxable year under a qualified
tuition program established and
maintained by 1 or more eligible
educational institutions.
``(iv) Treatment as
distributions.--Any benefit furnished
to a designated beneficiary under a
qualified tuition program shall be
treated as a distribution to the
beneficiary for purposes of this
paragraph.
``(v) Coordination with hope and
lifetime learning credits.--The total
amount of qualified higher education
expenses with respect to an individual
for the taxable year shall be reduced--
``(I) as provided in
section 25A(g)(2), and
``(II) by the amount of
such expenses which were taken
into account in determining the
credit allowed to the taxpayer
or any other person under
section 25A.
``(vi) Coordination with education
individual retirement accounts.--If,
with respect to an individual for any
taxable year--
``(I) the aggregate
distributions to which clauses
(i) and (ii) and section
530(d)(2)(A) apply, exceed
``(II) the total amount of
qualified higher education
expenses otherwise taken into
account under clauses (i) and
(ii) (after the application of
clause (v)) for such year,
the taxpayer shall allocate such
expenses among such distributions for
purposes of determining the amount of
the exclusion under clauses (i) and
(ii) and section 530(d)(2)(A).''.
(2) Conforming amendments.--
(A) Section 135(d)(2)(B) is amended by
striking ``the exclusion under section
530(d)(2)'' and inserting ``the exclusions
under sections 529(c)(3)(B) and 530(d)(2)''.
(B) Section 221(e)(2)(A) is amended by
inserting ``529,'' after ``135,''.
(c) Rollover to Different Program for Benefit of Same
Designated Beneficiary.--Section 529(c)(3)(C) (relating to
change in beneficiaries) is amended--
(1) by striking ``transferred to the credit'' in
clause (i) and inserting ``transferred--
``(I) to another qualified
tuition program for the benefit
of the designated beneficiary,
or
``(II) to the credit'',
(2) by adding at the end the following new clause:
``(iii) Limitation on certain
rollovers.--Clause (i)(I) shall not
apply to any transfer if such transfer
occurs within 12 months from the date
of a previous transfer to any qualified
tuition program for the benefit of the
designated beneficiary.'', and
(3) by inserting ``or programs'' after
``beneficiaries'' in the heading.
(d) Member of Family Includes First Cousin.--Section
529(e)(2) (defining member of family) is amended by striking
``and'' at the end of subparagraph (B), by striking the period
at the end of subparagraph (C) and by inserting ``; and'', and
by adding at the end the following new subparagraph:
``(D) any first cousin of such
beneficiary.''.
(e) Adjustment of Limitation on Room and Board
Distributions.--Section 529(e)(3)(B)(ii) is amended to read as
follows:
``(ii) Limitation.--The amount
treated as qualified higher education
expenses by reason of clause (i) shall
not exceed--
``(I) the allowance
(applicable to the student) for
room and board included in the
cost of attendance (as defined
in section 472 of the Higher
Education Act of 1965 (20
U.S.C. 1087ll), as in effect on
the date of the enactment of
the Economic Growth and Tax
Relief Reconciliation Act of
2001) as determined by the
eligible educational
institution for such period, or
``(II) if greater, the
actual invoice amount the
student residing in housing
owned or operated by the
eligible educational
institution is charged by such
institution for room and board
costs for such period.''.
(f) Special Needs Services.--Subparagraph (A) of section
529(e)(3) (defining qualified higher education expenses) is
amended to read as follows:
``(A) In general.--The term `qualified
higher education expenses' means--
``(i) tuition, fees, books,
supplies, and equipment required for
the enrollment or attendance of a
designated beneficiary at an eligible
educational institution; and
``(ii) expenses for special needs
services in the case of a special needs
beneficiary which are incurred in
connection with such enrollment or
attendance.''.
(g) Technical Amendments.--Section 529(c)(3)(D) is
amended--
(1) by inserting ``except to the extent provided by
the Secretary,'' before ``all distributions'' in clause
(ii), and
(2) by inserting ``except to the extent provided by
the Secretary,'' before ``the value'' in clause (iii).
(h) Effective Date.--The amendments made by this section
shall apply to taxable years beginning after December 31, 2001.
Subtitle B--Educational Assistance
SEC. 411. EXTENSION OF EXCLUSION FOR EMPLOYER-PROVIDED EDUCATIONAL
ASSISTANCE.
(a) In General.--Section 127 (relating to exclusion for
educational assistance programs) is amended by striking
subsection (d) and by redesignating subsection (e) as
subsection (d).
(b) Repeal of Limitation on Graduate Education.--The last
sentence of section 127(c)(1) is amended by striking ``, and
such term also does not include any payment for, or the
provision of any benefits with respect to, any graduate level
course of a kind normally taken by an individual pursuing a
program leading to a law, business, medical, or other advanced
academic or professional degree''.
(c) Conforming Amendment.--Section 51A(b)(5)(B)(iii) is
amended by striking ``or would be so excludable but for section
127(d)''.
(d) Effective Date.--The amendments made by this section
shall apply with respect to expenses relating to courses
beginning after December 31, 2001.
SEC. 412. ELIMINATION OF 60-MONTH LIMIT AND INCREASE IN INCOME
LIMITATION ON STUDENT LOAN INTEREST DEDUCTION.
(a) Elimination of 60-Month Limit.--
(1) In general.--Section 221 (relating to interest
on education loans), as amended by section
402(b)(2)(B), is amended by striking subsection (d) and
by redesignating subsections (e), (f), and (g) as
subsections (d), (e), and (f), respectively.
(2) Conforming amendment.--Section 6050S(e) is
amended by striking ``section 221(e)(1)'' and inserting
``section 221(d)(1)''.
(3) Effective date.--The amendments made by this
subsection shall apply with respect to any loan
interest paid after December 31, 2001, in taxable years
ending after such date.
(b) Increase in Income Limitation.--
(1) In general.--Section 221(b)(2)(B) (relating to
amount of reduction) is amended by striking clauses (i)
and (ii) and inserting the following:
``(i) the excess of--
``(I) the taxpayer's
modified adjusted gross income
for such taxable year, over
``(II) $50,000 ($100,000 in
the case of a joint return),
bears to
``(ii) $15,000 ($30,000 in the case
of a joint return).''.
(2) Conforming amendment.--Section 221(g)(1) is
amended by striking ``$40,000 and $60,000 amounts'' and
inserting ``$50,000 and $100,000 amounts''.
(3) Effective date.--The amendments made by this
subsection shall apply to taxable years ending after
December 31, 2001.
SEC. 413. EXCLUSION OF CERTAIN AMOUNTS RECEIVED UNDER THE NATIONAL
HEALTH SERVICE CORPS SCHOLARSHIP PROGRAM AND THE F.
EDWARD HEBERT ARMED FORCES HEALTH PROFESSIONS
SCHOLARSHIP AND FINANCIAL ASSISTANCE PROGRAM.
(a) In General.--Section 117(c) (relating to the exclusion
from gross income amounts received as a qualified scholarship)
is amended--
(1) by striking ``Subsections (a)'' and inserting
the following:
``(1) In general.--Except as provided in paragraph
(2), subsections (a)'', and
(2) by adding at the end the following new
paragraph:
``(2) Exceptions.--Paragraph (1) shall not apply to
any amount received by an individual under--
``(A) the National Health Service Corps
Scholarship Program under section 338A(g)(1)(A)
of the Public Health Service Act, or
``(B) the Armed Forces Health Professions
Scholarship and Financial Assistance program
under subchapter I of chapter 105 of title 10,
United States Code.''.
(b) Effective Date.--The amendments made by subsection (a)
shall apply to amounts received in taxable years beginning
after December 31, 2001.
Subtitle C--Liberalization of Tax-Exempt Financing Rules for Public
School Construction
SEC. 421. ADDITIONAL INCREASE IN ARBITRAGE REBATE EXCEPTION FOR
GOVERNMENTAL BONDS USED TO FINANCE EDUCATIONAL
FACILITIES.
(a) In General.--Section 148(f)(4)(D)(vii) (relating to
increase in exception for bonds financing public school capital
expenditures) is amended by striking ``$5,000,000'' the second
place it appears and inserting ``$10,000,000''.
(b) Effective Date.--The amendment made by subsection (a)
shall apply to obligations issued in calendar years beginning
after December 31, 2001.
SEC. 422. TREATMENT OF QUALIFIED PUBLIC EDUCATIONAL FACILITY BONDS AS
EXEMPT FACILITY BONDS.
(a) Treatment as Exempt Facility Bond.--Subsection (a) of
section 142 (relating to exempt facility bond) is amended by
striking ``or'' at the end of paragraph (11), by striking the
period at the end of paragraph (12) and inserting ``, or'', and
by adding at the end the following new paragraph:
``(13) qualified public educational facilities.''.
(b) Qualified Public Educational Facilities.--Section 142
(relating to exempt facility bond) is amended by adding at the
end the following new subsection:
``(k) Qualified Public Educational Facilities.--
``(1) In general.--For purposes of subsection
(a)(13), the term `qualified public educational
facility' means any school facility which is--
``(A) part of a public elementary school or
a public secondary school, and
``(B) owned by a private, for-profit
corporation pursuant to a public-private
partnership agreement with a State or local
educational agency described in paragraph (2).
``(2) Public-private partnership agreement
described.--A public-private partnership agreement is
described in this paragraph if it is an agreement--
``(A) under which the corporation agrees--
``(i) to do 1 or more of the
following: construct, rehabilitate,
refurbish, or equip a school facility,
and
``(ii) at the end of the term of
the agreement, to transfer the school
facility to such agency for no
additional consideration, and
``(B) the term of which does not exceed the
term of the issue to be used to provide the
school facility.
``(3) School facility.--For purposes of this
subsection, the term `school facility' means--
``(A) any school building,
``(B) any functionally related and
subordinate facility and land with respect to
such building, including any stadium or other
facility primarily used for school events, and
``(C) any property, to which section 168
applies (or would apply but for section 179),
for use in a facility described in subparagraph
(A) or (B).
``(4) Public schools.--For purposes of this
subsection, the terms `elementary school' and
`secondary school' have the meanings given such terms
by section 14101 of the Elementary and Secondary
Education Act of 1965 (20 U.S.C. 8801), as in effect on
the date of the enactment of this subsection.
``(5) Annual aggregate face amount of tax-exempt
financing.--
``(A) In general.--An issue shall not be
treated as an issue described in subsection
(a)(13) if the aggregate face amount of bonds
issued by the State pursuant thereto (when
added to the aggregate face amount of bonds
previously so issued during the calendar year)
exceeds an amount equal to the greater of--
``(i) $10 multiplied by the State
population, or
``(ii) $5,000,000.
``(B) Allocation rules.--
``(i) In general.--Except as
otherwise provided in this
subparagraph, the State may allocate
the amount described in subparagraph
(A) for any calendar year in such
manner as the State determines
appropriate.
``(ii) Rules for carryforward of
unused limitation.--A State may elect
to carry forward an unused limitation
for any calendar year for 3 calendar
years following the calendar year in
which the unused limitation arose under
rules similar to the rules of section
146(f), except that the only purpose
for which the carryforward may be
elected is the issuance of exempt
facility bonds described in subsection
(a)(13).''.
(c) Exemption From General State Volume Caps.--Paragraph
(3) of section 146(g) (relating to exception for certain bonds)
is amended--
(1) by striking ``or (12)'' and inserting ``(12),
or (13)'', and
(2) by striking ``and environmental enhancements of
hydroelectric generating facilities'' and inserting
``environmental enhancements of hydroelectric
generating facilities, and qualified public educational
facilities''.
(d) Exemption From Limitation on Use for Land
Acquisition.--Section 147(h) (relating to certain rules not to
apply to mortgage revenue bonds, qualified student loan bonds,
and qualified 501(c)(3) bonds) is amended by adding at the end
the following new paragraph:
``(3) Exempt facility bonds for qualified public-
private schools.--Subsection (c) shall not apply to any
exempt facility bond issued as part of an issue
described in section 142(a)(13) (relating to qualified
public educational facilities).''.
(e) Conforming Amendment.--The heading for section 147(h)
is amended by striking ``Mortgage Revenue Bonds, Qualified
Student Loan Bonds, and Qualified 501(c)(3) Bonds'' and
inserting ``Certain Bonds''.
(f) Effective Date.--The amendments made by this section
shall apply to bonds issued after December 31, 2001.
Subtitle D--Other Provisions
SEC. 431. DEDUCTION FOR HIGHER EDUCATION EXPENSES.
(a) Deduction Allowed.--Part VII of subchapter B of chapter
1 (relating to additional itemized deductions for individuals)
is amended by redesignating section 222 as section 223 and by
inserting after section 221 the following:
``SEC. 222. QUALIFIED TUITION AND RELATED EXPENSES.
``(a) Allowance of Deduction.--In the case of an
individual, there shall be allowed as a deduction an amount
equal to the qualified tuition and related expenses paid by the
taxpayer during the taxable year.
``(b) Dollar limitations.--
``(1) In general.--The amount allowed as a
deduction under subsection (a) with respect to the
taxpayer for any taxable year shall not exceed the
applicable dollar limit.
``(2) Applicable dollar limit.--
``(A) 2002 and 2003.--In the case of a
taxable year beginning in 2002 or 2003, the
applicable dollar limit shall be equal to--
``(i) in the case of a taxpayer
whose adjusted gross income for the
taxable year does not exceed $65,000
($130,000 in the case of a joint
return), $3,000, and--
``(ii) in the case of any other
taxpayer, zero.
``(B) 2004 and 2005.--In the case of a
taxable year beginning in 2004 or 2005, the
applicable dollar amount shall be equal to--
``(i) in the case of a taxpayer
whose adjusted gross income for the
taxable year does not exceed $65,000
($130,000 in the case of a joint
return), $4,000,
``(ii) in the case of a taxpayer
not described in clause (i) whose
adjusted gross income for the taxable
year does not exceed $80,000 ($160,000
in the case of a joint return), $2,000,
and
``(iii) in the case of any other
taxpayer, zero.
``(C) Adjusted gross income.--For purposes
of this paragraph, adjusted gross income shall
be determined--
``(i) without regard to this
section and sections 911, 931, and 933,
and
``(ii) after application of
sections 86, 135, 137, 219, 221, and
469.
``(c) No Double Benefit.--
``(1) In general.--No deduction shall be allowed
under subsection (a) for any expense for which a
deduction is allowed to the taxpayer under any other
provision of this chapter.
``(2) Coordination with other education
incentives.--
``(A) Denial of deduction if credit
elected.--No deduction shall be allowed under
subsection (a) for a taxable year with respect
to the qualified tuition and related expenses
with respect to an individual if the taxpayer
or any other person elects to have section 25A
apply with respect to such individual for such
year.
``(B) Coordination with exclusions.--The
total amount of qualified tuition and related
expenses shall be reduced by the amount of such
expenses taken into account in determining any
amount excluded under section 135, 529(c)(1),
or 530(d)(2). For purposes of the preceding
sentence, the amount taken into account in
determining the amount excluded under section
529(c)(1) shall not include that portion of the
distribution which represents a return of any
contributions to the plan.
``(3) Dependents.--No deduction shall be allowed
under subsection (a) to any individual with respect to
whom a deduction under section 151 is allowable to
another taxpayer for a taxable year beginning in the
calendar year in which such individual's taxable year
begins.
``(d) Definitions and Special Rules.--For purposes of this
section--
``(1) Qualified tuition and related expenses.--The
term `qualified tuition and related expenses' has the
meaning given such term by section 25A(f). Such
expenses shall be reduced in the same manner as under
section 25A(g)(2).
``(2) Identification requirement.--No deduction
shall be allowed under subsection (a) to a taxpayer
with respect to the qualified tuition and related
expenses of an individual unless the taxpayer includes
the name and taxpayer identification number of the
individual on the return of tax for the taxable year.
``(3) Limitation on taxable year of deduction.--
``(A) In general.--A deduction shall be
allowed under subsection (a) for qualified
tuition and related expenses for any taxable
year only to the extent such expenses are in
connection with enrollment at an institution of
higher education during the taxable year.
``(B) Certain prepayments allowed.--
Subparagraph (A) shall not apply to qualified
tuition and related expenses paid during a
taxable year if such expenses are in connection
with an academic term beginning during such
taxable year or during the first 3 months of
the next taxable year.
``(4) No deduction for married individuals filing
separate returns.--If the taxpayer is a married
individual (within the meaning of section 7703), this
section shall apply only if the taxpayer and the
taxpayer's spouse file a joint return for the taxable
year.
``(5) Nonresident aliens.--If the taxpayer is a
nonresident alien individual for any portion of the
taxable year, this section shall apply only if such
individual is treated as a resident alien of the United
States for purposes of this chapter by reason of an
election under subsection (g) or (h) of section 6013.
``(6) Regulations.--The Secretary may prescribe
such regulations as may be necessary or appropriate to
carry out this section, including regulations requiring
recordkeeping and information reporting.
``(e) Termination.--This section shall not apply to taxable
years beginning after December 31, 2005.''.
(b) Deduction Allowed in Computing Adjusted Gross Income.--
Section 62(a) is amended by inserting after paragraph (17) the
following:
``(18) Higher education expenses.--The deduction
allowed by section 222.''.
(c) Conforming Amendments.--
(1) Sections 86(b)(2), 135(c)(4), 137(b)(3), and
219(g)(3) are each amended by inserting ``222,'' after
``221,''.
(2) Section 221(b)(2)(C) is amended by inserting
``222,'' before ``911''.
(3) Section 469(i)(3)(F) is amended by striking
``and 221'' and inserting ``, 221, and 222''.
(4) The table of sections for part VII of
subchapter B of chapter 1 is amended by striking the
item relating to section 222 and inserting the
following:
``Sec. 222. Qualified tuition and related expenses.
``Sec. 223. Cross reference.''.
(d) Effective Date.--The amendments made by this section
shall apply to payments made in taxable years beginning after
December 31, 2001.
TITLE V--ESTATE, GIFT, AND GENERATION-SKIPPING TRANSFER TAX PROVISIONS
Subtitle A--Repeal of Estate and Generation-Skipping Transfer Taxes
SEC. 501. REPEAL OF ESTATE AND GENERATION-SKIPPING TRANSFER TAXES.
(a) Estate Tax Repeal.--Subchapter C of chapter 11 of
subtitle B (relating to miscellaneous) is amended by adding at
the end the following new section:
``SEC. 2210. TERMINATION.
``(a) In General.--Except as provided in subsection (b),
this chapter shall not apply to the estates of decedents dying
after December 31, 2009.
``(b) Certain Distributions From Qualified Domestic
Trusts.--In applying section 2056A with respect to the
surviving spouse of a decedent dying before January 1, 2010--
``(1) section 2056A(b)(1)(A) shall not apply to
distributions made after December 31, 2020, and
``(2) section 2056A(b)(1)(B) shall not apply after
December 31, 2009.''.
(b) Generation-Skipping Transfer Tax Repeal.--Subchapter G
of chapter 13 of subtitle B (relating to administration) is
amended by adding at the end the following new section:
``SEC. 2664. TERMINATION.
``This chapter shall not apply to generation-skipping
transfers after December 31, 2009.''.
(c) Conforming Amendments.--
(1) The table of sections for subchapter C of
chapter 11 is amended by adding at the end the
following new item:
``Sec. 2210. Termination.''.
(2) The table of sections for subchapter G of
chapter 13 is amended by adding at the end the
following new item:
``Sec. 2664. Termination.''.
(d) Effective Date.--The amendments made by this section
shall apply to the estates of decedents dying, and generation-
skipping transfers, after December 31, 2009.
Subtitle B--Reductions of Estate and Gift Tax Rates
SEC. 511. ADDITIONAL REDUCTIONS OF ESTATE AND GIFT TAX RATES.
(a) Maximum Rate of Tax Reduced to 50 Percent.--The table
contained in section 2001(c)(1) is amended by striking the two
highest brackets and inserting the following:
``Over $2,500,000.$1,025,800, plus 50% of the excess over ............
$2,500,000.''.
(b) Repeal of Phaseout of Graduated Rates.--Subsection (c)
of section 2001 is amended by striking paragraph (2).
(c) Additional Reductions of Maximum Rate of Tax.--
Subsection (c) of section 2001, as amended by subsection (b),
is amended by adding at the end the following new paragraph:
``(2) Phasedown of maximum rate of tax.--
``(A) In general.--In the case of estates
of decedents dying, and gifts made, in calendar
years after 2002 and before 2010, the tentative
tax under this subsection shall be determined
by using a table prescribed by the Secretary
(in lieu of using the table contained in
paragraph (1)) which is the same as such table;
except that--
``(i) the maximum rate of tax for
any calendar year shall be determined
in the table under subparagraph (B),
and
``(ii) the brackets and the amounts
setting forth the tax shall be adjusted
to the extentnecessary to reflect the
adjustments under subparagraph (A).
``(B) Maximum rate.--
``In calendar year: The maximum rate is:
2003............................................ 49 percent
2004............................................ 48 percent
2005............................................ 47 percent
2006............................................ 46 percent
2007, 2008, and 2009............................ 45 percent.''.
(d) Maximum Gift Tax Rate Reduced to Maximum Individual
Rate After 2009.--Subsection (a) of section 2502 (relating to
rate of tax) is amended to read as follows:
``(a) Computation of Tax.--
``(1) In general.--The tax imposed by section 2501
for each calendar year shall be an amount equal to the
excess of--
``(A) a tentative tax, computed under
paragraph (2), on the aggregate sum of the
taxable gifts for such calendar year and for
each of the preceding calendar periods, over
``(B) a tentative tax, computed under
paragraph (2), on the aggregate sum of the
taxable gifts for each of the preceding
calendar periods.
``(2) Rate schedule.--
``If the amount with respect to which
the tentative tax to be computed is: The tentative tax is:
Not over $10,000..18% of such amount..................................
Over $10,000 but n$1,800, plus 20% of the excess over $10,000.........
Over $20,000 but n$3,800, plus 22% of the excess over $20,000.........
Over $40,000 but n$8,200, plus 24% of the excess over $40,000.........
Over $60,000 but n$13,000, plus 26% of the excess over $60,000........
Over $80,000 but n$18,200, plus 28% of the excess over $80,000........
Over $100,000 but $23,800, plus 30% of the excess over $100,000.......
Over $150,000 but $38,800, plus 32% of the excess over $150,000.......
Over $250,000 but $70,800, plus 34% of the excess over $250,000.......
Over $500,000.....$155,800, plus 35% of the excess over $500,000.''...
(e) Treatment of Certain Transfers in Trust.--Section 2511
(relating to transfers in general) is amended by adding at the
end the following new subsection:
``(c) Treatment of Certain Transfers in Trust.--
Notwithstanding any other provision of this section and except
as provided in regulations, a transfer in trust shall be
treated as a taxable gift under section 2503, unless the trust
is treated as wholly owned by the donor or the donor's spouse
under subpart E of part I of subchapter J of chapter 1.''.
(f) Effective Dates.--
(1) Subsections (a) and (b).--The amendments made
by subsections (a) and (b) shall apply to estates of
decedents dying, and gifts made, after December 31,
2001.
(2) Subsection (c).--The amendment made by
subsection (c) shall apply to estates of decedents
dying, and gifts made, after December 31, 2002.
(3) Subsections (d) and (e).--The amendments made
by subsections (d) and (e) shall apply to gifts made
after December 31, 2009.
Subtitle C--Increase in Exemption Amounts
SEC. 521. INCREASE IN EXEMPTION EQUIVALENT OF UNIFIED CREDIT, LIFETIME
GIFTS EXEMPTION, AND GST EXEMPTION AMOUNTS.
(a) In General.--Subsection (c) of section 2010 (relating
to applicable credit amount) is amended by striking the table
and inserting the following new table:
``In the case of estates of decedents
dying during: The applicable exclusion amount is:
2002 and 2003............................... $1,000,000
2004 and 2005............................... $1,500,000
2006, 2007, and 2008........................ $2,000,000
2009........................................ $3,500,000.''.
(b) Lifetime Gift Exemption Increased to $1,000,000.--
(1) For periods before estate tax repeal.--
Paragraph (1) of section 2505(a) (relating to unified
credit against gift tax) is amended by inserting
``(determined as if the applicable exclusion amount
were $1,000,000)'' after ``calendar year''.
(2) For periods after estate tax repeal.--Paragraph
(1) of section 2505(a) (relating to unified credit
against gift tax), as amended by paragraph (1), is
amended to read as follows:
``(1) the amount of the tentative tax which would
be determined under the rate schedule set forth in
section 2502(a)(2) if the amount with respect to which
such tentative tax is to be computed were $1,000,000,
reduced by''.
(c) GST Exemption.--
(1) In general.--Subsection (a) of 2631 (relating
to GST exemption) is amended by striking ``of
$1,000,000'' and inserting ``amount''.
(2) Exemption amount.--Subsection (c) of section
2631 is amended to read as follows:
``(c) GST Exemption Amount.--For purposes of subsection
(a), the GST exemption amount for any calendar year shall be
equal to the applicable exclusion amount under section 2010(c)
for such calendar year.''.
(d) Repeal of Special Benefit for Family-Owned Business
Interests.--Section 2057 (relating to family-owned business
interests) is amended by adding at the end the following new
subsection:
``(j) Termination.--This section shall not apply to the
estates of decedents dying after December 31, 2003.''.
(e) Effective Dates.--
(1) In general.--Except as provided in paragraphs
(2) and (3), the amendments made by this section shall
apply to estates of decedents dying, and gifts made,
after December 31, 2001.
(2) Subsection (b)(2).--The amendments made by
subsection (b)(2) shall apply to gifts made after
December 31, 2009.
(3) Subsections (c) and (d).--The amendments made
by subsections (c) and (d) shall apply to estates of
decedents dying, and generation-skipping transfers,
after December 31, 2003.
Subtitle D--Credit for State Death Taxes
SEC. 531. REDUCTION OF CREDIT FOR STATE DEATH TAXES.
(a) In General.--Section 2011(b) (relating to amount of
credit) is amended--
(1) by striking ``Credit.--The credit allowed'' and
inserting ``Credit.--
``(1) In general.--Except as provided in paragraph
(2), the credit allowed'',
(2) by striking ``For purposes'' and inserting the
following:
``(3) Adjusted taxable estate.--For purposes'', and
(3) by inserting after paragraph (1) the following
new paragraph:
``(2) Reduction of maximum credit.--
``(A) In general.--In the case of estates
of decedents dying after December 31, 2001, the
credit allowed by this section shall not exceed
the applicable percentage of the credit
otherwise determined under paragraph (1).
``(B) Applicable percentage.--
``In the case of estates of decedents
dying during: The applicable percentage is:
2002........................................ 75 percent
2003........................................ 50 percent
2004........................................ 25 percent.''.
(b) Effective Date.--The amendments made by this subsection
shall apply to estates of decedents dying after December 31,
2001.
SEC. 532. CREDIT FOR STATE DEATH TAXES REPLACED WITH DEDUCTION FOR SUCH
TAXES.
(a) Repeal of Credit.--Section 2011 (relating to credit for
State death taxes) is amended by adding at the end the
following new subsection:
``(g) Termination.--This section shall not apply to the
estates of decedents dying after December 31, 2004.''.
(b) Deduction for State Death Taxes.--Part IV of subchapter
A of chapter 11 is amended by adding at the end the following
new section:
``SEC. 2058. STATE DEATH TAXES.
``(a) Allowance of Deduction.--For purposes of the tax
imposed by section 2001, the value of the taxable estate shall
be determined by deducting from the value of the gross estate
the amount of any estate, inheritance, legacy, or succession
taxes actually paid to any State or the District of Columbia,
in respect of any property included in the gross estate (not
including any such taxes paid with respect to the estate of a
person other than the decedent).
``(b) Period of Limitations.--The deduction allowed by this
section shall include only such taxes as were actually paid and
deduction therefor claimed before the later of--
``(1) 4 years after the filing of the return
required by section 6018, or
``(2) if--
``(A) a petition for redetermination of a
deficiency has been filed with the Tax Court
within the time prescribed in section 6213(a),
the expiration of 60 days after the decision of
the Tax Court becomes final,
``(B) an extension of time has been granted
under section 6161 or 6166 for payment of the
tax shown on the return, or of a deficiency,
the date of the expiration of the period of the
extension, or
``(C) a claim for refund or credit of an
overpayment of tax imposed by this chapter has
been filed within the time prescribed in
section 6511, the latest of the expiration of--
``(i) 60 days from the date of
mailing by certified mail or registered
mail by the Secretary to the taxpayer
of a notice of the disallowance of any
part of such claim,
``(ii) 60 days after a decision by
any court of competent jurisdiction
becomes final with respect to a timely
suit instituted upon such claim, or
``(iii) 2 years after a notice of
the waiver of disallowance is filed
under section 6532(a)(3).
Notwithstanding sections 6511 and 6512, refund based on the
deduction may be made if the claim for refund is filed within
the period provided in the preceding sentence. Any such refund
shall be made without interest.''.
(c) Conforming Amendments.--
(1) Subsection (a) of section 2012 is amended by
striking ``the credit for State death taxes provided by
section 2011 and''.
(2) Subparagraph (A) of section 2013(c)(1) is
amended by striking ``2011,''.
(3) Paragraph (2) of section 2014(b) is amended by
striking ``, 2011,''.
(4) Sections 2015 and 2016 are each amended by
striking ``2011 or''.
(5) Subsection (d) of section 2053 is amended to
read as follows:
``(d) Certain Foreign Death Taxes.--
``(1) In general.--Notwithstanding the provisions
of subsection (c)(1)(B), for purposes of the tax
imposed by section 2001, the value of the taxable
estate may be determined, if the executor so elects
before the expiration of the period of limitation for
assessment provided in section 6501, by deducting from
the value of the gross estate the amount (as determined
in accordance with regulations prescribed by the
Secretary) of any estate, succession, legacy, or
inheritance tax imposed by and actually paid to any
foreign country, in respect of any property situated
within such foreign country and included in the gross
estate of a citizen or resident of the United States,
upon a transfer by the decedent for public, charitable,
or religious uses described in section 2055. The
determination under this paragraph of the country
within which property is situated shall be made in
accordance with the rules applicable under subchapter B
(sec. 2101 and following) in determining whether
property is situated within or without the United
States. Any election under this paragraph shall be
exercised in accordance with regulations prescribed by
the Secretary.
``(2) Condition for allowance of deduction.--No
deduction shall be allowed under paragraph (1) for a
foreign death tax specified therein unless the decrease
in the tax imposed by section 2001 which results from
the deduction provided in paragraph (1) will inure
solely for the benefit of the public, charitable, or
religious transferees described in section 2055 or
section 2106(a)(2). In any case where the tax imposed
by section 2001 is equitably apportioned among all the
transferees of property included in the gross estate,
including those described in sections 2055 and
2106(a)(2) (taking into account any exemptions,
credits, or deductions allowed by this chapter), in
determining such decrease, there shall be disregarded
any decrease in the Federal estate tax which any
transferees other than those described in sections 2055
and 2106(a)(2) are required to pay.
``(3) Effect on credit for foreign death taxes of
deduction under this subsection.--
``(A) Election.--An election under this
subsection shall be deemed a waiver of the
right to claim a credit, against the Federal
estate tax, under a death tax convention with
any foreign country for any tax or portion
thereof in respect of which a deduction is
taken under this subsection.
``(B) Cross reference.--
``See section 2014(f) for the effect of a deduction taken
under this paragraph on the credit for foreign death taxes.''.
(6) Subparagraph (A) of section 2056A(b)(10) is
amended--
(A) by striking ``2011,'', and
(B) by inserting ``2058,'' after ``2056,''.
(7)(A) Subsection (a) of section 2102 is amended to
read as follows:
``(a) In General.--The tax imposed by section 2101 shall be
credited with the amounts determined in accordance with
sections 2012 and 2013 (relating to gift tax and tax on prior
transfers).''.
(B) Section 2102 is amended by striking subsection
(b) and by redesignating subsection (c) as subsection
(b).
(C) Section 2102(b)(5) (as redesignated by
subparagraph (B)) and section 2107(c)(3) are each
amended by striking ``2011 to 2013, inclusive,'' and
inserting ``2012 and 2013''.
(8) Subsection (a) of section 2106 is amended by
adding at the end the following new paragraph:
``(4) State death taxes.--The amount which bears
the same ratio to the State death taxes as the value of
the property, as determined for purposes of this
chapter, upon which State death taxes were paid and
which is included in the gross estate under section
2103 bears to the value of the total gross estate under
section 2103. For purposes of this paragraph, the term
`State death taxes' means the taxes described in
section 2011(a).''.
(9) Section 2201 is amended--
(A) by striking ``as defined in section
2011(d)'', and
(B) by adding at the end the following new
flush sentence:
``For purposes of this section, the additional estate tax is
the difference between the tax imposed by section 2001 or 2101
and the amount equal to 125 percent of the maximum credit
provided by section 2011(b), as in effect before its repeal by
the Economic Growth and Tax Relief Reconciliation Act of
2001.''.
(10) Section 2604 (relating to credit for certain
State taxes) is amended by adding at the end the
following new subsection:
``(c) Termination.--This section shall not apply to the
generation-skipping transfers after December 31, 2004.''.
(11) Paragraph (2) of section 6511(i) is amended by
striking ``2011(c), 2014(b),'' and inserting
``2014(b)''.
(12) Subsection (c) of section 6612 is amended by
striking ``section 2011(c) (relating to refunds due to
credit for State taxes),''.
(13) The table of sections for part II of
subchapter A of chapter 11 is amended by striking the
item relating to section 2011.
(14) The table of sections for part IV of
subchapter A of chapter 11 is amended by adding at the
end the following new item:
``Sec. 2058. State death taxes.''.
(15) The table of sections for subchapter A of
chapter 13 is amended by striking the item relating to
section 2604.
(d) Effective Date.--The amendments made by this section
shall apply to estates of decedents dying, and generation-
skipping transfers, after December 31, 2004.
Subtitle E--Carryover Basis at Death; Other Changes Taking Effect With
Repeal
SEC. 541. TERMINATION OF STEP-UP IN BASIS AT DEATH.
Section 1014 (relating to basis of property acquired from a
decedent) is amended by adding at the end the following new
subsection:
``(f) Termination.--This section shall not apply with
respect to decedents dying after December 31, 2009.''.
SEC. 542. TREATMENT OF PROPERTY ACQUIRED FROM A DECEDENT DYING AFTER
DECEMBER 31, 2009.
(a) General Rule.--Part II of subchapter O of chapter 1
(relating to basis rules of general application) is amended by
inserting after section 1021 the following new section:
``SEC. 1022. TREATMENT OF PROPERTY ACQUIRED FROM A DECEDENT DYING AFTER
DECEMBER 31, 2009.
``(a) In General.--Except as otherwise provided in this
section--
``(1) property acquired from a decedent dying after
December 31, 2009, shall be treated for purposes of
this subtitle as transferred by gift, and
``(2) the basis of the person acquiring property
from such a decedent shall be the lesser of--
``(A) the adjusted basis of the decedent,
or
``(B) the fair market value of the property
at the date of the decedent's death.
``(b) Basis Increase for Certain Property.--
``(1) In general.--In the case of property to which
this subsection applies, the basis of such property
under subsection (a) shall be increased by its basis
increase under this subsection.
``(2) Basis increase.--For purposes of this
subsection--
``(A) In general.--The basis increase under
this subsection for any property is the portion
of the aggregate basis increase which is
allocated to the property pursuant to this
section.
``(B) Aggregate basis increase.--In the
case of any estate, the aggregate basis
increase under this subsection is $1,300,000.
``(C) Limit increased by unused built-in
losses and loss carryovers.--The limitation
under subparagraph (B) shall be increased by--
``(i) the sum of the amount of any
capital loss carryover under section
1212(b), and the amount of any net
operating loss carryover under section
172, which would (but for the
decedent's death) be carried from the
decedent's last taxable year to a later
taxable year of the decedent, plus
``(ii) the sum of the amount of any
losses that would have been allowable
under section 165 if the property
acquired from the decedent had been
sold at fair market value immediately
before the decedent's death.
``(3) Decedent nonresidents who are not citizens of
the united states.--In the case of a decedent
nonresident not a citizen of the United States--
``(A) paragraph (2)(B) shall be applied by
substituting `$60,000' for `$1,300,000', and
``(B) paragraph (2)(C) shall not apply.
``(c) Additional Basis Increase for Property Acquired by
Surviving Spouse.--
``(1) In general.--In the case of property to which
this subsection applies and which is qualified spousal
property, the basis of such property under subsection
(a) (as increased under subsection (b)) shall be
increased by its spousal property basis increase.
``(2) Spousal property basis increase.--For
purposes of this subsection--
``(A) In general.--The spousal property
basis increase for property referred to in
paragraph (1) is the portion of the aggregate
spousal property basis increase which is
allocated to the property pursuant to this
section.
``(B) Aggregate spousal property basis
increase.--In the case of any estate, the
aggregate spousal property basis increase is
$3,000,000.
``(3) Qualified spousal property.--For purposes of
this subsection, the term `qualified spousal property'
means--
``(A) outright transfer property, and
``(B) qualified terminable interest
property.
``(4) Outright transfer property.--For purposes of
this subsection--
``(A) In general.--The term `outright
transfer property' means any interest in
property acquired from the decedent by the
decedent's surviving spouse.
``(B) Exception.--Subparagraph (A) shall
not apply where, on the lapse of time, on the
occurrence of an event or contingency, or on
the failure of an event or contingency to
occur, an interest passing to the surviving
spouse will terminate or fail--
``(i)(I) if an interest in such
property passes or has passed (for less
than an adequate and full consideration
in money or money's worth) from the
decedent to any person other than such
surviving spouse (or the estate of such
spouse), and
``(II) if by reason of such passing
such person (or his heirs or assigns)
may possess or enjoy any part of such
property after such termination or
failure of the interest so passing to
the surviving spouse, or
``(ii) if such interest is to be
acquired for the surviving spouse,
pursuant to directions of the decedent,
by his executor or by the trustee of a
trust.
For purposes of this subparagraph, an interest
shall not be considered as an interest which
will terminate or fail merely because it is the
ownership of a bond, note, or similar
contractual obligation, the discharge of which
would not have the effect of an annuity for
life or for a term.
``(C) Interest of spouse conditional on
survival for limited period.--For purposes of
this paragraph, an interest passing to the
surviving spouse shall not be considered as an
interest which will terminate or fail on the
death of such spouse if--
``(i) such death will cause a
termination or failure of such interest
only if it occurs within a period not
exceeding 6 months after the decedent's
death, or only if it occurs as a result
of a common disaster resulting in the
death of the decedent and the surviving
spouse, or only if it occurs in the
case of either such event, and
``(ii) such termination or failure
does not in fact occur.
``(5) Qualified terminable interest property.--For
purposes of this subsection--
``(A) In general.--The term `qualified
terminable interest property' means property--
``(i) which passes from the
decedent, and
``(ii) in which the surviving
spouse has a qualifying income interest
for life.
``(B) Qualifying income interest for
life.--The surviving spouse has a qualifying
income interest for life if--
``(i) the surviving spouse is
entitled to all the income from the
property, payable annually or at more
frequent intervals, or has a usufruct
interest for life in the property, and
``(ii) no person has a power to
appoint any part of the property to any
person other than the surviving spouse.
Clause (ii) shall not apply to a power
exercisable only at or after the death of the
surviving spouse. To the extent provided in
regulations, an annuity shall be treated in a
manner similar to an income interest in
property (regardless of whether the property
from which the annuity is payable can be
separately identified).
``(C) Property includes interest therein.--
The term `property' includes an interest in
property.
``(D) Specific portion treated as separate
property.--A specific portion of property shall
be treated as separate property. For purposes
of the preceding sentence, the term `specific
portion' only includes a portion determined on
a fractional or percentage basis.
``(d) Definitions and Special Rules for Application of
Subsections (b) and (c).--
``(1) Property to which subsections (b) and (c)
apply.--
``(A) In general.--The basis of property
acquired from a decedent may be increased under
subsection (b) or (c) only if the property was
owned by the decedent at the time of death.
``(B) Rules relating to ownership.--
``(i) Jointly held property.--In
the case of property which was owned by
the decedent and another person as
joint tenants with right of
survivorship or tenants by the
entirety--
``(I) if the only such
other person is the surviving
spouse, the decedent shall be
treated as the owner of only 50
percent of the property,
``(II) in any case (to
which subclause (I) does not
apply) in which the decedent
furnished consideration for the
acquisition of the property,
the decedent shall be treated
as the owner to the extent of
the portion of the property
which is proportionate to such
consideration, and
``(III) in any case (to
which subclause (I) does not
apply) in which the property
has been acquired by gift,
bequest, devise, or inheritance
by the decedent and any other
person as joint tenants with
right of survivorship and their
interests are not otherwise
specified or fixed by law, the
decedent shall be treated as
the owner to the extent of the
value of a fractional part to
be determined by dividing the
value of the property by the
number of joint tenants with
right of survivorship.
``(ii) Revocable trusts.--The
decedent shall be treated as owning
property transferred by the decedent
during life to a qualified revocable
trust (as defined in section
645(b)(1)).
``(iii) Powers of appointment.--The
decedent shall not be treated as owning
any property by reason of holding a
power of appointment with respect to
such property.
``(iv) Community property.--
Property which represents the surviving
spouse's one-half share of community
property held by the decedent and the
surviving spouse under the community
property laws of any State or
possession of the United States or any
foreign country shall be treated for
purposes of this section as owned by,
and acquired from, the decedent if at
least one-half of the whole of the
community interest in such property is
treated as owned by, and acquired from,
the decedent without regard to this
clause.
``(C) Property acquired by decedent by gift
within 3 years of death.--
``(i) In general.--Subsections (b)
and (c) shall not apply to property
acquired by the decedent by gift or by
inter vivos transfer for less than
adequate and full consideration in
money or money's worth during the 3-
year period ending on the date of the
decedent's death.
``(ii) Exception for certain gifts
from spouse.--Clause (i) shall not
apply to property acquired by the
decedent from the decedent's spouse
unless, during such 3-year period, such
spouse acquired the property in whole
or in part by gift or by inter vivos
transfer for less than adequate and
full consideration in money or money's
worth.
``(D) Stock of certain entities.--
Subsections (b) and (c) shall not apply to--
``(i) stock or securities of a
foreign personal holding company,
``(ii) stock of a DISC or former
DISC,
``(iii) stock of a foreign
investment company, or
``(iv) stock of a passive foreign
investment company unless such company
is a qualified electing fund (as
defined in section 1295) with respect
to the decedent.
``(2) Fair market value limitation.--The
adjustments under subsections (b) and (c) shall not
increase the basis of any interest in property acquired
from the decedent above its fair market value in the
hands of the decedent as of the date of the decedent's
death.
``(3) Allocation rules.--
``(A) In general.--The executor shall
allocate the adjustments under subsections (b)
and (c) on the return required by section 6018.
``(B) Changes in allocation.--Any
allocation made pursuant to subparagraph (A)
may be changed only as provided by the
Secretary.
``(4) Inflation adjustment of basis adjustment
amounts.--
``(A) In general.--In the case of decedents
dying in a calendar year after 2010, the
$1,300,000, $60,000, and $3,000,000 dollar
amounts in subsections (b) and (c)(2)(B) shall
each be increased by an amount equal to the
product of--
``(i) such dollar amount, and
``(ii) the cost-of-living
adjustment determined under section
1(f)(3) for such calendar year,
determined by substituting `2009' for
`1992' in subparagraph (B) thereof.
``(B) Rounding.--If any increase determined
under subparagraph (A) is not a multiple of--
``(i) $100,000 in the case of the
$1,300,000 amount,
``(ii) $5,000 in the case of the
$60,000 amount, and
``(iii) $250,000 in the case of the
$3,000,000 amount,
such increase shall be rounded to the next
lowest multiple thereof.
``(e) Property Acquired From the Decedent.--For purposes of
this section, the following property shall be considered to
have been acquired from the decedent:
``(1) Property acquired by bequest, devise, or
inheritance, or by the decedent's estate from the
decedent.
``(2) Property transferred by the decedent during
his lifetime--
``(A) to a qualified revocable trust (as
defined in section 645(b)(1)), or
``(B) to any other trust with respect to
which the decedent reserved the right to make
any change in the enjoyment thereof through the
exercise of a power to alter, amend, or
terminate the trust.
``(3) Any other property passing from the decedent
by reason of death to the extent that such property
passed without consideration.
``(f) Coordination With Section 691.--This section shall
not apply to property which constitutes a right to receive an
item of income in respect of a decedent under section 691.
``(g) Certain Liabilities Disregarded.--
``(1) In general.--In determining whether gain is
recognized on the acquisition of property--
``(A) from a decedent by a decedent's
estate or any beneficiary other than a tax-
exempt beneficiary, and
``(B) from the decedent's estate by any
beneficiary other than a tax-exempt
beneficiary,
and in determining the adjusted basis of such property,
liabilities in excess of basis shall be disregarded.
``(2) Tax-exempt beneficiary.--For purposes of
paragraph (1), the term `tax-exempt beneficiary'
means--
``(A) the United States, any State or
political subdivision thereof, any possession
of the United States, any Indian tribal
government (within the meaning of section
7871), or any agency or instrumentality of any
of the foregoing,
``(B) an organization (other than a
cooperative described in section 521) which is
exempt from tax imposed by chapter 1,
``(C) any foreign person or entity (within
the meaning of section 168(h)(2)), and
``(D) to the extent provided in
regulations, any person to whom property is
transferred for the principal purpose of tax
avoidance.
``(h) Regulations.--The Secretary shall prescribe such
regulations as may be necessary to carry out the purposes of
this section.''.
(b) Information Returns, Etc.--
(1) Large transfers at death.--So much of subpart C
of part II of subchapter A of chapter 61 as precedes
section 6019 is amended to read as follows:
``Subpart C--Returns Relating to Transfers During Life or at Death
``Sec. 6018. Returns relating to large transfers at death.
``Sec. 6019. Gift tax returns.
``SEC. 6018. RETURNS RELATING TO LARGE TRANSFERS AT DEATH.
``(a) In General.--If this section applies to property
acquired from a decedent, the executor of the estate of such
decedent shall make a return containing the information
specified in subsection (c) with respect to such property.
``(b) Property to Which Section Applies.--
``(1) Large transfers.--This section shall apply to
all property (other than cash) acquired from a decedent
if the fair market value of such property acquired from
the decedent exceeds the dollar amount applicable under
section 1022(b)(2)(B) (without regard to section
1022(b)(2)(C)).
``(2) Transfers of certain gifts received by
decedent within 3 years of death.--This section shall
apply to any appreciated property acquired from the
decedent if--
``(A) subsections (b) and (c) of section
1022 do not apply to such property by reason of
section 1022(d)(1)(C), and
``(B) such property was required to be
included on a return required to be filed under
section 6019.
``(3) Nonresidents not citizens of the united
states.--In the case of a decedent who is a nonresident
not a citizen of the United States, paragraphs (1) and
(2) shall be applied--
``(A) by taking into account only--
``(i) tangible property situated in
the United States, and
``(ii) other property acquired from
the decedent by a United States person,
and
``(B) by substituting the dollar amount
applicable under section 1022(b)(3) for the
dollar amount referred to in paragraph (1).
``(4) Returns by trustees or beneficiaries.--If the
executor is unable to make a complete return as to any
property acquired from or passing from the decedent,
the executor shall include in the return a description
of such property and the name of every person holding a
legal or beneficial interest therein. Upon notice from
the Secretary, such person shall in like manner make a
return as to such property.
``(c) Information Required To Be Furnished.--The
information specified in this subsection with respect to any
property acquired from the decedent is--
``(1) the name and TIN of the recipient of such
property,
``(2) an accurate description of such property,
``(3) the adjusted basis of such property in the
hands of the decedent and its fair market value at the
time of death,
``(4) the decedent's holding period for such
property,
``(5) sufficient information to determine whether
any gain on the sale of the property would be treated
as ordinary income,
``(6) the amount of basis increase allocated to the
property under subsection (b) or (c) of section 1022,
and
``(7) such other information as the Secretary may
by regulations prescribe.
``(d) Property Acquired From Decedent.--For purposes of
this section, section 1022 shall apply for purposes of
determining the property acquired from a decedent.
``(e) Statements To Be Furnished to Certain Persons.--Every
person required to make a return under subsection (a) shall
furnish to each person whose name is required to be set forth
in such return (other than the person required to make such
return) a written statement showing--
``(1) the name, address, and phone number of the
person required to make such return, and
``(2) the information specified in subsection (c)
with respect to property acquired from, or passing
from, the decedent to the person required to receive
such statement.
The written statement required under the preceding sentence
shall be furnished not later than 30 days after the date that
the return required by subsection (a) is filed.''.
(2) Gifts.--Section 6019 (relating to gift tax
returns) is amended--
(A) by striking ``Any individual'' and
inserting ``(a) In General.--Any individual'',
and
(B) by adding at the end the following new
subsection:
``(b) Statements To Be Furnished to Certain Persons.--Every
person required to make a return under subsection (a) shall
furnish to each person whose name is required to be set forth
in such return (other than the person required to make such
return) a written statement showing--
``(1) the name, address, and phone number of the
person required to make such return, and
``(2) the information specified in such return with
respect to property received by the person required to
receive such statement.
The written statement required under the preceding sentence
shall be furnished not later than 30 days after the date that
the return required by subsection (a) is filed.''.
(3) Time for filing section 6018 returns.--
(A) Returns relating to large transfers at
death.--Subsection (a) of section 6075 is
amended to read as follows:
``(a) Returns Relating to Large Transfers at Death.--The
return required by section 6018 with respect to a decedent
shall be filed with the return of the tax imposed by chapter 1
for the decedent's last taxable year or such later date
specified in regulations prescribed by the Secretary.''.
(B) Conforming amendments.--Paragraph (3)
of section 6075(b) is amended--
(i) by striking ``estate tax
return'' in the heading and inserting
``section 6018 return'', and
(ii) by striking ``(relating to
estate tax returns)'' and inserting
``(relating to returns relating to
large transfers at death)''.
(4) Penalties.--Part I of subchapter B of chapter
68 (relating to assessable penalties) is amended by
adding at the end the following new section:
``SEC. 6716. FAILURE TO FILE INFORMATION WITH RESPECT TO CERTAIN
TRANSFERS AT DEATH AND GIFTS.
``(a) Information Required To Be Furnished to the
Secretary.--Any person required to furnish any information
under section 6018 who fails to furnish such information on the
date prescribed therefor (determined with regard to any
extension of time for filing) shall pay a penalty of $10,000
($500 in the case of information required to be furnished under
section 6018(b)(2)) for each such failure.
``(b) Information Required To Be Furnished to
Beneficiaries.--Any person required to furnish in writing to
each person described in section 6018(e) or 6019(b) the
information required under such section who fails to furnish
such information shall pay a penalty of $50 for each such
failure.
``(c) Reasonable Cause Exception.--No penalty shall be
imposed under subsection (a) or (b) with respect to any failure
if it is shown that such failure is due to reasonable cause.
``(d) Intentional Disregard.--If any failure under
subsection (a) or (b) is due to intentional disregard of the
requirements under sections 6018 and 6019(b), the penalty under
such subsection shall be 5 percent of the fair market value (as
of the date of death or, in the case of section 6019(b), the
date of the gift) of the property with respect to which the
information is required.
``(e) Deficiency Procedures Not To Apply.--Subchapter B of
chapter 63 (relating to deficiency procedures for income,
estate, gift, and certain excise taxes) shall not apply in
respect of the assessment or collection of any penalty imposed
by this section.''.
(5) Clerical amendments.--
(A) The table of sections for part I of
subchapter B of chapter 68 is amended by adding
at the end the following new item:
``Sec. 6716. Failure to file information with respect to certain
transfers at death and gifts.''.
(B) The item relating to subpart C in the
table of subparts for part II of subchapter A
of chapter 61 is amended to read as follows:
``Subpart C. Returns relating to transfers during life or at
death.''.
(c) Exclusion of Gain on Sale of Principal Residence Made
Available to Heir of Decedent in Certain Cases.--Subsection (d)
of section 121 (relating to exclusion of gain from sale of
principal residence) is amended by adding at the end the
following new paragraph:
``(9) Property acquired from a decedent.--The
exclusion under this section shall apply to property
sold by--
``(A) the estate of a decedent,
``(B) any individual who acquired such
property from the decedent (within the meaning
of section 1022), and
``(C) a trust which, immediately before the
death of the decedent, was a qualified
revocable trust (as defined in section
645(b)(1)) established by the decedent,
determined by taking into account the ownership and use
by the decedent.''.
(d) Transfers of Appreciated Carryover Basis Property To
Satisfy Pecuniary Bequest.--
(1) In general.--Section 1040 (relating to transfer
of certain farm, etc., real property) is amended to
read as follows:
``SEC. 1040. USE OF APPRECIATED CARRYOVER BASIS PROPERTY TO SATISFY
PECUNIARY BEQUEST.
``(a) In General.--If the executor of the estate of any
decedent satisfies the right of any person to receive a
pecuniary bequest with appreciated property, then gain on such
exchange shall be recognized to the estate only to the extent
that, on the date of such exchange, the fair market value of
such property exceeds such value on the date of death.
``(b) Similar Rule for Certain Trusts.--To the extent
provided in regulations prescribed by the Secretary, a rule
similar to the rule provided in subsection (a) shall apply
where--
``(1) by reason of the death of the decedent, a
person has a right to receive from a trust a specific
dollar amount which is the equivalent of a pecuniary
bequest, and
``(2) the trustee of a trust satisfies such right
with property.
``(c) Basis of Property Acquired in Exchange Described in
Subsection (a) or (b).--The basis of property acquired in an
exchange with respect to which gain realized is not recognized
by reason of subsection (a) or (b) shall be the basis of such
property immediately before the exchange increased by the
amount of the gain recognized to the estate or trust on the
exchange.''.
(2) The item relating to section 1040 in the table
of sections for part III of subchapter O of chapter 1
is amended to read as follows:
``Sec. 1040. Use of appreciated carryover basis property to
satisfy pecuniary bequest.''.
(e) Amendments Related to Carryover Basis.--
(1) Recognition of gain on transfers to
nonresidents.--
(A) Subsection (a) of section 684 is
amended by inserting ``or to a nonresident
alien'' after ``or trust''.
(B) Subsection (b) of section 684 is
amended to read as follows:
``(b) Exceptions.--
``(1) Transfers to certain trusts.--Subsection (a)
shall not apply to a transfer to a trust by a United
States person to the extent that any United States
person is treated as the owner of such trust under
section 671.
``(2) Lifetime transfers to nonresident aliens.--
Subsection (a) shall not apply to a lifetime transfer
to a nonresident alien.''.
(C) The section heading for section 684 is
amended by inserting ``AND NONRESIDENT ALIENS''
after ``ESTATES''.
(D) The item relating to section 684 in the
table of sections for subpart F of part I of
subchapter J of chapter 1 is amended by
inserting ``and nonresident aliens'' after
``estates''.
(2) Capital gain treatment for inherited art work
or similar property.--
(A) In general.--Subparagraph (C) of
section 1221(a)(3) (defining capital asset) is
amended by inserting ``(other than by reason of
section 1022)'' after ``is determined''.
(B) Coordination with section 170.--
Paragraph (1) of section 170(e) (relating to
certain contributions of ordinary income and
capital gain property) is amended by adding at
the end the following: ``For purposes of this
paragraph, the determination of whether
property is a capital asset shall be made
without regard to the exception contained in
section 1221(a)(3)(C) for basis determined
under section 1022.''.
(3) Definition of executor.--Section 7701(a)
(relating to definitions) is amended by adding at the
end the following:
``(47) Executor.--The term `executor' means the
executor or administrator of the decedent, or, if there
is no executor or administrator appointed, qualified,
and acting within the United States, then any person in
actual or constructive possession of any property of
the decedent.''.
(4) Certain trusts.--Subparagraph (A) of section
4947(a)(2) is amended by inserting ``642(c),'' after
``170(f)(2)(B),''.
(5) Other amendments.--
(A) Section 1246 is amended by striking
subsection (e).
(B) Subsection (e) of section 1291 is
amended--
(i) by striking ``(e),''; and
(ii) by striking ``; except that''
and all that follows and inserting a
period.
(C) Section 1296 is amended by striking
subsection (i).
(6) Clerical amendment.--The table of sections for
part II of subchapter O of chapter 1 is amended by
inserting after the item relating to section 1021 the
following new item:
``Sec. 1022. Treatment of property acquired from a decedent
dying after December 31, 2009.''.
(f) Effective Date.--
(1) In general.--Except as provided in paragraph
(2), the amendments made by this section shall apply to
estates of decedents dying after December 31, 2009.
(2) Transfers to nonresidents.--The amendments made
by subsection (e)(1) shall apply to transfers after
December 31, 2009.
(3) Section 4947.--The amendment made by subsection
(e)(4) shall apply to deductions for taxable years
beginning after December 31, 2009.
Subtitle F--Conservation Easements
SEC. 551. EXPANSION OF ESTATE TAX RULE FOR CONSERVATION EASEMENTS.
(a) Repeal of Certain Restrictions on Where Land Is
Located.--Clause (i) of section 2031(c)(8)(A) (defining land
subject to a qualified conservation easement) is amended to
read as follows:
``(i) which is located in the
United States or any possession of the
United States,''.
(b) Clarification of Date for Determining Value of Land and
Easement.--Section 2031(c)(2) (defining applicable percentage)
is amended by adding at the end the following new sentence:
``The values taken into account under the preceding sentence
shall be such values as of the date of the contribution
referred to in paragraph (8)(B).''.
(c) Effective Date.--The amendments made by this section
shall apply to estates of decedents dying after December 31,
2000.
Subtitle G--Modifications of Generation-Skipping Transfer Tax
SEC. 561. DEEMED ALLOCATION OF GST EXEMPTION TO LIFETIME TRANSFERS TO
TRUSTS; RETROACTIVE ALLOCATIONS.
(a) In General.--Section 2632 (relating to special rules
for allocation of GST exemption) is amended by redesignating
subsection (c) as subsection (e) and by inserting after
subsection (b) the following new subsections:
``(c) Deemed Allocation to Certain Lifetime Transfers to
GST Trusts.--
``(1) In general.--If any individual makes an
indirect skip during such individual's lifetime, any
unused portion of such individual's GST exemption shall
be allocated to the property transferred to the extent
necessary to make the inclusion ratio for such property
zero. If the amount of the indirect skip exceeds such
unused portion, the entire unused portion shall be
allocated to the property transferred.
``(2) Unused portion.--For purposes of paragraph
(1), the unused portion of an individual's GST
exemption is that portion of such exemption which has
not previously been--
``(A) allocated by such individual,
``(B) treated as allocated under subsection
(b) with respect to a direct skip occurring
during or before the calendar year in which the
indirect skip is made, or
``(C) treated as allocated under paragraph
(1) with respect to a prior indirect skip.
``(3) Definitions.--
``(A) Indirect skip.--For purposes of this
subsection, the term `indirect skip' means any
transfer of property (other than a direct skip)
subject to the tax imposed by chapter 12 made
to a GST trust.
``(B) GST trust.--The term `GST trust'
means a trust that could have a generation-
skipping transfer with respect to the
transferor unless--
``(i) the trust instrument provides
that more than 25 percent of the trust
corpus must be distributed to or may be
withdrawn by one or more individuals
who are non-skip persons--
``(I) before the date that
the individual attains age 46,
``(II) on or before one or
more dates specified in the
trust instrument that will
occur before the date that such
individual attains age 46, or
``(III) upon the occurrence
of an event that, in accordance
with regulations prescribed by
the Secretary, may reasonably
be expected to occur before the
date that such individual
attains age 46,
``(ii) the trust instrument
provides that more than 25 percent of
the trust corpus must be distributed to
or may be withdrawn by one or more
individuals who are non-skip persons
and who are living on the date of death
of another person identified in the
instrument (by name or by class) who is
more than 10 years older than such
individuals,
``(iii) the trust instrument
provides that, if one or more
individuals who are non-skip persons
die on or before a date or event
described in clause (i) or (ii), more
than 25 percent of the trust corpus
either must be distributed to the
estate or estates of one or more of
such individuals or is subject to a
general power of appointment
exercisable by one or more of such
individuals,
``(iv) the trust is a trust any
portion of which would be included in
the gross estate of a non-skip person
(other than the transferor) if such
person died immediately after the
transfer,
``(v) the trust is a charitable
lead annuity trust (within the meaning
of section 2642(e)(3)(A)) or a
charitable remainder annuity trust or a
charitable remainder unitrust (within
the meaning of section 664(d)), or
``(vi) the trust is a trust with
respect to which a deduction was
allowed under section 2522 for the
amount of an interest in the form of
the right to receive annual payments of
a fixed percentage of the net fair
market value of the trust property
(determined yearly) and which is
required to pay principal to a non-skip
person if such person is alive when the
yearly payments for which the deduction
was allowed terminate.
For purposes of this subparagraph, the value of
transferred property shall not be considered to
be includible in the gross estate of a non-skip
person or subject to a right of withdrawal by
reason of such person holding a right to
withdraw so much of such property as does not
exceed the amount referred to in section
2503(b) with respect to any transferor, and it
shall be assumed that powers of appointment
held by non-skip persons will not be exercised.
``(4) Automatic allocations to certain gst
trusts.--For purposes of this subsection, an indirect
skip to which section 2642(f) applies shall be deemed
to have been made only at the close of the estate tax
inclusion period. The fair market value of such
transfer shall be the fair market value of the trust
property at the close of the estate tax inclusion
period.
``(5) Applicability and effect.--
``(A) In general.--An individual--
``(i) may elect to have this
subsection not apply to--
``(I) an indirect skip, or
``(II) any or all transfers
made by such individual to a
particular trust, and
``(ii) may elect to treat any trust
as a GST trust for purposes of this
subsection with respect to any or all
transfers made by such individual to
such trust.
``(B) Elections.--
``(i) Elections with respect to
indirect skips.--An election under
subparagraph (A)(i)(I) shall be deemed
to be timely if filed on a timely filed
gift tax return for the calendar year
in which the transfer was made or
deemed to have been made pursuant to
paragraph (4) or on such later date or
dates as may be prescribed by the
Secretary.
``(ii) Other elections.--An
election under clause (i)(II) or (ii)
of subparagraph (A) may be made on a
timely filed gift tax return for the
calendar year for which the election is
to become effective.
``(d) Retroactive Allocations.--
``(1) In general.--If--
``(A) a non-skip person has an interest or
a future interest in a trust to which any
transfer has been made,
``(B) such person--
``(i) is a lineal descendant of a
grandparent of the transferor or of a
grandparent of the transferor's spouse
or former spouse, and
``(ii) is assigned to a generation
below the generation assignment of the
transferor, and
``(C) such person predeceases the
transferor,
then the transferor may make an allocation of any of
such transferor's unused GST exemption to any previous
transfer or transfers to the trust on a chronological
basis.
``(2) Special rules.--If the allocation under
paragraph (1) by the transferor is made on a gift tax
return filed on or before the date prescribed by
section 6075(b) for gifts made within the calendar year
within which the non-skip person's death occurred--
``(A) the value of such transfer or
transfers for purposes of section 2642(a) shall
be determined as if such allocation had been
made on a timely filed gift tax return for each
calendar year within which each transfer was
made,
``(B) such allocation shall be effective
immediately before such death, and
``(C) the amount of the transferor's unused
GST exemption available to be allocated shall
be determined immediately before such death.
``(3) Future interest.--For purposes of this
subsection, a person has a future interest in a trust
if the trust may permit income or corpus to be paid to
such person on a date or dates in the future.''.
(b) Conforming Amendment.--Paragraph (2) of section 2632(b)
is amended by striking ``with respect to a prior direct skip''
and inserting ``or subsection (c)(1)''.
(c) Effective Dates.--
(1) Deemed allocation.--Section 2632(c) of the
Internal Revenue Code of 1986 (as added by subsection
(a)), and the amendment made by subsection (b), shall
apply to transfers subject to chapter 11 or 12 made
after December 31, 2000, and to estate tax inclusion
periods ending after December 31, 2000.
(2) Retroactive allocations.--Section 2632(d) of
the Internal Revenue Code of 1986 (as added by
subsection (a)) shall apply to deaths of non-skip
persons occurring after December 31, 2000.
SEC. 562. SEVERING OF TRUSTS.
(a) In General.--Subsection (a) of section 2642 (relating
to inclusion ratio) is amended by adding at the end the
following new paragraph:
``(3) Severing of trusts.--
``(A) In general.--If a trust is severed in
a qualified severance, the trusts resulting
from such severance shall be treated as
separate trusts thereafter for purposes of this
chapter.
``(B) Qualified severance.--For purposes of
subparagraph (A)--
``(i) In general.--The term
`qualified severance' means the
division of a single trust and the
creation (by any means available under
the governing instrument or under local
law) of two or more trusts if--
``(I) the single trust was
divided on a fractional basis,
and
``(II) the terms of the new
trusts, in the aggregate,
provide for the same succession
of interests of beneficiaries
as are provided in the original
trust.
``(ii) Trusts with inclusion ratio
greater than zero.--If a trust has an
inclusion ratio of greater than zero
and less than 1, a severance is a
qualified severance only if the single
trust is divided into two trusts, one
of which receives a fractional share of
the total value of all trust assets
equal to the applicable fraction of the
single trust immediately before the
severance. In such case, the trust
receiving such fractional share shall
have an inclusion ratio of zero and the
other trust shall have an inclusion
ratio of 1.
``(iii) Regulations.--The term
`qualified severance' includes any
other severance permitted under
regulations prescribed by the
Secretary.
``(C) Timing and manner of severances.--A
severance pursuant to this paragraph may be
made at any time. The Secretary shall prescribe
by forms or regulations the manner in which the
qualified severance shall be reported to the
Secretary.''.
(b) Effective Date.--The amendment made by this section
shall apply to severances after December 31, 2000.
SEC. 563. MODIFICATION OF CERTAIN VALUATION RULES.
(a) Gifts for Which Gift Tax Return Filed or Deemed
Allocation Made.--Paragraph (1) of section 2642(b) (relating to
valuation rules, etc.) is amended to read as follows:
``(1) Gifts for which gift tax return filed or
deemed allocation made.--If the allocation of the GST
exemption to any transfers of property is made on a
gift tax return filed on or before the date prescribed
by section 6075(b) for such transfer or is deemed to be
made under section 2632 (b)(1) or (c)(1)--
``(A) the value of such property for
purposes of subsection (a) shall be its value
as finally determined for purposes of chapter
12 (within the meaning of section 2001(f)(2)),
or, in the case of an allocation deemed to have
been made at the close of an estate tax
inclusion period, its value at the time of the
close of the estate tax inclusion period, and
``(B) such allocation shall be effective on
and after the date of such transfer, or, in the
case of an allocation deemed to have been made
at the close of an estate tax inclusion period,
on and after the close of such estate tax
inclusion period.''.
(b) Transfers at Death.--Subparagraph (A) of section
2642(b)(2) is amended to read as follows:
``(A) Transfers at death.--If property is
transferred as a result of the death of the
transferor, the value of such property for
purposes of subsection (a) shall be its value
as finally determined for purposes of chapter
11; except that, if the requirements prescribed
by the Secretary respecting allocation of post-
death changes in value are not met, the value
of such property shall be determined as of the
time of the distribution concerned.''.
(c) Effective Date.--The amendments made by this section
shall apply to transfers subject to chapter 11 or 12 of the
Internal Revenue Code of 1986 made after December 31, 2000.
SEC. 564. RELIEF PROVISIONS.
(a) In General.--Section 2642 is amended by adding at the
end the following new subsection:
``(g) Relief Provisions.--
``(1) Relief from late elections.--
``(A) In general.--The Secretary shall by
regulation prescribe such circumstances and
procedures under which extensions of time will
be granted to make--
``(i) an allocation of GST
exemption described in paragraph (1) or
(2) of subsection (b), and
``(ii) an election under subsection
(b)(3) or (c)(5) of section 2632.
Such regulations shall include procedures for
requesting comparable relief with respect to
transfers made before the date of the enactment
of this paragraph.
``(B) Basis for determinations.--In
determining whether to grant relief under this
paragraph, the Secretary shall take into
account all relevant circumstances, including
evidence of intent contained in the trust
instrument or instrument of transfer and such
other factors as the Secretary deems relevant.
For purposes of determining whether to grant
relief under this paragraph, the time for
making the allocation (or election) shall be
treated as if not expressly prescribed by
statute.
``(2) Substantial compliance.--An allocation of GST
exemption under section 2632 that demonstrates an
intent to have the lowest possible inclusion ratio with
respect to a transfer or a trust shall be deemed to be
an allocation of so much of the transferor's unused GST
exemption as produces the lowest possible inclusion
ratio. In determining whether there has been
substantial compliance, all relevant circumstances
shall be taken into account, including evidence of
intent contained in the trust instrument or instrument
of transfer and such other factors as the Secretary
deems relevant.''.
(b) Effective Dates.--
(1) Relief from late elections.--Section 2642(g)(1)
of the Internal Revenue Code of 1986 (as added by
subsection (a)) shall apply to requests pending on, or
filed after, December 31, 2000.
(2) Substantial compliance.--Section 2642(g)(2) of
such Code (as so added) shall apply to transfers
subject to chapter 11 or 12 of the Internal Revenue
Code of 1986 made after December 31, 2000. No
implication is intended with respect to the
availability of relief from late elections or the
application of a rule of substantial compliance on or
before such date.
Subtitle H--Extension of Time for Payment of Estate Tax
SEC. 571. INCREASE IN NUMBER OF ALLOWABLE PARTNERS AND SHAREHOLDERS IN
CLOSELY HELD BUSINESSES.
(a) In General.--Paragraphs (1)(B)(ii), (1)(C)(ii), and
(9)(B)(iii)(I) of section 6166(b) (relating to definitions and
special rules) are each amended by striking ``15'' and
inserting ``45''.
(b) Effective Date.--The amendments made by this section
shall apply to estates of decedents dying after December 31,
2001.
SEC. 572. EXPANSION OF AVAILABILITY OF INSTALLMENT PAYMENT FOR ESTATES
WITH INTERESTS QUALIFYING LENDING AND FINANCE
BUSINESSES.
(a) In General.--Section 6166(b) (relating to definitions
and special rules) is amended by adding at the end the
following new paragraph:
``(10) Stock in qualifying lending and finance
business treated as stock in an active trade or
business company.--
``(A) In general.--If the executor elects
the benefits of this paragraph, then--
``(i) Stock in qualifying lending
and finance business treated as stock
in an active trade or business
company.--For purposes of this section,
any asset used in a qualifying lending
and finance business shall be treated
as an asset which is used in carrying
on a trade or business.
``(ii) 5-year deferral for
principal not to apply.--The executor
shall be treated as having selected
under subsection (a)(3) the date
prescribed by section 6151(a).
``(iii) 5 equal installments
allowed.--For purposes of applying
subsection (a)(1), `5' shall be
substituted for `10'.
``(B) Definitions.--For purposes of this
paragraph--
``(i) Qualifying lending and
finance business.--The term `qualifying
lending and finance business' means a
lending and finance business, if--
``(I) based on all the
facts and circumstances
immediately before the date of
the decedent's death, there was
substantial activity with
respect to the lending and
finance business, or
``(II) during at least 3 of
the 5 taxable years ending
before the date of the
decedent's death, such business
had at least 1 full-time
employee substantially all of
whose services were the active
management of such business, 10
full-time, nonowner employees
substantially all of whose
services were directly related
to such business, and
$5,000,000 in gross receipts
from activities described in
clause (ii).
``(ii) Lending and finance
business.--The term `lending and
finance business' means a trade or
business of--
``(I) making loans,
``(II) purchasing or
discounting accounts
receivable, notes, or
installment obligations,
``(III) engaging in rental
and leasing of real and
tangible personal property,
including entering into leases
and purchasing, servicing, and
disposing of leases and leased
assets,
``(IV) rendering services
or making facilities available
in the ordinary course of a
lending or finance business,
and
``(V) rendering services or
making facilities available in
connection with activities
described in subclauses (I)
through (IV) carried on by the
corporation rendering services
or making facilities available,
or another corporation which is
a member of the same affiliated
group (as defined in section
1504 without regard to section
1504(b)(3)).
``(iii) Limitation.--The term
`qualifying lending and finance
business' shall not include any
interest in an entity, if the stock or
debt of such entity or a controlled
group (as defined in section 267(f)(1))
of which such entity was a member was
readily tradable on an established
securities market or secondary market
(as defined by the Secretary) at any
time within 3 years before the date of
the decedent's death.''.
(b) Effective Date.--The amendment made by this section
shall apply to estates of decedents dying after December 31,
2001.
SEC. 572. CLARIFICATION OF AVAILABILITY OF INSTALLMENT PAYMENT.
(a) In General.--Subparagraph (B) of section 6166(b)(8)
(relating to all stock must be non-readily-tradable stock) is
amended to read as follows:
``(B) All stock must be non-readily-
tradable stock.--
``(i) In general.--No stock shall
be taken into account for purposes of
applying this paragraph unless it is
non-readily-tradable stock (within the
meaning of paragraph (7)(B)).
``(ii) Special application where
only holding company stock is non-
readily-tradable stock.--If the
requirements of clause (i) are not met,
but all of the stock of each holding
company taken into account is non-
readily-tradable, then this paragraph
shall apply, but subsection (a)(1)
shall be applied by substituting `5'
for `10'.''.
(b) Effective Date.--The amendment made by this section
shall apply to estates of decedents dying after December 31,
2001.
Subtitle I--Other Provisions
SEC. 581. WAIVER OF STATUTE OF LIMITATION FOR TAXES ON CERTAIN FARM
VALUATIONS.
If on the date of the enactment of this Act (or at any time
within 1 year after the date of the enactment) a refund or
credit of any overpayment of tax resulting from the application
of section 2032A(c)(7)(E) of the Internal Revenue Code of 1986
is barred by any law or rule of law, the refund or credit of
such overpayment shall, nevertheless, be made or allowed if
claim therefor is filed before the date 1 year after the date
of the enactment of this Act.
TITLE VI--PENSION AND INDIVIDUAL RETIREMENT ARRANGEMENT PROVISIONS
Subtitle A--Individual Retirement Accounts
SEC. 601. MODIFICATION OF IRA CONTRIBUTION LIMITS.
(a) Increase in Contribution Limit.--
(1) In general.--Paragraph (1)(A) of section 219(b)
(relating to maximum amount of deduction) is amended by
striking ``$2,000'' and inserting ``the deductible
amount''.
(2) Deductible amount.--Section 219(b) is amended
by adding at the end the following new paragraph:
``(5) Deductible amount.--For purposes of paragraph
(1)(A)--
``(A) In general.--The deductible amount
shall be determined in accordance with the
following table:
``For taxable years beginning in: The deductible amount is:
2002 through 2004................................. $3,000
2005 through 2007................................. $4,000
2008 and thereafter............................... $5,000.
``(B) Catch-up contributions for
individuals 50 or older.--
``(i) In general.--In the case of
an individual who has attained the age
of 50 before the close of the taxable
year, the deductible amount for such
taxable year shall be increased by the
applicable amount.
``(ii) Applicable amount.--For
purposes of clause (i), the applicable
amount shall be the amount determined
in accordance with the following table:
``For taxable years beginning in: The applicable amount is:
2002 through 2005................................. $500
2006 and thereafter............................... $1,000.
``(C) Cost-of-living adjustment.--
``(i) In general.--In the case of
any taxable year beginning in a
calendar year after 2008, the $5,000
amount under subparagraph (A) shall be
increased by an amount equal to--
``(I) such dollar amount,
multiplied by
``(II) the cost-of-living
adjustment determined under
section 1(f)(3) for the
calendar year in which the
taxable year begins, determined
by substituting `calendar year
2007' for `calendar year 1992'
in subparagraph (B) thereof.
``(ii) Rounding rules.--If any
amount after adjustment under clause
(i) is not a multiple of $500, such
amount shall be rounded to the next
lower multiple of $500.''.
(b) Conforming Amendments.--
(1) Section 408(a)(1) is amended by striking ``in
excess of $2,000 on behalf of any individual'' and
inserting ``on behalf of any individual in excess of
the amount in effect for such taxable year under
section 219(b)(1)(A)''.
(2) Section 408(b)(2)(B) is amended by striking
``$2,000'' and inserting ``the dollar amount in effect
under section 219(b)(1)(A)''.
(3) Section 408(b) is amended by striking
``$2,000'' in the matter following paragraph (4) and
inserting ``the dollar amount in effect under section
219(b)(1)(A)''.
(4) Section 408(j) is amended by striking
``$2,000''.
(5) Section 408(p)(8) is amended by striking
``$2,000'' and inserting ``the dollar amount in effect
under section 219(b)(1)(A)''.
(c) Effective Date.--The amendments made by this section
shall apply to taxable years beginning after December 31, 2001.
SEC. 602. DEEMED IRAS UNDER EMPLOYER PLANS.
(a) In General.--Section 408 (relating to individual
retirement accounts) is amended by redesignating subsection (q)
as subsection (r) and by inserting after subsection (p) the
following new subsection:
``(q) Deemed IRAs Under Qualified Employer Plans.--
``(1) General rule.--If--
``(A) a qualified employer plan elects to
allow employees to make voluntary employee
contributions to a separate account or annuity
established under the plan, and
``(B) under the terms of the qualified
employer plan, such account or annuity meets
the applicable requirements of this section or
section 408A for an individual retirement
account or annuity,
then such account or annuity shall be treated for
purposes of this title in the same manner as an
individual retirement plan and not as a qualified
employer plan (and contributions to such account or
annuity as contributions to an individual retirement
plan and not to the qualified employer plan). For
purposes of subparagraph (B), the requirements of
subsection (a)(5) shall not apply.
``(2) Special rules for qualified employer plans.--
For purposes of this title, a qualified employer plan
shall not fail to meet any requirement of this title
solely by reason of establishing and maintaining a
program described in paragraph (1).
``(3) Definitions.--For purposes of this
subsection--
``(A) Qualified employer plan.--The term
`qualified employer plan' has the meaning given
such term by section 72(p)(4); except such term
shall not include a government plan which is
not a qualified plan unless the plan is an
eligible deferred compensation plan (as defined
in section 457(b)).
``(B) Voluntary employee contribution.--The
term `voluntary employee contribution' means
any contribution (other than a mandatory
contribution within the meaning of section
411(c)(2)(C))--
``(i) which is made by an
individual as an employee under a
qualified employer plan which allows
employees to elect to make
contributions described in paragraph
(1), and
``(ii) with respect to which the
individual has designated the
contribution as a contribution to which
this subsection applies.''.
(b) Amendment of ERISA.--
(1) In general.--Section 4 of the Employee
Retirement Income Security Act of 1974 (29 U.S.C. 1003)
isamended by adding at the end the following new
subsection:
``(c) If a pension plan allows an employee to elect to make
voluntary employee contributions to accounts and annuities as
provided in section 408(q) of the Internal Revenue Code of
1986, such accounts and annuities (and contributions thereto)
shall not be treated as part of such plan (or as a separate
pension plan) for purposes of any provision of this title other
than section 403(c), 404, or 405 (relating to exclusive
benefit, and fiduciary and co-fiduciary responsibilities).''.
(2) Conforming amendment.--Section 4(a) of such Act
(29 U.S.C. 1003(a)) is amended by inserting ``or (c)''
after ``subsection (b)''.
(c) Effective Date.--The amendments made by this section
shall apply to plan years beginning after December 31, 2002.
Subtitle B--Expanding Coverage
SEC. 611. INCREASE IN BENEFIT AND CONTRIBUTION LIMITS.
(a) Defined Benefit Plans.--
(1) Dollar limit.--
(A) Subparagraph (A) of section 415(b)(1)
(relating to limitation for defined benefit
plans) is amended by striking ``$90,000'' and
inserting ``$160,000''.
(B) Subparagraphs (C) and (D) of section
415(b)(2) are each amended in the headings and
the text, by striking ``$90,000'' and inserting
``$160,000'',
(C) Paragraph (7) of section 415(b)
(relating to benefits under certain
collectively bargained plans) is amended by
striking ``the greater of $68,212 or one-half
the amount otherwise applicable for such year
under paragraph (1)(A) for `$90,000' '' and
inserting ``one-half the amount otherwise
applicable for such year under paragraph (1)(A)
for `$160,000' ''.
(2) Limit reduced when benefit begins before age
62.--Subparagraph (C) of section 415(b)(2) is amended
by striking ``the social security retirement age'' each
place it appears in the heading and text and inserting
``age 62'' and by striking the second sentence.
(3) Limit increased when benefit begins after age
65.--Subparagraph (D) of section 415(b)(2) is amended
by striking ``the social security retirement age'' each
place it appears in the heading and text and inserting
``age 65''.
(4) Cost-of-living adjustments.--Subsection (d) of
section 415 (related to cost-of-living adjustments) is
amended--
(A) by striking ``$90,000'' in paragraph
(1)(A) and inserting ``$160,000''; and
(B) in paragraph (3)(A)--
(i) by striking ``$90,000'' in the
heading and inserting ``$160,000''; and
(ii) by striking ``October 1,
1986'' and inserting ``July 1, 2001''.
(5) Conforming amendments.--
(A) Section 415(b)(2) is amended by
striking subparagraph (F).
(B) Section 415(b)(9) is amended to read as
follows:
``(9) Special rule for commercial airline pilots.--
``(A) In general.--Except as provided in
subparagraph (B), in the case of any
participant who is a commercial airline pilot,
if, as of the time of the participant's
retirement, regulations prescribed by the
Federal Aviation Administration require an
individual to separate from service as a
commercial airline pilot after attaining any
age occurring on or after age 60 and before age
62, paragraph (2)(C) shall be applied by
substituting such age for age 62.
``(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)(C) shall
apply.''.
(C) Section 415(b)(10)(C)(i) is amended by
striking ``applied without regard to paragraph
(2)(F)''.
(b) Defined Contribution Plans.--
(1) Dollar limit.--Subparagraph (A) of section
415(c)(1) (relating to limitation for defined
contribution plans) is amended by striking ``$30,000''
and inserting ``$40,000''.
(2) Cost-of-living adjustments.--Subsection (d) of
section 415 (related to cost-of-living adjustments) is
amended--
(A) by striking ``$30,000'' in paragraph
(1)(C) and inserting ``$40,000''; and
(B) in paragraph (3)(D)--
(i) by striking ``$30,000'' in the
heading and inserting ``$40,000''; and
(ii) by striking ``October 1,
1993'' and inserting ``July 1, 2001''.
(c) Qualified Trusts.--
(1) Compensation limit.--Sections 401(a)(17),
404(l), 408(k), and 505(b)(7) are each amended by
striking ``$150,000'' each place it appears and
inserting ``$200,000''.
(2) Base period and rounding of cost-of-living
adjustment.--Subparagraph (B) of section 401(a)(17) is
amended--
(A) by striking ``October 1, 1993'' and
inserting ``July 1, 2001''; and
(B) by striking ``$10,000'' both places it
appears and inserting ``$5,000''.
(d) Elective Deferrals.--
(1) In general.--Paragraph (1) of section 402(g)
(relating to limitation on exclusion for elective
deferrals) is amended to read as follows:
``(1) In general.--
``(A) Limitation.--Notwithstanding
subsections (e)(3) and (h)(1)(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 the
applicable dollar amount.
``(B) Applicable dollar amount.--For
purposes of subparagraph (A), the applicable
dollar amount shall be the amount determined in
accordance with the following table:
``For taxable years beginning The applicable
in calendar year: dollar amount:
2002.............................................. $11,000
2003.............................................. $12,000
2004.............................................. $13,000
2005.............................................. $14,000
2006 or thereafter...............................$15,000.''.
(2) Cost-of-living adjustment.--Paragraph (5) of
section 402(g) is amended to read as follows:
``(5) Cost-of-living adjustment.--In the case of
taxable years beginning after December 31, 2006, the
Secretary shall adjust the $15,000 amount under
paragraph (1)(B) at the same time and in the same
manner as under section 415(d), except that the base
period shall be the calendar quarter beginning July 1,
2005, and any increase under this paragraph which is
not a multiple of $500 shall be rounded to the next
lowest multiple of $500.''.
(3) Conforming amendments.--
(A) Section 402(g) (relating to limitation
on exclusion for elective deferrals), as
amended by paragraphs (1) and (2), is further
amended by striking paragraph (4) and
redesignating paragraphs (5), (6), (7), (8),
and (9) as paragraphs (4), (5), (6), (7), and
(8), respectively.
(B) Paragraph (2) of section 457(c) is
amended by striking ``402(g)(8)(A)(iii)'' and
inserting ``402(g)(7)(A)(iii)''.
(C) Clause (iii) of section 501(c)(18)(D)
is amended by striking ``(other than paragraph
(4) thereof)''.
(e) Deferred Compensation Plans of State and Local
Governments and Tax-Exempt Organizations.--
(1) In general.--Section 457 (relating to deferred
compensation plans of State and local governments and
tax-exempt organizations) is amended--
(A) in subsections (b)(2)(A) and (c)(1) by
striking ``$7,500'' each place it appears and
inserting ``the applicable dollar amount''; and
(B) in subsection (b)(3)(A) by striking
``$15,000'' and inserting ``twice the dollar
amount in effect under subsection (b)(2)(A)''.
(2) Applicable dollar amount; cost-of-living
adjustment.--Paragraph (15) of section 457(e) is
amended to read as follows:
``(15) Applicable dollar amount.--
``(A) In general.--The applicable dollar
amount shall be the amount determined in
accordance with the following table:
``For taxable years beginning The applicable
in calendar year: dollar amount:
2002.............................................. $11,000
2003.............................................. $12,000
2004.............................................. $13,000
2005.............................................. $14,000
2006 or thereafter................................ $15,000.
``(B) Cost-of-living adjustments.--In the
case of taxable years beginning after December
31, 2006, the Secretary shall adjust the
$15,000 amount under subparagraph (A) at the
same time and in the same manner as under
section 415(d), except that the base period
shall be the calendar quarter beginning July 1,
2005, and any increase under this paragraph
which is not a multiple of $500 shall be
rounded to the next lowest multiple of $500.''.
(f) Simple Retirement Accounts.--
(1) Limitation.--Clause (ii) of section
408(p)(2)(A) (relating to general rule for qualified
salary reduction arrangement) is amended by striking
``$6,000'' and inserting ``the applicable dollar
amount''.
(2) Applicable dollar amount.--Subparagraph (E) of
408(p)(2) is amended to read as follows:
``(E) Applicable dollar amount; cost-of-
living adjustment.--
``(i) In general.--For purposes of
subparagraph (A)(ii), the applicable
dollar amount shall be the amount
determined in accordance with the
following table:
``For years beginning in calendar year: The applicable dollar amount:
2002.............................................. $7,000
2003.............................................. $8,000
2004.............................................. $9,000
2005 or thereafter................................ $10,000.
``(ii) Cost-of-living adjustment.--
In the case of a year beginning after
December 31, 2005, the Secretary shall
adjust the $10,000 amount under clause
(i) at the same time and in the same
manner as under section 415(d), except
that the base period taken into account
shall be the calendar quarter beginning
July 1, 2004, and any increase under
this subparagraph which is not a
multiple of $500 shall be rounded to
the next lower multiple of $500.''.
(3) Conforming amendments.--
(A) Subclause (I) of section
401(k)(11)(B)(i) is amended by striking
``$6,000'' and inserting ``the amount in effect
under section 408(p)(2)(A)(ii)''.
(B) Section 401(k)(11) is amended by
striking subparagraph (E).
(g) Certain Compensation Limits.--
(1) In general.--Subparagraph (A) of section
401(c)(2) (defining earned income) is amended by adding
at the end thereof the following new sentence: ``For
purposes of this part only (other than sections 419 and
419A), this subparagraph shall be applied as if the
term `trade or business' for purposes of section 1402
included service described in section 1402(c)(6).''.
(2) Simple retirement accounts.--Clause (ii) of
section 408(p)(6)(A) (defining self-employed) is
amended by adding at the end the following new
sentence: ``The preceding sentence shall be applied as
if the term `trade or business' for purposes of section
1402 included service described in section
1402(c)(6).''.
(h) Rounding Rule Relating to Defined Benefit Plans and
Defined Contribution Plans.--Paragraph (4) of section 415(d) is
amended to read as follows:
``(4) Rounding.--
``(A) $160,000 amount.--Any increase under
subparagraph (A) of paragraph (1) which is not
a multiple of $5,000 shall be rounded to the
next lowest multiple of $5,000.
``(B) $40,000 amount.--Any increase under
subparagraph (C) of paragraph (1) which is not
a multiple of $1,000 shall be rounded to the
next lowest multiple of $1,000.''.
(i) Effective Dates.--
(1) In general.--The amendments made by this
section shall apply to years beginning after December
31, 2001.
(2) Defined benefit plans.--The amendments made by
subsection (a) shall apply to years ending after
December 31, 2001.
SEC. 612. PLAN LOANS FOR SUBCHAPTER S OWNERS, PARTNERS, AND SOLE
PROPRIETORS.
(a) In General.--Subparagraph (B) of section 4975(f)(6)
(relating to exemptions not to apply to certain transactions)
is amended by adding at the end the following new clause:
``(iii) Loan exception.--For
purposes of subparagraph (A)(i), the
term `owner-employee' shall only
include a person described in subclause
(II) or (III) of clause (i).''.
(b) Amendment of ERISA.--Section 408(d)(2) of the Employee
Retirement Income Security Act of 1974 (29 U.S.C. 1108(d)(2))
is amended by adding at the end the following new subparagraph:
``(C) For purposes of paragraph (1)(A), the term `owner-
employee' shall only include a person described in clause (ii)
or (iii) of subparagraph (A).''.
(c) Effective Date.--The amendment made by this section
shall apply to years beginning after December 31, 2001.
SEC. 613. MODIFICATION OF TOP-HEAVY RULES.
(a) Simplification of Definition of Key Employee.--
(1) In general.--Section 416(i)(1)(A) (defining key
employee) is amended--
(A) by striking ``or any of the 4 preceding
plan years'' in the matter preceding clause
(i);
(B) by striking clause (i) and inserting
the following:
``(i) an officer of the employer
having an annual compensation greater
than $130,000,'';
(C) by striking clause (ii) and
redesignating clauses (iii) and (iv) as clauses
(ii) and (iii), respectively; and
(D) by striking the second sentence in the
matter following clause (iii), as redesignated
by subparagraph (C), and by inserting the
following: ``in the case of plan years
beginning after December 31, 2002, the $130,000
amount in clause (i) shall be adjusted at the
same time and in the same manner as under
section 415(d), except that the base period
shall be the calendar quarter beginning July 1,
2001, and any increase under this sentence
which is not a multiple of $5,000 shall be
rounded to the next lower multiple of
$5,000.''.
(2) Conforming amendment.--Section
416(i)(1)(B)(iii) is amended by striking ``and
subparagraph (A)(ii)''.
(b) Matching Contributions Taken Into Account for Minimum
Contribution Requirements.--Section 416(c)(2)(A) (relating to
defined contribution plans) is amended by adding at the end the
following: ``Employer matching contributions (as defined in
section 401(m)(4)(A)) shall be taken into account for purposes
of this subparagraph (and any reduction under this sentence
shall not be taken into account in determining whether section
401(k)(4)(A) applies).''.
(c) Distributions During Last Year Before Determination
Date Taken Into Account.--
(1) In general.--Paragraph (3) of section 416(g) is
amended to read as follows:
``(3) Distributions during last year before
determination date taken into account.--
``(A) In general.--For purposes of
determining--
``(i) the present value of the
cumulative accrued benefit for any
employee, or
``(ii) the amount of the account of
any employee,
such present value or amount shall be increased
by the aggregate distributions made with
respect to such employee under the plan during
the 1-year period ending on the determination
date. The preceding sentence shall also apply
to distributions under a terminated plan which
if it had not been terminated would have been
required to be included in an aggregation
group.
``(B) 5-year period in case of in-service
distribution.--In the case of any distribution
made for a reason other than separation from
service, death, or disability, subparagraph (A)
shall be applied by substituting `5-year
period' for `1-year period'.''.
(2) Benefits not taken into account.--Subparagraph
(E) of section 416(g)(4) is amended--
(A) by striking ``last 5 years'' in the
heading and inserting ``last year before
determination date''; and
(B) by striking ``5-year period'' and
inserting ``1-year period''.
(d) Definition of Top-Heavy Plans.--Paragraph (4) of
section 416(g) (relating to other special rules for top-heavy
plans) is amended by adding at the end the following new
subparagraph:
``(H) Cash or deferred arrangements using
alternative methods of meeting
nondiscrimination requirements.--The term `top-
heavy plan' shall not include a plan which
consists solely of--
``(i) a cash or deferred
arrangement which meets the
requirements of section 401(k)(12), and
``(ii) matching contributions with
respect to which the requirements of
section 401(m)(11) are met.
If, but for this subparagraph, a plan would be
treated as a top-heavy plan because it is a
member of an aggregation group which is a top-
heavy group, contributions under the plan may
be taken into account in determining whether
any other plan in the group meets the
requirements of subsection (c)(2).''.
(e) Frozen Plan Exempt From Minimum Benefit Requirement.--
Subparagraph (C) of section 416(c)(1) (relating to defined
benefit plans) is amended--
(A) by striking ``clause (ii)'' in clause
(i) and inserting ``clause (ii) or (iii)''; and
(B) by adding at the end the following:
``(iii) Exception for frozen
plan.--For purposes of determining an
employee's years ofservice with the
employer, any service with the employer shall be disregarded to the
extent that such service occurs during a plan year when the plan
benefits (within the meaning of section 410(b)) no key employee or
former key employee.''.
(f) Effective Date.--The amendments made by this section
shall apply to years beginning after December 31, 2001.
SEC. 614. ELECTIVE DEFERRALS NOT TAKEN INTO ACCOUNT FOR PURPOSES OF
DEDUCTION LIMITS.
(a) In General.--Section 404 (relating to deduction for
contributions of an employer to an employees' trust or annuity
plan and compensation under a deferred payment plan) is amended
by adding at the end the following new subsection:
``(n) Elective Deferrals Not Taken Into Account for
Purposes of Deduction Limits.--Elective deferrals (as defined
in section 402(g)(3)) shall not be subject to any limitation
contained in paragraph (3), (7), or (9) of subsection (a), and
such elective deferrals shall not be taken into account in
applying any such limitation to any other contributions.''.
(b) Effective Date.--The amendment made by this section
shall apply to years beginning after December 31, 2001.
SEC. 615. REPEAL OF COORDINATION REQUIREMENTS FOR DEFERRED COMPENSATION
PLANS OF STATE AND LOCAL GOVERNMENTS AND TAX-EXEMPT
ORGANIZATIONS.
(a) In General.--Subsection (c) of section 457 (relating to
deferred compensation plans of State and local governments and
tax-exempt organizations), as amended by section 611, is
amended to read as follows:
``(c) Limitation.--The maximum amount of the compensation
of any one individual which may be deferred under subsection
(a) during any taxable year shall not exceed the amount in
effect under subsection (b)(2)(A) (as modified by any
adjustment provided under subsection (b)(3)).''.
(b) Effective Date.--The amendment made by subsection (a)
shall apply to years beginning after December 31, 2001.
SEC. 616. DEDUCTION LIMITS.
(a) Modification of Limits.--
(1) Stock bonus and profit sharing trusts.--
(A) In general.--Subclause (I) of section
404(a)(3)(A)(i) (relating to stock bonus and
profit sharing trusts) is amended by striking
``15 percent'' and inserting ``25 percent''.
(B) Conforming amendment.--Subparagraph (C)
of section 404(h)(1) is amended by striking
``15 percent'' each place it appears and
inserting ``25 percent''.
(2) Defined contribution plans.--
(A) In general.--Clause (v) of section
404(a)(3)(A) (relating to stock bonus and
profit sharing trusts) is amended to read as
follows:
``(v) Defined contribution plans
subject to the funding standards.--
Except as provided by the Secretary, a
defined contribution plan which is
subject to the funding standards of
section 412 shall be treated in the
same manner as a stock bonus or profit-
sharing plan for purposes of this
subparagraph.''
(B) Conforming amendments.--
(i) Section 404(a)(1)(A) is amended
by inserting ``(other than a trust to
which paragraph (3) applies)'' after
``pension trust''.
(ii) Section 404(h)(2) is amended
by striking ``stock bonus or profit-
sharing trust'' and inserting ``trust
subject to subsection (a)(3)(A)''.
(iii) The heading of section
404(h)(2) is amended by striking
``stock bonus and profit-sharing
trust'' and inserting ``certain
trusts''.
(b) Compensation.--
(1) In general.--Section 404(a) (relating to
general rule) is amended by adding at the end the
following:
``(12) Definition of compensation.--For purposes of
paragraphs (3), (7), (8), and (9), the term
`compensation' shall include amounts treated as
`participant's compensation' under subparagraph (C) or
(D) of section 415(c)(3).''.
(2) Conforming amendments.--
(A) Subparagraph (B) of section 404(a)(3)
is amended by striking the last sentence
thereof.
(B) Clause (i) of section 4972(c)(6)(B) is
amended by striking ``(within the meaning of
section 404(a))'' and inserting ``(within the
meaning of section 404(a) and as adjusted under
section 404(a)(12))''.
(c) Effective Date.--The amendments made by this section
shall apply to years beginning after December 31, 2001.
SEC. 617. OPTION TO TREAT ELECTIVE DEFERRALS AS AFTER-TAX ROTH
CONTRIBUTIONS.
(a) In General.--Subpart A of part I of subchapter D of
chapter 1 (relating to deferred compensation, etc.) is amended
by inserting after section 402 the following new section:
``SEC. 402A. OPTIONAL TREATMENT OF ELECTIVE DEFERRALS AS ROTH
CONTRIBUTIONS.
``(a) General Rule.--If an applicable retirement plan
includes a qualified Roth contribution program--
``(1) any designated Roth contribution made by an
employee pursuant to the program shall be treated as an
elective deferral for purposes of this chapter, except
that such contribution shall not be excludable from
gross income, and
``(2) such plan (and any arrangement which is part
of such plan) shall not be treated as failing to meet
any requirement of this chapter solely by reason of
including such program.
``(b) Qualified Roth Contribution Program.--For purposes of
this section--
``(1) In general.--The term `qualified Roth
contribution program' means a program under which an
employee may elect to make designated Roth
contributions in lieu of all or a portion of elective
deferrals the employee is otherwise eligible to make
under the applicable retirement plan.
``(2) Separate accounting required.--A program
shall not be treated as a qualified Roth contribution
program unless the applicable retirement plan--
``(A) establishes separate accounts
(`designated Roth accounts') for the designated
Roth contributions of each employee and any
earnings properly allocable to the
contributions, and
``(B) maintains separate recordkeeping with
respect to each account.
``(c) Definitions and Rules Relating to Designated Roth
Contributions.--For purposes of this section--
``(1) Designated roth contribution.--The term
`designated Roth contribution' means any elective
deferral which--
``(A) is excludable from gross income of an
employee without regard to this section, and
``(B) the employee designates (at such time
and in such manner as the Secretary may
prescribe) as not being so excludable.
``(2) Designation limits.--The amount of elective
deferrals which an employee may designate under
paragraph (1) shall not exceed the excess (if any) of--
``(A) the maximum amount of elective
deferrals excludable from gross income of the
employee for the taxable year (without regard
to this section), over
``(B) the aggregate amount of elective
deferrals of the employee for the taxable year
which the employee does not designate under
paragraph (1).
``(3) Rollover contributions.--
``(A) In general.--A rollover contribution
of any payment or distribution from a
designated Roth account which is otherwise
allowable under this chapter may be made only
if the contribution is to--
``(i) another designated Roth
account of the individual from whose
account the payment or distribution was
made, or
``(ii) a Roth IRA of such
individual.
``(B) Coordination with limit.--Any
rollover contribution to a designated Roth
account under subparagraph (A) shall not be
taken into account for purposes of paragraph
(1).
``(d) Distribution Rules.--For purposes of this title--
``(1) Exclusion.--Any qualified distribution from a
designated Roth account shall not be includible in
gross income.
``(2) Qualified distribution.--For purposes of this
subsection--
``(A) In general.--The term `qualified
distribution' has the meaning given such term
by section 408A(d)(2)(A) (without regard to
clause (iv) thereof).
``(B) Distributions within nonexclusion
period.--A payment or distribution from a
designated Roth account shall not be treated as
a qualified distribution if such payment or
distribution is made within the 5-taxable-year
period beginning with the earlier of--
``(i) the first taxable year for
which the individual made a designated
Roth contribution to any designated
Roth account established for such
individual under the same applicable
retirement plan, or
``(ii) if a rollover contribution
was made to such designated Roth
account from a designated Roth account
previously established for such
individual under another applicable
retirement plan, the first taxable year
for which the individual made a
designated Roth contribution to such
previously established account.
``(C) Distributions of excess deferrals and
contributions and earnings thereon.--The term
`qualified distribution' shall not include any
distribution of any excess deferral under
section 402(g)(2) or any excess contribution
under section 401(k)(8), and any income on the
excess deferral or contribution.
``(3) Treatment of distributions of certain excess
deferrals.--Notwithstanding section 72, if any excess
deferral under section 402(g)(2) attributable to a
designated Roth contribution is not distributed on or
before the 1st April 15 following the close of the
taxable year in which such excess deferral is made, the
amount of such excess deferral shall--
``(A) not be treated as investment in the
contract, and
``(B) be included in gross income for the
taxable year in which such excess is
distributed.
``(4) Aggregation rules.--Section 72 shall be
applied separately with respect to distributions and
payments from a designated Roth account and other
distributions and payments from the plan.
``(e) Other Definitions.--For purposes of this section--
``(1) Applicable retirement plan.--The term
`applicable retirement plan' means--
``(A) an employees' trust described in
section 401(a) which is exempt from tax under
section 501(a), and
``(B) a plan under which amounts are
contributed by an individual's employer for an
annuity contract described in section 403(b).
``(2) Elective deferral.--The term `elective
deferral' means any elective deferral described in
subparagraph (A) or (C) of section 402(g)(3).''.
(b) Excess Deferrals.--Section 402(g) (relating to
limitation on exclusion for elective deferrals) is amended--
(1) by adding at the end of paragraph (1)(A) (as
added by section 201(c)(1)) the following new sentence:
``The preceding sentence shall not apply the portion of
such excess as does not exceed the designated Roth
contributions of the individual for the taxable
year.''; and
(2) by inserting ``(or would be included but for
the last sentence thereof)'' after ``paragraph (1)'' in
paragraph (2)(A).
(c) Rollovers.--Subparagraph (B) of section 402(c)(8) is
amended by adding at the end the following:
``If any portion of an eligible rollover
distribution is attributable to payments or
distributions from a designated Roth account
(as defined in section 402A), an eligible
retirement plan with respect to such portion
shall include only another designated Roth
account and a Roth IRA.''.
(d) Reporting Requirements.--
(1) W-2 information.--Section 6051(a)(8) is amended
by inserting ``, including the amount of designated
Roth contributions (as defined in section 402A)''
before the comma at the end.
(2) Information.--Section 6047 is amended by
redesignating subsection (f) as subsection (g) and by
inserting after subsection (e) the following new
subsection:
``(f) Designated Roth Contributions.--The Secretary shall
require the plan administrator of each applicable retirement
plan (as defined in section 402A) to make such returns and
reports regarding designated Roth contributions (as defined in
section 402A) to the Secretary, participants and beneficiaries
of the plan, and such other persons as the Secretary may
prescribe.''.
(e) Conforming Amendments.--
(1) Section 408A(e) is amended by adding after the
first sentence the following new sentence: ``Such term
includes a rollover contribution described in section
402A(c)(3)(A).''.
(2) The table of sections for subpart A of part I
of subchapter D of chapter 1 is amended by inserting
after the item relating to section 402 the following
new item:
``Sec. 402A. Optional treatment of elective deferrals as Roth
contributions.''.
(f) Effective Date.--The amendments made by this section
shall apply to taxable years beginning after December 31, 2005.
SEC. 618. NONREFUNDABLE CREDIT TO CERTAIN INDIVIDUALS FOR ELECTIVE
DEFERRALS AND IRA CONTRIBUTIONS.
(a) In General.--Subpart A of part IV of subchapter A of
chapter 1 (relating to nonrefundable personal credits) is
amended by inserting after section 25A the following new
section:
``SEC. 25B. ELECTIVE DEFERRALS AND IRA CONTRIBUTIONS BY CERTAIN
INDIVIDUALS.
``(a) Allowance of Credit.--In the case of an eligible
individual, there shall be allowed as a credit against the tax
imposed by this subtitle for the taxable year an amount equal
to the applicable percentage of so much of the qualified
retirement savings contributions of the eligible individual for
the taxable year as do not exceed $2,000.
``(b) Applicable Percentage.--For purposes of this section,
the applicable percentage is the percentage determined in
accordance with the following table:
------------------------------------------------------------------------
Adjusted Gross Income
-------------------------------------------------------------
Joint return Head of a All other cases Applicable
--------------------- household -------------------- percentage
--------------------
Over Not over Over Not over Over Not over
------------------------------------------------------------------------
$30,000 ........ $22,500 ........ $15,000 50
30,000 32,500 22,500 24,375 15,000 16,250 20
32,500 50,000 24,375 37,500 16,250 25,000 10
50,000 ......... 37,500 ........ 25,000 ........ 0
------------------------------------------------------------------------
``(c) Eligible Individual.--For purposes of this section--
``(1) In general.--The term `eligible individual'
means any individual if such individual has attained
the age of 18 as of the close of the taxable year.
``(2) Dependents and full-time students not
eligible.--The term `eligible individual' shall not
include--
``(A) any individual with respect to whom a
deduction under section 151 is allowed to
another taxpayer for a taxable year beginning
in the calendar year in which such individual's
taxable year begins, and
``(B) any individual who is a student (as
defined in section 151(c)(4)).
``(d) Qualified Retirement Savings Contributions.--For
purposes of this section--
``(1) In general.--The term `qualified retirement
savings contributions' means, with respect to any
taxable year, the sum of--
``(A) the amount of the qualified
retirement contributions (as defined in section
219(e)) made by the eligible individual,
``(B) the amount of--
``(i) any elective deferrals (as
defined in section 402(g)(3)) of such
individual, and
``(ii) any elective deferral of
compensation by such individual under
an eligible deferred compensation plan
(as defined in section 457(b)) of an
eligible employer described in section
457(e)(1)(A), and
``(C) the amount of voluntary employee
contributions by such individual to any
qualified retirement plan (as defined in
section 4974(c)).
``(2) Reduction for certain distributions.--
``(A) In general.--The qualified retirement
savings contributions determined under
paragraph (1) shall be reduced (but not below
zero) by the sum of--
``(i) any distribution from a
qualified retirement plan (as defined
in section 4974(c)), or from an
eligible deferred compensation plan (as
defined in section 457(b)), received by
the individual during the testing
period which is includible in gross
income, and
``(ii) any distribution from a Roth
IRA or a Roth account received by the
individual during the testing period
which is not a qualified rollover
contribution (as defined in section
408A(e)) to a Roth IRA or a rollover
under section 402(c)(8)(B) to a Roth
account.
``(B) Testing period.--For purposes of
subparagraph (A), the testing period, with
respect to a taxable year, is the period which
includes--
``(i) such taxable year,
``(ii) the 2 preceding taxable
years, and
``(iii) the period after such
taxable year and before the due date
(including extensions) for filing the
return of tax for such taxable year.
``(C) Excepted distributions.--There shall
not be taken into account under subparagraph
(A)--
``(i) any distribution referred to
in section 72(p), 401(k)(8), 401(m)(6),
402(g)(2), 404(k), or 408(d)(4), and
``(ii) any distribution to which
section 408A(d)(3) applies.
``(D) Treatment of distributions received
by spouse of individual.--For purposes of
determining distributions received by an
individual under subparagraph (A) for any
taxable year, any distribution received by the
spouse of such individual shall be treated as
received by such individual if such individual
and spouse file a joint return for such taxable
year and for the taxable year during which the
spouse receives the distribution.
``(e) Adjusted Gross Income.--For purposes of this section,
adjusted gross income shall be determined without regard to
sections 911, 931, and 933.
``(f) Investment in the Contract.--Notwithstanding any
other provision of law, a qualified retirement savings
contribution shall not fail to be included in determining the
investment in the contract for purposes of section 72 by reason
of the credit under this section.
``(g) Termination.--This section shall not apply to taxable
years beginning after December 31, 2006.''.
(b) Credit Allowed Against Regular Tax and Alternative
Minimum Tax.--
(1) In general.--Section 25B, as added by
subsection (a), is amended by inserting after
subsection (f) the following new subsection:
``(g) Limitation Based on Amount of Tax.--The credit
allowed under subsection (a) for the taxable year shall not
exceed the excess of--
``(1) the sum of the regular tax liability (as
defined in section 26(b)) plus the tax imposed by
section 55, over
``(2) the sum of the credits allowable under this
subpart (other than this section and section 23) and
section 27 for the taxable year.''
(2) Conforming amendments.--
(A) Section 24(b)(3)(B), as amended by
sections 201(b) and 203(d), is amended by
striking ``section 23'' and inserting
``sections 23 and 25B''.
(B) Section 25(e)(1)(C), as amended by
section 201(b), is amended by inserting
``25B,'' after ``24,''.
(C) Section 26(a)(1), as amended by
sections 201(b) and 203, is amended by striking
``and 24'' and inserting ``, 24, and 25B''.
(D) Section 904(h), as amended by sections
201(b) and 203, is amended by striking ``and
24'' and inserting ``, 24, and 25B''.
(E) Section 1400C(d), as amended by
sections 201(b) and 203, is amended by striking
``and 24'' and inserting ``, 24, and 25B''.
(c) Conforming Amendment.--The table of sections for
subpart A of part IV of subchapter A of chapter 1, as amended
by section 432, is amended by inserting after the item relating
to section 25A the following new item:
``Sec. 25B. Elective deferrals and IRA contributions by certain
individuals.''
(d) Effective Date.--The amendments made by this section
shall apply to taxable years beginning after December 31, 2001.
SEC. 619. CREDIT FOR PENSION PLAN STARTUP COSTS OF SMALL EMPLOYERS.
(a) In General.--Subpart D of part IV of subchapter A of
chapter 1 (relating to business related credits) is amended by
adding at the end the following new section:
``SEC. 45E. SMALL EMPLOYER PENSION PLAN STARTUP COSTS.
``(a) General Rule.--For purposes of section 38, in the
case of an eligible employer, the small employer pension plan
startup cost credit determined under this section for any
taxable year is an amount equal to 50 percent of the qualified
startup costs paid or incurred by the taxpayer during the
taxable year.
``(b) Dollar Limitation.--The amount of the credit
determined under this section for any taxable year shall not
exceed--
``(1) $500 for the first credit year and each of
the 2 taxable years immediately following the first
credit year, and
``(2) zero for any other taxable year.
``(c) Eligible Employer.--For purposes of this section--
``(1) In general.--The term `eligible employer' has
the meaning given such term by section 408(p)(2)(C)(i).
``(2) Requirement for new qualified employer
plans.--Such term shall not include an employer if,
during the 3-taxable year period immediately preceding
the 1st taxable year for which the credit under this
section is otherwise allowable for a qualified employer
plan of the employer, the employer or any member of any
controlled group including the employer (or any
predecessor of either) established or maintained a
qualified employer plan with respect to which
contributions were made, or benefits were accrued, for
substantially the same employees as are in the
qualified employer plan.
``(d) Other Definitions.--For purposes of this section--
``(1) Qualified startup costs.--
``(A) In general.--The term `qualified
startup costs' means any ordinary and necessary
expenses of an eligible employer which are paid
or incurred in connection with--
``(i) the establishment or
administration of an eligible employer
plan, or
``(ii) the retirement-related
education of employees with respect to
such plan.
``(B) Plan must have at least 1
participant.--Such term shall not include any
expense in connection with a plan that does not
have at least 1 employee eligible to
participate who is not a highly compensated
employee.
``(2) Eligible employer plan.--The term `eligible
employer plan' means a qualified employer plan within
the meaning of section 4972(d).
``(3) First credit year.--The term `first credit
year' means--
``(A) the taxable year which includes the
date that the eligible employer plan to which
such costs relate becomes effective, or
``(B) at the election of the eligible
employer, the taxable year preceding the
taxable year referred to in subparagraph (A).
``(e) Special Rules.--For purposes of this section--
``(1) Aggregation rules.--All persons treated as a
single employer under subsection (a) or (b) of section
52, or subsection (n) or (o) of section 414, shall be
treated as one person. All eligible employer plans
shall be treated as 1 eligible employer plan.
``(2) Disallowance of deduction.--No deduction
shall be allowed for that portion of the qualified
startup costs paid or incurred for the taxable year
which is equal to the credit determined under
subsection (a).
``(3) Election not to claim credit.--This section
shall not apply to a taxpayer for any taxable year if
such taxpayer elects to have this section not apply for
such taxable year.''
(b) Credit Allowed as Part of General Business Credit.--
Section 38(b) (defining current year business credit) is
amended by striking ``plus'' at the end of paragraph (12), by
striking the period at the end of paragraph (13) and inserting
``, plus'', and by adding at the end the following new
paragraph:
``(14) in the case of an eligible employer (as
defined in section 45E(c)), the small employer pension
plan startup cost credit determined under section
45E(a).''
(c) Conforming Amendments.--
(1) Section 39(d) is amended by adding at the end
the following new paragraph:
``(10) No carryback of small employer pension plan
startup cost credit before january 1, 2002.--No portion
of the unused business credit for any taxable year
which is attributable to the small employer pension
plan startup cost credit determined under section 45E
may be carried back to a taxable year beginning before
January 1, 2002.''
(2) Subsection (c) of section 196 is amended by
striking ``and'' at the end of paragraph (8), by
striking the period at the end of paragraph (9) and
inserting ``, and'', and by adding at the end the
following new paragraph:
``(10) the small employer pension plan startup cost
credit determined under section 45E(a).''
(3) The table of sections for subpart D of part IV
of subchapter A of chapter 1 is amended by adding at
the end the following new item:
``Sec. 45E. Small employer pension plan startup costs.''
(d) Effective Date.--The amendments made by this section
shall apply to costs paid or incurred in taxable years
beginning after December 31, 2001, with respect to qualified
employer plans established after such date.
SEC. 620. ELIMINATION OF USER FEE FOR REQUESTS TO IRS REGARDING PENSION
PLANS.
(a) Elimination of Certain User Fees.--The Secretary of the
Treasury or the Secretary's delegate shall not require payment
of user fees under the program established under section 10511
of the Revenue Act of 1987 for requests to the Internal Revenue
Service for determination letters with respect to the qualified
status of a pension benefit plan maintained solely by one or
more eligible employers or any trust which is part of the plan.
The preceding sentence shall not apply to any request--
(1) made after the later of--
(A) the fifth plan year the pension benefit
plan is in existence; or
(B) the end of any remedial amendment
period with respect to the plan beginning
within the first 5 plan years; or
(2) made by the sponsor of any prototype or similar
plan which the sponsor intends to market to
participating employers.
(b) Pension Benefit Plan.--For purposes of this section,
the term ``pension benefit plan'' means a pension, profit-
sharing, stock bonus, annuity, or employee stock ownership
plan.
(c) Eligible Employer.--For purposes of this section, the
term ``eligible employer'' means an eligible employer (as
defined in section 408(p)(2)(C)(i)(I) of the Internal Revenue
Code of 1986) which has at least one employee who is not a
highly compensated employee (as defined in section 414(q)) and
is participating in the plan. The determination of whether an
employer is an eligible employer under this section shall be
made as of the date of the request described in subsection (a).
(d) Determination of Average Fees Charged.--For purposes of
any determination of average fees charged, any request to which
subsection (a) applies shall not be taken into account.
(e) Effective Date.--The provisions of this section shall
apply with respect to requests made after December 31, 2001.
SEC. 621. TREATMENT OF NONRESIDENT ALIENS ENGAGED IN INTERNATIONAL
TRANSPORTATION SERVICES.
(a) Exclusion From Income Sourcing Rules.--The second
sentence of section 861(a)(3) (relating to gross income from
sources within the United States) is amended by striking
``except for purposes of sections 79 and 105 and subchapter
D,''.
(b) Effective Date.--The amendment made by subsection (a)
shall apply to remuneration for services performed in plan
years beginning after December 31, 2001.
Subtitle C--Enhancing Fairness for Women
SEC. 631. CATCH-UP CONTRIBUTIONS FOR INDIVIDUALS AGE 50 OR OVER.
(a) In General.--Section 414 (relating to definitions and
special rules) is amended by adding at the end the following
new subsection:
``(v) Catch-up Contributions for Individuals Age 50 or
Over.--
``(1) In general.--An applicable employer plan
shall not be treated as failing to meet any requirement
of this title solely because the plan permits an
eligible participant to make additional elective
deferrals in any plan year.
``(2) Limitation on amount of additional
deferrals.--
``(A) In general.--A plan shall not permit
additional elective deferrals under paragraph
(1) for any year in an amount greater than the
lesser of--
``(i) the applicable dollar amount,
or
``(ii) the excess (if any) of--
``(I) the participant's
compensation (as defined in
section 415(c)(3)) for the
year, over
``(II) any other elective
deferrals of the participant
for such year which are made
without regard to this
subsection.
``(B) Applicable dollar amount.--For
purposes of this paragraph--
``(i) In the case of an applicable
employer plan other than a plan
described in section 401(k)(11) or
408(p), the applicable dollar amount
shall be determined in accordance with
the following table:
``For taxable years The applicable
beginning in: dollar amount is:
2002...................................................... $1,000
2003...................................................... $2,000
2004...................................................... $3,000
2005...................................................... $4,000
2006 and thereafter....................................... $5,000.
``(ii) In the case of an applicable
employer plan described in section
401(k)(11) or 408(p), the applicable
dollar amount shall be determined in
accordance with the following table:
``For taxable years The applicable
beginning in: dollar amount is:
2002.................................................. $500
2003.................................................. $1,000
2004.................................................. $1,500
2005.................................................. $2,000
2006 and thereafter................................... $2,500.
``(C) Cost-of-living adjustment.--In the
case of a year beginning after December 31,
2006, the Secretary shall adjust annually the
$5,000 amount in subparagraph (B)(i) and the
$2,500 amount in subparagraph (B)(ii) for
increases in the cost-of-living at the same
time and in the same manner as adjustments
under section 415(d); except that the base
period taken into account shall be the calendar
quarter beginning July 1, 2005, and any
increase under this subparagraph which is not a
multiple of $500 shall be rounded to the next
lower multiple of $500.''.
``(3) Treatment of contributions.--In the case of
any contribution to a plan under paragraph (1)--
``(A) such contribution shall not, with
respect to the year in which the contribution
is made--
``(i) be subject to any otherwise
applicable limitation contained in
section 402(g), 402(h), 403(b), 404(a),
404(h), 408(k), 408(p), 415, or 457, or
``(ii) be taken into account in
applying such limitations to other
contributions or benefits under such
plan or any other such plan, and
``(B) except as provided in paragraph (4),
such plan shall not be treated as failing to
meet the requirements of section 401(a)(4),
401(a)(26), 401(k)(3), 401(k)(11), 401(k)(12),
403(b)(12), 408(k), 408(p), 408B, 410(b), or
416 by reason of the making of (or the right to
make) such contribution.
``(4) Application of nondiscrimination rules.--
``(A) In general.--An applicable employer
plan shall be treated as failing to meet the
nondiscrimination requirements under section
401(a)(4) with respect to benefits, rights, and
features unless the plan allows all eligible
participants to make the same election with
respect to the additional elective deferrals
under this subsection.
``(B) Aggregation.--For purposes of
subparagraph (A), all plans maintained by
employers who are treated as a single employer
under subsection (b), (c), (m), or (o) of
section 414 shall be treated as 1 plan.
``(5) Eligible participant.--For purposes of this
subsection, the term `eligible participant' means, with
respect to any plan year, a participant in a plan--
``(A) who has attained the age of 50 before
the close of the plan year, and
``(B) with respect to whom no other
elective deferrals may (without regard to this
subsection) be made to the plan for the plan
year by reason of the application of any
limitation or other restriction described in
paragraph (3) or comparable limitation or
restriction contained in the terms of the plan.
``(6) Other definitions and rules.--For purposes of
this subsection--
``(A) Applicable employer plan.--The term
`applicable employer plan' means--
``(i) an employees' trust described
in section 401(a) which is exempt from
tax under section 501(a),
``(ii) a plan under which amounts
are contributed by an individual's
employer for an annuity contract
described in section 403(b),
``(iii) an eligible deferred
compensation plan under section 457 of
an eligible employer described in
section 457(e)(1)(A), and
``(iv) an arrangement meeting the
requirements of section 408 (k) or (p).
``(B) Elective deferral.--The term
`elective deferral' has the meaning given such
term by subsection (u)(2)(C).
``(C) Exception for section 457 plans.--
This subsection shall not apply to an
applicable employer plan described in
subparagraph (A)(iii) for any year to which
section 457(b)(3) applies.''.
(b) Effective Date.--The amendment made by this section
shall apply to contributions in taxable years beginning after
December 31, 2001.
SEC. 632. EQUITABLE TREATMENT FOR CONTRIBUTIONS OF EMPLOYEES TO DEFINED
CONTRIBUTION PLANS.
(a) Equitable Treatment.--
(1) In general.--Subparagraph (B) of section
415(c)(1) (relating to limitation for defined
contribution plans) is amended by striking ``25
percent'' and inserting ``100 percent''.
(2) Application to section 403(b).--Section 403(b)
is amended--
(A) by striking ``the exclusion allowance
for such taxable year'' in paragraph (1) and
inserting ``the applicable limit under section
415'',
(B) by striking paragraph (2), and
(C) by inserting ``or any amount received
by a former employee after the fifth taxable
year following the taxable year in which such
employee was terminated'' before the period at
the end of the second sentence of paragraph
(3).
(3) Conforming amendments.--
(A) Subsection (f) of section 72 is amended
by striking ``section 403(b)(2)(D)(iii))'' and
inserting ``section 403(b)(2)(D)(iii), as in
effect before the enactment of the Economic
Growth and Tax Relief Reconciliation Act of
2001''.
(B) Section 404(a)(10)(B) is amended by
striking ``, the exclusion allowance under
section 403(b)(2),''.
(C) Section 415(a)(2) is amended by
striking ``, and the amount of the contribution
for such portion shall reduce the exclusion
allowance as provided in section 403(b)(2)''.
(D) Section 415(c)(3) is amended by adding
at the end the following new subparagraph:
``(E) Annuity contracts.--In the case of an
annuity contract described in section 403(b),
the term `participant's compensation' means the
participant's includible compensation
determined under section 403(b)(3).''.
(E) Section 415(c) is amended by striking
paragraph (4).
(F) Section 415(c)(7) is amended to read as
follows:
``(7) Certain contributions by church plans not
treated as exceeding limit.--
``(A) In general.--Notwithstanding any
other provision of this subsection, at the
election of a participant who is an employee of
a church or a convention or association of
churches, including an organization described
in section 414(e)(3)(B)(ii), contributions and
other additions for an annuity contract or
retirement income account described in section
403(b) with respect to such participant, when
expressed as an annual addition to such
participant's account, shall be treated as not
exceeding the limitation of paragraph (1) if
such annual addition is not in excess of
$10,000.
``(B) $40,000 aggregate limitation.--The
total amount of additions with respect to any
participant which may be taken into account for
purposes of this subparagraph for all years may
not exceed $40,000.
``(C) Annual addition.--For purposes of
this paragraph, the term `annual addition' has
the meaning given such term by paragraph
(2).''.
(G) Subparagraph (B) of section 402(g)(7)
(as redesignated by section 611(c)(3)) is
amended by inserting before the period at the
end the following: ``(as in effect before the
enactment of the Economic Growth and Tax Relief
Reconciliation Act of 2001''.
(H) Section 664(g) is amended--
(i) in paragraph (3)(E) by striking
``limitations under section 415(c)''
and inserting ``applicable limitation
under paragraph (7)'', and
(ii) by adding at the end the
following new paragraph:
``(7) Applicable limitation.--
``(A) In general.--For purposes of
paragraph (3)(E), the applicable limitation
under this paragraph with respect to a
participant is an amount equal to the lesser
of--
``(i) $30,000, or
``(ii) 25 percent of the
participant's compensation (as defined
in section 415(c)(3)).
``(B) Cost-of-living adjustment.--The
Secretary shall adjust annually the $30,000
amount under subparagraph (A)(i) at the same
time and in the same manner as under section
415(d), except that the base period shall be
the calendar quarter beginning October 1, 1993,
and any increase under this subparagraph which
is not a multiple of $5,000 shall be rounded to
the next lowest multiple of $5,000.''.
(4) Effective date.--The amendments made by this
subsection shall apply to years beginning after
December 31, 2001.
(b) Special Rules for Sections 403(b) and 408.--
(1) In general.--Subsection (k) of section 415 is
amended by adding at the end the following new
paragraph:
``(4) Special rules for sections 403(b) and 408.--
For purposes of this section, any annuity contract
described in section 403(b) for the benefit of a
participant shall be treated as a defined contribution
plan maintained by each employer with respect to which
the participant has the control required under
subsection (b) or (c) of section 414 (as modified by
subsection (h)). For purposes of this section, any
contribution by an employer to a simplified employee
pension plan for an individual for a taxable year shall
be treated as an employer contribution to a defined
contribution plan for such individual for such year.''.
(2) Effective date.--
(A) In general.--The amendment made by
paragraph (1) shall apply to limitation years
beginning after December 31, 1999.
(B) Exclusion allowance.--Effective for
limitation years beginning in 2000, in the case
of any annuity contract described in section
403(b) of the Internal Revenue Code of 1986,
the amount of the contribution disqualified by
reason of section 415(g) of such Code shall
reduce the exclusion allowance as provided in
section 403(b)(2) of such Code.
(3) Election to modify section 403(b) exclusion
allowance to conform to section 415 modification.--In
the case of taxable years beginning after December 31,
1999, and before January 1, 2002, a plan may disregard
the requirement in the regulations regarding the
exclusion allowance under section 403(b)(2) of the
Internal Revenue Code of 1986 that contributions to a
defined benefit pension plan be treated as previously
excluded amounts for purposes of the exclusion
allowance.
(c) Deferred Compensation Plans of State and Local
Governments and Tax-Exempt Organizations.--
(1) In general.--Subparagraph (B) of section
457(b)(2) (relating to salary limitation on eligible
deferred compensation plans) is amended by striking
``33\1/3\ percent'' and inserting ``100 percent''.
(2) Effective date.--The amendment made by this
subsection shall apply to years beginning after
December 31, 2001.
SEC. 633. FASTER VESTING OF CERTAIN EMPLOYER MATCHING CONTRIBUTIONS.
(a) In General.--Section 411(a) (relating to minimum
vesting standards) is amended--
(1) in paragraph (2), by striking ``A plan'' and
inserting ``Except as provided in paragraph (12), a
plan''; and
(2) by adding at the end the following:
``(12) Faster vesting for matching contributions.--
In the case of matching contributions (as defined in
section 401(m)(4)(A)), paragraph (2) shall be applied--
``(A) by substituting `3 years' for `5
years' in subparagraph (A), and
``(B) by substituting the following table
for the table contained in subparagraph (B):
The nonforfeitable
``Years of service: percentage is:
2................................................. 20
3................................................. 40
4................................................. 60
5................................................. 80
6................................................. 100.''.
(b) Amendment of ERISA.--Section 203(a) of the Employee
Retirement Income Security Act of 1974 (29 U.S.C. 1053(a)) is
amended--
(1) in paragraph (2), by striking ``A plan'' and
inserting ``Except as provided in paragraph (4), a
plan'', and
(2) by adding at the end the following:
``(4) In the case of matching contributions (as
defined in section 401(m)(4)(A) of the Internal Revenue
Code of 1986), paragraph (2) shall be applied--
``(A) by substituting `3 years' for `5
years' in subparagraph (A), and
``(B) by substituting the following table
for the table contained in subparagraph (B):
The nonforfeitable
``Years of service: percentage is:
2..................................................... 20
3..................................................... 40
4..................................................... 60
5..................................................... 80
6..................................................... 100.''.
(c) Effective Dates.--
(1) In general.--Except as provided in paragraph
(2), the amendments made by this section shall apply to
contributions for plan years beginning after December
31, 2001.
(2) Collective bargaining agreements.--In the case
of a plan maintained pursuant to one or more collective
bargaining agreements between employee representatives
and one or more employers ratified by the date of the
enactment of this Act, the amendments made by this
section shall not apply to contributions on behalf of
employees covered by any such agreement for plan years
beginning before the earlier of--
(A) the later of--
(i) the date on which the last of
such collective bargaining agreements
terminates (determined without regard
to any extension thereof on or after
such date of the enactment); or
(ii) January 1, 2002; or
(B) January 1, 2006.
(3) Service required.--With respect to any plan,
the amendments made by this section shall not apply to
any employee before the date that such employee has 1
hour of service under such plan in any plan year to
which the amendments made by this section apply.
SEC. 634. MODIFICATION TO MINIMUM DISTRIBUTION RULES.
The Secretary of the Treasury shall modify the life
expectancy tables under the regulations relating to minimum
distribution requirements under sections 401(a)(9), 408(a)(6)
and (b)(3), 403(b)(10), and 457(d)(2) of the Internal Revenue
Code to reflect current life expectancy.
SEC. 635. CLARIFICATION OF TAX TREATMENT OF DIVISION OF SECTION 457
PLAN BENEFITS UPON DIVORCE.
(a) In General.--Section 414(p)(11) (relating to
application of rules to governmental and church plans) is
amended--
(1) by inserting ``or an eligible deferred
compensation plan (within the meaning of section
457(b))'' after ``subsection (e))''; and
(2) in the heading, by striking ``governmental and
church plans'' and inserting ``certain other plans''.
(b) Waiver of Certain Distribution Requirements.--Paragraph
(10) of section 414(p) is amended by striking ``and section
409(d)'' and inserting ``section 409(d), and section 457(d)''.
(c) Tax Treatment of Payments From a Section 457 Plan.--
Subsection (p) of section 414 is amended by redesignating
paragraph (12) as paragraph (13) and inserting after paragraph
(11) the following new paragraph:
``(12) Tax treatment of payments from a section 457
plan.--If a distribution or payment from an eligible
deferred compensation plan described in section 457(b)
is made pursuant to a qualified domestic relations
order, rules similar to the rules of section
402(e)(1)(A) shall apply to such distribution or
payment.''.
(d) Effective Date.--The amendment made by this section
shall apply to transfers, distributions, and payments made
after December 31, 2001.
SEC. 636. PROVISIONS RELATING TO HARDSHIP DISTRIBUTIONS.
(a) Safe Harbor Relief.--
(1) In general.--The Secretary of the Treasury
shall revise the regulations relating to hardship
distributions under section 401(k)(2)(B)(i)(IV) of the
Internal Revenue Code of 1986 to provide that the
period an employee is prohibited from making elective
and employee contributions in order for a distribution
to be deemed necessary to satisfy financial need shall
be equal to 6 months.
(2) Effective date.--The revised regulations under
this subsection shall apply to years beginning after
December 31, 2001.
(b) Hardship Distributions Not Treated as Eligible Rollover
Distributions.--
(1) Modification of definition of eligible
rollover.--Subparagraph (C) of section 402(c)(4)
(relating to eligible rollover distribution) is amended
to read as follows:
``(C) any distribution which is made upon
hardship of the employee.''.
(2) Effective date.--The amendment made by this
subsection shall apply to distributions made after
December 31, 2001.
SEC. 637. WAIVER OF TAX ON NONDEDUCTIBLE CONTRIBUTIONS FOR DOMESTIC OR
SIMILAR WORKERS.
(a) In General.--Section 4972(c)(6) (relating to exceptions
to nondeductible contributions), as amended by section 616, is
amended by striking ``and'' at the end of subparagraph (A), by
striking the period and inserting ``, or'' at the end of
subparagraph (B), and by inserting after subparagraph (B) the
following new subparagraph:
``(C) so much of the contributions to a
simple retirement account (within the meaning
of section 408(p)) or a simple plan (within the
meaning of section 401(k)(11)) which are not
deductible when contributed solely because such
contributions are not made in connection with a
trade or business of the employer.''
(b) Exclusion of Certain Contributions.--Section
4972(c)(6), as amended by subsection (a), is amended by adding
at the end the following new sentence: ``Subparagraph (C) shall
not apply to contributions made on behalf of the employer or a
member of the employer's family (as defined in section
447(e)(1)).''.
(c) No Inference.--Nothing in the amendments made by this
section shall be construed to infer the proper treatment of
nondeductible contributions under the laws in effect before
such amendments.
(d) Effective Date.--The amendments made by this section
shall apply to taxable years beginning after December 31, 2001.
Subtitle D--Increasing Portability for Participants
SEC. 641. ROLLOVERS ALLOWED AMONG VARIOUS TYPES OF PLANS.
(a) Rollovers From and to Section 457 Plans.--
(1) Rollovers from section 457 plans.--
(A) In general.--Section 457(e) (relating
to other definitions and special rules) is
amended by adding at the end the following:
``(16) Rollover amounts.--
``(A) General rule.--In the case of an
eligible deferred compensation plan established
and maintained by an employer described in
subsection (e)(1)(A), if--
``(i) any portion of the balance to
the credit of an employee in such plan
is paid to such employee in an eligible
rollover distribution (within the
meaning of section 402(c)(4)),
``(ii) the employee transfers any
portion of the property such employee
receives in such distribution to an
eligible retirement plan described in
section 402(c)(8)(B), and
``(iii) in the case of a
distribution of property other than
money, the amount so transferred
consists of the property distributed,
then such distribution (to the extent so
transferred) shall not be includible in gross
income for the taxable year in which paid.
``(B) Certain rules made applicable.--The
rules of paragraphs (2) through (7) and (9) of
section 402(c) and section 402(f) shall apply
for purposes of subparagraph (A).
``(C) Reporting.--Rollovers under this
paragraph shall be reported to the Secretary in
the same manner as rollovers from qualified
retirement plans (as defined in section
4974(c)).''.
(B) Deferral limit determined without
regard to rollover amounts.--Section 457(b)(2)
(defining eligible deferred compensation plan)
is amended by inserting ``(other than rollover
amounts)'' after ``taxable year''.
(C) Direct rollover.--Paragraph (1) of
section 457(d) is amended by striking ``and''
at the end of subparagraph (A), by striking the
period at the end of subparagraph (B) and
inserting ``, and'', and by inserting after
subparagraph (B) the following:
``(C) in the case of a plan maintained by
an employer described in subsection (e)(1)(A),
the plan meets requirements similar to the
requirements of section 401(a)(31).
Any amount transferred in a direct trustee-to-trustee
transfer in accordance with section 401(a)(31) shall
not be includible in gross income for the taxable year
of transfer.''.
(D) Withholding.--
(i) Paragraph (12) of section
3401(a) is amended by adding at the end
the following:
``(E) under or to an eligible deferred
compensation plan which, at the time of such
payment, is a plan described in section 457(b)
which is maintained by an eligible employer
described in section 457(e)(1)(A), or''.
(ii) Paragraph (3) of section
3405(c) is amended to read as follows:
``(3) Eligible rollover distribution.--For purposes
of this subsection, the term `eligible rollover
distribution' has the meaning given such term by
section 402(f)(2)(A).''.
(iii) Liability for withholding.--
Subparagraph (B) of section 3405(d)(2)
is amended by striking ``or'' at the
end of clause (ii), by striking the
period at the end of clause (iii) and
inserting ``, or'', and by adding at
the end the following:
``(iv) section 457(b) and which is
maintained by an eligible employer
described in section 457(e)(1)(A).''.
(2) Rollovers to section 457 plans.--
(A) In general.--Section 402(c)(8)(B)
(defining eligible retirement plan) is amended
by striking ``and'' at the end of clause (iii),
by striking the period at the end of clause
(iv) and inserting ``, and'', and by inserting
after clause (iv) the following new clause:
``(v) an eligible deferred
compensation plan described in section
457(b) which is maintained by an
eligible employer described in section
457(e)(1)(A).''.
(B) Separate accounting.--Section 402(c) is
amended by adding at the end the following new
paragraph:
``(10) Separate accounting.--Unless a plan
described in clause (v) of paragraph (8)(B) agrees to
separately account for amounts rolled into such plan
from eligible retirement plans not described in such
clause, the plan described in such clause may not
accept transfers or rollovers from such retirement
plans.''.
(C) 10 percent additional tax.--Subsection
(t) of section 72 (relating to 10-percent
additional tax on early distributions from
qualified retirement plans) is amended by
adding at the end the following new paragraph:
``(9) Special rule for rollovers to section 457
plans.--For purposes of this subsection, a distribution
from an eligible deferred compensation plan (as defined
in section 457(b)) of an eligible employer described in
section 457(e)(1)(A) shall be treated as a distribution
from a qualified retirement plan described in
4974(c)(1) to the extent that such distribution is
attributable to an amount transferred to an eligible
deferred compensation plan from a qualified retirement
plan (as defined in section 4974(c)).''.
(b) Allowance of Rollovers From and To 403(b) Plans.--
(1) Rollovers from section 403(b) plans.--Section
403(b)(8)(A)(ii) (relating to rollover amounts) is
amended by striking ``such distribution'' and all that
follows and inserting ``such distribution to an
eligible retirement plan described in section
402(c)(8)(B), and''.
(2) Rollovers to section 403(b) plans.--Section
402(c)(8)(B) (defining eligible retirement plan), as
amended by subsection (a), is amended by striking
``and'' at the end of clause (iv), by striking the
period at the end of clause (v) and inserting ``,
and'', and by inserting after clause (v) the following
new clause:
``(vi) an annuity contract
described in section 403(b).''.
(c) Expanded Explanation to Recipients of Rollover
Distributions.--Paragraph (1) of section 402(f) (relating to
written explanation to recipients of distributions eligible for
rollover treatment) is amended by striking ``and'' at the end
of subparagraph (C), by striking the period at the end of
subparagraph (D) and inserting ``, and'', and by adding at the
end the following new subparagraph:
``(E) of the provisions under which
distributions from the eligible retirement plan
receiving the distribution may be subject to
restrictions and tax consequences which are
different from those applicable to
distributions from the plan making such
distribution.''.
(d) Spousal Rollovers.--Section 402(c)(9) (relating to
rollover where spouse receives distribution after death of
employee) is amended by striking ``; except that'' and all that
follows up to the end period.
(e) Conforming Amendments.--
(1) Section 72(o)(4) is amended by striking ``and
408(d)(3)'' and inserting ``403(b)(8), 408(d)(3), and
457(e)(16)''.
(2) Section 219(d)(2) is amended by striking ``or
408(d)(3)'' and inserting ``408(d)(3), or 457(e)(16)''.
(3) Section 401(a)(31)(B) is amended by striking
``and 403(a)(4)'' and inserting ``, 403(a)(4),
403(b)(8), and 457(e)(16)''.
(4) Subparagraph (A) of section 402(f)(2) is
amended by striking ``or paragraph (4) of section
403(a)'' and inserting ``, paragraph (4) of section
403(a), subparagraph (A) of section 403(b)(8), or
subparagraph (A) of section 457(e)(16)''.
(5) Paragraph (1) of section 402(f) is amended by
striking ``from an eligible retirement plan''.
(6) Subparagraphs (A) and (B) of section 402(f)(1)
are amended by striking ``another eligible retirement
plan'' and inserting ``an eligible retirement plan''.
(7) Subparagraph (B) of section 403(b)(8) is
amended to read as follows:
``(B) Certain rules made applicable.--The
rules of paragraphs (2) through (7) and (9) of
section 402(c) and section 402(f) shall apply
for purposes of subparagraph (A), except that
section 402(f) shall be applied to the payor in
lieu of the plan administrator.''.
(8) Section 408(a)(1) is amended by striking ``or
403(b)(8),'' and inserting ``403(b)(8), or
457(e)(16)''.
(9) Subparagraphs (A) and (B) of section 415(b)(2)
are each amended by striking ``and 408(d)(3)'' and
inserting ``403(b)(8), 408(d)(3), and 457(e)(16)''.
(10) Section 415(c)(2) is amended by striking ``and
408(d)(3)'' and inserting ``408(d)(3), and
457(e)(16)''.
(11) Section 4973(b)(1)(A) is amended by striking
``or 408(d)(3)'' and inserting ``408(d)(3), or
457(e)(16)''.
(f) Effective Date; Special Rule.--
(1) Effective date.--The amendments made by this
section shall apply to distributions after December 31,
2001.
(2) Reasonable notice.--No penalty shall be imposed
on a plan for the failure to provide the information
required by the amendment made by subsection (c) with
respect to any distribution made before the date that
is 90 days after the date on which the Secretary of the
Treasury issues a safe harbor rollover notice after the
date of the enactment of this Act, if the administrator
of such plan makes a reasonable attempt to comply with
such requirement.
(3) Special rule.--Notwithstanding any other
provision of law, subsections (h)(3) and (h)(5) of
section 1122 of the Tax Reform Act of 1986 shall not
apply to any distribution from an eligible retirement
plan (as defined in clause (iii) or (iv) of section
402(c)(8)(B) of the Internal Revenue Code of 1986) on
behalf of an individual if there was a rollover to such
plan on behalf of such individual which is permitted
solely by reason of any amendment made by this section.
SEC. 642. ROLLOVERS OF IRAS INTO WORKPLACE RETIREMENT PLANS.
(a) In General.--Subparagraph (A) of section 408(d)(3)
(relating to rollover amounts) is amended by adding ``or'' at
the end of clause (i), by striking clauses (ii) and (iii), and
by adding at the end the following:
``(ii) the entire amount received
(including money and any other
property) is paid into an eligible
retirement plan for the benefit of such
individual not later than the 60th day
after the date on which the payment or
distribution is received, except that
the maximum amount which may be paid
into such plan may not exceed the
portion of the amount received which is
includible in gross income (determined
without regard to this paragraph).
For purposes of clause (ii), the term `eligible
retirement plan' means an eligible retirement
plan described in clause (iii), (iv), (v), or
(vi) of section 402(c)(8)(B).''.
(b) Conforming Amendments.--
(1) Paragraph (1) of section 403(b) is amended by
striking ``section 408(d)(3)(A)(iii)'' and inserting
``section 408(d)(3)(A)(ii)''.
(2) Clause (i) of section 408(d)(3)(D) is amended
by striking ``(i), (ii), or (iii)'' and inserting ``(i)
or (ii)''.
(3) Subparagraph (G) of section 408(d)(3) is
amended to read as follows:
``(G) Simple retirement accounts.--In the
case of any payment or distribution out of a
simple retirement account (as defined in
subsection (p)) to which section 72(t)(6)
applies, this paragraph shall not apply unless
such payment or distribution is paid into
another simple retirement account.''.
(c) Effective Date; Special Rule.--
(1) Effective date.--The amendments made by this
section shall apply to distributions after December 31,
2001.
(2) Special rule.--Notwithstanding any other
provision of law, subsections (h)(3) and (h)(5) of
section 1122 of the Tax Reform Act of 1986 shall not
apply to any distribution from an eligible retirement
plan (as defined in clause (iii) or (iv) of section
402(c)(8)(B) of the Internal Revenue Code of 1986) on
behalf of an individual if there was a rollover to such
plan on behalf of such individual which is permitted
solely by reason of the amendments made by this
section.
SEC. 643. ROLLOVERS OF AFTER-TAX CONTRIBUTIONS.
(a) Rollovers From Exempt Trusts.--Paragraph (2) of section
402(c) (relating to maximum amount which may be rolled over) is
amended by adding at the end the following: ``The preceding
sentence shall not apply to such distribution to the extent--
``(A) such portion is transferred in a
direct trustee-to-trustee transfer to a
qualified trust which is part of a plan which
is a defined contribution plan and which agrees
to separately account for amounts so
transferred, including separately accounting
for the portion of such distribution which is
includible in gross income and the portion of
such distribution which is not so includible,
or
``(B) such portion is transferred to an
eligible retirement plan described in clause
(i) or (ii) of paragraph (8)(B).''.
(b) Optional Direct Transfer of Eligible Rollover
Distributions.--Subparagraph (B) of section 401(a)(31)
(relating to limitation) is amended by adding at the end the
following: ``The preceding sentence shall not apply to such
distribution if the plan to which such distribution is
transferred--
``(i) agrees to separately account
for amounts so transferred, including
separately accounting for the portion
of such distribution which is
includible in gross income and the
portion of such distribution which is
not so includible, or
``(ii) is an eligible retirement
plan described in clause (i) or (ii) of
section 402(c)(8)(B).''.
(c) Rules for Applying Section 72 to IRAs.--Paragraph (3)
of section 408(d) (relating to special rules for applying
section 72) is amended by inserting at the end the following:
``(H) Application of section 72.--
``(i) In general.--If--
``(I) a distribution is
made from an individual
retirement plan, and
``(II) a rollover
contribution is made to an
eligible retirement plan
described in section
402(c)(8)(B)(iii), (iv), (v),
or (vi) with respect to all or
part of such distribution,
then, notwithstanding paragraph (2),
the rules of clause (ii) shall apply
for purposes of applying section 72.
``(ii) Applicable rules.--In the
case of a distribution described in
clause (i)--
``(I) section 72 shall be
applied separately to such
distribution,
``(II) notwithstanding the
pro rata allocation of income
on, and investment in, the
contract to distributions under
section 72, the portion of such
distribution rolled over to an
eligible retirement plan
described in clause (i) shall
be treated as from income on
the contract (to the extent of
the aggregate income on the
contract from all individual
retirement plans of the
distributee), and
``(III) appropriate
adjustments shall be made in
applying section 72 to other
distributions in such taxable
year and subsequent taxable
years.''.
(d) Effective Date.--The amendments made by this section
shall apply to distributions made after December 31, 2001.
SEC. 644. HARDSHIP EXCEPTION TO 60-DAY RULE.
(a) Exempt Trusts.--Paragraph (3) of section 402(c)
(relating to transfer must be made within 60 days of receipt)
is amended to read as follows:
``(3) Transfer must be made within 60 days of
receipt.--
``(A) In general.--Except as provided in
subparagraph (B), paragraph (1) shall not apply
to any transfer of a distribution made after
the 60th day following the day on which the
distributee received the property distributed.
``(B) Hardship exception.--The Secretary
may waive the 60-day requirement under
subparagraph (A) where the failure to waive
such requirement would be against equity or
good conscience, including casualty, disaster,
or other events beyond the reasonable control
of the individual subject to such
requirement.''.
(b) IRAs.--Paragraph (3) of section 408(d) (relating to
rollover contributions), as amended by section 643, is amended
by adding after subparagraph (H) the following new
subparagraph:
``(I) Waiver of 60-day requirement.--The
Secretary may waive the 60-day requirement
under subparagraphs (A) and (D) where the
failure to waive such requirement would be
against equity or good conscience, including
casualty, disaster, or other events beyond the
reasonable control of the individual subject to
such requirement.''.
(c) Effective Date.--The amendments made by this section
shall apply to distributions after December 31, 2001.
SEC. 645. TREATMENT OF FORMS OF DISTRIBUTION.
(a) Plan Transfers.--
(1) Amendment of internal revenue code.--Paragraph
(6) of section 411(d) (relating to accrued benefit not
to be decreased by amendment) is amended by adding at
the end the following:
``(D) Plan transfers.--
``(i) In general.--A defined
contribution plan (in this subparagraph
referred to as the `transferee plan')
shall not be treated as failing to meet
the requirements of this subsection
merely because the transferee plan does
not provide some or all of the forms of
distribution previously available under
another defined contribution plan (in
this subparagraph referred to as the
`transferor plan') to the extent that--
``(I) the forms of
distribution previously
available under the transferor
plan applied to the account of
a participant or beneficiary
under the transferor plan that
was transferred from the
transferor plan to the
transferee plan pursuant to a
direct transfer rather than
pursuant to a distribution from
the transferor plan,
``(II) the terms of both
the transferor plan and the
transferee plan authorize the
transfer described in subclause
(I),
``(III) the transfer
described in subclause (I) was
made pursuant to a voluntary
election by the participant or
beneficiary whose account was
transferred to the transferee
plan,
``(IV) the election
described in subclause (III)
was made after the participant
or beneficiary received a
notice describing the
consequences of making the
election, and
``(V) the transferee plan
allows the participant or
beneficiary described in
subclause (III) to receive any
distribution to which the
participant or beneficiary is
entitled under the transferee
plan in the form of a single
sum distribution.
``(ii) Special rule for mergers,
etc.--Clause (i) shall apply to plan
mergers and other transactions having
the effect of a direct transfer,
including consolidations of benefits
attributable to different employers
within a multiple employer plan.
``(E) Elimination of form of
distribution.--Except to the extent provided in
regulations, a defined contribution plan shall
not be treated as failing to meet the
requirements of this section merely because of
the elimination of a form of distribution
previously available thereunder. This
subparagraph shall not apply to the elimination
of a form of distribution with respect to any
participant unless--
``(i) a single sum payment is
available to such participant at the
same time or times as the form of
distribution being eliminated, and
``(ii) such single sum payment is
based on the same or greater portion of
the participant's account as the form
of distribution being eliminated.''.
(2) Amendment of erisa.--Section 204(g) of the
Employee Retirement Income Security Act of 1974 (29
U.S.C. 1054(g)) is amended by adding at the end the
following:
``(4)(A) A defined contribution plan (in this subparagraph
referred to as the `transferee plan') shall not be treated as
failing to meet the requirements of this subsection merely
because the transferee plan does not provide some or all of the
forms of distribution previously available under another
defined contribution plan (in this subparagraph referred to as
the `transferor plan') to the extent that--
``(i) the forms of distribution previously
available under the transferor plan applied to the
account of a participant or beneficiary under the
transferor plan that was transferred from the
transferor plan to the transferee plan pursuant to a
direct transfer rather than pursuant to a distribution
from the transferor plan;
``(ii) the terms of both the transferor plan and
the transferee plan authorize the transfer described in
clause (i);
``(iii) the transfer described in clause (i) was
made pursuant to a voluntary election by the
participant or beneficiary whose account was
transferred to the transferee plan;
``(iv) the election described in clause (iii) was
made after the participant or beneficiary received a
notice describing the consequences of making the
election; and
``(v) the transferee plan allows the participant or
beneficiary described in clause (iii) to receive any
distribution to which the participant or beneficiary is
entitled under the transferee plan in the form of a
single sum distribution.
``(B) Subparagraph (A) shall apply to plan mergers and
other transactions having the effect of a direct transfer,
including consolidations of benefits attributable to different
employers within a multiple employer plan.
``(5) Except to the extent provided in regulations
promulgated by the Secretary of the Treasury, a defined
contribution plan shall not be treated as failing to meet the
requirements of this subsection merely because of the
elimination of a form of distribution previously available
thereunder. This paragraph shall not apply to the elimination
of a form of distribution with respect to any participant
unless--
``(A) a single sum payment is available to such
participant at the same time or times as the form of
distribution being eliminated; and
``(B) such single sum payment is based on the same
or greater portion of the participant's account as the
form of distribution being eliminated.''.
(3) Effective date.--The amendments made by this
subsection shall apply to years beginning after
December 31, 2001.
(b) Regulations.--
(1) Amendment of internal revenue code.--Paragraph
(6)(B) of section 411(d) (relating to accrued benefit
not to be decreased by amendment) is amended by
inserting after the second sentence the following:
``The Secretary shall by regulations provide that this
subparagraph shall not apply to any plan amendment
which reduces or eliminates benefits or subsidies which
create significant burdens or complexities for the plan
and plan participants, unless such amendment adversely
affects the rights of any participant in a more than de
minimis manner.''.
(2) Amendment of erisa.--Section 204(g)(2) of the
Employee Retirement Income Security Act of 1974 (29
U.S.C. 1054(g)(2)) is amended by inserting after the
second sentence the following: ``The Secretary of the
Treasury shall by regulations provide that this
paragraph shall not apply to any plan amendment which
reduces or eliminates benefits or subsidies which
create significant burdens or complexities for the plan
and plan participants, unless such amendment adversely
affects the rights of any participant in a more than de
minimis manner.''.
(3) Secretary directed.--Not later than December
31, 2003, the Secretary of the Treasury is directed to
issue regulations under section 411(d)(6) of the
Internal Revenue Code of 1986 and section 204(g) of the
Employee Retirement Income Security Act of 1974,
including the regulations required by the amendment
made by this subsection. Such regulations shall apply
to plan years beginning after December 31, 2003, or
such earlier date as is specified by the Secretary of
the Treasury.
SEC. 646. RATIONALIZATION OF RESTRICTIONS ON DISTRIBUTIONS.
(a) Modification of Same Desk Exception.--
(1) Section 401(k).--
(A) Section 401(k)(2)(B)(i)(I) (relating to
qualified cash or deferred arrangements) is
amended by striking ``separation from service''
and inserting ``severance from employment''.
(B) Subparagraph (A) of section 401(k)(10)
(relating to distributions upon termination of
plan or disposition of assets or subsidiary) is
amended to read as follows:
``(A) In general.--An event described in
this subparagraph is the termination of the
plan without establishment or maintenance of
another defined contribution plan (other than
an employee stock ownership plan as defined in
section 4975(e)(7)).''.
(C) Section 401(k)(10) is amended--
(i) in subparagraph (B)--
(I) by striking ``An
event'' in clause (i) and
inserting ``A termination'';
and
(II) by striking ``the
event'' in clause (i) and
inserting ``the termination'';
(ii) by striking subparagraph (C);
and
(iii) by striking ``or disposition
of assets or subsidiary'' in the
heading.
(2) Section 403(b).--
(A) Paragraphs (7)(A)(ii) and (11)(A) of
section 403(b) are each amended by striking
``separates from service'' and inserting ``has
a severance from employment''.
(B) The heading for paragraph (11) of
section 403(b) is amended by striking
``separation from service'' and inserting
``severance from employment''.
(3) Section 457.--Clause (ii) of section
457(d)(1)(A) is amended by striking ``is separated from
service'' and inserting ``has a severance from
employment''.
(b) Effective Date.--The amendments made by this section
shall apply to distributions after December 31, 2001.
SEC. 647. PURCHASE OF SERVICE CREDIT IN GOVERNMENTAL DEFINED BENEFIT
PLANS.
(a) Section 403(b) Plans.--Subsection (b) of section 403 is
amended by adding at the end the following new paragraph:
``(13) Trustee-to-trustee transfers to purchase
permissive service credit.--No amount shall be
includible in gross income by reason of a direct
trustee-to-trustee transfer to a defined benefit
governmental plan (as defined in section 414(d)) if
such transfer is--
``(A) for the purchase of permissive
service credit (as defined in section
415(n)(3)(A)) under such plan, or
``(B) a repayment to which section 415 does
not apply by reason of subsection (k)(3)
thereof.''.
(b) Section 457 Plans.--Subsection (e) of section 457, as
amended by section 641, is amended by adding after paragraph
(16) the following new paragraph:
``(17) Trustee-to-trustee transfers to purchase
permissive service credit.--No amount shall be
includible in gross income by reason of a direct
trustee-to-trustee transfer to a defined benefit
governmental plan (as defined in section 414(d)) if
such transfer is--
``(A) for the purchase of permissive
service credit (as defined in section
415(n)(3)(A)) under such plan, or
``(B) a repayment to which section 415 does
not apply by reason of subsection (k)(3)
thereof.''.
(c) Effective Date.--The amendments made by this section
shall apply to trustee-to-trustee transfers after December 31,
2001.
SEC. 648. EMPLOYERS MAY DISREGARD ROLLOVERS FOR PURPOSES OF CASH-OUT
AMOUNTS.
(a) Qualified Plans.--
(1) Amendment of internal revenue code.--Section
411(a)(11) (relating to restrictions on certain
mandatory distributions) is amended by adding at the
end the following:
``(D) Special rule for rollover
contributions.--A plan shall not fail to meet
the requirements of this paragraph if, under
the terms of the plan, the present value of the
nonforfeitable accrued benefit is determined
without regard to that portion of such benefit
which is attributable to rollover contributions
(and earnings allocable thereto). For purposes
of this subparagraph, the term `rollover
contributions' means any rollover contribution
under sections 402(c), 403(a)(4), 403(b)(8),
408(d)(3)(A)(ii), and 457(e)(16).''.
(2) Amendment of erisa.--Section 203(e) of the
Employee Retirement Income Security Act of 1974 (29
U.S.C. 1053(c)) is amended by adding at the end the
following:
``(4) A plan shall not fail to meet the requirements of
this subsection if, under the terms of the plan, the present
value of the nonforfeitable accrued benefit is determined
without regard to that portion of such benefit which is
attributable to rollover contributions (and earnings allocable
thereto). For purposes of this subparagraph, the term `rollover
contributions' means any rollover contribution under sections
402(c), 403(a)(4), 403(b)(8), 408(d)(3)(A)(ii), and 457(e)(16)
of the Internal Revenue Code of 1986.''.
(b) Eligible Deferred Compensation Plans.--Clause (i) of
section 457(e)(9)(A) is amended by striking ``such amount'' and
inserting ``the portion of such amount which is not
attributable to rollover contributions (as defined in section
411(a)(11)(D))''.
(c) Effective Date.--The amendments made by this section
shall apply to distributions after December 31, 2001.
SEC. 649. MINIMUM DISTRIBUTION AND INCLUSION REQUIREMENTS FOR SECTION
457 PLANS.
(a) Minimum Distribution Requirements.--Paragraph (2) of
section 457(d) (relating to distribution requirements) is
amended to read as follows:
``(2) Minimum distribution requirements.--A plan
meets the minimum distribution requirements of this
paragraph if such plan meets the requirements of
section 401(a)(9).''.
(b) Inclusion in Gross Income.--
(1) Year of inclusion.--Subsection (a) of section
457 (relating to year of inclusion in gross income) is
amended to read as follows:
``(a) Year of Inclusion in Gross Income.--
``(1) In general.--Any amount of compensation
deferred under an eligible deferred compensation 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--
``(A) is paid to the participant or other
beneficiary, in the case of a plan of an
eligible employer described in subsection
(e)(1)(A), and
``(B) is paid or otherwise made available
to the participant or other beneficiary, in the
case of a plan of an eligible employer
described in subsection (e)(1)(B).
``(2) Special rule for rollover amounts.--To the
extent provided in section 72(t)(9), section 72(t)
shall apply to any amount includible in gross income
under this subsection.''.
(2) Conforming amendments.--
(A) So much of paragraph (9) of section
457(e) as precedes subparagraph (A) is amended
to read as follows:
``(9) Benefits of tax exempt organization plans not
treated as made available by reason of certain
elections, etc.--In the case of an eligible deferred
compensation plan of an employer described in
subsection (e)(1)(B)--''.
(B) Section 457(d) is amended by adding at
the end the following new paragraph:
``(3) Special rule for government plan.--An
eligible deferred compensation plan of an employer
described in subsection (e)(1)(A) shall not be treated
as failing to meet the requirements of this subsection
solely by reason of making a distribution described in
subsection (e)(9)(A).''.
(c) Effective Date.--The amendments made by subsections (a)
and (b) shall apply to distributions after December 31, 2001.
Subtitle E--Strengthening Pension Security and Enforcement
PART I--GENERAL PROVISIONS
SEC. 651. REPEAL OF 160 PERCENT OF CURRENT LIABILITY FUNDING LIMIT.
(a) Amendments to Internal Revenue Code.--Section 412(c)(7)
(relating to full-funding limitation) is amended--
(1) by striking ``the applicable percentage'' in
subparagraph (A)(i)(I) and inserting ``in the case of
plan years beginning before January 1, 2004, the
applicable percentage''; and
(2) by amending subparagraph (F) to read as
follows:
``(F) Applicable percentage.--For purposes
of subparagraph (A)(i)(I), the applicable
percentage shall be determined in accordance
with the following table:
``In the case of any plan year The applicable
beginning in-- percentage is--
2002.............................................. 165
2003.............................................. 170.''.
(b) Amendment of ERISA.--Section 302(c)(7) of the Employee
Retirement Income Security Act of 1974 (29 U.S.C. 1082(c)(7))
is amended--
(1) by striking ``the applicable percentage'' in
subparagraph (A)(i)(I) and inserting ``in the case of
plan years beginning before January 1, 2004, the
applicable percentage'', and
(2) by amending subparagraph (F) to read as
follows:
``(F) Applicable percentage.--For purposes
of subparagraph (A)(i)(I), the applicable
percentage shall be determined in accordance
with the following table:
``In the case of any plan year The applicable
beginning in alendar year-- percentage is--
2002.............................................. 165
2003.............................................. 170.''.
(c) Effective Date.--The amendments made by this section
shall apply to plan years beginning after December 31, 2001.
SEC. 652. MAXIMUM CONTRIBUTION DEDUCTION RULES MODIFIED AND APPLIED TO
ALL DEFINED BENEFIT PLANS.
(a) In General.--Subparagraph (D) of section 404(a)(1)
(relating to special rule in case of certain plans) is amended
to read as follows:
``(D) Special rule in case of certain
plans.--
``(i) In general.--In the case of
any defined benefit plan, except as
provided in regulations, the maximum
amount deductible under the limitations
of this paragraph shall not be less
than the unfunded current liability
determined under section 412(l).
``(ii) Plans with 100 or less
participants.--For purposes of this
subparagraph, in the case of a plan
which has 100 or less participants for
the plan year, unfunded current
liability shall not include the
liability attributable to benefit
increases for highly compensated
employees (as defined in section
414(q)) resulting from a plan amendment
which is made or becomes effective,
whichever is later, within the last 2
years.
``(iii) Rule for determining number
of participants.--For purposes of
determining the number of plan
participants, all defined benefit plans
maintained by the same employer (or any
member of such employer's controlled
group (within the meaning of section
412(l)(8)(C))) shall be treated as one
plan, but only employees of such member
or employer shall be taken into
account.
``(iv) Plans maintained by
professional service employers.--In the
case of a plan which, subject to
section 4041 of the Employee Retirement
Income Security Act of 1974, terminates
during the plan year, clause (i) shall
be applied by substituting for unfunded
current liability the amount required
to make the plan sufficient for benefit
liabilities (within the meaning of
section 4041(d) of such Act).''.
(b) Conforming Amendment.--Paragraph (6) of section
4972(c), as amended by sections 616 and 637, is amended--
(1) by striking subparagraph (A) and redesignating
subparagraphs (B) and (C) as subparagraphs (A) and (B),
respectively,
(2) by striking the first sentence following
subparagraph (B) (as so redesignated),
(3) by striking ``subparagraph (B)'' in the next to
last sentence and inserting ``subparagraph (A)'', and
(4) by striking ``Subparagraph (C)'' in the last
sentence and inserting ``Subparagraph (B)''.
(c) Effective Date.--The amendments made by this section
shall apply to plan years beginning after December 31, 2001.
SEC. 653. EXCISE TAX RELIEF FOR SOUND PENSION FUNDING.
(a) In General.--Subsection (c) of section 4972 (relating
to nondeductible contributions) is amended by adding at the end
the following new paragraph:
``(7) Defined benefit plan exception.--In
determining the amount of nondeductible contributions
for any taxable year, an employer may elect for such
year not to take into account any contributions to a
defined benefit plan except to the extent that such
contributions exceed the full-funding limitation (as
defined in section 412(c)(7), determined without regard
to subparagraph (A)(i)(I) thereof). For purposes of
this paragraph, the deductible limits under section
404(a)(7) shall first be applied to amounts contributed
to defined contribution plans and then to amounts
described in this paragraph. If an employer makes an
election under this paragraph for a taxable year,
paragraph (6) shall not apply to such employer for such
taxable year.''.
(b) Effective Date.--The amendment made by this section
shall apply to years beginning after December 31, 2001.
SEC. 654. TREATMENT OF MULTIEMPLOYER PLANS UNDER SECTION 415.
(a) Compensation Limit.--
(1) In general.--Paragraph (11) of section 415(b)
(relating to limitation for defined benefit plans) is
amended to read as follows:
``(11) Special limitation rule for governmental and
multiemployer plans.--In the case of a governmental
plan (as defined in section 414(d)) or a multiemployer
plan (as defined in section 414(f)), subparagraph (B)
of paragraph (1) shall not apply.''.
(2) Conforming amendment.--Section 415(b)(7)
(relating to benefits under certain collectively
bargained plans) is amended by inserting ``(other than
a multiemployer plan)'' after ``defined benefit plan''
in the matter preceding subparagraph (A).
(b) Combining and Aggregation of Plans.--
(1) Combining of plans.--Subsection (f) of section
415 (relating to combining of plans) is amended by
adding at the end the following:
``(3) Exception for multiemployer plans.--
Notwithstanding paragraph (1) and subsection (g), a
multiemployer plan (as defined in section 414(f)) shall
not be combined or aggregated--
``(A) with any other plan which is not a
multiemployer plan for purposes of applying
subsection (b)(1)(B) to such other plan, or
``(B) with any other multiemployer plan for
purposes of applying the limitations
established in this section.''.
(2) Conforming amendment for aggregation of
plans.--Subsection (g) of section 415 (relating to
aggregation of plans) is amended by striking ``The
Secretary'' and inserting ``Except as provided in
subsection (f)(3), the Secretary''.
(c) Effective Date.--The amendments made by this section
shall apply to years beginning after December 31, 2001.
SEC. 655. PROTECTION OF INVESTMENT OF EMPLOYEE CONTRIBUTIONS TO 401(K)
PLANS.
(a) In General.--Section 1524(b) of the Taxpayer Relief Act
of 1997 is amended to read as follows:
``(b) Effective Date.--
``(1) In general.--Except as provided in paragraph
(2), the amendments made by this section shall apply to
elective deferrals for plan years beginning after
December 31, 1998.
``(2) Nonapplication to previously acquired
property.--The amendments made by this section shall
not apply to any elective deferral which is invested in
assets consisting of qualifying employer securities,
qualifying employer real property, or both, if such
assets were acquired before January 1, 1999.''.
(b) Effective Date.--The amendment made by this section
shall apply as if included in the provision of the Taxpayer
Relief Act of 1997 to which it relates.
SEC. 656. PROHIBITED ALLOCATIONS OF STOCK IN S CORPORATION ESOP.
(a) In General.--Section 409 (relating to qualifications
for tax credit employee stock ownership plans) is amended by
redesignating subsection (p) as subsection (q) and by inserting
after subsection (o) the following new subsection:
``(p) Prohibited Allocations of Securities in an S
Corporation.--
``(1) In general.--An employee stock ownership plan
holding employer securities consisting of stock in an S
corporation shall provide that no portion of the assets
of the plan attributable to (or allocable in lieu of)
such employer securities may, during a nonallocation
year, accrue (or be allocated directly or indirectly
under any plan of the employer meeting the requirements
of section 401(a)) for the benefit of any disqualified
person.
``(2) Failure to meet requirements.--
``(A) In general.--If a plan fails to meet
the requirements of paragraph (1), the plan
shall be treated as having distributed to any
disqualified person the amount allocated to the
account of such person in violation of
paragraph (1) at the time of such allocation.
``(B) Cross reference.--
``For excise tax relating to violations of paragraph (1) and
ownership of synthetic equity, see section 4979A.
``(3) Nonallocation year.--For purposes of this
subsection--
``(A) In general.--The term `nonallocation
year' means any plan year of an employee stock
ownership plan if, at any time during such plan
year--
``(i) such plan holds employer
securities consisting of stock in an S
corporation, and
``(ii) disqualified persons own at
least 50 percent of the number of
shares of stock in the S corporation.
``(B) Attribution rules.--For purposes of
subparagraph (A)--
``(i) In general.--The rules of
section 318(a) shall apply for purposes
of determining ownership, except that--
``(I) in applying paragraph
(1) thereof, the members of an
individual's family shall
include members of the family
described in paragraph (4)(D),
and
``(II) paragraph (4)
thereof shall not apply.
``(ii) Deemed-owned shares.--
Notwithstanding the employee trust
exception in section 318(a)(2)(B)(i),
an individual shall be treated as
owning deemed-owned shares of the
individual.
Solely for purposes of applying paragraph (5),
this subparagraph shall be applied after the
attribution rules of paragraph (5) have been
applied.
``(4) Disqualified person.--For purposes of this
subsection--
``(A) In general.--The term `disqualified
person' means any person if--
``(i) the aggregate number of
deemed-owned shares of such person and
the members of such person's family is
at least 20 percent of the number of
deemed-owned shares of stock in the S
corporation, or
``(ii) in the case of a person not
described in clause (i), the number of
deemed-owned shares of such person is
at least 10 percent of the number of
deemed-owned shares of stock in such
corporation.
``(B) Treatment of family members.--In the
case of a disqualified person described in
subparagraph (A)(i), any member of such
person's family with deemed-owned shares shall
be treated as a disqualified person if not
otherwise treated as a disqualified person
under subparagraph (A).
``(C) Deemed-owned shares.--
``(i) In general.--The term
`deemed-owned shares' means, with
respect to any person--
``(I) the stock in the S
corporation constituting
employer securities of an
employee stock ownership plan
which is allocated to such
person under the plan, and
``(II) such person's share
of the stock in such
corporation which is held by
such plan but which is not
allocated under the plan to
participants.
``(ii) Person's share of
unallocated stock.--For purposes of
clause (i)(II), a person's share of
unallocated S corporation stock held by
such plan is the amount of the
unallocated stock which would be
allocated to such person if the
unallocated stock were allocated to all
participants in the same proportions as
the most recent stock allocation under
the plan.
``(D) Member of family.--For purposes of
this paragraph, the term `member of the family'
means, with respect to any individual--
``(i) the spouse of the individual,
``(ii) an ancestor or lineal
descendant of the individual or the
individual's spouse,
``(iii) a brother or sister of the
individual or the individual's spouse
and any lineal descendant of the
brother or sister, and
``(iv) the spouse of any individual
described in clause (ii) or (iii).
A spouse of an individual who is legally
separated from such individual under a decree
of divorce or separate maintenance shall not be
treated as such individual's spouse for
purposes of this subparagraph.
``(5) Treatment of synthetic equity.--For purposes
of paragraphs (3) and (4), in the case of a person who
owns synthetic equity in the S corporation, except to
the extent provided in regulations, the shares of stock
in such corporation on which such synthetic equity is
based shall be treated as outstanding stock in such
corporation and deemed-owned shares of such person if
such treatment of synthetic equity of 1 or more such
persons results in--
``(A) the treatment of any person as a
disqualified person, or
``(B) the treatment of any year as a
nonallocation year.
For purposes of this paragraph, synthetic equity shall
be treated as owned by a person in the same manner as
stock is treated as owned by a person under the rules
of paragraphs (2) and (3) of section 318(a). If,
without regard to this paragraph, a person is treated
as a disqualified person or a year is treated as a
nonallocation year, this paragraph shall not be
construed to result in the person or year not being so
treated.
``(6) Definitions.--For purposes of this
subsection--
``(A) Employee stock ownership plan.--The
term `employee stock ownership plan' has the
meaning given such term by section 4975(e)(7).
``(B) Employer securities.--The term
`employer security' has the meaning given such
term by section 409(l).
``(C) Synthetic equity.--The term
`synthetic equity' means any stock option,
warrant, restricted stock, deferred issuance
stock right, or similar interest or right that
gives the holder the right to acquire or
receive stock of the S corporation in the
future. Except to the extent provided in
regulations, synthetic equity also includes a
stock appreciation right, phantom stock unit,
or similar right to a future cash payment based
on the value of such stock or appreciation in
such value.
``(7) Regulations and guidance.--
``(A) In general.--The Secretary shall
prescribe such regulations as may be necessary
to carry out the purposes of this subsection.
``(B) Avoidance or evasion.--The Secretary
may, by regulation or other guidance of general
applicability, provide that a nonallocation
year occurs in any case in which the principal
purpose of the ownership structure of an S
corporation constitutes an avoidance or evasion
of this subsection.''.
(b) Coordination With Section 4975(e)(7).--The last
sentence of section 4975(e)(7) (defining employee stock
ownership plan) is amended by inserting ``, section 409(p),''
after ``409(n)''.
(c) Excise Tax.--
(1) Application of tax.--Subsection (a) of section
4979A (relating to tax on certain prohibited
allocations of employer securities) is amended--
(A) by striking ``or'' at the end of
paragraph (1), and
(B) by striking all that follows paragraph
(2) and inserting the following:
``(3) there is any allocation of employer
securities which violates the provisions of section
409(p), or a nonallocation year described in subsection
(e)(2)(C) with respect to an employee stock ownership
plan, or
``(4) any synthetic equity is owned by a
disqualified person in any nonallocation year,
there is hereby imposed a tax on such allocation or ownership
equal to 50 percent of the amount involved.''.
(2) Liability.--Section 4979A(c) (defining
liability for tax) is amended to read as follows:
``(c) Liability for Tax.--The tax imposed by this section
shall be paid--
``(1) in the case of an allocation referred to in
paragraph (1) or (2) of subsection (a), by--
``(A) the employer sponsoring such plan, or
``(B) the eligible worker-owned
cooperative,
which made the written statement described in section
664(g)(1)(E) or in section 1042(b)(3)(B) (as the case
may be), and
``(2) in the case of an allocation or ownership
referred to in paragraph (3) or (4) of subsection (a),
by the S corporation the stock in which was so
allocated or owned.''.
(3) Definitions.--Section 4979A(e) (relating to
definitions) is amended to read as follows:
``(e) Definitions and Special Rules.--For purposes of this
section--
``(1) Definitions.--Except as provided in paragraph
(2), terms used in this section have the same
respective meanings as when used in sections 409 and
4978.
``(2) Special rules relating to tax imposed by
reason of paragraph (3) or (4) of subsection (a).--
``(A) Prohibited allocations.--The amount
involved with respect to any tax imposed by
reason of subsection (a)(3) is the amount
allocated to the account of any person in
violation of section 409(p)(1).
``(B) Synthetic equity.--The amount
involved with respect to any tax imposed by
reason of subsection (a)(4) is the value of the
shares on which the synthetic equity is based.
``(C) Special rule during first
nonallocation year.--For purposes of
subparagraph (A), the amount involved for the
first nonallocation year of anyemployee stock
ownership plan shall be determined by taking into account the total
value of all the deemed-owned shares of all disqualified persons with
respect to such plan.
``(D) Statute of limitations.--The
statutory period for the assessment of any tax
imposed by this section by reason of paragraph
(3) or (4) of subsection (a) shall not expire
before the date which is 3 years from the later
of--
``(i) the allocation or ownership
referred to in such paragraph giving
rise to such tax, or
``(ii) the date on which the
Secretary is notified of such
allocation or ownership.''.
(d) Effective Dates.--
(1) In general.--The amendments made by this
section shall apply to plan years beginning after
December 31, 2004.
(2) Exception for certain plans.--In the case of
any--
(A) employee stock ownership plan
established after March 14, 2001, or
(B) employee stock ownership plan
established on or before such date if employer
securities held by the plan consist of stock in
a corporation with respect to which an election
under section 1362(a) of the Internal Revenue
Code of 1986 is not in effect on such date,
the amendments made by this section shall apply to plan
years ending after March 14, 2001.
SEC. 657. AUTOMATIC ROLLOVERS OF CERTAIN MANDATORY DISTRIBUTIONS.
(a) Direct Transfers of Mandatory Distributions.--
(1) In general.--Section 401(a)(31) (relating to
optional direct transfer of eligible rollover
distributions), as amended by section 643, is amended
by redesignating subparagraphs (B), (C), and (D) as
subparagraphs (C), (D), and (E), respectively, and by
inserting after subparagraph (A) the following new
subparagraph:
``(B) Certain mandatory distributions.--
``(i) In general.--In case of a
trust which is part of an eligible
plan, such trust shall not constitute a
qualified trust under this section
unless the plan of which such trust is
a part provides that if--
``(I) a distribution
described in clause (ii) in
excess of $1,000 is made, and
``(II) the distributee does
not make an election under
subparagraph (A) and does not
elect to receive the
distribution directly,
the plan administrator shall make such
transfer to an individual retirement
plan of a designated trustee or issuer
and shall notify the distributee in
writing (either separately or as part
of the notice under section 402(f))
that the distribution may be
transferred to another individual
retirement plan.
``(ii) Eligible plan.--For purposes
of clause (i), the term `eligible plan'
means a plan which provides that any
nonforfeitable accrued benefit for
which the present value (as determined
under section 411(a)(11)) does not
exceed $5,000 shall be immediately
distributed to the participant.''.
(2) Conforming amendments.--
(A) The heading of section 401(a)(31) is
amended by striking ``Optional direct'' and
inserting ``Direct''.
(B) Section 401(a)(31)(C), as redesignated
by paragraph (1), is amended by striking
``Subparagraph (A)'' and inserting
``Subparagraphs (A) and (B)''.
(b) Notice Requirement.--Subparagraph (A) of section
402(f)(1) is amended by inserting before the comma at the end
the following: ``and that the automatic distribution by direct
transfer applies to certain distributions in accordance with
section 401(a)(31)(B)''.
(c) Fiduciary Rules.--
(1) In general.--Section 404(c) of the Employee
Retirement Income Security Act of 1974 (29 U.S.C.
1104(c)) is amended by adding at the end the following
new paragraph:
``(3) In the case of a pension plan which makes a
transfer to an individual retirement account or annuity
of a designated trustee or issuer under section
401(a)(31)(B) of the Internal Revenue Code of 1986, the
participant or beneficiary shall, for purposes of
paragraph (1), be treated as exercising control over
the assets in the account or annuity upon--
``(A) the earlier of the earlier of--
``(i) a rollover of all or a
portion of the amount to another
individual retirement account or
annuity; or
``(ii) one year after the transfer
is made; or
``(B) if the transfer is made in a manner
consistent with guidance provided by the
Secretary.''.
(2) Regulations.--
(A) Automatic rollover safe harbor.--Not
later than 3 years after the date of enactment
of this Act, the Secretary of Labor shall
prescribe regulations providing for safe
harbors under which the designation of an
institution and investment of funds in
accordance with section 401(a)(31)(B) of the
Internal Revenue Code of 1986 is deemed to
satisfy the fiduciary requirements of section
404(a) of the Employee Retirement Income
Security Act of 1974 (29 U.S.C. 1104(a)).
(B) Use of low-cost individual retirement
plans.--The Secretary of the Treasury and the
Secretary of Labor may provide, and shall give
consideration to providing, special relief with
respect to the use of low-cost individual
retirement plans for purposes of transfers
under section 401(a)(31)(B) of the Internal
Revenue Code of 1986 and for other uses that
promote the preservation of assets for
retirement income purposes.
(d) Effective Date.--The amendments made by this section
shall apply to distributions made after final regulations
implementing subsection (c)(2)(A) are prescribed.
SEC. 658. CLARIFICATION OF TREATMENT OF CONTRIBUTIONS TO MULTIEMPLOYER
PLAN.
(a) Not Considered Method of Accounting.--For purposes of
section 446 of the Internal Revenue Code of 1986, a
determination under section 404(a)(6) of such Code regarding
the taxable year with respect to which a contribution to a
multiemployer pension plan is deemed made shall not be treated
as a method of accounting of the taxpayer. No deduction shall
be allowed for any taxable year for any contribution to a
multiemployer pension plan with respect to which a deduction
was previously allowed.
(b) Regulations.--The Secretary of the Treasury shall
promulgate such regulations as necessary to clarify that a
taxpayer shall not be allowed an aggregate amount of deductions
for contributions to a multiemployer pension plan which exceeds
the amount of such contributions made or deemed made under
section 404(a)(6) of the Internal Revenue Code of 1986 to such
plan.
(c) Effective Date.--Subsection (a), and any regulations
promulgated under subsection (b), shall be effective for years
ending after the date of the enactment of this Act.
PART II--TREATMENT OF PLAN AMENDMENTS REDUCING FUTURE BENEFIT ACCRUALS
SEC. 659. EXCISE TAX ON FAILURE TO PROVIDE NOTICE BY DEFINED BENEFIT
PLANS SIGNIFICANTLY REDUCING FUTURE BENEFIT
ACCRUALS.
(a) Amendment of Internal Revenue Code.--
(1) In general.--Chapter 43 (relating to qualified
pension, etc., plans) is amended by adding at the end
the following new section:
``SEC. 4980F. FAILURE OF APPLICABLE PLANS REDUCING BENEFIT ACCRUALS TO
SATISFY NOTICE REQUIREMENTS.
``(a) Imposition of Tax.--There is hereby imposed a tax on
the failure of any applicable pension plan to meet the
requirements of subsection (e) with respect to any applicable
individual.
``(b) Amount of Tax.--
``(1) In general.--The amount of the tax imposed by
subsection (a) on any failure with respect to any
applicable individual shall be $100 for each day in the
noncompliance period with respect to such failure.
``(2) Noncompliance period.--For purposes of this
section, the term `noncompliance period' means, with
respect to any failure, the period beginning on the
date the failure first occurs and ending on the date
the notice to which the failure relates is provided or
the failure is otherwise corrected.
``(c) Limitations on Amount of Tax.--
``(1) Tax not to apply where failure not discovered
and reasonable diligence exercised.--No tax shall be
imposed by subsection (a) on any failure during any
period for which it is established to the satisfaction
of the Secretary that any person subject to liability
for the tax under subsection (d) did not know that the
failure existed and exercised reasonable diligence to
meet the requirements of subsection (e).
``(2) Tax not to apply to failures corrected within
30 days.--No tax shall be imposed by subsection (a) on
any failure if--
``(A) any person subject to liability for
the tax under subsection (d) exercised
reasonable diligence to meet the requirements
of subsection (e), and
``(B) such person provides the notice
described in subsection (e) during the 30-day
period beginning on the first date such person
knew, or exercising reasonable diligence would
have known, that such failure existed.
``(3) Overall limitation for unintentional
failures.--
``(A) In general.--If the person subject to
liability for tax under subsection (d)
exercised reasonable diligence to meet the
requirements of subsection (e), the tax imposed
by subsection (a) for failures during the
taxable year of the employer (or, in the case
of a multiemployer plan, the taxable year of
the trust forming part of the plan) shall not
exceed $500,000. For purposes of the preceding
sentence, all multiemployer plans of which the
same trust forms a part shall be treated as 1
plan.
``(B) Taxable years in the case of certain
controlled groups.--For purposes of this
paragraph, if all persons who are treated as a
single employer for purposes of this section do
not have the same taxable year, the taxable
years taken into account shall be determined
under principles similar to the principles of
section 1561.
``(4) Waiver by secretary.--In the case of a
failure which is due to reasonable cause and not to
willful neglect, the Secretary may waive part or all of
the tax imposed by subsection (a) to the extent that
the payment of such tax would be excessive or otherwise
inequitable relative to the failure involved.
``(d) Liability for Tax.--The following shall be liable for
the tax imposed by subsection (a):
``(1) In the case of a plan other than a
multiemployer plan, the employer.
``(2) In the case of a multiemployer plan, the
plan.
``(e) Notice Requirements for Plans Significantly Reducing
Benefit Accruals.--
``(1) In general.--If an applicable pension plan is
amended to provide for a significant reduction in the
rate of future benefit accrual, the plan administrator
shall provide written notice to each applicable
individual (and to each employee organization
representing applicable individuals).
``(2) Notice.--The notice required by paragraph (1)
shall be written in a manner calculated to be
understood by the average plan participant and shall
provide sufficient information (as determined in
accordance with regulations prescribed by the
Secretary) to allow applicable individuals to
understand the effect of the plan amendment. The
Secretary may provide a simplified form of notice for,
or exempt from any notice requirement, a plan--
``(A) which has fewer than 100 participants
who have accrued a benefit under the plan, or
``(B) which offers participants the option
to choose between the new benefit formula and
the old benefit formula.
``(3) Timing of notice.--Except as provided in
regulations, the notice required by paragraph (1) shall
be provided within a reasonable time before the
effective date of the plan amendment.
``(4) Designees.--Any notice under paragraph (1)
may be provided to a person designated, in writing, by
the person to which it would otherwise be provided.
``(5) Notice before adoption of amendment.--A plan
shall not be treated as failing to meet the
requirements of paragraph (1) merely because notice is
provided before the adoption of the plan amendment if
no material modification of the amendment occurs before
the amendment is adopted.
``(f) Definitions and Special Rules.--For purposes of this
section--
``(1) Applicable individual.--The term `applicable
individual' means, with respect to any plan amendment--
``(A) each participant in the plan, and
``(B) any beneficiary who is an alternate
payee (within the meaning of section 414(p)(8))
under an applicable qualified domestic
relations order (within the meaning of section
414(p)(1)(A)),
whose rate of future benefit accrual under the plan may
reasonably be expected to be significantly reduced by
such plan amendment.
``(2) Applicable pension plan.--The term
`applicable pension plan' means--
``(A) any defined benefit plan, or
``(B) an individual account plan which is
subject to the funding standards of section
412.
Such term shall not include a governmental plan (within
the meaning of section 414(d)) or a church plan (within
the meaning of section 414(e)) with respect to which
the election provided by section 410(d) has not been
made.
``(3) Early retirement.--A plan amendment which
eliminates or significantly reduces any early
retirement benefit or retirement-type subsidy (within
the meaning of section 411(d)(6)(B)(i)) shall be
treated as having the effect of significantly reducing
the rate of future benefit accrual.
``(g) New Technologies.--The Secretary may by regulations
allow any notice under subsection (e) to be provided by using
new technologies.''.
(2) Clerical amendment.--The table of sections for
chapter 43 is amended by adding at the end the
following new item:
``Sec. 4980F. Failure of applicable plans reducing benefit
accruals to satisfy notice requirements.''.
(b) Amendment of ERISA.--Subsection (h) of section 204 of
the Employee Retirement Income Security Act of 1974 (29 U.S.C.
1054) is amended to read as follows:
``(h)(1) An applicable pension plan may not be amended so
as to provide for a significant reduction in the rate of future
benefit accrual unless the plan administrator provides the
notice described in paragraph (2) to each applicable individual
(and to each employee organization representing applicable
individuals).
``(2) The notice required by paragraph (1) shall be written
in a manner calculated to be understood by the average plan
participant and shall provide sufficient information (as
determined in accordance with regulations prescribed by the
Secretary of the Treasury) to allow applicable individuals to
understand the effect of the plan amendment. The Secretary of
the Treasury may provide a simplified form of notice for, or
exempt from any notice requirement, a plan--
``(A) which has fewer than 100 participants who
have accrued a benefit under the plan, or
``(B) which offers participants the option to
choose between the new benefit formula and the old
benefit formula.
``(3) Except as provided in regulations prescribed by the
Secretary of the Treasury, the notice required by paragraph (1)
shall be provided within a reasonable time before the effective
date of the plan amendment.
``(4) Any notice under paragraph (1) may be provided to a
person designated, in writing, by the person to which it would
otherwise be provided.
``(5) A plan shall not be treated as failing to meet the
requirements of paragraph (1) merely because notice is provided
before the adoption of the plan amendment if no material
modification of the amendment occurs before the amendment is
adopted.
``(6)(A) In the case of any egregious failure to meet any
requirement of this subsection with respect to any plan
amendment, the provisions of the applicable pension plan shall
be applied as if such plan amendment entitled all applicable
individuals to the greater of--
``(i) the benefits to which they would have been
entitled without regard to such amendment, or
``(ii) the benefits under the plan with regard to
such amendment.
``(B) For purposes of subparagraph (A), there is an
egregious failure to meet the requirements of this subsection
if such failure is within the control of the plan sponsor and
is--
``(i) an intentional failure (including any failure
to promptly provide the required notice or information
after the plan administrator discovers an unintentional
failure to meet the requirements of this subsection),
``(ii) a failure to provide most of the individuals
with most of the information they are entitled to
receive under this subsection, or
``(iii) a failure which is determined to be
egregious under regulations prescribed by the Secretary
of the Treasury.
``(7) The Secretary of the Treasury may by regulations
allow any notice under this subsection to be provided by using
new technologies.
``(8) For purposes of this subsection--
``(A) The term `applicable individual' means, with
respect to any plan amendment--
``(i) each participant in the plan; and
``(ii) any beneficiary who is an alternate
payee (within the meaning of section
206(d)(3)(K)) under an applicable qualified
domestic relations order (within the meaning of
section 206(d)(3)(B)(i)),
whose rate of future benefit accrual under the plan may
reasonably be expected to be significantly reduced by
such plan amendment.
``(B) The term `applicable pension plan' means--
``(i) any defined benefit plan; or
``(ii) an individual account plan which is
subject to the funding standards of section 412
of the Internal Revenue Code of 1986.
``(9) For purposes of this subsection, a plan amendment
which eliminates or significantly reduces any early retirement
benefit or retirement-type subsidy (within the meaning of
subsection (g)(2)(A)) shall be treated as having the effect of
significantly reducing the rate of future benefit accrual.''.
(c) Effective Dates.--
(1) In general.--The amendments made by this
section shall apply to plan amendments taking effect on
or after the date of the enactment of this Act.
(2) Transition.--Until such time as the Secretary
of the Treasury issues regulations under sections
4980F(e)(2) and (3) of the Internal Revenue Code of
1986, and section 204(h) of the Employee Retirement
Income Security Act of 1974, as added by the amendments
made by this section, a plan shall be treated as
meeting the requirements of such sections if it makes a
good faith effort to comply with such requirements.
(3) Special notice rule.--
(A) In general.--The period for providing
any notice required by the amendments made by
this section shall not end before the date
which is 3 months after the date of the
enactment of this Act.
(B) Reasonable notice.--The amendments made
by this section shall not apply to any plan
amendment taking effect on or after the date of
the enactment of this Act if, before April 25,
2001, notice was provided to participants and
beneficiaries adversely affected by the plan
amendment (or their representatives) which was
reasonably expected to notify them of the
nature and effective date of the plan
amendment.
Subtitle F--Reducing Regulatory Burdens
SEC. 661. MODIFICATION OF TIMING OF PLAN VALUATIONS.
(a) In General.--Paragraph (9) of section 412(c) (relating
to annual valuation) is amended to read as follows:
``(9) Annual valuation.--
``(A) In general.--For purposes of this
section, a determination of experience gains
and losses and a valuation of the plan's
liability shall be made not less frequently
than once every year, except that such
determination shall be made more frequently to
the extent required in particular cases under
regulations prescribed by the Secretary.
``(B) Valuation date.--
``(i) Current year.--Except as
provided in clause (ii), the valuation
referred to in subparagraph (A) shall
be made as of a date within the plan
year to which the valuation refers or
within one month prior to the beginning
of such year.
``(ii) Use of prior year
valuation.--The valuation referred to
in subparagraph (A) may be made as of a
date within the plan year prior to the
year to which the valuation refers if,
as of such date, the value of the
assets of the plan are not less than
125 percent of the plan's current
liability (as defined in paragraph
(7)(B)).
``(iii) Adjustments.--Information
under clause (ii) shall, in accordance
with regulations, be actuarially
adjusted to reflect significant
differences in participants.''.
(b) Amendment of ERISA.--Paragraph (9) of section 302(c) of
the Employee Retirement Income Security Act of 1974 (29 U.S.C.
1053(c)) is amended--
(1) by inserting ``(A)'' after ``(9)'', and
(2) by adding at the end the following:
``(B)(i) Except as provided in clause (ii), the valuation
referred to in subparagraph (A) shall be made as of a date
within the plan year to which the valuation refers or within
one month prior to the beginning of such year.
``(ii) The valuation referred to in subparagraph (A) may be
made as of a date within the plan year prior to the year to
which the valuation refers if, as of such date, the value of
the assets of the plan are not less than 125 percent of the
plan's current liability (as defined in paragraph (7)(B)).
``(iii) Information under clause (ii) shall, in accordance
with regulations, be actuarially adjusted to reflect
significant differences in participants.''.
(c) Effective Date.--The amendments made by this section
shall apply to plan years beginning after December 31, 2001.
SEC. 662. ESOP DIVIDENDS MAY BE REINVESTED WITHOUT LOSS OF DIVIDEND
DEDUCTION.
(a) In General.--Section 404(k)(2)(A) (defining applicable
dividends) is amended by striking ``or'' at the end of clause
(ii), by redesignating clause (iii) as clause (iv), and by
inserting after clause (ii) the following new clause:
``(iii) is, at the election of such
participants or their beneficiaries--
``(I) payable as provided
in clause (i) or (ii), or
``(II) paid to the plan and
reinvested in qualifying
employer securities, or''.
(b) Standards for Disallowance.--Section 404(k)(5)(A)
(relating to disallowance of deduction) is amended by inserting
``avoidance or'' before ``evasion''.
(c) Effective Date.--The amendments made by this section
shall apply to taxable years beginning after December 31, 2001.
SEC. 663. REPEAL OF TRANSITION RULE RELATING TO CERTAIN HIGHLY
COMPENSATED EMPLOYEES.
(a) In General.--Paragraph (4) of section 1114(c) of the
Tax Reform Act of 1986 is hereby repealed.
(b) Effective Date.--The repeal made by subsection (a)
shall apply to plan years beginning after December 31, 2001.
SEC. 664. EMPLOYEES OF TAX-EXEMPT ENTITIES.
(a) In General.--The Secretary of the Treasury shall modify
Treasury Regulations section 1.410(b)-6(g) to provide that
employees of an organization described in section
403(b)(1)(A)(i) of the Internal Revenue Code of 1986 who are
eligible to make contributions under section 403(b) of such
Code pursuant to a salary reduction agreement may be treated as
excludable with respect to a plan under section 401(k) or (m)
of such Code that is provided under the same general
arrangement as a plan under such section 401(k), if--
(1) no employee of an organization described in
section 403(b)(1)(A)(i) of such Code is eligible to
participate in such section 401(k) plan or section
401(m) plan; and
(2) 95 percent of the employees who are not
employees of an organization described in section
403(b)(1)(A)(i) of such Code are eligible to
participate in such plan under such section 401(k) or
(m).
(b) Effective Date.--The modification required by
subsection (a) shall apply as of the same date set forth in
section 1426(b) of the Small Business Job Protection Act of
1996.
SEC. 665. CLARIFICATION OF TREATMENT OF EMPLOYER-PROVIDED RETIREMENT
ADVICE.
(a) In General.--Subsection (a) of section 132 (relating to
exclusion from gross income) is amended by striking ``or'' at
the end of paragraph (5), by striking the period at the end of
paragraph (6) and inserting ``, or'', and by adding at the end
the following new paragraph:
``(7) qualified retirement planning services.''.
(b) Qualified Retirement Planning Services Defined.--
Section 132 is amended by redesignating subsection (m) as
subsection (n) and by inserting after subsection (l) the
following:
``(m) Qualified Retirement Planning Services.--
``(1) In general.--For purposes of this section,
the term `qualified retirement planning services' means
any retirement planning advice or information provided
to an employee and his spouse by an employer
maintaining a qualified employer plan.
``(2) Nondiscrimination rule.--Subsection (a)(7)
shall apply in the case of highly compensated employees
only if such services are available on substantially
the same terms to each member of the group of employees
normally provided education and information regarding
the employer's qualified employer plan.
``(3) Qualified employer plan.--For purposes of
this subsection, the term `qualified employer plan'
means a plan, contract, pension, or account described
in section 219(g)(5).''.
(c) Effective Date.--The amendments made by this section
shall apply to years beginning after December 31, 2001.
SEC. 666. REPEAL OF THE MULTIPLE USE TEST.
(a) In General.--Paragraph (9) of section 401(m) is amended
to read as follows:
``(9) Regulations.--The Secretary shall prescribe
such regulations as may be necessary to carry out the
purposes of this subsection and subsection (k),
including regulations permitting appropriate
aggregation of plans and contributions.''.
(b) Effective Date.--The amendment made by this section
shall apply to years beginning after December 31, 2001.
Subtitle G--Miscellaneous Provisions
SEC. 671. TAX TREATMENT AND INFORMATION REQUIREMENTS OF ALASKA NATIVE
SETTLEMENT TRUSTS.
(a) Treatment of Alaska Native Settlement Trusts.--Subpart
A of part I of subchapter J of chapter 1 (relating to general
rules for taxation of trusts and estates) is amended by adding
at the end the following new section:
``SEC. 646. TAX TREATMENT OF ELECTING ALASKA NATIVE SETTLEMENT TRUSTS.
``(a) In General.--If an election under this section is in
effect with respect to any Settlement Trust, the provisions of
this section shall apply in determining the income tax
treatment of the Settlement Trust and its beneficiaries with
respect to the Settlement Trust.
``(b) Taxation of Income of Trust.--Except as provided in
subsection (f)(1)(B)(ii)--
``(1) In general.--There is hereby imposed on the
taxable income of an electing Settlement Trust, other
than its net capital gain, a tax at the lowest rate
specified in section 1(c).
``(2) Capital gain.--In the case of an electing
Settlement Trust with a net capital gain for the
taxable year, a tax is hereby imposed on such gain at
the rate of tax which would apply to such gain if the
taxpayer were subject to a tax on its other taxable
income at only the lowest rate specified in section
1(c).
Any such tax shall be in lieu of the income tax otherwise
imposed by this chapter on such income or gain.
``(c) One-Time Election.--
``(1) In general.--A Settlement Trust may elect to
have the provisions of this section apply to the trust
and its beneficiaries.
``(2) Time and method of election.--An election
under paragraph (1) shall be made by the trustee of
such trust--
``(A) on or before the due date (including
extensions) for filing the Settlement Trust's
return of tax for the first taxable year of
such trust ending after the date of the
enactment of this section, and
``(B) by attaching to such return of tax a
statement specifically providing for such
election.
``(3) Period election in effect.--Except as
provided in subsection (f), an election under this
subsection--
``(A) shall apply to the first taxable year
described in paragraph (2)(A) and all
subsequent taxable years, and
``(B) may not be revoked once it is made.
``(d) Contributions to Trust.--
``(1) Beneficiaries of electing trust not taxed on
contributions.--In the case of an electing Settlement
Trust, no amount shall be includible in the gross
income of a beneficiary of such trust by reason of a
contribution to such trust.
``(2) Earnings and profits.--The earnings and
profits of the sponsoring Native Corporation shall not
be reduced on account of any contribution to such
Settlement Trust.
``(e) Tax Treatment of Distributions to Beneficiaries.--
Amounts distributed by an electing Settlement Trust during any
taxable year shall be considered as having the following
characteristics in the hands of the recipient beneficiary:
``(1) First, as amounts excludable from gross
income for the taxable year to the extent of the
taxable income of such trust for such taxable year
(decreased by any income tax paid by the trust with
respect to the income) plus any amount excluded from
gross income of the trust under section 103.
``(2) Second, as amounts excludable from gross
income to the extent of the amount described in
paragraph (1) for all taxable years for which an
election is in effect under subsection (c) with respect
to the trust, and not previously taken into account
under paragraph (1).
``(3) Third, as amounts distributed by the
sponsoring Native Corporation with respect to its stock
(within the meaning of section 301(a)) during such
taxable year and taxable to the recipient beneficiary
as amounts described in section 301(c)(1), to the
extent of current or accumulated earnings and profits
of the sponsoring Native Corporation as of the close of
such taxable year after proper adjustment is made for
all distributions made by the sponsoring Native
Corporation during such taxable year.
``(4) Fourth, as amounts distributed by the trust
in excess of the distributable net income of such trust
for such taxable year.
Amounts distributed to which paragraph (3) applies shall not be
treated as a corporate distribution subject to section 311(b),
and for purposes of determining the amount of a distribution
for purposes of paragraph (3) and the basis to the recipients,
section 643(e) and not section 301 (b) or (d) shall apply.
``(f) Special Rules Where Transfer Restrictions Modified.--
``(1) Transfer of beneficial interests.--If, at any
time, a beneficial interest in an electing Settlement
Trust may be disposed of to a person in a manner which
would not be permitted by section 7(h) of the Alaska
Native Claims Settlement Act (43 U.S.C. 1606(h)) if
such interest were Settlement Common Stock--
``(A) no election may be made under
subsection (c) with respect to such trust, and
``(B) if such an election is in effect as
of such time--
``(i) such election shall cease to
apply as of the first day of the
taxable year in which such disposition
is first permitted,
``(ii) the provisions of this
section shall not apply to such trust
for such taxable year and all taxable
years thereafter, and
``(iii) the distributable net
income of such trust shall be increased
by the current or accumulated earnings
and profits of the sponsoring Native
Corporation as of the close of such
taxable year after proper adjustment is
made for all distributions made by the
sponsoring Native Corporation during
such taxable year.
In no event shall the increase under clause (iii)
exceed the fair market value of the trust's assets as
of the date the beneficial interest of the trust first
becomes so disposable. The earnings and profits of the
sponsoring Native Corporation shall be adjusted as of
the last day of such taxable year by the amount of
earnings and profits so included in the distributable
net income of the trust.
``(2) Stock in corporation.--If--
``(A) stock in the sponsoring Native
Corporation may be disposed of to a person in a
manner which would not be permitted by section
7(h) of the Alaska Native Claims Settlement Act
(43 U.S.C. 1606(h)) if such stock were
Settlement Common Stock, and
``(B) at any time after such disposition of
stock is first permitted, such corporation
transfers assets to a Settlement Trust,
paragraph (1)(B) shall be applied to such trust on and
after the date of the transfer in the same manner as if
the trust permitted dispositions of beneficial
interests in the trust in a manner not permitted by
such section 7(h).
``(3) Certain distributions.--For purposes of this
section, the surrender of an interest in a Native
Corporation or an electing Settlement Trust in order to
accomplish the whole or partial redemption of the
interest of a shareholder or beneficiary in such
corporation or trust, or to accomplish the whole or
partial liquidation of such corporation or trust, shall
be deemed to be a transfer permitted by section 7(h) of
the Alaska Native Claims Settlement Act.
``(g) Taxable Income.--For purposes of this title, the
taxable income of an electing Settlement Trust shall be
determined under section 641(b) without regard to any deduction
under section 651 or 661.
``(h) Definitions.--For purposes of this section--
``(1) Electing settlement trust.--The term
`electing Settlement Trust' means a Settlement Trust
which has made the election, effective for a taxable
year, described in subsection (c).
``(2) Native corporation.--The term `Native
Corporation' has the meaning given such term by section
3(m) of the Alaska Native Claims Settlement Act (43
U.S.C. 1602(m)).
``(3) Settlement common stock.--The term
`Settlement Common Stock' has the meaning given such
term by section 3(p) of the Alaska Native Claims
Settlement Act (43 U.S.C. 1602(p)).
``(4) Settlement trust.--The term `Settlement
Trust' means a trust that constitutes a settlement
trust under section 3(t) of the Alaska Native Claims
Settlement Act (43 U.S.C. 1602(t)).
``(5) Sponsoring native corporation.--The term
`sponsoring Native Corporation' means the Native
Corporation which transfers assets to an electing
Settlement Trust.
``(i) Special Loss Disallowance Rule.--Any loss that would
otherwise be recognized by a shareholder upon a disposition of
a share of stock of a sponsoring Native Corporation shall be
reduced (but not below zero) by the per share loss adjustment
factor. The per share loss adjustment factor shall be the
aggregate of all contributions to all electing Settlement
Trusts sponsored by such Native Corporation made on or after
the first day each trust is treated as an electing Settlement
Trust expressed on a per share basis and determined as of the
day of each such contribution.
``(j) Cross Reference.--
``For information required with respect to electing Settlement
Trusts and sponsoring Native Corporations, see section 6039H.''.
(b) Reporting.--Subpart A of part III of subchapter A of
chapter 61 of subtitle F (relating to information concerning
persons subject to special provisions) is amended by inserting
after section 6039G the following new section:
``SEC. 6039H. INFORMATION WITH RESPECT TO ALASKA NATIVE SETTLEMENT
TRUSTS AND SPONSORING NATIVE CORPORATIONS.
``(a) Requirement.--The fiduciary of an electing Settlement
Trust (as defined in section 646(h)(1)) shall include with the
return of income of the trust a statement containing the
information required under subsection (c).
``(b) Application With Other Requirements.--The filing of
any statement under this section shall be in lieu of the
reporting requirements under section 6034A to furnish any
statement to a beneficiary regarding amounts distributed to
such beneficiary (and such other reporting rules as the
Secretary deems appropriate).
``(c) Required Information.--The information required under
this subsection shall include--
``(1) the amount of distributions made during the
taxable year to each beneficiary,
``(2) the treatment of such distribution under the
applicable provision of section 646, including the
amount that is excludable from the recipient
beneficiary's gross income under section 646, and
``(3) the amount (if any) of any distribution
during such year that is deemed to have been made by
the sponsoring Native Corporation (as defined in
section 646(h)(5)).
``(d) Sponsoring Native Corporation.--
``(1) In general.--The electing Settlement Trust
shall, on or before the date on which the statement
under subsection (a) is required to be filed, furnish
such statement to the sponsoring Native Corporation (as
so defined).
``(2) Distributees.--The sponsoring Native
Corporation shall furnish each recipient of a
distribution described in section 646(e)(3) a statement
containing the amount deemed to have been distributed
to such recipient by such corporation for the taxable
year.''.
(c) Clerical Amendment.--
(1) The table of sections for subpart A of part I
of subchapter J of chapter 1 of such Code is amended by
adding at the end the following new item:
``Sec. 646. Tax treatment of electing Alaska Native Settlement
Trusts.''.
(2) The table of sections for subpart A of part III
of subchapter A of chapter 61 of subtitle F of such
Code is amended by inserting after the item relating to
section 6039G the following new item:
``Sec. 6039H. Information with respect to Alaska Native
Settlement Trusts and sponsoring Native
Corporations.''.
(d) Effective Date.--The amendments made by this section
shall apply to taxable years ending after the date of the
enactment of this Act and to contributions made to electing
Settlement Trusts for such year or any subsequent year.
TITLE VII--ALTERNATIVE MINIMUM TAX
SEC. 701. INCREASE IN ALTERNATIVE MINIMUM TAX EXEMPTION.
(a) In General.--
(1) Subparagraph (A) of section 55(d)(1) (relating
to exemption amount for taxpayers other than
corporations) is amended by striking ``$45,000'' and
inserting ``$45,000 ($49,000 in the case of taxable
years beginning in 2001, 2002, 2003, and 2004)''.
(2) Subparagraph (B) of section 55(d)(1) (relating
to exemption amount for taxpayers other than
corporations) is amended by striking ``$33,750'' and
inserting ``$33,750 ($35,750 in the case of taxable
years beginning in 2001, 2002, 2003, and 2004)''.
(b) Conforming Amendments.--
(1) Paragraph (1) of section 55(d) is amended by
striking ``and'' at the end of subparagraph (B), by
striking subparagraph (C), and by inserting after
subparagraph (B) the following new subparagraphs:
``(C) 50 percent of the dollar amount
applicable under paragraph (1)(A) in the case
of a married individual who files a separate
return, and
``(D) $22,500 in the case of an estate or
trust.''.
(2) Subparagraph (C) of section 55(d)(3) is amended
by striking ``paragraph (1)(C)'' and inserting
``subparagraph (C) or (D) of paragraph (1)''.
(3) The last sentence of section 55(d)(3) is
amended--
(A) by striking ``paragraph (1)(C)(i)'' and
inserting ``paragraph (1)(C)''; and
(B) by striking ``$165,000 or (ii)
$22,500'' and inserting ``the minimum amount of
such income (as so determined) for which the
exemption amount under paragraph (1)(C) is
zero, or (ii) such exemption amount (determined
without regard to this paragraph)''.
(c) Effective Date.--The amendments made by this section
shall apply to taxable years beginning after December 31, 2000.
TITLE VIII--OTHER PROVISIONS
SEC. 801. TIME FOR PAYMENT OF CORPORATE ESTIMATED TAXES.
Notwithstanding section 6655 of the Internal Revenue Code
of 1986--
(1) 100 percent of the amount of any required
installment of corporate estimated tax which is
otherwise due in September 2001 shall not be due until
October 1, 2001; and
(2) 20 percent of the amount of any required
installment of corporate estimated tax which is
otherwise due in September 2004 shall not be due until
October 1, 2004.
SEC. 802. EXPANSION OF AUTHORITY TO POSTPONE CERTAIN TAX-RELATED
DEADLINES BY REASON OF PRESIDENTIALLY DECLARED
DISASTER.
(a) In General.--Section 7508A(a) (relating to authority to
postpone certain tax-related deadlines by reason of
presidentially declared disaster) is amended by striking ``90
days'' and inserting ``120 days''.
(b) Effective Date.--The amendment made by this section
shall take effect on the date of enactment of this Act.
SEC. 803. NO FEDERAL INCOME TAX ON RESTITUTION RECEIVED BY VICTIMS OF
THE NAZI REGIME OR THEIR HEIRS OR ESTATES.
(a) In General.--For purposes of the Internal Revenue Code
of 1986, any excludable restitution payments received by an
eligible individual (or the individual's heirs or estate) and
any excludable interest--
(1) shall not be included in gross income; and
(2) shall not be taken into account for purposes of
applying any provision of such Code which takes into
account excludable income in computing adjusted gross
income, including section 86 of such Code (relating to
taxation of Social Security benefits).
For purposes of such Code, the basis of any property received
by an eligible individual (or the individual's heirs or estate)
as part of an excludable restitution payment shall be the fair
market value of such property as of the time of the receipt.
(b) Eligible Individual.--For purposes of this section, the
term ``eligible individual'' means a person who was persecuted
on the basis of race, religion, physical or mental disability,
or sexual orientation by Nazi Germany, any other Axis regime,
or any other Nazi-controlled or Nazi-allied country.
(c) Excludable Restitution Payment.--For purposes of this
section, the term ``excludable restitution payment'' means any
payment or distribution to an individual (or the individual's
heirs or estate) which--
(1) is payable by reason of the individual's status
as an eligible individual, including any amount payable
by any foreign country, the United States of America,
or any other foreign or domestic entity, or a fund
established by any such country or entity, any amount
payable as a result of a final resolution of a legal
action, and any amount payableunder a law providing for
payments or restitution of property;
(2) constitutes the direct or indirect return of,
or compensation or reparation for, assets stolen or
hidden from, or otherwise lost to, the individual
before, during, or immediately after World War II by
reason of the individual's status as an eligible
individual, including any proceeds of insurance under
policies issued on eligible individuals by European
insurance companies immediately before and during World
War II; or
(3) consists of interest which is payable as part
of any payment or distribution described in paragraph
(1) or (2).
(d) Excludable Interest.--For purposes of this section, the
term ``excludable interest'' means any interest earned by--
(1) escrow accounts or settlement funds established
pursuant to the settlement of the action entitled ``In
re: Holocaust Victim Assets Litigation,'' (E.D.N.Y.)
C.A. No. 96-4849,
(2) funds to benefit eligible individuals or their
heirs created by the International Commission on
Holocaust Insurance Claims as a result of the Agreement
between the Government of the United States of America
and the Government of the Federal Republic of Germany
concerning the Foundation ``Remembrance,
Responsibility, and Future,'' dated July 17, 2000, or
(3) similar funds subject to the administration of
the United States courts created to provide excludable
restitution payments to eligible individuals (or
eligible individuals' heirs or estates).
(e) Effective Date.--
(1) In general.--This section shall apply to any
amount received on or after January 1, 2000.
(2) No inference.--Nothing in this Act shall be
construed to create any inference with respect to the
proper tax treatment of any amount received before
January 1, 2000.
TITLE IX--COMPLIANCE WITH CONGRESSIONAL BUDGET ACT
SEC. 901. SUNSET OF PROVISIONS OF ACT.
(a) In General.--All provisions of, and amendments made by,
this Act shall not apply--
(1) to taxable, plan, or limitation years beginning
after December 31, 2010, or
(2) in the case of title V, to estates of decedents
dying, gifts made, or generation skipping transfers,
after December 31, 2010.
(b) Application of Certain Laws.--The Internal Revenue Code
of 1986 and the Employee Retirement Income Security Act of 1974
shall be applied and administered to years, estates, gifts, and
transfers described in subsection (a) as if the provisions and
amendments described in subsection (a) had never been enacted.
And the Senate agree to the same.
William Thomas,
Dick Armey,
Managers on the Part of the House.
Chuck Grassley,
Orrin Hatch,
Frank H. Murkowski,
Don Nickles,
Phil Gramm,
Max Baucus,
John Breaux,
Managers on the Part of the Senate.
JOINT EXPLANATORY STATEMENT OF THE COMMITTEE OF CONFERENCE
The managers on the part of the House and the Senate at
the conference on the disagreeing votes of the two Houses on
the amendment of the Senate to the bill (H.R. 1836), to provide
for reconciliation pursuant to section 104 of the concurrent
resolution on the budget for fiscal year 2002, submit the
following joint statement to the House and the Senate in
explanation of the effect of the action agreed upon by the
managers and recommended in the accompanying conference report:
The Senate amendment struck all of the House bill after
the enacting clause and inserted a substitute text.
The House recedes from its disagreement to the amendment
of the Senate with an amendment that is a substitute for the
House bill and the Senate amendment. The differences between
the House bill, the Senate amendment, and the substitute agreed
to in conference are noted below, except for clerical
corrections, conforming changes made necessary by agreements
reached by the conferees, and minor drafting and clerical
changes.
C O N T E N T S
Page
I. Marginal Tax Rate Reduction....................................120
A. Individual Income Tax Rate Structure (secs. 2 and 3
of the House bill, sec. 101 of the Senate amendment
and sec. 1 of the Code)............................ 120
B. Increase Starting Point for Phase-Out of Itemized
Deductions (sec. 102 of the Senate amendment and
sec. 68 of the Code)............................... 129
C. Phase-out of Special Rules for Personal Exemptions
(sec. 103 of the Senate amendment and sec.
151(d)(3) of the Code)............................. 130
II. Tax Benefits Relating to Children..............................131
A. Increase and Expand the Child Tax Credit (sec. 2 of
the House bill, secs. 201 and 204 of the Senate
amendment and sec. 24 of the Code)................. 131
B. Sense of the Senate Regarding Child Credit Expansion
(sec. 202 of the Senate amendment)................. 134
C. Extension and Expansion of Adoption Tax Benefits
(sec. 2 of H.R. 622, sec. 203 of the Senate
amendment, and secs. 23 and 137 of the Code)....... 134
D. Expansion of Dependent Care Tax Credit (sec. 205 of
the Senate amendment and sec. 21 of the Code)...... 137
E. Tax Credit for Employer-Provided Child Care
Facilities (secs. 206 and 207 of the Senate
amendment and new sec. 45D of the Code)............ 138
III. Marriage Penalty Relief Provisions.............................140
A. Standard Deduction Marriage Penalty Relief (sec. 2
of H.R. 6, sec. 301 of the Senate amendment and
sec. 63 of the Code)............................... 140
B. Expansion of the 15-Percent Rate Bracket For Married
Couples Filing Joint Returns (sec. 3 of H.R. 6,
sec. 302 of the Senate amendment and sec. 1 of the
Code).............................................. 141
C. Marriage Penalty Relief and Simplification Relating
to the Earned Income Credit (sec. 2(b)(2) of the
House bill, sec. 4 of H.R. 6, sec. 303 of the
Senate amendment, and sec. 32 of the Code)......... 143
IV. Education Incentives...........................................147
A. Modifications to Education IRAs (sec. 401 and 414 of
the Senate amendment and secs. 530 and 127 of the
Code).............................................. 147
B. Private Prepaid Tuition Programs; Exclusion From
Gross Income of Education Distributions From
Qualified Tuition Programs (sec. 402 of the Senate
amendment and sec. 529 of the Code)................ 153
C. Exclusion for Employer-Provided Educational
Assistance (sec. 411 of the Senate amendment and
sec. 127 of the Code).............................. 157
D. Modifications to Student Loan Interest Deduction
(sec. 412 of the Senate amendment and sec. 221 of
the Code).......................................... 158
E. Eliminate Tax on Awards Under the National Health
Service Corps Scholarship Program and the F. Edward
Hebert Armed Forces Health Professions Scholarship
and Financial Assistance Program (sec. 413 of the
Senate amendment and sec. 117 of the Code)......... 159
F. Tax Benefits for Certain Types of Bonds for
Educational Facilities and Activities (secs. 421-
422 of the Senate amendment and secs. 142 and 146-
148 of the Code)................................... 160
G. Modify Rules Governing Tax-Exempt Bonds for Section
501(c)(3) Organizations as Applied to Organizations
Engaged in Timber Conservation Activities (sec. 423
of the Senate amendment and sec. 145 of the Code).. 164
H. Deduction for Qualified Higher Education Expenses
(sec. 431 of the Senate amendment and new sec. 222
of the Code)....................................... 165
I. Credit for Interest on Qualified Higher Education
Loans (sec. 432 of the Senate amendment and new
sec. 25B of the Code).............................. 168
J. Deduction for Qualified Emergency Response Expenses
of Eligible Emergency Response Professionals (sec.
433 of the Senate amendment and new sec. 224 of the
Code).............................................. 169
K. Enhanced Deduction for Charitable Contribution of
Book Inventory for Educational Purposes (sec. 434
of the Senate amendment and sec. 170 of the Code).. 170
L. Deduction for Qualified Professional Development
Expenses of Elementary and Secondary School
Teachers (sec. 442 of the Senate amendment and new
sec. 223 of the Code).............................. 171
M. Credit for Classroom Materials (sec. 443 of the
Senate amendment and new sec. 30B of the Code)..... 174
V. Estate, Gift, and Generation-Skipping Transfer Tax Provisions..175
A. Phaseout and Repeal of Estate and Generation-
Skipping Transfer Taxes; Increase in Gift Tax
Unified Credit Effective Exemption (secs. 101, 201,
301, and 401-402 of H.R. 8, secs. 501-542 of the
Senate amendment, secs. 121, 684, 1014, 1040, 1221,
2001-2210, 2501, 2502, 2503, 2505, 2511, 2601-2663,
4947, 6018, 6019, and 7701 of the Code, and new
secs. 1022, 2058, 2210, 2664, and 6716 of the Code) 175
B. Expand Estate Tax Rule for Conservation Easements
(sec. 501 of H.R. 8, sec. 551 of the Senate
amendment, and sec. 2031 of the Code).............. 194
C. Modify Generation-Skipping Transfer Rax Rules....... 196
1. Deemed allocation of the generation-skipping
transfer tax exemption to lifetime transfers to
trusts that are not direct skips (sec. 601 of
H.R. 8, sec. 561 of the Senate amendment, and
sec. 2632 of the Code)......................... 196
2. Retroactive allocation of the generation-
skipping transfer tax exemption (sec. 601 of
H.R. 8, sec. 561 of the Senate amendment, and
sec. 2632 of the Code)......................... 199
3. Severing of trusts holding property having an
inclusion ratio of greater than zero (sec. 602
of H.R. 8, sec. 562 of the Senate amendment,
and sec. 2642 of the Code)..................... 200
4. Modification of certain valuation rules (sec.
603 of H.R. 8, sec. 563 of the Senate
amendment, and sec. 2642 of the Code).......... 201
5. Relief from late elections (sec. 604 of H.R. 8,
sec. 564 of the Senate amendment, and sec. 2642
of the Code)................................... 202
6. Substantial compliance (sec. 604 of the House
bill, sec. 564 of the Senate amendment, and
sec. 2642 of the Code)......................... 203
D. Expand and Modify Availability of Installment
Payment of Estate Tax for Closely-Held Businesses
(sec. 701 of H.R. 8, secs. 571 and 572 of the
Senate amendment, and sec. 6166 of the Code)....... 203
VI. Pension and Individual Retirement Arrangement Provisions.......205
A. Individual Retirement Arrangements (``IRAs'') (sec.
101 of the House bill, secs. 601-603 of the Senate
amendment and secs. 219, 408, and 408A of the Code) 205
B. Pension Provisions.................................. 210
1. Expanding Coverage.............................. 210
(a) Increase in benefit and contribution limits
(secs. 201 and 209 of the House bill, sec. 611
of the Senate amendment, and secs. 401(a)(17),
401(c)(2), 402(g), 408(p), 415 and 457 of the
Code).......................................... 210
(b) Plan loans or S corporation shareholders,
partners, and sole proprietors (sec. 202 of the
House bill, sec. 612 of the Senate amendment,
and sec. 4975 of the Code)..................... 214
(c) Modification of top-heavy rules (sec. 203 of
the House bill, sec. 613 of the Senate
amendment, and sec. 416 of the Code)........... 216
(d) Elective deferrals not taken into account for
purposes of deduction limits (sec. 204 of the
House bill, sec. 614 of the Senate amendment,
and sec. 404 of the Code)...................... 220
(e) Repeal of coordination requirements for
deferred compensation plans of state and local
governments and tax-exempt organizations (sec.
205 of the House bill, sec. 615 of the Senate
amendment, and sec. 457 of the Code)........... 221
(f) Eliminate IRS user fees for certain
determination letter requests regarding
employer plans (sec. 206 of the House bill and
sec. 621 of the Senate amendment).............. 222
(g) Deduction limits (sec. 207 of the House bill,
sec. 616 of the Senate amendment, and sec. 404
of the Code)................................... 224
(h) Option to treat elective deferrals as after-
tax contributions (sec. 208 of the bill, sec.
617 of the Senate amendment, and new sec. 402A
of the Code)................................... 225
(i) Certain nonresident aliens excluded in
applying minimum coverage requirements (sec.
210 of the House bill, sec. 622 of the Senate
amendment, and secs. 410(b)(3) and 861(a)(3) of
the Code)...................................... 228
(j) Nonrefundable credit to certain individuals
for elective deferrals and IRA contributions
(sec. 618 of the Senate amendment and new sec.
25B of the Code)............................... 229
(k) Small business tax credit for qualified
retirement plan contributions (sec. 619 of the
Senate amendment and new sec. 45E of the Code). 231
(l) Small business tax credit for new retirement
plan expenses (sec. 620 of the Senate amendment
and new sec. 45E of the Code).................. 233
2. Enhancing Fairness for Women.................... 234
(a) Additional salary reduction catch-up
contributions (sec. 301 of the House bill, sec.
631 of the Senate amendment, and sec 414 of the
Code).......................................... 234
(b) Equitable treatment for contributions of
employees to defined contribution plans (sec.
302 of the House bill, sec. 632 of the Senate
amendment, and secs. 403(b), 415, and 457 of
the Code)...................................... 237
(c) Faster vesting of employer matching
contributions (sec. 303 of the House bill, sec.
63 of the Senate amendment, and sec. 411 of the
Code).......................................... 240
(d) Modifications to minimum distribution rules
(sec. 304 of the House bill, sec. 634 of the
Senate amendment, and sec. 401(a)(9) of the
Code).......................................... 241
(e) Clarification of tax treatment of division of
section 457 plan benefits upon divorce (sec.
305 of the House bill, sec. 635 of the Senate
amendment, and secs. 414(p) and 457 of the
Code).......................................... 244
(f) Provisions relating to hardship withdrawals
(sec. 306 of the House bill, sec. 636 of the
Senate amendment, and sec. 401(k) and 402 of
the Code)...................................... 245
(g) Pension coverage for domestic and similar
workers (sec. 307 of the House bill, sec. 637
of the Senate amendment, and sec. 4972(c)(6) of
the Code)...................................... 247
3. Increasing Portability for Participants......... 248
(a) Rollovers of retirement plan and IRA
distributions (secs. 401-403 and 409 of the
House bill, secs. 641-643 and 649 of the Senate
amendment, and secs. 401, 402, 403(b), 408,
457, and 3405 of the Code)..................... 248
(b) Waiver of 60-day rule (sec. 404 of the House
bill, sec. 644 of the Senate amendment, and
secs. 402 and 408 of the Code)................. 252
(c) Treatment of forms of distribution (sec. 405
of the House bill, sec. 645 of the Senate
amendment, and sec. 411(d)(6) of the Code)..... 253
(d) Rationalization of restrictions on
distributions (sec. 406 of the House bill, sec.
646 of the Senate amendment, and secs. 401(k),
and 403(b), and 457 of the Code)............... 256
(e) Purchase of service credit under government
pension plans (sec. 407 of the House bill, sec.
647 of the Senate amendment, and secs. 403(b)
and 457 of the Code)........................... 258
(f) Employers may disregard rollovers for
purposes of cash-out rules (sec. 408 of the
House bill, sec. 648 of the Senate amendment,
and secs. 411(a)(11) of the Code).............. 259
(g) Minimum distribution and inclusion
requirements for section 457 plans (sec. 409 of
the House bill, sec. 649 of the Senate
amendment, and sec. 457 of the Code)........... 259
4. Strengthening Pension Security and Enforcement.. 260
(a) Phase in repeal of 160 percent of current
liability funding limit; deduction for
contributions to fund termination liability
(sec. 501-502 of the House bill, secs. 651-652
of the Senate amendment, and secs. 404(a)(1),
412(c)(7), and 4972(c) of the Code)............ 260
(b) Excise tax relief for sound pension funding
(sec. 503 of the House bill, sec. 653 of the
Senate amendment, and secs. 4972 of the Code).. 263
(c) Notice of significant reduction in plan
benefit accruals (sec. 504 of the House bill,
sec. 659 of the Senate amendment, and new sec.
4980F of the Code)............................. 264
(d) Modifications to section 415 limits for
multiemployer plans (sec. 505 of the House
bill, sec. 654 of the Senate amendment, and
sec. 415 the Code)............................. 270
(e) Investment of employee contributions in
401(k) plans (sec. 506 of the House bill, sec.
655 of the Senate amendment, and sec. 1524(6)
of the Taxpayer Relief Act of 1997)............ 271
(f) Periodic pension benefit statements (sec. 507
of the House bill and sec. 105(a) of ERISA).... 272
(g) Prohibited allocations of stock in an S
corporation ESOP (sec. 508 of the House bill,
sec. 656 of the Senate amendment, and secs. 409
and 4979a of the Code)......................... 274
(h) Automatic rollovers of certain mandatory
distributions (sec. 657 of the Senate amendment
and secs. 401(a)(31) and 402(f)(1) of the Code
and sec. 404(c) of ERISA)...................... 277
(i) Clarification of Treatment of contributions
to a multiemployer plan (sec. 658 of the bill). 278
5. Reducing regulatory burdens..................... 279
(a) Modification of timing of plan valuations
(sec. 601 of the House bill, sec. 661 of the
Senate amendment, and secs. 412 of the Code)... 279
(b) ESOP dividends may be reinvested without loss
of divided deduction (sec. 602 of the House
bill, sec. 662 of the Senate amendment, and
sec. 404 of the Code).......................... 280
(c) Repeal transition rule relating to certain
highly compensated employees (sec. 603 of the
House bill, sec. 663 of the Senate amendment,
and sec. 1114(c)(4) of the Tax Reform Act of
1986).......................................... 282
(d) Employees of tax-exempt entities (sec. 604 of
the House bill and sec. 664 of the Senate
amendment)..................................... 282
(e) Treatment of employer-provide retirement
advice (sec. 605 of the House bill, sec. 665 of
the Senate amendment, and sec. 132 of the Code) 283
(f) Reporting simplification (sec. 606 of the
House bill and sec. 666 of the Senate
amendment)..................................... 284
(g) Improvement to Employee Plans Compliance
Resolution System (sec. 607 of the House bill
and sec. 667 of the Senate amendment).......... 286
(h) Repeal of the multiple use test (sec. 608 of
the House bill, sec. 668 of the Senate
amendment, and sec. 401(m) of the Code)........ 287
(i) Flexibility in nondiscrimination, coverage,
and line of business rules (sec. 609 of the
House bill, sec. 669 of the Senate amendment,
and secs. 401(a)(4), 410(b), and 414(r) of the
Code).......................................... 289
(j) Extension to all governmental plans of
moratorium on application of certain
nondiscrimination rules applicable to state and
local government plans (sec. 610 of the House
bill, sec. 670 of the Senate amendment, sec.
1505 of the Taxpayer Relief Act of 1997, and
secs. 401(a) and 401(k) of the Code)........... 290
(k) Notice and consent period regarding
distributions (sec. 611 of the House bill and
sec. 417 of the Code).......................... 291
(l) Annual report dissemination (sec. 612 of the
House bill and sec. 104(b)(3) of ERISA)........ 292
(m) Modifications to the SAVER Act (sec. 613 of
the House bill and sec. 517 of ERISA).......... 292
6. Other ERISA provisions.......................... 294
(a) Extension of PBGC missing participants
program (sec. 701 of the House bill, sec. of
the Senate amendment, and secs. 206(f) and 4050
of ERISA)...................................... 294
(b) Reduce PBGC premiums for small and new plans
(secs. 702-703 of the House bill, secs. 682-683
of the Senate amendment, and sec. 4006 of
ERISA)......................................... 295
(c) Authorization for PBGC to pay interest on
premium overpayment refunds (sec. 704 of the
House bill, sec. 684 of the Senate amendment,
and sec. 4007(b) of ERISA)..................... 296
(d) Rules for substantial owner benefits in
terminated plans (sec. 705 of the House bill,
sec. 685 of the Senate amendment, and secs.
4021, 4022, 4043 and 4044 of ERISA)............ 297
(e) Civil penalties for breach of fiduciary
responsibility (sec. 706 of the House bill and
sec. 502 of ERISA)............................. 298
(f) Benefit suspension notice (sec. 707 of the
House bill and sec. 203 of ERISA).............. 299
(g) Studies (sec. 708 of the House bill)......... 300
7. Miscellaneous provisions........................ 301
(a) Tax treatment of electing Alaska Native
Settlement Trusts (section 691 of the Senate
amendment and new sections 646 and 6039H of the
Code, modifying Code sections including 1(e),
301, 641, 651, 661, and 6034A)................. 301
8. Provisions relating to plan amendments (sec. 801
of the House bill)............................. 305
VII. Alternative Minimum Tax........................................306
A. Individual Alternative Minimum Tax Relief (sec. 3(c)
of H.R. 6, sec. 701 of the Senate amendment and
sec. 55 of the Code)............................... 306
VIII.Other Provisions...............................................307
A. Modification to Corporate Estimated Tax Requirements
(secs. 801 and 815 of the Senate amendment)........ 307
B. Authority to Postpone Certain Tax-Related Deadlines
by Reason of Presidentially Declared Disaster (sec.
802 of the Senate amendment and sec. 7508A of the
Code).............................................. 308
C. Income Tax Treatment of Certain Restitution Payments
to Holocaust Victims (sec. 803 of the Senate
amendment)......................................... 309
D. Treatment of Survivor Annuity Payments with Respect
to Public Safety Officers (sec. 804 of the Senate
amendment)......................................... 310
E. Circuit Breaker (sec. 805 of the Senate amendment).. 311
F. Acceleration of Health Insurance Deduction for Self-
Employed Individuals (secs. 806 and 807 of the
Senate amendment and sec. 162(l) of the Code)...... 312
G. Enhanced Deduction for Charitable Contribution of
Literary, Musical, and Artistic Compositions (sec.
808 of the Senate amendment and sec. 170 of the
Code).............................................. 313
H. Estate Tax Recapture from Cash Rents to Specially-
Valued Property (sec. 809 of the Senate amendment). 315
I. Extension of Research and Experimentation Tax Credit
and New Vaccine Research Credit (sec. 810 and 811
of the Senate amendment and sec. 41 and new sec.
45G of the Code)................................... 316
J. Acceleration of Round II Empowerment Zone Wage
Credit (sec. 812 of the Senate amendment and sec.
1396 of the Code).................................. 318
K. Treatment of Certain Hospital Support Organizations
in Determining Acquisition Indebtedness (sec. 813
of the Senate amendment and sec. 514 of the Code).. 318
L. Modify Rules Governing Tax-Exempt Bonds for Certain
Private Water Facilities (sec. 814 of the Senate
amendment and sec. 142 of the Code)................ 319
M. Combined Employment Tax Reporting (sec. 816 of the
Senate amendment and sec. 6103(d)(5) of the Code).. 320
N. Reporting Requirements of State and Local Political
Organizations (secs. 901-904 of the Senate
amendment and secs. 527 and 6012 of the Code)...... 321
IX. Compliance with Congressional Budget Act (secs. 111, 211, 311,
451, 581, 695, 711, and 821 of the Senate amendment)...........325
X. Tax Complexity Analysis........................................326
Estimated Budget Effects of the Conference Agreement for H.R.
1836........................................................... 333
I. MARGINAL TAX RATE REDUCTION
A. Individual Income Tax Rate Structure (Secs. 2 and 3 of the House
bill, Sec. 101 of the Senate Amendment and Sec. 1 of the Code)
present law
Under the Federal individual income tax system, an
individual who is a citizen or a resident of the United States
generally is subject to tax on worldwide taxable income.
Taxable income is total gross income less certain exclusions,
exemptions, and deductions. An individual may claim either a
standard deduction or itemized deductions.
An individual's income tax liability is determined by
computing his or her regular income tax liability and, if
applicable, alternative minimum tax liability.
Regular income tax liability
Regular income tax liability is determined by applying
the regular income tax rate schedules (or tax tables) to the
individual's taxable income. This tax liability is then reduced
by any applicable tax credits. The regular income tax rate
schedules are divided into several ranges of income, known as
income brackets, and the marginal tax rate increases as the
individual's income increases. The income bracket amounts are
adjusted annually for inflation. Separate rate schedules apply
based on filing status: single individuals (other than heads of
households and surviving spouses), heads of households, married
individuals filing joint returns (including surviving spouses),
married individuals filing separate returns, and estates and
trusts. Lower rates may apply to capital gains.
For 2001, the regular income tax rate schedules for
individuals are shown in Table 1, below. The rate bracket
breakpoints for married individuals filing separate returns are
exactly one-half of the rate brackets for married individuals
filing joint returns. A separate, compressed rate schedule
applies to estates and trusts.
TABLE 1.--INDIVIDUAL REGULAR INCOME TAX RATES FOR 2001
------------------------------------------------------------------------
But not Then regular income tax
If taxable income is over: over: equals:
------------------------------------------------------------------------
Single individuals
$0.................................. $27,050 15% of taxable income
$27,050............................. $65,550 $4,057.50, plus 28% of
the amount over
$27,050
$65,550............................. $136,750 $14,837.50, plus 31% of
the amount over
$65,550
$136,750............................ $297,350 $36,909.50, plus 36% of
the amount over
$136,750
Over $297,350....................... ......... $94,725.50, plus 39.6%
of the amount over
$297,350
Heads of households
$0.................................. $36,250 15% of taxable income
$36,250............................. $93,650 $5,437.50, plus 28% of
the amount over
$36,250
$93,650............................. $151,650 $21,509.50, plus 31% of
the amount over
$93,650
$151,650............................ $297,350 $39,489.50, plus 36% of
the amount over
$151,650
Over $297,350....................... ......... $91,941.50, plus 39.6%
of the amount over
$297,350
Married individuals filing joint returns
$0.................................. $45,200 15% of taxable income
$45,200............................. $109,250 $6,780.00, plus 28% of
the amount over
$45,200
$109,250............................ $166,500 $24,714.50, plus 31% of
the amount over
$109,250
$166,500............................ $297,350 $42,461.50, plus 36% of
the amount over
$166,500
Over $297,350....................... ......... $89,567.50, plus 39.6%
of the amount over
$297,350
------------------------------------------------------------------------
House Bill
In general
The House bill creates a new low-rate regular income tax
bracket for a portion of taxable income that is currently taxed
at 15 percent. The bill reduces the other regular income tax
rates and consolidates rate brackets. By 2006, the present-law
structure of five regular income tax rates (15 percent, 28
percent, 31 percent, 36 percent and 39.6 percent) will be
reduced to four rates of 10 percent, 15 percent, 25 percent,
and 33 percent.
New low-rate bracket
The bill establishes a new regular income tax rate
bracket for a portion of taxable income that is currently taxed
at 15 percent, as shown in Table 2, below. The taxable income
levels for the new low-rate bracket will be adjusted annually
for inflation for taxable years beginning after December 31,
2006.
TABLE 2.--PROPOSED NEW LOW-RATE BRACKET
----------------------------------------------------------------------------------------------------------------
Taxable income
------------------------------------------------ Proposed new
Calendar Year Single Heads of Married filing rate
individuals household joint returns
----------------------------------------------------------------------------------------------------------------
2001-2002....................................... 0-$6,000 0-$10,000 0-$12,000 12%
2003-2005....................................... 0-$6,000 0-$10,000 0-$12,000 11%
2006............................................ 0-$6,000 0-$10,000 0-$12,000 10%
2007 and later.................................. Adjust annually for inflation \1\ 10%
----------------------------------------------------------------------------------------------------------------
\1\ The new low-rate bracket for joint returns and head of household returns will be rounded down to the nearest
$50. The bracket for single individuals and married individuals filing separately will be one-half the bracket
for joint returns (after adjustment of that bracket for inflation).
Modification of 15-percent bracket
The 15-percent regular income tax bracket is modified to
begin at the end of the new low-rate regular income tax
bracket. The 15-percent regular income tax bracket ends at the
same level as under present law. H.R. 6 also makes other
changes to the 15-percent rate bracket.\1\
---------------------------------------------------------------------------
\1\ See discussion of the marriage penalty relief in the 15-percent
bracket.
---------------------------------------------------------------------------
Reduction of other rates and consolidation of rate brackets
The present-law regular income tax rates of 28 percent
and 31 percent are phased down to 25 percent over five years,
effective for taxable years beginning after December 31, 2001.
The taxable income level for the new 25-percent rate bracket
begins at the level at which the 28-percent rate bracket begins
under present law and ends at the level at which the 31-percent
rate bracket ends under present law.
The present-law regular income tax rates of 36 percent
and 39.6 percent are phased down to 33 percent over five years,
effective for taxable years beginning after December 31, 2001.
The taxable income level for the new 33-percent rate bracket
begins at the level at which the 36-percent rate bracket begins
under present law.
Table 3, below, shows the schedule of proposed regular
income tax rate reductions.
TABLE 3.--PROPOSED REGULAR INCOME TAX RATE REDUCTIONS
----------------------------------------------------------------------------------------------------------------
28% rate 31% rate 36% rate 39.6% rate
Calendar Year reduced to: reduced to: reduced to: reduced to:
----------------------------------------------------------------------------------------------------------------
2002............................................ 27% 30% 35% 38%
2003............................................ 27% 29% 35% 37%
2004............................................ 26% 28% 34% 36%
2005............................................ 26% 27% 34% 35%
2006 and later.................................. 25% 25% 33% 33%
----------------------------------------------------------------------------------------------------------------
Projected regular income tax rate schedules under the proposal
Table 4, below, shows the projected individual regular
income tax rate schedules when the rate reductions are fully
phased in (i.e., for 2006). As under present law, the rate
brackets for married taxpayers filing separate returns under
the bill are one half the rate brackets for married individuals
filing joint returns. In addition, appropriate adjustments are
made to the separate, compressed rate schedule for estate and
trusts.
TABLE 4.--INDIVIDUAL REGULAR INCOME TAX RATES FOR 2006 (PROJECTED)
------------------------------------------------------------------------
Then regular income tax
If taxable income is: equals:
------------------------------------------------------------------------
Single individuals
$0-6,000.................................. 10% of taxable income
$6,000-30,950............................. $600, plus 15 percent of the
amount over $6,000
$30,950-$156,300.......................... $4,342.50, plus 25% of the
amount over $30,950
Over $156,300............................. $35,680, plus 33% of the
amount over $156,300
Heads of households
$0-$10,000................................ 10% of taxable income
$10,000-$41,450........................... $1,000, plus 15% of the
amount over $10,000
$41,450-$173,300.......................... $5,717.50, plus 25% of the
amount over $41,450
Over $173,300............................. $38,680, plus 33% of the
amount over $173,300
Married individuals filing joint returns
$0-$12,000................................ 10% of taxable income
$12,000-$51,700........................... $1,200, plus 15% of the
amount over $12,000
$51,700-$190,300.......................... $7,155, plus 25% of the
amount over $51,700
$190,300.................................. $41,805, plus 33% of the
amount over $190,300
------------------------------------------------------------------------
Revised wage withholding for 2001
Under present law, the Secretary of the Treasury is
authorized to prescribe appropriate income tax withholding
tables or computational procedures for the withholding of
income taxes from wages paid by employers. The Secretary is
expected to make appropriate revisions to the wage withholding
tables to reflect the proposed rate reduction for calendar year
2001 as expeditiously as possible.
Transfer to Social Security and Medicare trust funds
The House bill provides that the amounts transferred to
the Social Security and Medicare trust funds are determined as
if the rate reductions in the bill were not enacted. Thus,
there will be no reduction in transfers to these funds as a
result of the bill.
Effective date.--The provisions of the House bill
generally apply to taxable years beginning after December 31,
2000, except that the conforming amendments to certain
withholding provisions under the bill are effective for amounts
paid more than 60 days after the date of enactment.
Senate Amendment
In general
The Senate amendment creates a new 10-percent regular
income tax bracket for a portion of taxable income that is
currently taxed at 15 percent, effective for taxable years
beginning after December 31, 2000. The Senate amendment also
reduces other regular income tax rates. By 2007, the present-
law individual income tax rates of 28 percent, 31 percent, 36
percent and 39.6 percent will be lowered to 25 percent, 28
percent, 33 percent, and 36 percent, respectively.
New low-rate bracket
The Senate amendment establishes a new 10-percent regular
income tax rate bracket for a portion of taxable income that is
currently taxed at 15 percent, as shown in Table 3, below. The
taxable income levels for the new 10-percent rate bracket will
be adjusted annually for inflation for taxable years beginning
after December 31, 2006. The new low-rate bracket for joint
returns and head of household returns will be rounded down to
the nearest $50. The bracket for single individuals and married
individuals filing separately will be one-half the bracket for
joint returns (after adjustment for inflation).
The 10-percent rate bracket applies to the first $6,000
of taxable income for single individuals, $10,000 of taxable
income for heads of households, and $12,000 for married couples
filing joint returns.
Modification of 15-percent bracket
The 15-percent regular income tax bracket is modified to
begin at the end of the new low-rate regular income tax
bracket. The 15-percent regular income tax bracket ends at the
same level as under present law. The Senate amendment also
makes other changes to the 15-percent rate bracket.\2\
---------------------------------------------------------------------------
\2\ See the discussion of marriage penalty relief in sec. 302 of
the Senate amendment.
---------------------------------------------------------------------------
Reduction of other rates
The present-law regular income tax rates of 28 percent,
31 percent, 36 percent, and 39.6 percent are phased-down over
six years to 25 percent, 28 percent, 33 percent, and 36
percent, effective for taxable years beginning after December
31, 2001. The taxable income levels for the new rates are the
same as the taxable income levels that apply under the present-
law rates.
Table 5, below, shows the schedule of regular income tax
rate reductions.
TABLE 5.--REGULAR INCOME TAX RATE REDUCTIONS
----------------------------------------------------------------------------------------------------------------
28% rate 31% rate 36% rate 39.6% rate
Calendar year reduced to: reduced to: reduced to: reduced to:
----------------------------------------------------------------------------------------------------------------
2002-2004....................................... 27% 30% 35% 38.6%
2005-2006....................................... 26% 29% 34% 37.6%
2007 and later.................................. 25% 28% 33% 36%
----------------------------------------------------------------------------------------------------------------
Projected regular income tax rate schedules under the Senate amendment
Table 6, below, shows the projected individual regular
income tax rate schedules when the rate reductions are fully
phased-in (i.e., for 2007). As under present law, the rate
brackets for married taxpayers filing separate returns will be
one half the rate brackets for married individuals filing joint
returns. In addition, appropriate adjustments will be made to
the separate, compressed rate schedule for estate and trusts.
TABLE 6.--INDIVIDUAL REGULAR INCOME TAX RATES FOR 2007 (PROJECTED)
------------------------------------------------------------------------
But not Then regular income tax
If taxable income is: over: equals:
------------------------------------------------------------------------
Single individuals
$0.................................. $6,150 10% of taxable income
$6,150.............................. $31,700 $615, plus 15% of the
amount over $6,150
$31,700............................. $76,800 $4,447.50, plus 25% of
the amount over
$31,700
$76,800............................. $160,250 $15,722.50 plus 28% of
the amount over
$76,800
$160,250............................ $348,350 $39,088.50 plus 33% of
the amount over
$160,250
Over $348,350....................... ......... $101,161.50, plus 36%
of the amount over
$348,350
Heads of households
$0.................................. $10,250 10% of taxable income
$10,250............................. $42,500 $1,025, plus 15% of the
amount over $10,250
$42,500............................. $109,700 $5,862.50, plus 25% of
the amount over
$42,500
$109,700............................ $177,650 $22,662.50, plus 28% of
the amount over
$109,700
$177,650............................ $348,350 $41,688.50, plus 33% of
the amount over
$177,650
Over $348,350....................... ......... $98,019.50, plus 36% of
the amount over
$348,350
Married individuals filing joint returns
$0.................................. $12,300 10% of taxable income
$12,300............................. \3\$59,25 $1,230, plus 15% of the
0 amount over $12,300
$59,250............................. $128,000 $8,272.50, plus 25% of
the amount over
$59,250
$128,000............................ $195,050 $25,460, plus 28% of
the amount over
$128,000
$195,050............................ $348,350 $44,234, plus 33% of
the amount over
$195,050
Over $348,350....................... ......... $94,823, plus 36% of
the amount over
$348,350
------------------------------------------------------------------------
\3\ The end point of the 15-percent rate bracket for married individuals
filing joint returns also reflects the phase-in of the increase in the
size of the 15-percent bracket in section 302 of the Senate amendment.
Revised wage withholding for 2001
Under present law, the Secretary of the Treasury is
authorized to prescribe appropriate income tax withholding
tables or computational procedures for the withholding of
income taxes from wages paid by employers. The Secretary is
expected to make appropriate revisions to the wage withholding
tables to reflect the rate reduction for calendar year 2001 as
expeditiously as possible.
Effective date.--The new 10-percent rate bracket is
effective for taxable years beginning after December 31, 2000.
The reduction in the 28 percent, 31 percent, 36 percent, and
39.6 percent rates is phased-in beginning in taxable years
beginning after December 31, 2001.
Conference Agreement
In general
The conference agreement creates a new 10-percent regular
income tax bracket for a portion of taxable income that is
currently taxed at 15 percent, effective for taxable years
beginning after December 31, 2000. The conference agreement
also reduces the other regular income tax rates, effective July
1, 2001. By 2006, the present-law regular income tax rates (28
percent, 31 percent, 36 percent and 39.6 percent) will be
lowered to 25 percent, 28 percent, 33 percent, and 35 percent,
respectively.
New low-rate bracket
The conference agreement establishes a new 10-percent
income tax rate bracket for a portion of taxable income that is
currently taxed at 15 percent. The 10-percent rate bracket
applies to the first $6,000 of taxable income for single
individuals, $10,000 of taxable income for heads of households,
and $12,000 for married couples filing joint returns. This
$6,000 increases to $7,000 and this $12,000 increases to
$14,000 for 2008 and thereafter.
The taxable income levels for the new low-rate bracket
will be adjusted annually for inflation for taxable years
beginning after December 31, 2008. The new low-rate bracket for
joint returns and head of household returns will be rounded
down to the nearest $50. The bracket for single individuals and
married individuals filing separately will be one-half for
joint returns (after adjustment of that bracket for inflation).
Rate reduction credit for 2001
The conference agreement includes a rate reduction credit
for 2001 to more immediately achieve one of the purposes behind
the new bottom rate bracket for 2001 that was included in both
the House bill and the Senate amendment. The conferees have
chosen to utilize this credit mechanism (and the issuance of
checks described below) because it will deliver economic
stimulus to the economy more rapidly than would implementation
of a new 10-percent rate bracket, even if that were accompanied
by an immediate implementation of new wage withholding tables.
Accordingly, this rate reduction credit operates in lieu of the
new 10-percent income tax rate bracket for 2001.
This credit is computed in the following manner.
Taxpayers would be entitled to a credit in tax year 2001 of 5
percent (the difference between the 15-percent rate and the 10-
percent rate) of the amount of income that would have been
eligible for the new 10-percent rate. Taxpayers may not receive
a credit in excess of their income tax liability (determined
after nonrefundable credits).
Most taxpayers will receive this credit in the form of a
check issued by the Department of the Treasury. The amount of
the check would be computed in the same manner as the credit,
except that it will be done on the basis of tax returns filed
for 2000 (instead of 2001). The conferees anticipate that the
Department of the Treasury will make every effort to issue all
checks before October 1, 2001, to taxpayers who timely filed
their 2000 tax returns. Taxpayers who filed late or pursuant to
extensions will receive their checks later in the fall.
Taxpayers would reconcile the amount of the credit with
the check they receive in the following manner. They would
complete a worksheet calculating the amount of the credit based
on their 2001 tax return. They would then subtract from the
credit the amount of the check they received. For many
taxpayers, these two amounts would be the same. If, however,
the result is a positive number (because, for example, the
taxpayer paid no tax in 2000 but is paying tax in 2001), the
taxpayer may claim that amount as a credit against 2001 tax
liability. If, however, the result is negative (because, for
example, the taxpayer paid tax in 2000 but owes no tax for
2001), the taxpayer is not required to repay that amount to the
Treasury. Otherwise, the checks have no effect on tax returns
filed in 2001; the amount is not includible in gross income and
it does not otherwise reduce the amount of withholding. In no
event may the Department of the Treasury issue checks after
December 31, 2001.\4\ This is designed to prevent errors by
taxpayers who might claim the full amount of the credit on
their 2001 tax returns and file those returns early in 2002, at
the same time the Treasury check might be mailed to them.
Payment of the credit (or the check) is treated, for all
purposes of the Code,\5\ as a payment of tax. As such, the
credit or the check is subject to the refund offset provisions,
such as those applicable to past-due child support under
section 6402 of the Code.
---------------------------------------------------------------------------
\4\ For administrative reasons, the Department of the Treasury may
need to establish an earlier termination date in order to fully
implement the intent of this provision.
\5\ A special rule provides that no interest will be paid with
respect to the checks.
---------------------------------------------------------------------------
In general, taxpayers eligible for the credit (and the
check) are individuals other than estates or trusts,
nonresident aliens, or dependents. The determination of this
status for the relevant year is made on the basis of the
information filed on the tax return.
The conferees understand that, in light of the large
number of checks that are being issued, the issuance of checks
will take several months.\6\ Accordingly, no interest will be
paid with respect to these checks. The conferees understand
that checks will be issued in the order of the last two digits
of the taxpayer identification number (which is generally a
taxpayer's social security number), from lowest to highest.
Payment by check is the only mechanism for receiving the
payment prior to filing the 2001 tax return; taxpayers may not
file either amended returns or claims for tentative refunds for
tax year 2000 to claim these amounts.
---------------------------------------------------------------------------
\6\ The conferees investigated the possibility of utilizing
electronic means, instead of paper checks, to deliver these amounts
even more rapidly, but doing so was not possible because of limitations
on available data on individual's banking accounts.
---------------------------------------------------------------------------
The conferees anticipate that the IRS will send notices
to most taxpayers approximately one month after enactment. The
notices will inform taxpayers of the computation of their
checks and the approximate date by which they can expect to
receive their check. This information should decrease the
number of telephone calls made by taxpayers to the IRS
inquiring when their check will be issued.
Modification of 15-percent bracket
The 15-percent regular income tax bracket is modified to
begin at the end of the new low-rate regular income tax
bracket. The 15-percent regular income tax bracket ends at the
same level as under present law. The conference agreement also
makes other changes to the 15-percent rate bracket.\7\
---------------------------------------------------------------------------
\7\ See discussion of the conference agreement regarding marriage
penalty relief in the 15-percent bracket.
---------------------------------------------------------------------------
Reduction of other rates and consolidation of rate brackets
The present-law regular income tax rates of 28 percent,
31 percent, 36 percent, and 39.6 percent are phased down over
six years to 25 percent, 28 percent, 33 percent, and 35
percent, effective after June 30, 2001. Accordingly, for
taxable years beginning during 2001, the rate reduction will
come in the form of a blended tax rate. The taxable income
levels for the new rates in all taxable years are the same as
the taxable income levels that apply under the present-law
rates.
Table 7, below, shows the schedule of regular income tax
rate reductions.
TABLE 7.--REGULAR INCOME TAX RATE REDUCTIONS
----------------------------------------------------------------------------------------------------------------
28% rate 31% rate 36% rate 39.6% rate
Calendar year reduced to: reduced to: reduced to: reduced to:
----------------------------------------------------------------------------------------------------------------
2001\1\-2003.................................... 27% 30% 35% 38.6%
2004-2005....................................... 26% 29% 34% 37.6%
2006 and later.................................. 25% 28% 33% 35%
----------------------------------------------------------------------------------------------------------------
\1\ Effective July 1, 2001.
Projected regular income tax rate schedules under the proposal
Table 8, below, shows the projected individual regular
income tax rate schedules when the rate reductions are fully
phased in (i.e., for 2006). As under present law, the rate
brackets for married taxpayers filing separate returns under
the bill are one half the rate brackets for married individuals
filing joint returns. In addition, appropriate adjustments are
made to the separate, compressed rate schedule for estates and
trusts.
TABLE 8.--INDIVIDUAL REGULAR INCOME TAX RATES FOR 2006 (PROJECTED)
------------------------------------------------------------------------
But not Then regular income tax
If taxable income is: over: equals:
------------------------------------------------------------------------
Single individuals
$0.................................. $6,000 10% of taxable income
$6,000.............................. $30,950 $600, plus 15% of the
amount over $6,000
$30,950............................. $74,950 $4,342.50, plus 25% of
the amount over
$30,950
$74,950............................. $156,300 $15,342.50, plus 28% of
the amount over
$74,950
$156,300............................ $339,850 $38,120.50, plus 33% of
the amount over
$156,300
Over $339,850....................... ......... $98,692, plus 35% of
the amount over
$339,850
Heads of households
$0.................................. $10,000 10% of taxable income
$10,000............................. $41,450 $1,000, plus 15% of the
amount over $10,000
$41,450............................. $107,000 $5,717.50, plus 25% of
the amount over
$41,450
$107,000............................ $173,300 $22,105, plus 28% of
the amount over
$107,000
$173,300............................ $339,850 $40,669, plus 33% of
the amount over
$173,300
Over $339,850....................... ......... $95,630.50, plus 35% of
the amount over
$339,850
Married individuals filing joint returns
$0.................................. $12,000 10% of taxable income
$12,000............................. \8\ $57,8 $1,200, plus 15% of the
50 amount over $12,000
$57,850............................. $124,900 $8,077.50, plus 25% of
the amount over
$57,850
$124,900............................ $190,300 $24,840, plus 28% of
the amount over
$124,900
$190,300............................ $339,850 $43,152, plus 33% of
the amount over
$190,300
Over $339,850....................... ......... $92,503.50, plus 35% of
the amount over
$339,850
------------------------------------------------------------------------
\8\ The end point of the 15-percent rate bracket for married individuals
filing joint returns also reflects the phase-in of the increase in the
size of the 15-percent bracket in section 302 of the bill, below.
Revised wage withholding for 2001
Under present law, the Secretary of the Treasury is
authorized to prescribe appropriate income tax withholding
tables or computational procedures for the withholding of
income taxes from wages paid by employers. The Secretary is
expected to make appropriate revisions to the wage withholding
tables to reflect the rate reduction that will be effective
beginning July 1, 2001, as expeditiously as possible.
Transfer to Social Security and Medicare trust funds
The conference agreement does not follow the House bill.
Effective date.--The provisions of the conference
agreement generally apply to taxable years beginning after
December 31, 2000. The reductions in the tax rates, other than
the new 10-percent rate, are effective after June 30, 2001. The
conforming amendments to certain withholding provisions under
the bill are effective for amounts paid more than 60 days after
the date of enactment.
B. Increase Starting Point for Phase-Out of Itemized Deductions (Sec.
102 of the Senate Amendment and Sec. 68 of the Code)
Present Law
Itemized deductions
Taxpayers may choose to claim either the basic standard
deduction (and additional standard deductions, if applicable)
or itemized deductions (subject to certain limitations) for
certain expenses incurred during the taxable year. Among these
deductible expenses are unreimbursed medical expenses,
investment interest, casualty and theft losses, wagering
losses, charitable contributions, qualified residence interest,
State and local income and property taxes, unreimbursed
employee business expenses, and certain other miscellaneous
expenses.
Overall limitation on itemized deductions (``Pease'' limitation)
Under present law, the total amount of otherwise
allowable itemized deductions (other than medical expenses,
investment interest, and casualty, theft, or wagering losses)
is reduced by three percent of the amount of the taxpayer's
adjusted gross income in excess of $132,950 in 2001 ($66,475
for married couples filing separate returns). These amounts are
adjusted annually for inflation. In computing this reduction of
total itemized deductions, all present-law limitations
applicable to such deductions (such as the separate floors) are
first applied and, then, the otherwise allowable total amount
of itemized deductions is reduced in accordance with this
provision. Under this provision, the otherwise allowable
itemized deductions may not be reduced by more than 80 percent.
House Bill
No provision.
Senate Amendment
The Senate amendment increases the starting point of the
overall limitation on itemized deductions for all taxpayers
(other than married couples filing separate returns) to the
starting point of the personal exemption phase-out for married
couples filing a joint return. This amount is projected under
present law to be $245,500 in 2009. The starting point of the
overall limitation on itemized deductions for married couples
filing separate returns would continue to be one-half of the
amount for other taxpayers.
Effective date.--The provision is effective for taxable
years beginning after December 31, 2008.
Conference Agreement
The conference agreement repeals the overall limitation
on itemized deductions for all taxpayers. The repeal is phased-
in over five years, as follows. The otherwise applicable
overall limitation on itemized deductions is reduced by one-
third in taxable years beginning in 2006 and 2007, and by two-
thirds in taxable years beginning in 2008 and 2009. The overall
limitation is repealed for taxable years beginning after
December 31, 2009.
Effective date.--The conference agreement is effective
for taxable years beginning after December 31, 2005.
C. Phase-out of Special Rules for Personal Exemptions (Sec. 103 of the
Senate Amendment and Sec. 151(d)(3) of the Code)
Present Law
In order to determine taxable income, an individual
reduces adjusted gross income by any personal exemptions,
deductions, and either the applicable standard deduction or
itemized deductions. Personal exemptions generally are allowed
for the taxpayer, his or her spouse, and any dependents. For
2001, the amount deductible for each personal exemption is
$2,900. This amount is adjusted annually for inflation.
Under present law, the deduction for personal exemptions
is phased-out ratably for taxpayers with adjusted gross income
over certain thresholds. The applicable thresholds for 2001 are
$132,950 for single individuals, $199,450 for married
individuals filing a joint return, $166,200 for heads of
households, and $99,725 for married individuals filing separate
returns. These thresholds are adjusted annually for inflation.
The total amount of exemptions that may be claimed by a
taxpayer is reduced by two percent for each $2,500 (or portion
thereof) by which the taxpayer's adjusted gross income exceeds
the applicable threshold. The phase-out rate is two percent for
each $1,250 for married taxpayers filing separate returns.
Thus, the personal exemptions claimed are phased-out over a
$122,500 range ($61,250 for married taxpayers filing separate
returns), beginning at the applicable threshold. The size of
these phase-out ranges ($122,500/$61,250) is not adjusted for
inflation. For 2001, the point at which a taxpayer's personal
exemptions are completely phased-out is $255,450 for single
individuals, $321,950 for married individuals filing a joint
return, $288,700 for heads of households, and $160,975 for
married individuals filing separate returns.
House Bill
No provision.
Senate Amendment
The Senate amendment repeals the personal exemption
phase-out.
Effective date.--The provision is effective for taxable
years beginning after December 31, 2008.
Conference Agreement
The conference agreement follows the Senate amendment,
with a modification. The modification provides for a five-year
phase-in of the repeal of the personal exemption phase-out.
Under the five-year phase-in, the otherwise applicable personal
exemption phase-out is reduced by one-third in taxable years
beginning in 2006 and 2007, and is reduced by two-thirds in
taxable years beginning in 2008 and 2009. The repeal is fully
effective for taxable years beginning after December 31, 2009.
II. TAX BENEFITS RELATING TO CHILDREN
A. Increase and Expand the Child Tax Credit (sec. 2 of the House Bill,
Secs. 201 and 204 of the Senate Amendment and Sec. 24 of the Code)
Present Law
In general
Under present law, an individual may claim a $500 tax
credit for each qualifying child under the age of 17. In
general, a qualifying child is an individual for whom the
taxpayer can claim a dependency exemption and who is the
taxpayer's son or daughter (or descendent of either), stepson
or stepdaughter, or eligible foster child.
The child tax credit is phased-out for individuals with
income over certain thresholds. Specifically, the otherwise
allowable child tax credit is reduced by $50 for each $1,000
(or fraction thereof) of modified adjusted gross income over
$75,000 for single individuals or heads of households, $110,000
for married individuals filing joint returns, and $55,000 for
married individuals filing separate returns. Modified adjusted
gross income is the taxpayer's total gross income plus certain
amounts excluded from gross income (i.e., excluded income of
U.S. citizens or residents living abroad (sec. 911); residents
of Guam, American Samoa, and the Northern Mariana Islands (sec.
931); and residents of Puerto Rico (sec. 933)). The length of
the phase-out range depends on the number of qualifying
children. For example, the phase-out range for a single
individual with one qualifying child is between $75,000 and
$85,000 of modified adjusted gross income. The phase-out range
for a single individual with two qualifying children is between
$75,000 and $95,000.
The child tax credit is not adjusted annually for
inflation.
Refundability
In general, the child tax credit is nonrefundable.
However, for families with three or more qualifying children,
the child tax credit is refundable up to the amount by which
the taxpayer's social security taxes exceed the taxpayer's
earned income credit.
Alternative minimum tax liability
An individual's alternative minimum tax liability reduces
the amount of the refundable earned income credit and, for
taxable years beginning after December 31, 2001, the amount of
the refundable child credit for families with three or more
children. This is known as the alternative minimum tax offset
of refundable credits.
Through 2001, an individual generally may reduce his or
her tentative alternative minimum tax liability by
nonrefundable personal tax credits (such as the $500 child tax
credit and the adoption tax credit). For taxable years
beginning after December 31, 2001, nonrefundable personal tax
credits may not reduce an individual's income tax liability
below his or her tentative alternative minimum tax.
House Bill
In general
No provision. However, H.R. 6, as passed by the House,
contains a provision that increases the child tax credit to
$1,000, phased in over six years, beginning in 2001. Table 10,
below, shows the proposed increase in the amount of the child
tax credit under the provision.
Table 10.--Increase of the Child Tax Credit
Credit amount
Taxable year per child
2001.......................................................... $600
2002.......................................................... $600
2003.......................................................... $700
2004.......................................................... $800
2005.......................................................... $900
2006 and thereafter........................................... $1,000
Refundability
No provision. However, H.R. 6 extends the present-law
refundability of the child tax credit to families with fewer
than three children.
Alternative minimum tax
No provision. However, H.R. 6 provides that the
refundable child tax credit will no longer be reduced by the
amount of the alternative minimum tax. In addition, H.R. 6
allows the child tax credit to the extent of the full amount of
the individual's regular income tax and alternative minimum
tax.
Effective date.--No provision. However, the provisions of
H.R. 6 generally are effective for taxable years beginning
after December 31, 2000.
Senate Amendment
In general
The Senate amendment increases the child tax credit to
$1,000, phased-in over eleven years, effective for taxable
years beginning after December 31, 2000.
Table 11, below, shows the increase of the child tax
credit.
Table 11.--Increase of the Child Tax Credit
Credit amount
Calendar year per child
2001-2003..................................................... $600
2004-2006..................................................... $700
2007-2009..................................................... $800
2010.......................................................... $900
2011 and later................................................ $1,000
Refundability
The Senate amendment makes the child credit refundable to
the extent of 15 percent of the taxpayer's earned income in
excess of $10,000.\9\ Thus, in 2001, families with earned
income of at least $14,000 and one child will get a refundable
credit of $600. Families with three or more children are
allowed a refundable credit for the amount by which the
taxpayer's social security taxes exceed the taxpayer's earned
income credit (the present-law rule), if that amount is greater
than 15 percent of the taxpayer's earned income in excess of
$10,000. The Senate amendment also provides that the refundable
portion of the child credit does not constitute income and
shall not be treated as resources for purposes of determining
eligibility or the amount or nature of benefits or assistance
under any Federal program or any State or local program
financed with Federal funds.
---------------------------------------------------------------------------
\9\ For these purposes, earned income is defined as under section
32, as amended by this bill.
---------------------------------------------------------------------------
Alternative minimum tax
Same as H.R. 6.
Effective date.--The provision is effective for taxable
years beginning after December 31, 2000.
Conference Agreement
In general
The conference agreement increases the child tax credit
to $1,000, phased-in over ten years, effective for taxable
years beginning after December 31, 2000.
Table 12, below, shows the increase of the child tax
credit.
Table 12.--Increase of the Child Tax Credit
Credit amount
Calendar year per child
2001-2004..................................................... $600
2005-2008..................................................... $700
2009.......................................................... $800
2010 and later................................................ $1,000
Refundability
The conference agreement makes the child credit
refundable to the extent of 10 percent of the taxpayer's earned
income in excess of $10,000 for calendar years 2001-2004. The
percentage is increased to 15 percent for calendar years 2005
and thereafter. The $10,000 amount is indexed for inflation
beginning in 2002. Families with three or more children are
allowed a refundable credit for the amount by which the
taxpayer's social security taxes exceed the taxpayer's earned
income credit (the present-law rule), if that amount is greater
than the refundable credit based on the taxpayer's earned
income in excess of $10,000. The conference agreement also
provides that the refundable portion of the child credit does
not constitute income and shall not be treated as resources for
purposes of determining eligibility or the amount or nature of
benefits or assistance under any Federal program or any State
or local program financed with Federal funds.
Alternative minimum tax
The conference agreement follows H.R. 6 and the Senate
amendment.
Effective date.--The provision generally is effective for
taxable years beginning after December 31, 2000. The provision
relating to allowing the child tax credit against alternative
minimum tax is effective for taxable years beginning after
December 31, 2001.
B. Sense of the Senate Regarding Child Credit Expansion (Sec. 202 of
the Senate Amendment)
Present Law
Under present law, an individual may claim a $500 tax
credit for each qualifying child under the age of 17. In
general, a qualifying child is an individual for whom the
taxpayer can claim a dependency exemption and who is the
taxpayer's son or daughter (or descendent of either), stepson
or stepdaughter, or eligible foster child.
House Bill
No provision.
Senate Amendment
The Senate amendment provides a Sense of the Senate
resolution that the expansion of the child credit included in
the Senate amendment be retained in the conference agreement.
Conference Agreement
The conference agreement does not include the Senate
amendment.
C. Extension and Expansion of Adoption Tax Benefits (Sec. 2 of H.R.
622, Sec. 203 of the Senate Amendment, and Secs. 23 and 137 of the
Code)
Present Law
Tax credit
In general
A tax credit is allowed for qualified adoption expenses
paid or incurred by a taxpayer. The maximum credit is $5,000
per eligible child ($6,000 for a special needs child). An
eligible child is an individual (1) who has not attained age 18
or (2) is physically or mentally incapable of caring for
himself or herself. A special needs child is an eligible child
who is a citizen or resident of the United States who a State
has determined: (1) cannot or should not be returned to the
home of the birth parents; and (2) has a specific factor or
condition (such as the child's ethnic background, age, or
membership in a minority or sibling group, or the presence of
factors such as medical conditions, or physical, mental, or
emotional handicaps) because of which the child cannot be
placed with adoptive parents without adoption assistance.
Qualified adoption expenses are reasonable and necessary
adoption fees, court costs, attorneys fees, and other expenses
that are: (1) directly related to, and the principal purpose of
which is for, the legal adoption of an eligible child by the
taxpayer; (2) not incurred in violation of State or Federal
law, or in carrying out any surrogate parenting arrangement;
(3) not for the adoption of the child of the taxpayer's spouse;
and (4) not reimbursed (e.g., by an employer).
Qualified adoption expenses may be incurred in one or
more taxable years, but the credit may not exceed $5,000 per
adoption ($6,000 for a special needs child). The adoption
credit is phased out ratably for taxpayers with modified
adjusted gross income between $75,000 and $115,000. Modified
adjusted gross income is the sum of the taxpayer's adjusted
gross income plus amounts excluded from income under Code
sections 911, 931, and 933 (relating to the exclusion of income
of U.S. citizens or residents living abroad; residents of Guam,
American Samoa, and the Northern Mariana Islands; and residents
of Puerto Rico, respectively).
The adoption credit for special needs children is
permanent. The adoption credit with respect to other children
does not apply to expenses paid or incurred after December 31,
2001.
Alternative minimum tax
Through 2001, the adoption credit generally reduces the
individual's regular income tax and alternative minimum tax.
For taxable years beginning after December 31, 2001, the
otherwise allowable adoption credit is allowed only to the
extent that the individual's regular income tax liability
exceeds the individual's tentative minimum tax, determined
without regard to the minimum tax foreign tax credit.
Exclusion from income
A maximum $5,000 exclusion from the gross income of an
employee is allowed for qualified adoption expenses paid or
reimbursed by an employer under an adoption assistance program.
The maximum excludible amount is $6,000 for special needs
adoptions. The exclusion is phased out ratably for taxpayers
with modified adjusted gross income between $75,000 and
$115,000. Modified adjusted gross income is the sum of the
taxpayer's adjusted gross income plus amounts excluded from
income under Code sections 911, 931, and 933 (relating to the
exclusion of income of U.S. citizens or residents living
abroad; residents of Guam, American Samoa, and the Northern
Mariana Islands; and residents of Puerto Rico, respectively).
For purposes of this exclusion, modified adjusted gross income
also includes all employer payments and reimbursements for
adoption expenses whether or not they are taxable to the
employee. The exclusion does not apply for purposes of payroll
taxes. Adoption expenses paid or reimbursed by the employer
under an adoption assistance program are not eligible for the
adoption credit. A taxpayer may be eligible for the adoption
credit (with respect to qualified adoption expenses he or she
incurs) and also for the exclusion (with respect to different
qualified adoption expenses paid or reimbursed by his or her
employer).
The exclusion from income does not apply to amounts paid
or expenses incurred after December 31, 2001.
House Bill
Tax credit
No provision. However, H.R. 622, the ``Hope for Children
Act,'' as passed by the House, permanently extends the adoption
credit for children other than special needs children. The
maximum credit is increased to $10,000 per eligible child,
including special needs children. The beginning point of the
income phase-out range is increased to $150,000 of modified
adjusted gross income. Therefore, the adoption credit is
phased-out for taxpayers with modified adjusted gross income of
$190,000 or more. Finally, the adoption credit is allowed
against the alternative minimum tax permanently.
Exclusion from income
No provision. However, H.R. 622 permanently extends the
exclusion from income for employer-provided adoption
assistance. The maximum exclusion is increased to $10,000 per
eligible child, including special needs children. The beginning
point of the income phase-out range is increased to $150,000 of
modified adjusted gross income. Therefore, the exclusion is not
available to taxpayers with modified adjusted gross income of
$190,000 or more.
Effective date.--Generally, the provision of H.R. 622 is
effective for taxable years beginning after December 31, 2001.
Qualified expenses paid or incurred in taxable years beginning
on or before December 31, 2001, remain subject to the present-
law dollar limits.
Senate Amendment
Tax credit
Same as H.R. 622, with one modification. The Senate
amendment provides a $10,000 credit in the year a special needs
adoption is finalized regardless of whether the taxpayer has
qualified adoption expenses. No credit is allowed with respect
to the adoption of a special needs child if the adoption is not
finalized.
Exclusion from income
Same as H.R. 622, with one modification. The Senate
amendment provides a $10,000 exclusion in the case of a special
needs adoption regardless of whether the taxpayer has qualified
adoption expenses.
Effective date.--The provision is effective for taxable
years beginning after December 31, 2001.
Conference Agreement
The conference agreement follows the Senate amendment
with one modification. The provisions of the Senate amendment
that extend the tax credit and exclusion from income for
special needs adoptions regardless of whether the taxpayer has
qualified adoption expenses are effective for taxable years
beginning after December 31, 2002.
D. Expansion of Dependent Care Tax Credit (sec. 205 of the Senate
amendment and sec. 21 of the Code)
present law
Dependent care tax credit
A taxpayer who maintains a household that includes one or
more qualifying individuals may claim a nonrefundable credit
against income tax liability for up to 30 percent of a limited
amount of employment-related expenses. Eligible employment-
related expenses are limited to $2,400 if there is one
qualifying individual or $4,800 if there are two or more
qualifying individuals. Thus, the maximum credit is $720 if
there is one qualifying individual and $1,440 if there are two
or more qualifying individuals. The applicable dollar limit
($2,400/$4,800) of otherwise eligible employment-related
expenses is reduced by any amount excluded from income under an
employer-provided dependent care assistance program. For
example, a taxpayer with one qualifying individual who has
$2,400 of otherwise eligible employment-related expenses but
who excludes $1,000 of dependent care assistance must reduce
the dollar limit of eligible employment-related expenses for
the dependent care tax credit by the amount of the exclusion to
$1,400 ($2,400-$1,000 = $1,400).
A qualifying individual is (1) a dependent of the
taxpayer under the age of 13 for whom the taxpayer is eligible
to claim a dependency exemption, (2) a dependent of the
taxpayer who is physically or mentally incapable of caring for
himself or herself, or (3) the spouse of the taxpayer; if the
spouse is physically or mentally incapable of caring for
himself or herself.
The 30 percent credit rate is reduced, but not below 20
percent, by 1 percentage point for each $2,000 (or fraction
thereof) of adjusted gross income above $10,000. The credit is
not available to married taxpayers unless they file a joint
return.
Exclusion for employer-provided dependent care
Amounts paid or incurred by an employer for dependent
care assistance provided to an employee generally are excluded
from the employee's gross income and wages if the assistance is
furnished under a program meeting certain requirements. These
requirements include that the program be described in writing,
satisfy certain nondiscrimination rules, and provide for
notification to all eligible employees. Dependent care
assistance expenses eligible for the exclusion are defined the
same as employment-related expenses with respect to a
qualifying individual under the dependent care tax credit.
The dependent care exclusion is limited to $5,000 per
year, except that a married taxpayer filing a separate return
may exclude only $2,500. Dependent care expenses excluded from
income are not eligible for the dependent care tax credit (sec.
21(c)).
house bill
No provision.
senate amendment
The Senate amendment increases the maximum amount of
eligible employment-related expenses from $2,400 to $3,000, if
there is one qualifying individual (from $4,800 to $6,000, if
there are two or more qualifying individuals). The Senate
amendment also increases the maximum credit from 30 percent to
40 percent. Thus, the maximum credit is $1,200, if there is one
qualifying individual and $2,400, if there are two or more
qualifying individuals. Finally, the Senate amendment modifies
the phase-down of the credit. Under the Senate amendment, the
40-percent credit rate is reduced, but not below 20 percent, by
1 percentage point for each $2,000 (or fraction thereof) of
adjusted gross income above $20,000. Therefore, the credit
percentage is reduced to 20 percent for taxpayers with adjusted
gross income over $58,000.
Effective date.--The provision is effective for taxable
years beginning after December 31, 2001.
conference agreement
The conference agreement follows the Senate amendment,
with modifications. Under the conference agreement, the maximum
credit is 35 percent. Further, the conference agreement
provides that the phase-down of the credit applies with respect
to adjusted gross income above $15,000. Therefore, the credit
percentage is reduced to 20 percent for taxpayers with adjusted
gross income over $43,000.
Effective date.--The conference agreement provision is
effective for taxable years beginning after December 31, 2002.
E. Tax Credit for Employer-Provided Child Care Facilities (Secs. 206
and 207 of the Senate Amendment and New Sec. 45D of the Code)
present law
Present law does not provide a tax credit to employers
for supporting child care or child care resource and referral
services. An employer, however, may be able to deduct such
expenses as ordinary and necessary business expenses.
Alternatively, the employer may be required to capitalize the
expenses and claim depreciation deductions over time.
house bill
No provision.
senate amendment
Under the Senate amendment, taxpayers receive a tax
credit equal to 25 percent of qualified expenses for employee
child care and 10 percent of qualified expenses for child care
resource and referral services. The maximum total credit that
may be claimed by a taxpayer cannot exceed $150,000 per taxable
year.
Qualified child care expenses include costs paid or
incurred: (1) to acquire, construct, rehabilitate or expand
property that is to be used as part of the taxpayer's qualified
child care facility; \10\ (2) for the operation of the
taxpayer's qualified child care facility, including the costs
of training and certain compensation for employees of the child
care facility, and scholarship programs; or (3) under a
contract with a qualified child care facility to provide child
care services to employees of the taxpayer. To be a qualified
child care facility, the principal use of the facility must be
for child care (unless it is the principal residence of the
taxpayer), and the facility must meet all applicable State and
local laws and regulations, including any licensing laws. A
facility is not treated as a qualified child care facility with
respect to a taxpayer unless: (1) it has open enrollment to the
employees of the taxpayer; (2) use of the facility (or
eligibility to use such facility) does not discriminate in
favor of highly compensated employees of the taxpayer (within
the meaning of section 414(q); and (3) at least 30 percent of
the children enrolled in the center are dependents of the
taxpayer's employees, if the facility is the principal trade or
business of the taxpayer. Qualified child care resource and
referral expenses are amounts paid or incurred under a contract
to provide child care resource and referral services to the
employees of the taxpayer. Qualified child care services and
qualified child care resource and referral expenditures must be
provided (or be eligible for use) in a way that does not
discriminate in favor of highly compensated employees of the
taxpayer (within the meaning of section 414(q).
---------------------------------------------------------------------------
\10\ In addition, a depreciation deduction (or amortization in lieu
of depreciation) must be allowable with respect to the property and the
property must not be part of the principal residence of the taxpayer or
any employee of the taxpayer.
---------------------------------------------------------------------------
Any amounts for which the taxpayer may otherwise claim a
tax deduction are reduced by the amount of these credits.
Similarly, if the credits are taken for expenses of acquiring,
constructing, rehabilitating, or expanding a facility, the
taxpayer's basis in the facility is reduced by the amount of
the credits.
Credits taken for the expenses of acquiring,
constructing, rehabilitating, or expanding a qualified facility
are subject to recapture for the first ten years after the
qualified child care facility is placed in service. The amount
of recapture is reduced as a percentage of the applicable
credit over the ten-year recapture period. Recapture takes
effect if the taxpayer either ceases operation of the qualified
child care facility or transfers its interest in the qualified
child care facility without securing an agreement to assume
recapture liability for the transferee. Other rules apply.
Effective date.--The provision is effective for taxable
years beginning after December 31, 2001.
conference Agreement
The conference agreement follows the Senate amendment.
III. MARRIAGE PENALTY RELIEF PROVISIONS
A. Standard Deduction Marriage Penalty`Relief (Sec. 2 of H.R. 6, Sec.
301 of the Senate Amendment and Sec. 63 of the Code)
present law
Marriage penalty
A married couple generally is treated as one tax unit
that must pay tax on the couple's total taxable income.
Although married couples may elect to file separate returns,
the rate schedules and other provisions are structured so that
filing separate returns usually results in a higher tax than
filing a joint return. Other rate schedules apply to single
persons and to single heads of households.
A ``marriage penalty'' exists when the combined tax
liability of a married couple filing a joint return is greater
than the sum of the tax liabilities of each individual computed
as if they were not married. A ``marriage bonus'' exists when
the combined tax liability of a married couple filing a joint
return is less than the sum of the tax liabilities of each
individual computed as if they were not married.
Basic standard deduction
Taxpayers who do not itemize deductions may choose the
basic standard deduction (and additional standard deductions,
if applicable),\11\ which is subtracted from adjusted gross
income (``AGI'') in arriving at taxable income. The size of the
basic standard deduction varies according to filing status and
is adjusted annually for inflation. For 2001, the basic
standard deduction amount for single filers is 60 percent of
the basic standard deduction amount for married couples filing
joint returns. Thus, two unmarried individuals have standard
deductions whose sum exceeds the standard deduction for a
married couple filing a joint return.
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\11\ Additional standard deductions are allowed with respect to any
individual who is elderly (age 65 or over) or blind.
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house bill
No provision. However, H.R. 6, as passed by the House,
contains a provision that increases the basic standard
deduction for a married couple filing a joint return to twice
the basic standard deduction for an unmarried individual filing
a single return. The basic standard deduction for a married
taxpayer filing separately will continue to equal one-half of
the basic standard deduction for a married couple filing
jointly; thus, the basic standard deduction for unmarried
individuals filing a single return and for married couples
filing separately will be the same.
Effective date.--The provision is effective for taxable
years beginning after December 31, 2001.
Senate Amendment
The Senate amendment is the same as H.R. 6 except that
the increase in the standard deduction is phased-in over five
years beginning in 2005 and would be fully phased-in for 2009
and thereafter. Table 13, below, shows the standard deduction
for married couples filing a joint return as a percentage of
the standard deduction for single individuals during the phase-
in period.
Table 13.--Phase-In of Increase of Standard Deduction for Married
Couples Filing Joint Returns
Calendar Year Standard Deduction for Joint Returns as Percentage
of Standard Deduction for Single Returns
2005.................................................. 174%
2006.................................................. 184%
2007.................................................. 187%
2008.................................................. 190%
2009 and later........................................ 200%
Effective date.--The provision is effective for taxable
years beginning after December 31, 2004.
conference agreement
The conference agreement follows the Senate amendment.
B. Expansion of the 15-Percent Rate Bracket for Married Couples Filing
Joint Returns (Sec. 3 of H.R. 6, Sec. 302 of the Senate Amendment and
Sec. 1 of the Code)
present law
In general
Under the Federal individual income tax system, an
individual who is a citizen or resident of the United States
generally is subject to tax on worldwide taxable income.
Taxable income is total gross income less certain exclusions,
exemptions, and deductions. An individual may claim either a
standard deduction or itemized deductions.
An individual's income tax liability is determined by
computing his or her regular income tax liability and, if
applicable, alternative minimum tax liability.
Regular income tax liability
Regular income tax liability is determined by applying
the regular income tax rate schedules (or tax tables) to the
individual's taxable income and then is reduced by any
applicable tax credits. The regular income tax rate schedules
are divided into several ranges of income, known as income
brackets, and the marginal tax rate increases as the
individual's income increases. The income bracket amounts are
adjusted annually for inflation. Separate rate schedules apply
based on filing status: single individuals (other than heads of
households and surviving spouses), heads of households, married
individuals filing joint returns (including surviving spouses),
married individuals filing separate returns, and estates and
trusts. Lower rates may apply to capital gains.
In general, the bracket breakpoints for single
individuals are approximately 60 percent of the rate bracket
breakpoints for married couples filing joint returns.\12\ The
rate bracket breakpoints for married individuals filing
separate returns are exactly one-half of the rate brackets for
married individuals filing joint returns. A separate,
compressed rate schedule applies to estates and trusts.
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\12\ The rate bracket breakpoint for the 39.6 percent marginal tax
rate is the same for single individuals and married couples filing
joint returns.
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House Bill
No provision. However, H.R. 6, as passed by the House,
contains a provision that increases the size of the 15-percent
regular income tax rate bracket for a married couple filing a
joint return to twice the size of the corresponding rate
bracket for an unmarried individual filing a single return.
This increase is phased in over six years as shown in Table 15,
below. Therefore, this provision is fully effective (i.e., the
size of the lowest regular income tax rate bracket for a
married couple filing a joint return is twice the size of the
lowest regular income tax rate bracket for an unmarried
individual filing a single return) for taxable years beginning
after December 31, 2008.
Table 15.--Increase in Size of 15-Percent Rate Bracket for Married
Couples Filing a Joint Return
Taxable year Size of 15-percent rate bracket for married couple
filing joint return as percentage of rate bracket
for unmarried individuals
2004.................................................. 172%
2005.................................................. 178%
2006.................................................. 183%
2007.................................................. 189%
2008.................................................. 195%
2009 and thereafter................................... 200%
Effective date.--The provision is effective for taxable
years beginning after December 31, 2003.
senate amendment
The Senate amendment increases the size of the 15-percent
regular income tax rate bracket for a married couple filing a
joint return to twice the size of the corresponding rate
bracket for an unmarried individual filing a single return. The
increase is phased-in over five years, beginning in 2005.
Therefore, this provision is fully effective (i.e., the size of
the 15-percent regular income tax rate bracket for a married
couple filing a joint return would be twice the size of the 15-
percent regular income tax rate bracket for an unmarried
individual filing a single return) for taxable years beginning
after December 31, 2008. Table 16, below, shows the increase in
the size of the 15-percent bracket during the phase-in period.
Table 16.--Increase in Size of 15-Percent Rate Bracket for Married
Couples Filing a Joint Return
Taxable year End point of 15-percent rate bracket for married
couple filing joint return as percentage of end
point of 15-percent rate bracket for unmarried
individuals
2005.................................................. 174%
2006.................................................. 184%
2007.................................................. 187%
2008.................................................. 190%
2009 and thereafter................................... 200%
Effective date.--The provision is effective for taxable
years beginning after December 31, 2004.
conference agreement
The conference agreement increases the size of the 15-
percent regular income tax rate bracket for a married couple
filing a joint return to twice the size of the corresponding
rate bracket for an unmarried individual filing a single
return. The increase is phased-in over four years, beginning in
2005. Therefore, this provision is fully effective (i.e., the
size of the 15-percent regular income tax rate bracket for a
married couple filing a joint return would be twice the size of
the 15-percent regular income tax rate bracket for an unmarried
individual filing a single return) for taxable years beginning
after December 31, 2007. Table 17, below, shows the increase in
the size of the 15-percent bracket during the phase-in period.
Table 17.--Increase in Size of 15-Percent Rate Bracket for Married
Couples Filing a Joint Return
Taxable year End point of 15-percent rate bracket for married
couple filing joint return as percentage of end
point of 15-percent rate bracket for unmarried
individuals
2005.................................................. 180%
2006.................................................. 187%
2007.................................................. 193%
2008 and thereafter................................... 200%
Effective date.--The provision is effective for taxable
years beginning after December 31, 2004.
C. Marriage Penalty Relief and Simplification Relating to the Earned
Income Credit (Sec. 2(b)(2) of the House bill, Sec. 4 of H.R. 6, Sec.
303 of the Senate Amendment, and Sec. 32 of the Code)
Present Law
In general
Eligible low-income workers are able to claim a
refundable earned income credit. The amount of the credit an
eligible taxpayer may claim depends upon the taxpayer's income
and whether the taxpayer has one, more than one, or no
qualifying children.
The earned income credit is not available to married
individuals who file separate returns. No earned income credit
is allowed if the taxpayer has disqualified income in excess of
$2,450 (for 2001) for the taxable year.\13\ In addition, no
earned income credit is allowed if an eligible individual is
the qualifying child of another taxpayer.\14\
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\13\ Sec. 32(i). Disqualified income is the sum of: (1) interest
and dividends includible in gross income for the taxable year; (2) tax-
exempt income received or accrued in the taxable year; (3) net income
from rents and royalties for the taxable year not derived in the
ordinary course of business; (4) capital gain net income for the
taxpayer year; and (5) net passive income for the taxable year. Sec.
32(i)(2).
\14\ Sec. 32(c)(1)(B).
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Definition of qualifying child and tie-breaker rules
To claim the earned income credit, a taxpayer must either
(1) have a qualifying child or (2) meet the requirements for
childless adults. A qualifying child must meet a relationship
test, an age test, and a residence test. First, the qualifying
child must be the taxpayer's child, stepchild, adopted child,
grandchild, or foster child. Second, the child must be under
age 19 (or under age 24 if a full-time student) or permanently
and totally disabled regardless of age. Third, the child must
live with the taxpayer in the United States for more than half
the year (a full year for foster children).
An individual satisfies the relationship test under the
earned income credit if the individual is the taxpayer's: (1)
son or daughter or a descendant of either;\15\ (2) stepson or
stepdaughter; or (3) eligible foster child. An eligible foster
child is an individual (1) who is a brother, sister,
stepbrother, or stepsister of the taxpayer (or a descendant of
any such relative), or who is placed with the taxpayer by an
authorized placement agency, and (2) who the taxpayer cares for
as her or his own child. A married child of the taxpayer is not
treated as meeting the relationship test unless the taxpayer is
entitled to a dependency exemption with respect to the married
child (e.g., the support test is satisfied) or would be
entitled to the exemption if the taxpayer had not waived the
exemption to the noncustodial parent.\16\
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\15\ A child who is legally adopted or placed with the taxpayer for
adoption by an authorized adoption agency is treated as the taxpayer's
own child. Sec. 32(c)(3)(B)(iv).
\16\ Sec. 32(c)(3)(B)(ii).
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If a child otherwise qualifies with respect to more than
one person, the child is treated as a qualifying child only of
the person with the highest modified adjusted gross income.
``Modified adjusted gross income'' means adjusted gross
income determined without regard to certain losses and
increased by certain amounts not includible in gross
income.\17\ The losses disregarded are: (1) net capital losses
(up to $3,000); (2) net losses from estates and trusts; (3) net
losses from nonbusiness rents and royalties; (4) 75 percent of
the net losses from businesses, computed separately with
respect to sole proprietorships (other than farming), farming
sole proprietorships, and other businesses. The amounts added
to adjusted gross income to arrive at modified adjusted gross
income include: (1) tax-exempt interest; and (2) nontaxable
distributions from pensions, annuities, and individual
retirement plans (but not nontaxable rollover distributions or
trustee-to-trustee transfers).
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\17\ Sec. 32(c)(5).
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Definition of earned income
To claim the earned income credit, the taxpayer must have
earned income. Earned income consists of wages, salaries, other
employee compensation, and net earnings from self
employment.\18\ Employee compensation includes anything of
value received by the taxpayer from the employer in return for
services of the employee, including nontaxable earned income.
Nontaxable forms of compensation treated as earned income
include the following: (1) elective deferrals under a cash or
deferred arrangement or section 403(b) annuity (sec. 402(g));
(2) employer contributions for nontaxable fringe benefits,
including contributions for accident and health insurance (sec.
106), dependent care (sec. 129), adoption assistance (sec.
137), educational assistance (sec. 127), and miscellaneous
fringe benefits (sec. 132); (3) salary reduction contributions
under a cafeteria plan (sec. 125); (4) meals and lodging
provided for the convenience of the employer (sec. 119), and
(5) housing allowance or rental value of a parsonage for the
clergy (sec. 107). Some of these items are not required to be
reported on the Wage and Tax Statement (Form W-2).
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\18\ Sec. 32(c)(2)(A).
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Calculation of the credit
The maximum earned income credit is phased in as an
individual's earned income increases. The credit phases out for
individuals with earned income (or if greater, modified
adjusted gross income) over certain levels. In the case of a
married individual who files a joint return, the earned income
credit both for the phase-in and phase-out is calculated based
on the couples' combined income.
The credit is determined by multiplying the credit rate
by the taxpayer's earned income up to a specified earned income
amount. The maximum amount of the credit is the product of the
credit rate and the earned income amount. The maximum credit
amount applies to taxpayers with (1) earnings at or above the
earned income amount and (2) modified adjusted gross income (or
earnings, if greater) at or below the phase-out threshold
level.
For taxpayers with modified adjusted gross income (or
earned income, if greater) in excess of the phase-out
threshold, the credit amount is reduced by the phase-out rate
multiplied by the amount of earned income (or modified adjusted
gross income, if greater) in excess of the phase-out threshold.
In other words, the credit amount is reduced, falling to $0 at
the ``breakeven'' income level, the point where a specified
percentage of ``excess'' income above the phase-out threshold
offsets exactly the maximum amount of the credit. The earned
income amount and the phase-out threshold are adjusted annually
for inflation. Table 18, below, shows the earned income credit
parameters for taxable year 2001.\19\
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\19\ The table is based on Rev. Proc. 2001-13.
TABLE 18.--EARNED INCOME CREDIT PARAMETERS (2001)
------------------------------------------------------------------------
Two or more One No
qualifying qualifying qualifying
children child children.
------------------------------------------------------------------------
Credit rate (percent)............ 40.00% 34.00% 7.65%
Earned income amount............. $10,020 $7,140 $4,760
Maximum credit................... $4,008 $2,428 $364
Phase-out begins................. $13,090 $13,090 $5,950
Phase-out rate (percent)......... 21.06% 15.98% 7.65%
Phase-out ends................... $32,121 $28,281 $10,710
------------------------------------------------------------------------
An individual's alternative minimum tax liability reduces
the amount of the refundable earned income credit.\20\
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\20\ Sec. 32(h).
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house bill
The House bill provides that the earned income credit
will no longer be reduced by the amount of the alternative
minimum tax. The same provision is included in H.R. 6, as
passed by the House.
In addition, H.R. 6 increases the earned income amount
used to calculate the earned income credit for married
taxpayers who file a joint return to 110 percent of the earned
income amount for all other taxpayers eligible for the earned
income credit.
H.R. 6 also simplifies the definition of earned income by
excluding nontaxable earned income amounts from the definition
of earned income for earned income credit purposes. Thus, under
H.R. 6, earned income includes wages, salaries, tips, and other
employee compensation, if includible in gross income for the
taxable year, plus net earnings from self-employment.
Effective date.--The House bill is effective for taxable
years beginning after December 31, 2000.
senate amendment
For married taxpayers who file a joint return, the Senate
amendment increases the beginning and ending of the earned
income credit phase-out by $3,000. These beginning and ending
points are to be adjusted annually for inflation after 2002.
The Senate amendment simplifies the definition of earned
income by excluding nontaxable employee compensation from the
definition of earned income for earned income credit purposes.
Thus, under the Senate amendment, earned income includes wages,
salaries, tips, and other employee compensation, if includible
in gross income for the taxable year, plus net earnings from
self employment.
The Senate amendment repeals the present-law provision
that reduces the earned income credit by the amount of an
individual's alternative minimum tax.
The Senate amendment simplifies the calculation of the
earned income credit by replacing modified adjusted gross
income with adjusted gross income.
The Senate amendment provides that the relationship test
is met if the individual is the taxpayer's son, daughter,
stepson, stepdaughter, or a descendant of any such
individuals.\21\ A brother, sister, stepbrother, stepsister, or
a descendant of such individuals, also qualifies if the
taxpayer cares for such individual as his or her own child. A
foster child satisfies the relationship test as well. A foster
child is defined as an individual who is placed with the
taxpayer by an authorized placement agency and who the taxpayer
cares for as his or her own child. In order to be a qualifying
child, in all cases the child must have the same principal
place of abode as the taxpayer for over one-half of the taxable
year.
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\21\ As under present law, an adopted child is treated as a child
of the taxpayer by blood.
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The Senate amendment changes the present-law tie-breaking
rule. Under the Senate amendment, if an individual would be a
qualifying child with respect to more than one taxpayer, and
more than one taxpayer claims the earned income credit with
respect to that child, then the following tie-breaking rules
apply. First, if one of the individuals claiming the child is
the child's parent (or parents who file a joint return), then
the child is considered the qualifying child of the parent (or
parents). Second, if both parents claim the child and the
parents do not file a joint return together, then the child is
considered a qualifying child first of the parent with whom the
child resided for the longest period of time during the year,
and second of the parent with the highest adjusted gross
income. Finally, if none of the taxpayers claiming the child as
a qualifying child is the child's parent, the child is
considered a qualifying child with respect to the taxpayer with
the highest adjusted gross income.
The Senate amendment authorizes the IRS, beginning in
2004, to use math error authority to deny the earned income
credit if the Federal Case Registry of Child Support Orders
indicates that the taxpayer is the noncustodial parent of the
child with respect to whom the credit is claimed.
It is the intent of the Senate that by September 2002,
the Department of the Treasury, in consultation with the
National Taxpayer Advocate, deliver to the Senate Committee on
Finance and the House Committee on Ways and Means a study of
the Federal Case Registry database. The study is to cover (1)
the accuracy and timeliness of the data in the Federal Case
Registry, (2) the efficacy of using math error authority in
this instance in reducing costs due to erroneous or fraudulent
claims, and (3) the implications of using math error authority
in this instance, given the findings on the accuracy and
timeliness of the data.
Effective date.--The Senate amendment generally is
effective for taxable years beginning after December 31, 2001.
The Senate amendment to authorize the IRS to use math error
authority if the Federal Case Registry of Child Support Orders
indicates the taxpayer is the noncustodial parent is effective
beginning in 2004.
conference agreement
The conference agreement follows the Senate amendment,
except under the conference agreement, for married taxpayers
filing a joint return, the earned income credit phase-out
amount is increased as follows: by $1,000 in the case of
taxable years beginning in 2002, 2003, and 2004; by $2,000 in
the case of taxable years beginning in 2005, 2006, and 2007;
and by $3,000 in the case of taxable years beginning after
2007. The $3,000 amount is to be adjusted annually for
inflation after 2008.
The conferees realize that the expansion of the earned
income credit may create a financial hardship on U.S.
possessions with mirror codes and that further study of such
effects is necessary.
IV. EDUCATION INCENTIVES
A. Modifications to Education IRAs (Sec. 401 and 414 of the Senate
Amendment and Secs. 530 and 127 of the Code)
present law
In general
Section 530 of the Code provides tax-exempt status to
education individual retirement accounts (``education IRAs''),
meaning certain trusts or custodial accounts which are created
or organized in the United States exclusively for the purpose
of paying the qualified higher education expenses of a
designated beneficiary. Contributions to education IRAs may be
made only in cash.\22\ Annual contributions to education IRAs
may not exceed $500 per beneficiary (except in cases involving
certain tax-free rollovers, as described below) and may not be
made after the designated beneficiary reaches age 18.
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\22\ Special estate and gift tax rules apply to contributions made
to and distributions made from education IRAs.
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Phase-out of contribution limit
The $500 annual contribution limit for education IRAs is
generally phased-out ratably for contributors with modified
adjusted gross income (between $95,000 and $110,000). The
phase-out range for married taxpayers filing a joint return is
$150,000 to $160,000 of modified adjusted gross income.
Individuals with modified adjusted gross income above the
phase-out range are not allowed to make contributions to an
education IRA established on behalf of any individual.
Treatment of distributions
Earnings on contributions to an education IRA generally
are subject to tax when withdrawn. However, distributions from
an education IRA are excludable from the gross income of the
beneficiary to the extent that the total distribution does not
exceed the ``qualified higher education expenses'' incurred by
the beneficiary during the year the distribution is made.
If the qualified higher education expenses of the
beneficiary for the year are less than the total amount of the
distribution (i.e., contributions and earnings combined) from
an education IRA, then the qualified higher education expenses
are deemed to be paid from a pro-rata share of both the
principal and earnings components of the distribution. Thus, in
such a case, only a portion of the earnings are excludable
(i.e., the portion of the earnings based on the ratio that the
qualified higher education expenses bear to the total amount of
the distribution) and the remaining portion of the earnings is
includible in the beneficiary's gross income.
The earnings portion of a distribution from an education
IRA that is includible in income is also subject to an
additional 10-percent tax. The 10-percent additional tax does
not apply if a distribution is made on account of the death or
disability of the designated beneficiary, or on account of a
scholarship received by the designated beneficiary.
The additional 10-percent tax also does not apply to the
distribution of any contribution to an education IRA made
during the taxable year if such distribution is made on or
before the date that a return is required to be filed
(including extensions of time) by the beneficiary for the
taxable year during which the contribution was made (or, if the
beneficiary is not required to file such a return, April 15th
of the year following the taxable year during which the
contribution was made).
Present law allows tax-free transfers or rollovers of
account balances from one education IRA benefiting one
beneficiary to another education IRA benefiting another
beneficiary (as well as redesignations of the named
beneficiary), provided that the new beneficiary is a member of
the family of the old beneficiary and is under age 30.
Any balance remaining in an education IRA is deemed to be
distributed within 30 days after the date that the beneficiary
reaches age 30 (or, if earlier, within 30 days of the date that
the beneficiary dies).
Qualified higher education expenses
The term ``qualified higher education expenses'' includes
tuition, fees, books, supplies, and equipment required for the
enrollment or attendance of the designated beneficiary at an
eligible education institution, regardless of whether the
beneficiary is enrolled at an eligible educational institution
on a full-time, half-time, or less than half-time basis.
Qualified higher education expenses include expenses with
respect to undergraduate or graduate-level courses. In
addition, qualified higher education expenses include amounts
paid or incurred to purchase tuition credits (or to make
contributions to an account) under a qualified State tuition
program, as defined in section 529, for the benefit of the
beneficiary of the education IRA.
Moreover, qualified higher education expenses include,
within limits, room and board expenses for any academic period
during which the beneficiary is at least a half-time student.
Room and board expenses that may be treated as qualified higher
education expenses are limited to the minimum room and board
allowance applicable to the student in calculating costs of
attendance for Federal financial aid programs under section 472
of the Higher Education Act of 1965, as in effect on the date
of enactment of the Small Business Job Protection Act of 1996
(August 20, 1996). Thus, room and board expenses cannot exceed
the following amounts: (1) for a student living at home with
parents or guardians, $1,500 per academic year; (2) for a
student living in housing owned or operated by the eligible
education institution, the institution's ``normal'' room and
board charge; and (3) for all other students, $2,500 per
academic year.
Qualified higher education expenses generally include
only out-of-pocket expenses. Such qualified higher education
expenses do not include expenses covered by educational
assistance for the benefit of the beneficiary that is
excludable from gross income. Thus, total qualified higher
education expenses are reduced by scholarship or fellowship
grants excludablefrom gross income under present-law section
117, as well as any other tax-free educational benefits, such as
employer-provided educational assistance that is excludable from the
employee's gross income under section 127.
Present law also provides that if any qualified higher
education expenses are taken into account in determining the
amount of the exclusion for a distribution from an education
IRA, then no deduction (e.g., for trade or business expenses),
exclusion (e.g., for interest on education savings bonds) or
credit is allowed with respect to such expenses.
Eligible educational institutions are defined by
reference to section 481 of the Higher Education Act of 1965.
Such institutions generally are accredited post-secondary
educational institutions offering credit toward a bachelor's
degree, an associate's degree, a graduate-level or professional
degree, or another recognized post-secondary credential.
Certain proprietary institutions and post-secondary vocational
institutions also are eligible institutions. The institution
must be eligible to participate in Department of Education
student aid programs.
Time for making contributions
Contributions to an education IRA for a taxable year are
taken into account in the taxable year in which they are made.
Coordination with HOPE and Lifetime Learning credits
If an exclusion from gross income is allowed for
distributions from an education IRA with respect to an
individual, then neither the HOPE nor Lifetime Learning credit
may be claimed in the same taxable year with respect to the
same individual. However, an individual may elect to waive the
exclusion with respect to distributions from an education IRA.
If such a waiver is made, then the HOPE or Lifetime Learning
credit may be claimed with respect to the individual for the
taxable year.
Coordination with qualified tuition programs
An excise tax is imposed on contributions to an education
IRA for a year if contributions are made by anyone to a
qualified State tuition program on behalf of the same
beneficiary in the same year. The excise tax is equal to 6
percent of the contributions to the education IRA. The excise
tax is imposed each year after the contribution is made, unless
the contributions are withdrawn.
House Bill
No provision.
Senate Amendment
Annual contribution limit
The Senate amendment increases the annual limit on
contributions to education IRAs from $500 to $2,000. Thus,
aggregate contributions that may be made by all contributors to
one (or more) education IRAs established on behalf of any
particular beneficiary is limited to $2,000 for each year.
Qualified education expenses
The Senate amendment expands the definition of qualified
education expenses that may be paid tax-free from an education
IRA to include ``qualified elementary and secondary school
expenses,'' meaning expenses for (1) tuition, fees, academic
tutoring, special need services, books, supplies, and other
equipment incurred in connection with the enrollment or
attendance of the beneficiary at a public, private, or
religious school providing elementary or secondary education
(kindergarten through grade 12) as determined under State law,
(2) room and board, uniforms, transportation, and supplementary
items or services (including extended day programs) required or
provided by such a school in connection with such enrollment or
attendance of the beneficiary, and (3) the purchase of any
computer technology or equipment (as defined in sec.
170(e)(6)(F)(i)) or Internet access and related services, if
such technology, equipment, or services are to be used by the
beneficiary and the beneficiary's family during any of the
years the beneficiary is in school. Computer software primarily
involving sports, games, or hobbies is not considered a
qualified elementary and secondary school expense unless the
software is educational in nature.
Phase-out of contribution limit
The Senate amendment increases the phase-out range for
married taxpayers filing a joint return so that it is twice the
range for single taxpayers. Thus, the phase-out range for
married taxpayers filing a joint return is $190,000 to $220,000
of modified adjusted gross income.
Special needs beneficiaries
The Senate amendment provides that the rule prohibiting
contributions to an education IRA after the beneficiary attains
18 does not apply in the case of a special needs beneficiary
(as defined by Treasury Department regulations). In addition, a
deemed distribution of any balance in an education IRA does not
occur when a special needs beneficiary reaches age 30. Finally,
the age 30 limitation does not apply in the case of a rollover
contribution for the benefit of a special needs beneficiary or
a change in beneficiaries to a special needs beneficiary.
Contributions by persons other than individuals
The Senate amendment clarifies that corporations and
other entities (including tax-exempt organizations) are
permitted to make contributions to education IRAs, regardless
of the income of the corporation or entity during the year of
the contribution.
Exclusion for employer contributions
The Senate amendment provides an exclusion from gross
income for certain employer contributions to an education IRA
for the employee, the employee's spouse, or a lineal descendent
of the employee or his or her spouse (provided such individual
otherwise meets the eligibility requirements for education
IRAs). The maximum amount excludable is $500 per year per each
beneficiary. Thus, for example, if an employee has two children
under age 18, theemployer could contribute $500 each year to an
education IRA for each child. The exclusion does not apply to self-
employed individuals. The employer is required to report the amount of
any education IRA contributions on the employee's W-2 for the year.
In order to be excludable from gross income, the
contribution must be made pursuant to a plan that meets the
requirements of an educational assistance program under section
127.\23\ Thus, for example, the plan must be in writing and
must satisfy nondiscrimination rules.
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\23\ Contributions to education IRAs are not subject to the $5,250
annual limit on the exclusion for employer-provided educational
assistance, and are not taken into account for purposes of applying
that limit to other education assistance. Rather, such contributions
are subject to the $500 per beneficiary limit described above.
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Education IRA contributions that are excludable from
gross income are treated as earnings for purposes of
determining the amount includible in gross income, if any, due
to a withdrawal from the education IRA.
The exclusion does not apply for Social Security tax
purposes.
Contributions permitted until April 15
Under the Senate amendment, individual contributors to
education IRAs are deemed to have made a contribution 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 individual's Federal
income tax return for such taxable year (not including
extensions). Thus, individual contributors generally may make
contributions for a year until April 15 of the following year.
Qualified room and board expenses
The Senate amendment modifies the definition of room and
board expenses considered to be qualified higher education
expenses. This modification is described with the provisions
relating to qualified tuition programs, below.
Coordination with HOPE and Lifetime Learning credits
The Senate amendment allows a taxpayer to claim a HOPE
credit or Lifetime Learning credit for a taxable year and to
exclude from gross income amounts distributed (both the
contributions and the earnings portions) from an education IRA
on behalf of the same student as long as the distribution is
not used for the same educational expenses for which a credit
was claimed.
Coordination with qualified tuition programs
The Senate amendment repeals the excise tax on
contributions made by any person to an education IRA on behalf
of a beneficiary during any taxable year in which any
contributions are made by anyone to a qualified State tuition
program on behalf of the same beneficiary.
If distributions from education IRAs and qualified
tuition programs exceed the beneficiary's qualified higher
education expenses for the year (after reduction by amounts
used in claiming the HOPE or Lifetime Learning credit), the
beneficiary is required to allocate the expenses between the
distributions to determine the amount includible in income.
Effective date.--The provisions modifying education IRAs
are effective for taxable years beginning after December 31,
2001.
Conference Agreement
The conference agreement follows the Senate amendment,
except that the conference agreement does not include the
exclusion for employer contributions. As under the Senate
amendment, the conference agreement provides that certain age
limitations do not apply in the case of special needs
beneficiaries. The conferees intend that Treasury regulations
will define a special needs beneficiary to include an
individual who because of a physical, mental, or emotional
condition (including learning disability) requires additional
time to complete his or her education. The conference agreement
clarifies the rule relating to computer software by providing
that computer software involving sports, games, or hobbies is
not considered a qualified elementary and secondary school
expense unless the software is predominantly educational in
nature.
Effective date.--The conference agreement follows the
Senate amendment.
B. Private Prepaid Tuition Programs; Exclusion From Gross Income of
Education Distributions From Qualified Tuition Programs (Sec. 402 of
the Senate Amendment and Sec. 529 of the Code)
Present Law
Section 529 of the Code provides tax-exempt status to
``qualified State tuition programs,'' meaning certain programs
established and maintained by a State (or agency or
instrumentality thereof) under which persons may (1) purchase
tuition credits or certificates on behalf of a designated
beneficiary that entitle the beneficiary to a waiver or payment
of qualified higher education expenses of the beneficiary, or
(2) make contributions to an account that is established for
the purpose of meeting qualified higher education expenses of
the designated beneficiary of the account (a ``savings account
plan''). The term ``qualified higher education expenses''
generally has the same meaning as does the term for purposes of
education IRAs (as described above) and, thus, includes
expenses for tuition, fees, books, supplies, and equipment
required for the enrollment or attendance at an eligible
educational institution,\24\ as well as certain room and board
expenses for any period during which the student is at least a
half-time student.
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\24\ An ``eligible education institution'' is defined the same for
purposes of education IRAs (described above) and qualified State
tuition programs.
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No amount is included in the gross income of a
contributor to, or a beneficiary of, a qualified State tuition
program with respect to any distribution from, or earnings
under, such program, except that (1) amounts distributed or
educational benefits provided to a beneficiary are included in
the beneficiary's gross income (unless excludable under another
Code section) to the extent such amounts or the value of the
educational benefits exceed contributions made on behalf of the
beneficiary, and (2) amounts distributed to a contributor
(e.g., when a parent receives a refund) are included in the
contributor's gross income to the extent such amounts exceed
contributions made on behalf of the beneficiary.\25\
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\25\ Distributions from qualified State tuition programs are
treated as representing a pro-rata share of the contributions and
earnings in the account.
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A qualified State tuition program is required to provide
that purchases or contributions only be made in cash.\26\
Contributors and beneficiaries are not allowed to direct the
investment of contributions to the program (or earnings
thereon). The program is required to maintain a separate
accounting for each designated beneficiary. A specified
individual must be designated as the beneficiary at the
commencement of participation in a qualified State tuition
program (i.e., when contributions are first made to purchase an
interest in such a program), unless interests in such a program
are purchased by a State or local government or a tax-exempt
charity described in section 501(c)(3) as part of a scholarship
program operated by such government or charity under which
beneficiaries to be named in the future will receive such
interests as scholarships.
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\26\ Special estate and gift tax rules apply to contributions made
to and distributions made from qualified State tuition programs.
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A transfer of credits (or other amounts) from one account
benefiting one designated beneficiary to another account
benefiting a different beneficiary is considered a distribution
(as is a change in the designated beneficiary of an interest in
a qualified State tuition program), unless the beneficiaries
are members of the same family. For this purpose, the term
``member of the family'' means: (1) the spouse of the
beneficiary; (2) a son or daughter of the beneficiary or a
descendent of either; (3) a stepson or stepdaughter of the
beneficiary; (4) a brother, sister, stepbrother or stepsister
of the beneficiary; (5) the father or mother of the beneficiary
or an ancestor of either; (6) a stepfather or stepmother of the
beneficiary; (7) a son or daughter of a brother or sister of
the beneficiary; (8) a brother or sister of the father or
mother of the beneficiary; (9) a son-in-law, daughter-in-law,
father-in-law, mother-in-law, brother-in-law, or sister-in-law
of the beneficiary; or (10) the spouse of any person described
in (2)-(9).
Earnings on an account may be refunded to a contributor
or beneficiary, but the State or instrumentality must impose a
more than de minimis monetary penalty unless the refund is (1)
used for qualified higher education expenses of the
beneficiary, (2) made on account of the death or disability of
the beneficiary, (3) made on account of a scholarship received
by the beneficiary, or (4) a rollover distribution.
To the extent that a distribution from a qualified State
tuition program is used to pay for qualified tuition and
related expenses (as defined in sec. 25A(f)(1)), the
beneficiary (or another taxpayer claiming the beneficiary as a
dependent) may claim the HOPE credit or Lifetime Learning
credit with respect to such tuition and related expenses
(assuming that the other requirements for claiming the HOPE
credit or Lifetime Learning credit are satisfied and the
modified AGI phase-out for those credits does not apply).
House Bill
No provision.
Senate Amendment
Qualified tuition program
The Senate amendment expands the definition of
``qualified tuition program'' to include certain prepaid
tuition programs established and maintained by one or more
eligible educational institutions (which may be private
institutions) that satisfy the requirements under section 529
(other than the present-law State sponsorship rule). In the
case of a qualified tuition program maintained by one or more
private eligible educational institutions, persons are able to
purchase tuition credits or certificates on behalf of a
designated beneficiary (as set forth in sec. 529(b)(1)(A)(i)),
but would not be able to make contributions to a savings
account plan (as described in sec. 529(b)(1)(A)(ii)). Except to
the extent provided in regulations, a tuition program
maintained by a private institution is not treated as qualified
unless it has received a ruling or determination from the IRS
that the program satisfies applicable requirements.
Exclusion from gross income
Under the Senate amendment, an exclusion from gross
income is provided for distributions made in taxable years
beginning after December 31, 2001, from qualified Statetuition
programs to the extent that the distribution is used to pay for
qualified higher education expenses. This exclusion from gross income
is extended to distributions from qualified tuition programs
established and maintained by an entity other than a State (or agency
or instrumentality thereof) for distributions made in taxable years
after December 31, 2003.
Qualified higher education expenses
The Senate amendment provides that, for purposes of the
exclusion for distributions from qualified tuition plans, the
maximum room and board allowance is the amount applicable to
the student in calculating costs of attendance for Federal
financial aid programs under section 472 of the Higher
Education Act of 1965, as in effect on the date of enactment,
or, in the case of a student living in housing owned or
operated by an eligible educational institution, the actual
amount charged the student by the educational institution for
room and board.\27\
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\27\ This definition also applies to distributions from education
IRAs.
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Coordination with HOPE and Lifetime Learning credits
The Senate amendment allows a taxpayer to claim a HOPE
credit or Lifetime Learning credit for a taxable year and to
exclude from gross income amounts distributed (both the
principal and the earnings portions) from a qualified tuition
program on behalf of the same student as long as the
distribution is not used for the same expenses for which a
credit was claimed.
Rollovers for benefit of same beneficiary
The Senate amendment provides that a transfer of credits
(or other amounts) from one qualified tuition program for the
benefit of a designated beneficiary to another qualified
tuition program for the benefit of the same beneficiary is not
considered a distribution. This rollover treatment does not
apply to more than one transfer within any 12-month period with
respect to the same beneficiary.
Member of family
The Senate amendment provides that, for purposes of tax-
free rollovers and changes of designated beneficiaries, a
``member of the family'' includes first cousins of the original
beneficiary.
Effective date.--The provisions are effective for taxable
years beginning after December 31, 2001, except that the
exclusion from gross income for certain distributions from a
qualified tuition program established and maintained by an
entity other than a State (or agency or instrumentality
thereof) is effective for taxable years beginning after
December 31, 2003.
Conference Agreement
The conference agreement follows the Senate amendment,
with modifications. The conference agreement modifies the
definition of qualified higher education expenses to include
expenses of a special needs beneficiary which are necessary in
connection with his or her enrollment or attendance at the
eligible education institution.\28\ A special needs beneficiary
would be defined as under the provisions relating to education
IRAs, described above.
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\28\ This definition also applies to distributions from education
IRAs.
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The conference agreement repeals the present-law rule
that a qualified State tuition program must impose a more than
de minimis monetary penalty on any refund of earnings not used
for qualified higher education expenses of the beneficiary
(except in certain circumstances). Instead, the conference
agreement imposes an additional 10-percent tax on the amount of
a distribution from a qualified tuition plan that is includible
in gross income (like the additional tax that applies to such
distributions from education IRAs). The same exceptions that
apply to the 10-percent additional tax with respect to
education IRAs apply. A special rule applies because the
exclusion for earnings on distributions used for qualified
higher education expenses does not apply to qualified tuition
programs of private institutions until 2004. Under the special
rule, the additional 10-percent tax does not apply to any
payment in a taxable year beginning before January 1, 2004,
which is includible in gross income but used for qualified
higher education expenses. Thus, for example, the earnings
portion of a distribution from a qualified tuition program of a
private institution that is made in 2003 and that is used for
qualified higher education expenses is not subject to the
additional tax, even though the earnings portion is includible
in gross income. Conforming the penalty to the education IRA
provisions will make it easier for taxpayers to allocate
expenses between the various education tax incentives.\29\ For
example, under the conference agreement, a taxpayer who
receives distributions from an education IRA and a qualified
tuition program in the same year is required to allocate
qualified expenses in order to determine the amount excludable
from income. Other interactions between the various provisions
also arise under the conference agreement. For example, a
taxpayer may need to know the amount excludable from income due
to a distribution from a qualified tuition program in order to
determine the amount of expenses eligible for the tuition
deduction. The conferees expect that the Secretary will
exercise the existing authority under sections 529(d) and
530(h) to require appropriate reporting, e.g., the amount of
distributions and the earnings portions of distributions
(taxable and nontaxable), to facilitate the provisions of the
conference agreement.
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\29\ The conferees also believe that this change is appropriate in
light of the expansion of qualified tuition programs to include
programs maintained by private institutions.
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The conference agreement provides that, in order for a
tuition program of a private eligible education institution to
be a qualified tuition program, assets of the program must be
held in a trust created or organized in the United States for
the exclusive benefit of designated beneficiaries that complies
with the requirements under section 408(a)(2) and (5). Under
these rules, the trustee must be a bank or other person who
demonstrates that it will administer the trust in accordance
with applicable requirements and the assets of the trust may
not be commingled with other property except in a common trust
fund or common investment fund.
As under the Senate amendment, the conference agreement
provides that a transfer of credits (or other amounts) from one
qualified tuition program for the benefit of a designated
beneficiary to another qualified tuition program for the
benefit of the same beneficiary is not considered a
distribution. This rollover treatment does not apply to more
than one transfer within any 12-month period with respect to
the same beneficiary. The conferees intend that this provision
will allow, for example, transfers between a prepaid tuition
program and a savings program maintained by the same State and
between a State plan and a private prepaid tuition program.
C. Exclusion for Employer-Provided Educational Assistance (Sec. 411 of
the Senate Amendment and Sec. 127 of the Code)
Present Law
Educational expenses paid by an employer for its
employees are generally deductible by the employer.
Employer-paid educational expenses are excludable from
the gross income and wages of an employee if provided under a
section 127 educational assistance plan or if the expenses
qualify as a working condition fringe benefit under section
132. Section 127 provides an exclusion of $5,250 annually for
employer-provided educational assistance. The exclusion does
not apply to graduate courses beginning after June 30, 1996.
The exclusion for employer-provided educational assistance for
undergraduate courses expires with respect to courses beginning
after December 31, 2001.
In order for the exclusion to apply, certain requirements
must be satisfied. The educational assistance must be provided
pursuant to a separate written plan of the employer. The
educational assistance program must not discriminate in favor
of highly compensated employees. In addition, not more than
five percent of the amounts paid or incurred by the employer
during the year for educational assistance under a qualified
educational assistance plan can be provided for the class of
individuals consisting of more than five percent owners of the
employer (and their spouses and dependents).
Educational expenses that do not qualify for the section
127 exclusion may be excludable from income as a working
condition fringe benefit.\30\ In general, education qualifies
as a working condition fringe benefit if the employee could
have deducted the education expenses under section 162 if the
employee paid for the education. In general, education expenses
are deductible by an individual under section 162 if the
education (1) maintains or improves a skill required in a trade
or business currently engaged in by the taxpayer, or (2) meets
the express requirements of the taxpayer's employer, applicable
law or regulations imposed as a condition of continued
employment. However, education expenses are generally not
deductible if they relate to certain minimum educational
requirements or to education or training that enables a
taxpayer to begin working in a new trade or business.\31\
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\30\ These rules also apply in the event that section 127 expires.
\31\ In the case of an employee, education expenses (if not
reimbursed by the employer) may be claimed as an itemized deduction
only if such expenses, along with other miscellaneous expenses, exceed
two percent of the taxpayer's AGI. An individual's total deductions may
also be reduced by the overall limitation on itemized deductions under
section 68. These limitations do not apply in determining whether an
item is excludable from income as a working condition fringe benefit.
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House Bill
No provision.
Senate Amendment
The provision extends the exclusion for employer-provided
educational assistance to graduate education and makes the
exclusion (as applied to both undergraduate and graduate
education) permanent.
Effective date.--The provision is effective with respect
to courses beginning after December 31, 2001.
Conference Agreement
The conference agreement follows the Senate amendment.
D. Modifications to Student Loan Interest Deduction (Sec. 412 of the
Senate Amendment and Sec. 221 of the Code)
Present Law
Certain individuals may claim an above-the-line deduction
for interest paid on qualified education loans, subject to a
maximum annual deduction limit. The deduction is allowed only
with respect to interest paid on a qualified education loan
during the first 60 months in which interest payments are
required. Required payments of interest generally do not
include voluntary payments, such as interest payments made
during a period of loan forbearance. Months during which
interest payments are not required because the qualified
education loan is in deferral or forbearance do not count
against the 60-month period. No deduction is allowed to an
individual if that individual is claimed as a dependent on
another taxpayer's return for the taxable year.
A qualified education loan generally is defined as any
indebtedness incurred solely to pay for certain costs of
attendance (including room and board) of a student (who may be
the taxpayer, the taxpayer's spouse, or any dependent of the
taxpayer as of the time the indebtedness was incurred) who is
enrolled in a degree program on at least a half-time basis at
(1) an accredited post-secondary educational institution
defined by reference to section 481 of the Higher Education Act
of 1965, or (2) an institution conducting an internship or
residency program leading to a degree or certificate from an
institution of higher education, a hospital, or a health care
facility conducting postgraduate training.
The maximum allowable annual deduction is $2,500. The
deduction is phased-out ratably for single taxpayers with
modified adjusted gross income between $40,000 and $55,000 and
for married taxpayers filing joint returns with modified
adjusted gross income between $60,000 and $75,000. The income
ranges will be adjusted for inflation after 2002.
House Bill
No provision.
Senate Amendment
The Senate amendment increases the income phase-out
ranges for eligibility for the student loan interest deduction
to $50,000 to $65,000 for single taxpayers and to $100,000 to
$130,000 for married taxpayers filing joint returns. These
income phase-out ranges are adjusted annually for inflation
after 2002.
The Senate amendment repeals both the limit on the number
of months during which interest paid on a qualified education
loan is deductible and the restriction that voluntary payments
of interest are not deductible.
Effective date.--The provision is effective for interest
paid on qualified education loans after December 31, 2001.
Conference Agreement
The conference agreement follows the Senate amendment.
E. Eliminate Tax on Awards Under the National Health Service Corps
Scholarship Program and the F. Edward Hebert Armed Forces Health
Professions Scholarship and Financial Assistance Program (Sec. 413 of
the Senate Amendment and Sec. 117 of the Code)
Present Law
Section 117 excludes from gross income amounts received
as a qualified scholarship by an individual who is a candidate
for a degree and used for tuition and fees required for the
enrollment or attendance (or for fees, books, supplies, and
equipment required for courses of instruction) at a primary,
secondary, or post-secondary educational institution. The tax-
free treatment provided by section 117 does not extend to
scholarship amounts covering regular living expenses, such as
room and board. In addition to the exclusion for qualified
scholarships, section 117 provides an exclusion from gross
income for qualified tuition reductions for certain education
provided to employees (and their spouses and dependents) of
certain educational organizations.
The exclusion for qualified scholarships and qualified
tuition reductions does not apply to any amount received by a
student that represents payment for teaching, research, or
other services by the student required as a condition for
receiving the scholarship or tuition reduction.
The National Health Service Corps Scholarship Program
(the ``NHSC Scholarship Program'') and the F. Edward Hebert
Armed Forces Health Professions Scholarship and Financial
Assistance Program (the ``Armed Forces Scholarship Program'')
provide education awards to participants on the condition that
the participants provide certain services. In the case of the
NHSC Program, the recipient of the scholarship is obligated to
provide medical services in a geographic area (or to an
underserved population group or designated facility) identified
by the Public Health Service as having a shortage of health
care professionals. In the case of the Armed Forces Scholarship
Program, the recipient of the scholarship is obligated to serve
a certain number of years in the military at an armed forces
medical facility. Because the recipients are required to
perform services in exchange for the education awards, the
awards used to pay higher education expenses are taxable income
to the recipient.
House Bill
No provision.
Senate Amendment
The Senate amendment provides that amounts received by an
individual under the NHSC Scholarship Program or the Armed
Forces Scholarship Program are eligible for tax-free treatment
as qualified scholarships under section 117, without regard to
any service obligation by the recipient. As with other
qualified scholarships under section 117, the tax-free
treatment does not apply to amounts received by students for
regular living expenses, including room and board.
Effective date.--The provision is effective for education
awards received after December 31, 2001.
Conference Agreement
The conference agreement follows the Senate amendment.
F. Tax Benefits for Certain Types of Bonds for Educational Facilities
and Activities (Secs. 421-422 of the Senate Amendment and Secs. 142 and
146-148 of the Code)
Present Law
Tax-exempt bonds
In general
Interest on debt \32\ incurred by States or local
governments is excluded from income if the proceeds of the
borrowing are used to carry out governmental functions of those
entities or the debt is repaid with governmental funds (sec.
103). \33\ Like other activities carried out or paid for by
States and local governments, the construction, renovation, and
operation of public schools is an activity eligible for
financing with the proceeds of tax-exempt bonds.
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\32\ Hereinafter referred to as ``State or local government
bonds.''
\33\ Interest on this debt is included in calculating the
``adjusted current earnings'' preference of the corporate alternative
minimum tax.
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Interest on bonds that nominally are issued by States or
local governments, but the proceeds of which are used (directly
or indirectly) by a private person and payment of which is
derived from funds of such a private person is taxable unless
the purpose of the borrowing is approved specifically in the
Code or in a non-Code provision of a revenue Act. These bonds
are called ``private activity bonds.'' \34\ The term ``private
person'' includes the Federal Government and all other
individuals and entities other than States or local
governments.
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\34\ Interest on private activity bonds (other than qualified
501(c)(3) bonds) is a preference item in calculating the alternative
minimum tax.
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Private activities eligible for financing with tax-exempt
private activity bonds
Present law includes several exceptions permitting States
or local governments to act as conduits providing tax-exempt
financing for private activities. Both capital expenditures and
limited working capital expenditures of charitable
organizations described in section 501(c)(3) of the Code--
including elementary, secondary, and post-secondary schools--
may be financed with tax-exempt private activity bonds
(``qualified 501(c)(3) bonds'').
States or local governments may issue tax-exempt
``exempt-facility bonds'' to finance property for certain
private businesses. Business facilities eligible for this
financing include transportation (airports, ports, local mass
commuting, and high speed intercity rail facilities); privately
owned and/or privately operated public works facilities
(sewage, solid waste disposal, local district heating or
cooling, and hazardous waste disposal facilities); privately-
owned and/or operated low-income rental housing; and certain
private facilities for the local furnishing of electricity or
gas. A further provision allows tax-exempt financing for
``environmental enhancements of hydro-electric generating
facilities.'' Tax-exempt financing also is authorized for
capital expenditures for small manufacturing facilities and
land and equipment for first-time farmers (``qualified small-
issue bonds''), local redevelopment activities (``qualified
redevelopment bonds''), and eligible empowerment zone and
enterprise community businesses. Tax-exempt private activity
bonds also may be issued to finance limited non-business
purposes: certain student loans and mortgage loans for owner-
occupied housing (``qualified mortgage bonds'' and ``qualified
veterans' mortgage bonds'').
Private activity tax-exempt bonds may not be issued to
finance schools for private, for-profit businesses.
In most cases, the aggregate volume of private activity
tax-exempt bonds is restricted by annual aggregate volume
limits imposed on bonds issued by issuers within each State.
These annual volume limits are equal to $62.50 per resident of
the State, or $187.5 million if greater. The volume limits are
scheduled to increase to the greater of $75 per resident of the
State or $225 million in calendar year 2002. After 2002, the
volume limits will be indexed annually for inflation.
Arbitrage restrictions on tax-exempt bonds
The Federal income tax does not apply to the income of
States and local governments that is derived from the exercise
of an essential governmental function. To prevent these tax-
exempt entities from issuing more Federally subsidized tax-
exempt bonds than is necessary for the activity being financed
or from issuing such bonds earlier than needed for the purpose
of the borrowing, the Code includes arbitrage restrictions
limiting the ability to profit from investment of tax-exempt
bond proceeds. In general, arbitrage profits may be earned only
during specified periods (e.g., defined ``temporary periods''
before funds are needed for the purpose of the borrowing) or on
specified types of investments (e.g., ``reasonably required
reserve or replacement funds''). Subject to limited exceptions,
profits that are earned during these periods or on such
investments must be rebated to the Federal Government.
Present law includes three exceptions to the arbitrage
rebate requirements applicable to education-related bonds.
First, issuers of all types of tax-exempt bonds are not
required to rebate arbitrage profits if all of the proceeds of
the bonds are spent for the purpose of the borrowing within six
months after issuance. \35\
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\35\ In the case of governmental bonds (including bonds to finance
public schools), the six-month expenditure exception is treated as
satisfied if at least 95 percent of the proceeds is spent within six
months and the remaining five percent is spent within 12 months after
the bonds are issued.
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Second, in the case of bonds to finance certain
construction activities, including school construction and
renovation, the six-month period is extended to 24 months.
Arbitrage profits earned on construction proceeds are not
required to be rebated if all such proceeds (other than certain
retainage amounts) are spent by the end of the 24-month period
and prescribed intermediate spending percentages are satisfied.
\36\ Issuers qualifying for this ``construction bond''
exception may elect to be subject to a fixed penalty payment
regime in lieu of rebate if they fail to satisfy the spending
requirements.
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\36\ Retainage amounts are limited to no more than five percent of
the bond proceeds, and these amounts must be spent for the purpose of
the borrowing no later than 36 months after the bonds are issued.
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Third, governmental bonds issued by ``small'' governments
are not subject to the rebate requirement. Small governments
are defined as general purpose governmental units that issue no
more than $5 million of tax-exempt governmental bonds in a
calendar year. The $5 million limit is increased to $10 million
if at least $5 million of the bonds are used to finance public
schools.
Qualified zone academy bonds
As an alternative to traditional tax-exempt bonds, States
and local governments are given the authority to issue
``qualified zone academy bonds.'' Under present law, a total of
$400 million of qualified zone academy bonds may be issued in
each of 1998 through 2001. The $400 million aggregate bond
authority is allocated each year to the States according to
their respective populations of individuals below the poverty
line. Each State, in turn, allocates the credit to qualified
zone academies within such State. A State may carry over any
unused allocation for up to two years (three years for
authority arising before 2000).
Certain financial institutions (i.e., banks, insurance
companies, and corporations actively engaged in the business of
lending money) that hold qualified zone academy bonds are
entitled to a nonrefundable tax credit in an amount equal to a
credit rate multiplied by the face amount of the bond. An
eligible financial institution holding a qualified zone academy
bond on the credit allowance date (i.e., each one-year
anniversary of the issuance of the bond) is entitled to a
credit. The credit amount is includible in gross income (as if
it were a taxable interest payment on the bond), and the credit
may be claimed against regular income tax and alternative
minimum tax liability.
The Treasury Department sets the credit rate daily at a
rate estimated to allow issuance of qualified zone academy
bonds without discount and without interest cost to the issuer.
The maximum term of the bonds also is determined by the
Treasury Department, so that the present value of the
obligation to repay the bond is 50 percent of the face value of
the bond. Present value is determined using as a discount rate
the average annual interest rate of tax-exempt obligations with
a term of 10 years or more issued during the month.
``Qualified zone academy bonds'' are defined as bonds
issued by a State or local government, provided that: (1) at
least 95 percent of the proceeds is used for the purpose of
renovating, providing equipment to, developing course materials
for use at, or training teachers and other school personnel in
a ``qualified zone academy'' and (2) private entities have
promised to contribute to the qualified zone academy certain
equipment, technical assistance or training, employee services,
or other property or services with a value equal to at least 10
percent of the bond proceeds.
A school is a ``qualified zone academy'' if (1) the
school is a public school that provides education and training
below the college level, (2) the school operates a special
academic program in cooperation with businesses to enhance the
academic curriculum and increase graduation and employment
rates, and (3) either (a) the school is located in a designated
empowerment zone or a designated enterprise community, or (b)
it is reasonably expected that at least 35 percent of the
students at the school will be eligible for free or reduced-
cost lunches under the school lunch program established under
the National School Lunch Act.
House Bill
No provision.
Senate Amendment
Increase amount of governmental bonds that may be issued by governments
qualifying for the ``small governmental unit'' arbitrage rebate
exception
The additional amount of governmental bonds for public
schools that small governmental units may issue without being
subject to the arbitrage rebate requirements is increased from
$5 million to $10 million. Thus, these governmental units may
issue up to $15 million of governmental bonds in a calendar
year provided that at least $10 million of the bonds are used
to finance public school construction expenditures.
Allow issuance of tax-exempt private activity bonds for public school
facilities
The private activities for which tax-exempt bonds may be
issued are expanded to include elementary and secondary public
school facilities which are owned by private, for-profit
corporations pursuant to public-private partnership agreements
with a State or local educational agency. The term school
facility includes school buildings and functionally related and
subordinate land (including stadiums or other athletic
facilities primarily used for school events) \37\ and
depreciable personal property used in the school facility. The
school facilities for which these bonds are issued must be
operated by a public educational agency as part of a system of
public schools.
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\37\ The present-law limit on the amount of the proceeds of a
private activity bond issue that may be used to finance land
acquisition does not apply to these bonds.
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A public-private partnership agreement is defined as an
arrangement pursuant to which the for-profit corporate party
constructs, rehabilitates, refurbishes or equips a school
facility for a public school agency (typically pursuant to a
lease arrangement). The agreement must provide that, at the end
of the contract term, ownership of the bond-financed property
is transferred to the public school agency party to the
agreement for no additional consideration.
Issuance of these bonds is subject to a separate annual
per-State private activity bond volume limit equal to $10 per
resident ($5 million, if greater) in lieu of the present-law
State private activity bond volume limits. As with the present-
law State private activity bond volume limits, States can
decide how to allocate the bond authority to State and local
government agencies. Bond authority that is unused in the year
in which it arises may be carried forward for up to three years
for public school projects under rules similar to the
carryforward rules of the present-law private activity bond
volume limits.
Effective date.--The provisions are effective for bonds
issued after December 31, 2001.
Conference Agreement
The conference agreement follows the Senate amendment.
G. Modify Rules Governing Tax-Exempt Bonds for Section 501(c)(3)
Organizations as Applied to Organizations Engaged in Timber
Conservation Activities (Sec. 423 of the Senate Amendment and Sec. 145
of the Code)
Present Law
Interest on State or local government bonds is tax-exempt
when the proceeds of the bonds are used to finance activities
carried out by or paid for by those governmental units.
Interest on bonds issued by State or local governments acting
as conduit borrowers for private businesses is taxable unless a
specific exception is included in the Code. One such exemption
allows tax-exempt bonds to be issued to finance activities of
non-profit organizations described in Code section 501(c)(3)
(``qualified 501(c)(3) bonds'').
Qualified 501(c)(3) bonds may be issued only to finance
exempt, as opposed to unrelated business, activities of these
organizations. However, if the bonds are issued to finance
property which is intended to be, or is in fact, sold to a
private business while the bonds are outstanding, bond interest
may be taxable. An example of such an issue would be qualified
501(c)(3) bonds issued to finance purchase of land and standing
timber, when the timber was to be sold.
As is true of other private activities receiving tax-
exempt financing, beneficiaries of qualified 501(c)(3) bonds
are restricted in the arrangements they may have with private
businesses relating to control and use of bond-financed
property.
House Bill
No provision.
Senate Amendment
The Senate amendment modifies the rules governing
issuance of qualified 501(c)(3) bonds to permit issuance of
long-term bonds for the acquisition of timber land by
organizations a principal purpose of which is conservation of
that land as timber land. Under these rules, the bonds will not
have to be repaid (to avoid loss of tax-exemption on interest)
when the timber is harvested and sold. In addition, the Senate
amendment provision allows these section 501(c)(3)
organizations to enter into certain otherwise prohibited timber
management arrangements with private businesses without losing
tax-exemption on bonds used to finance the property and timber.
Effective date.--The provision is effective for bonds
issued after December 31, 2001, and before January 1, 2005.
Conference Agreement
The conference agreement does not include the Senate
amendment provision.
H. Deduction for Qualified Higher Education Expenses (Sec. 431 of the
Senate Amendment and New Sec. 222 of the Code)
present law
Deduction for education expenses
Under present law, an individual taxpayer generally may
not deduct the education and training expenses of the taxpayer
or the taxpayer's dependents. However, a deduction for
education expenses generally is allowed under Internal Revenue
Code (``the Code'') section 162 if the education or training
(1) maintains or improves a skill required in a trade or
business currently engaged in by the taxpayer, or (2) meets the
express requirements of the taxpayer's employer, or
requirements of applicable law or regulations, imposed as a
condition of continued employment (Treas. Reg. sec. 1.162-5).
Education expenses are not deductible if they relate to certain
minimum educational requirements or to education or training
that enables a taxpayer to begin working in a new trade or
business. In the case of an employee, education expenses (if
not reimbursed by the employer) may be claimed as an itemized
deduction only if such expenses meet the above described
criteria for deductibility under section 162 and only to the
extent that the expenses, along with other miscellaneous
deductions, exceed two percent of the taxpayer's adjusted gross
income.
HOPE and Lifetime Learning credits
HOPE credit
Under present law, individual taxpayers are allowed to
claim a nonrefundable credit, the ``HOPE'' credit, against
Federal income taxes of up to $1,500 per student per year for
qualified tuition and related expenses paid for the first two
years of the student's post secondary education in a degree or
certificate program. The HOPE credit rate is 100 percent on the
first $1,000 of qualified tuition and related expenses, and 50
percent on the next $1,000 of qualified tuition and related
expenses.\38\ The qualified tuition and related expenses must
be incurred on behalf of the taxpayer, the taxpayer's spouse,
or a dependent of the taxpayer. The HOPE credit is available
with respect to an individual student for two taxable years,
provided that the student has not completed the first two years
of post-secondary education before the beginning of the second
taxable year.\39\ The HOPE credit that a taxpayer may otherwise
claim is phased-out ratably for taxpayers with modified AGI
between $40,000 and $50,000 ($80,000 and $100,000 for joint
returns). For taxable years beginning after 2001, the $1,500
maximum HOPE credit amount and the AGI phase-out ranges are
indexed for inflation.
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\38\ Thus, an eligible student who incurs $1,000 of qualified
tuition and related expenses is eligible (subject to the AGI phase-out)
for a $1,000 HOPE credit. If an eligible student incurs $2,000 of
qualified tuition and related expenses, then he or she is eligible for
a $1,500 HOPE credit.
\39\ The HOPE credit may not be claimed against a taxpayer's
alternative minimum tax liability.
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The HOPE credit is available for ``qualified tuition and
related expenses,'' which include tuition and fees required to
be paid to an eligible educational institution as a condition
of enrollment or attendance of an eligible student at the
institution. Charges and fees associated with meals, lodging,
insurance, transportation, and similar personal, living, or
family expenses are not eligible for the credit. The expenses
of education involving sports, games, or hobbies are not
qualified tuition and related expenses unless this education is
part of the student's degree program.
Qualified tuition and related expenses generally include
only out-of-pocket expenses. Qualified tuition and related
expenses do not include expenses covered by employer-provided
educational assistance and scholarships that are not required
to be included in the gross income of either the student or the
taxpayer claiming the credit. Thus, total qualified tuition and
related expenses are reduced by any scholarship or fellowship
grants excludable from gross income under section 117 and any
other tax free educational benefits received by the student (or
the taxpayer claiming the credit) during the taxable year.
Lifetime Learning credit
Individual taxpayers are allowed to claim a nonrefundable
credit, the Lifetime Learning credit, against Federal income
taxes equal to 20 percent of qualified tuition and related
expenses incurred during the taxable year on behalf of the
taxpayer, the taxpayer's spouse, or any dependents. For
expenses paid after June 30, 1998, and prior to January 1,
2003, up to $5,000 of qualified tuition and related expenses
per taxpayer return are eligible for the Lifetime Learning
credit (i.e., the maximum credit per taxpayer return is
$1,000). For expenses paid after December 31, 2002, up to
$10,000 of qualified tuition and related expenses per taxpayer
return will be eligible for the Lifetime Learning credit (i.e.,
the maximum credit per taxpayer return will be $2,000).
In contrast to the HOPE credit, a taxpayer may claim the
Lifetime Learning credit for an unlimited number of taxable
years. Also in contrast to the HOPE credit, the maximum amount
of the Lifetime Learning credit that may be claimed on a
taxpayer's return will not vary based on the number of students
in the taxpayer's family--that is, the HOPE credit is computed
on a per student basis, while the Lifetime Learning credit is
computed on a family wide basis. The Lifetime Learning credit
amount that a taxpayer may otherwise claim is phased-out
ratably for taxpayers with modified AGI between $40,000 and
$50,000 ($80,000 and $100,000 for joint returns).
house bill
No provision.
senate amendment
The Senate amendment permits taxpayers an above-the-line
deduction for qualified higher education expenses paid by the
taxpayer during a taxable year. Qualified higher education
expenses are defined in the same manner as for purposes of the
HOPE credit.
In 2002 and 2003, taxpayers with adjusted gross income
\40\ that does not exceed $65,000 ($130,000 in the case of
married couples filing joint returns) are entitled to a maximum
deduction of $3,000 per year. Taxpayers with adjusted gross
income above these thresholds would not be entitled to a
deduction. In 2004 and 2005, taxpayers with adjusted gross
income that does not exceed $65,000 ($130,000 in the case of
married taxpayers filing joint returns) are entitled to a
maximum deduction of $5,000 and taxpayers with adjusted gross
income that does not exceed $80,000 ($160,000 in the case of
married taxpayers filing joint returns) are entitled to a
maximum deduction of $2,000.
---------------------------------------------------------------------------
\40\ The provision contains ordering rules for use in determining
adjusted gross income for purposes of the deduction.
---------------------------------------------------------------------------
Taxpayers are not eligible to claim the deduction and a
HOPE or Lifetime Learning Credit in the same year with respect
to the same student. A taxpayer may not claim a deduction for
amounts taken into account in determining the amount excludable
due to a distribution (i.e., the earnings and contribution
portion of a distribution) from an education IRA or the amount
of interest excludable with respect to education savings bonds.
A taxpayer may not claim a deduction for the amount of a
distribution from a qualified tuition plan that is excludable
from income; however, a taxpayer may claim a deduction for the
amount of a distribution from a qualified tuition plan that is
not attributable to earnings. Thus, for example, if a taxpayer
receives a distribution of $100 from a qualified tuition plan
which is used for tuition, $10 of which represents earnings,
the taxpayer would be entitled to claim the deduction with
respect to the $90 representing a return of contributions. On
the other hand, if the distribution were from an education IRA,
the $90 would not be eligible for the deduction.
Effective date.--The provision is effective for payments
made in taxable years beginning after December 31, 2001, and
before January 1, 2006.
conference agreement
The conference agreement follows the Senate amendment
with the modification that the maximum deduction in 2004 and
2005 is $4,000 for taxpayers with adjusted gross income that
does not exceed $65,000 ($130,000 in the case of married
taxpayers filing joint returns).
I. Credit for Interest on Qualified Higher Education Loans (Sec. 432 of
the Senate Amendment and New Sec. 25B of the Code)
present law
An above-the-line deduction for interest paid on
qualified education loans is permitted during the first 60
months in which interest payments are required. Required
payments of interest generally do not include voluntary
payments, such as interest payments made during a period of
loan forbearance. Months during which interest payments are not
required because the qualified education loan is in deferral or
forbearance do not count against the 60-month period. No
deduction is allowed to an individual if that individual is
claimed as a dependent on another taxpayer's return for the
taxable year.
The maximum allowable annual deduction is $2,500. The
deduction is phased-out ratably for single taxpayers with
modified adjusted gross income between $40,000 and $55,000 and
for married taxpayers filing joint returns with modified
adjusted gross income between $60,000 and $75,000. The income
ranges will be adjusted for inflation after 2002.\41\
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\41\ Another section of the Senate amendment makes certain
modifications to present law.
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A qualified education loan generally is defined as any
indebtedness incurred solely to pay for certain costs of
attendance (including room and board) of a student (who may be
the taxpayer, the taxpayer's spouse, or any dependent of the
taxpayer as of the time the indebtedness was incurred) who is
enrolled in a degree program on at least a half-time basis at
(1) an accredited post-secondary educational institution
defined by reference to section 481 of the Higher Education Act
of 1965, or (2) an institution conducting an internship or
residency program leading to a degree or certificate from an
institution of higher education, a hospital, or a health care
facility conducting postgraduate training.
house bill
No provision.
senate amendment
The Senate amendment permits taxpayers a nonrefundable
personal credit for interest paid on qualified education loans
during the first 60 months in which interest payments are
required. The maximum annual credit available would be $500.
The credit is phased-out for single taxpayers with
modified adjusted gross income between $35,000 and $45,000 and
for married taxpayers filing joint returns with modified
adjusted gross income between $70,000 and $90,000. These income
phase-out ranges would be adjusted annually for inflation after
2009.
A taxpayer taking the credit in a taxable year for
payment of interest on a qualified education loan would not be
allowed a student loan interest deduction in such taxable year.
Similarly, if the taxpayer took a deduction, the taxpayer would
not qualify for the credit.
Effective date.--The provision is effective for taxable
years beginning after December 31, 2008.
conference agreement
The conference agreement does not include the Senate
amendment provision.
J. Deduction for Qualified Emergency Response Expenses of Eligible
Emergency Response Professionals (Sec. 433 of the Senate Amendment and
New Sec. 224 of the Code)
present law
Employee business expenses are deductible only as an
itemized deduction and only to the extent that the expenses,
along with the taxpayer's other allowable miscellaneous
itemized deductions, exceed two percent of the taxpayer's
adjusted gross income. Itemized deductions may be further
reduced by the overall limitation on itemized deductions, which
generally applies to taxpayers with adjusted gross income in
excess of $132,950 (for 2001).
house bill
No provision.
senate amendment
The Senate amendment provides an above-the-line deduction
for qualified expenses paid or incurred during the taxable year
by an eligible emergency response professional.
An eligible emergency response professional is (1) a
full-time employee of a police or fire department organized and
operated by a government to provide police protection or
firefighting or emergency medical services within its
jurisdiction, (2) a licensed emergency medical technician
employed by a State or nonprofit agency to provide emergency
medical services, or (3) a member of a volunteer fire
department organized to provide firefighting or emergency
medical services within an area that is not provided with other
firefighting services. Qualified expenses means unreimbursed
expenses for police and firefighter activities (as determined
by the Secretary of Treasury).
No other deduction or credit is allowed with respect to
the amount taken into account under this provision. A deduction
is allowed for qualified expenses under the provision only to
the extent the amount of such expenses exceeds the amount
excludable under the provisions relating to education savings
bonds, education IRAs, and qualified tuition plans.
Effective date.--The Senate amendment applies to taxable
years beginning after December 31, 2001, and before January 1,
2007.
conference agreement
The conference agreement does not include the Senate
amendment provision.
K. Enhanced Deduction for Charitable Contribution of Book Inventory for
Educational Purposes (Sec. 434 of the Senate Amendment and Sec. 170 of
the Code)
present law
In the case of a charitable contribution of inventory or
other ordinary-income or short-term capital gain property, the
amount of the deduction is limited to the taxpayer's basis in
the property. In the case of a charitable contribution of
tangible personal property, the deduction is limited to the
taxpayer's basis in such property if the use by the recipient
charitable organization is unrelated to the organization's tax-
exempt purpose. In cases involving contributions to a private
foundation (other than certain private operating foundations),
the amount of the deduction is limited to the taxpayer's basis
in the property.
Under present law, a taxpayer's deduction for charitable
contributions of book inventory generally is limited to the
taxpayer's basis (typically, cost) in the inventory. However,
certain corporations may claim a deduction in excess of basis
for certain charitable contributions to charitable
organizations other than private non-operating foundations.
This enhanced deduction is equal to the lesser of (1) basis
plus one-half of the item's appreciated value (i.e., basis plus
one half of fair market value minus basis) or (2) two times
basis. To be eligible for an enhanced deduction, (1) the use of
the property by the donee must be related to the donee's exempt
purpose and be used by the donee solely for the care of the
ill, the needy, or infants; (2) the property must not be
transferred by the donee in exchange for money, other property,
or services; and (3) the taxpayer must receive a written
statement from the donee agreeing to such conditions on use of
the contributed property. The taxpayer also must establish that
the fair market value of the donated item exceeds basis.
house bill
No provision.
senate amendment
The Senate amendment provides that contributions of book
inventory to certain educational organizations are entitled to
the present-law enhanced deduction. Eligible educational
organizations are (1) educational organizations that normally
maintain a regular faculty and curriculum and normally have a
regularly enrolled body of pupils or students in attendance at
the place where its educational activities are regularly
carried on; (2) charities organized primarily for purposes of
supporting elementary and secondary education; and (3)
charities organized primarily to make books available to the
general public at no cost or to operate a literacy program.
Present-law requirements relating to use of the property by the
donee and provision of a written statement by the donee apply.
Effective date.--The deduction for contributions of book
inventory for educational purposes applies to contributions
made after the date of enactment.
conference agreement
The conference agreement does not include the Senate
amendment provision.
L. Deduction for Qualified Professional Development Expenses of
Elementary and Secondary School Teachers (Sec. 442 of the Senate
Amendment and New Sec. 223 of the Code)
present law
Deduction for education expenses
Under present law, an individual taxpayer generally may
not deduct the education and training expenses of the taxpayer
or the taxpayer's dependents. However, a deduction for
education expenses generally is allowed under Internal Revenue
Code (``the Code'') section 162 if the education or training
(1) maintains or improves a skill required in a trade or
business currently engaged in by the taxpayer, or (2) meets the
express requirements of the taxpayer's employer, or
requirements of applicable law or regulations, imposed as a
condition of continued employment (Treas. Reg. sec. 1.162-5).
Education expenses are not deductible if they relate to certain
minimum educational requirements or to education or training
that enables a taxpayer to begin working in a new trade or
business. In the case of an employee, education expenses (if
not reimbursed by the employer) may be claimed as an itemized
deduction only if such expenses meet the above described
criteria for deductibility under section 162 and only to the
extent that the expenses, along with other miscellaneous
deductions, exceed two percent of the taxpayer's adjusted gross
income.
HOPE and Lifetime Learning credits
HOPE credit
Under present law, individual taxpayers are allowed to
claim a nonrefundable credit, the ``HOPE'' credit, against
Federal income taxes of up to $1,500 per student per year for
qualified tuition and related expenses paid for the first two
years of the student's post secondary education in a degree or
certificate program. The HOPE credit rate is 100 percent on the
first $1,000 of qualified tuition and related expenses, and 50
percent on the next $1,000 of qualified tuition and related
expenses.\42\ The qualified tuition and related expenses must
be incurred on behalf of the taxpayer, the taxpayer's spouse,
or a dependent of the taxpayer. The HOPE credit is available
with respect to an individual student for two taxable years,
provided that the student has not completed the first two years
of post-secondary education before the beginning of the second
taxable year.\43\ The HOPE credit that a taxpayer may otherwise
claim is phased-out ratably for taxpayers with modified AGI
between $40,000 and $50,000 ($80,000 and $100,000 for joint
returns). For taxable years beginning after 2001, the $1,500
maximum HOPE credit amount and the AGI phase-out ranges are
indexed for inflation.
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\42\ Thus, an eligible student who incurs $1,000 of qualified
tuition and related expenses is eligible (subject to the AGI phase-out)
for a $1,000 HOPE credit. If an eligible student incurs $2,000 of
qualified tuition and related expenses, then he or she is eligible for
a $1,500 HOPE credit.
\43\ The HOPE credit may not be claimed against a taxpayer's
alternative minimum tax liability.
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The HOPE credit is available for ``qualified tuition and
related expenses,'' which include tuition and fees required to
be paid to an eligible educational institution as a condition
of enrollment or attendance of an eligible student at the
institution. Charges and fees associated with meals, lodging,
insurance, transportation, and similar personal, living, or
family expenses are not eligible for the credit. The expenses
of education involving sports, games, or hobbies are not
qualified tuition and related expenses unless this education is
part of the student's degree program.
Qualified tuition and related expenses generally include
only out-of-pocket expenses. Qualified tuition and related
expenses do not include expenses covered by employer-provided
educational assistance and scholarships that are not required
to be included in the gross income of either the student or the
taxpayer claiming the credit. Thus, total qualified tuition and
related expenses are reduced by any scholarship or fellowship
grants excludable from gross income under section 117 and any
other tax free educational benefits received by the student (or
the taxpayer claiming the credit) during the taxable year.
Lifetime Learning credit
Individual taxpayers are allowed to claim a nonrefundable
credit, the Lifetime Learning credit, against Federal income
taxes equal to 20 percent of qualified tuition and related
expenses incurred during the taxable year on behalf of the
taxpayer, the taxpayer's spouse, or any dependents. For
expenses paid after June 30, 1998, and prior to January 1,
2003, up to $5,000 of qualified tuition and related expenses
per taxpayer return are eligible for the Lifetime Learning
credit (i.e., the maximum credit per taxpayer return is
$1,000). For expenses paid after December 31, 2002, up to
$10,000 of qualified tuition and related expenses per taxpayer
return will be eligible for the Lifetime Learning credit (i.e.,
the maximum credit per taxpayer return will be $2,000).
In contrast to the HOPE credit, a taxpayer may claim the
Lifetime Learning credit for an unlimited number of taxable
years. Also in contrast to the HOPE credit, the maximum amount
of the Lifetime Learning credit that may be claimed on a
taxpayer's return will not vary based on the number of students
in the taxpayer's family--that is, the HOPE credit is computed
on a per student basis, while the Lifetime Learning credit is
computed on a family wide basis. The Lifetime Learning credit
amount that a taxpayer may otherwise claim is phased-out
ratably for taxpayers with modified AGI between $40,000 and
$50,000 ($80,000 and $100,000 for joint returns).
house bill
No provision.
senate amendment
The Senate amendment provides an above-the-line deduction
for up to $500 of qualified professional development expenses
paid or incurred during the taxable year. The deduction
isavailable to kindergarten through 12th grade teachers, instructors,
counselors, principals, or aides who work in an elementary or secondary
school \44\ for at least 900 hours during the school year.
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\44\ Elementary and secondary schools are defined by reference to
section 14101 of the Elementary and Secondary Education Act of 1965.
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Qualified professional development expenses are tuition,
fees, books, supplies, equipment, and transportation required
for the enrollment or attendance in a qualified course of
instruction. A qualified course of instruction is a course
which: (1) is (a) directly related to the curriculum and
academic subjects in which the individual provides instruction,
(b) designed to enhance the ability of the individual to
understand and use State standards for the academic subjects in
which the individual provides instruction, (c) designed to
provide instruction in how to teach children with different
learning styles, particularly children with disabilities and
children with special learning needs (including children who
are gifted and talented), or (d) designed to provide
instruction in how to best discipline children in the classroom
and identify early and appropriate interventions to help
children described in (c) learn; (2) is tied to (a) challenging
State or local content standards and student performance
standards or (b) strategies and programs that demonstrate
effectiveness in increasing student academic achievement and
student performance, or substantially increasing the knowledge
and teaching skills of the individual; (3) is of sufficient
intensity and duration to have a positive and lasting impact on
the performance of the individual in the classroom \45\ (which
does not include one-day or short-term workshops and
conferences); and (3) is part of a program of professional
development approved and certified by the appropriate local
educational agency \46\ as furthering the goals described in
(1) and (2).
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\45\ One-day or short-term workshops and conferences do not satisfy
this requirement. This requirement does not apply to an activity that
is one component described in a long-term comprehensive professional
development plan established by the individual and his or her
supervisor based on an assessment of the needs of the individual, the
individual's students, and the local educational agency involved.
\46\ Local education agency is as defined in section 14101 of the
Elementary and Secondary Education Act of 1965, as in effect on the
date of enactment.
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No other deduction or credit is allowed with respect to
the amount taken into account under this provision. A deduction
is allowed for qualified professional development expenses
under the provision only to the extent the amount of such
expenses exceeds the amount excludable under the provisions
relating to education savings bonds, education IRAs, and
qualified tuition plans.
Effective date.--The provision is effective for taxable
years beginning after December 31, 2000, and expires on
December 31, 2005.
Conference Agreement
The conference agreement does not include the Senate
amendment provision.
M. Credit for Classroom Materials (Sec. 443 of the Senate Amendment and
New Sec. 30B of the Code)
Present Law
Unreimbursed employee business expenses are deductible
only as an itemized deduction and only to the extent that the
individual's total miscellaneous itemized deductions (including
employee business expenses) exceed two percent of adjusted
gross income.
Taxpayers who itemize deductions may claim a deduction
for contributions to qualified charitable organizations. Total
deductible contributions may not exceed 50 percent of adjusted
gross income. Other limits apply in the case of contributions
to certain organizations and certain property.
An individual's otherwise allowable itemized deductions
may be further limited by the overall limitation on itemized
deductions, which reduces itemized deductions for taxpayers
with adjusted gross income in excess of $132,950 (for 2001).
Depending on the particular facts and circumstances, a
contribution by a teacher to the school and which he or she is
employed may be deductible as an unreimbursed employee business
expenses or as a charitable contribution.
House Bill
No provision.
Senate Amendment
The Senate amendment provides a nonrefundable personal
credit equal to 50 percent of the qualified elementary and
secondary education expenses paid or incurred by an eligible
educator during the taxable year. The maximum credit cannot
exceed $250 in any year. An eligible educators are kindergarten
through 12th grade teachers, instructors, counselors,
principals, or aides who work in an elementary or secondary
school \47\ for at least 900 hours during the school year.
Qualified elementary and secondary education expenses are
expenses for books, supplies (other than nonathletic supplies
for courses of instruction in health or physical education),
computer equipment (including related software and services)
and other equipment, and supplementary materials used by an
eligible educator in the classroom.
---------------------------------------------------------------------------
\47\ Elementary and secondary schools are defined by reference to
section 14101 of the Elementary and Secondary Education Act of 1965.
---------------------------------------------------------------------------
The credit may not exceed the excess (if any) of (1) the
taxpayer's regular tax for the taxable year, reduced by the sum
of certain other allowable credits over (2) the taxpayer's
tentative minimum tax for the taxable year.
No deduction is allowed for any expense for which a
credit is allowed under the provision.
A taxpayer may elect not to have the credit apply.
Effective date.--The provision is effective for taxable
years beginning after December 31, 2001, and expires on
December 31, 2005.
Conference Agreement
The conference agreement does not include the Senate
amendment provision.
V. ESTATE, GIFT, AND GENERATION-SKIPPING TRANSFER TAX PROVISIONS
A. Phaseout and Repeal of Estate and Generation-Skipping Transfer
Taxes; Increase in Gift Tax Unified Credit Effective Exemption (Secs.
101, 201, 301, and 401-402 of H.R. 8, Secs. 501-542 of the Senate
Amendment, Secs. 121, 684, 1014, 1040, 1221, 2001-2210, 2501, 2502,
2503, 2505, 2511, 2601-2663, 4947, 6018, 6019, and 7701 of the Code,
and New Secs. 1022, 2058, 2210, 2664, and 6716 of the Code)
Present Law
Estate and gift tax rules
In general
Under present law, a gift tax is imposed on lifetime
transfers and an estate tax is imposed on transfers at death.
The gift tax and the estate tax are unified so that a single
graduated rate schedule applies to cumulative taxable transfers
made by a taxpayer during his or her lifetime and at death. The
unified estate and gift tax rates begin at 18 percent on the
first $10,000 of cumulative taxable transfers and reach 55
percent on cumulative taxable transfers over $3 million. In
addition, a 5-percent surtax is imposed on cumulative taxable
transfers between $10 million and $17,184,000, which has the
effect of phasing out the benefit of the graduated rates. Thus,
these estates are subject to a top marginal rate of 60 percent.
Estates over $17,184,000 are subject to a flat rate of 55
percent on all amounts exceeding the unified credit effective
exemption amount, as the benefit of the graduated rates has
been phased out.
Gift tax annual exclusion
Donors of lifetime gifts are provided an annual exclusion
of $10,000 (indexed for inflation occurring after 1997; the
inflation-adjusted amount for 2001 remains at $10,000) of
transfers of present interests in property to any one donee
during the taxable year. If the non-donor spouse consents to
split the gift with the donor spouse, then the annual exclusion
is $20,000. Unlimited transfers between spouses are permitted
without imposition of a gift tax.
Unified credit
A unified credit is available with respect to taxable
transfers by gift and at death. The unified credit amount
effectively exempts from tax transfers totaling $675,000 in
2001, $700,000 in 2002 and 2003, $850,000 in 2004, $950,000 in
2005, and $1 million in 2006 and thereafter. The benefit of the
unified credit applies at the lowest estate and gift tax rates.
For example, in 2001, the unified credit applies between the
18-percent and 37-percent estate and gift tax rates. Thus, in
2001, taxable transfers, after application of the unified
credit, are effectively subject to estate and gift tax rates
beginning at 37 percent.
Transfers to a surviving spouse
In general.--A 100-percent marital deduction generally is
permitted for the value of property transferred between
spouses. In addition, transfers of a ``qualified terminable
interest'' also are eligible for the marital deduction. A
``qualified terminable interest'' is property: (1) which passes
from the decedent, (2) in which the surviving spouse has a
``qualifying income interest for life,'' and (3) to which an
election under these rules applies. A ``qualifying income
interest for life'' exists if: (1) the surviving spouse is
entitled to all the income from the property (payable annually
or at more frequent intervals) or the right to use property
during the spouse's life, and (2) no person has the power to
appoint any part of the property to any person other than the
surviving spouse.
Transfers to surviving spouses who are not U.S.
citizens.--A marital deduction generally is denied for property
passing to a surviving spouse who is not a citizen of the
United States. A marital deduction is permitted, however, for
property passing to a qualified domestic trust of which the
noncitizen surviving spouse is a beneficiary. A qualified
domestic trust is a trust that has as its trustee at least one
U.S. citizen or U.S. corporation. No corpus may be distributed
from a qualified domestic trust unless the U.S. trustee has the
right to withhold any estate tax imposed on the distribution.
There is an estate tax imposed on (1) any distribution
from a qualified domestic trust before the date of the death of
the noncitizen surviving spouse and (2) the value of the
property remaining in a qualified domestic trust on the date of
death of the noncitizen surviving spouse. The tax is computed
as an additional estate tax on the estate of the first spouse
to die.
Expenses, indebtedness, and taxes
An estate tax deduction is allowed for funeral expenses
and administration expenses of an estate. An estate tax
deduction also is allowed for claims against the estate and
unpaid mortgages on, or any indebtedness in respect of,
property for which the value of the decedent's interest
therein, undiminished by the debt, is included in the value of
the gross estate.
If the total amount of claims and debts against the
estate exceeds the value of the property to which the claims
relate, an estate tax deduction for the excess is allowed,
provided such excess is paid before the due date of the estate
tax return. A deduction for claims against the estate generally
is permitted only if the claim is allowable by the law of the
jurisdiction under which the estate is being administered.
A deduction also is allowed for the full unpaid amount of
any mortgage upon, or of any other indebtedness in respect of,
any property included in the gross estate (including interest
which has accrued thereon to the date of the decedent's death),
provided that the full value of the underlying property is
included in the decedent's gross estate.
Basis of property received
In general.--Gain or loss, if any, on the disposition of
the property is measured by the taxpayer's amount realized
(e.g., gross proceeds received) on the disposition, less the
taxpayer's basis in such property. Basis generally represents a
taxpayer's investment in property withcertain adjustments
required after acquisition. For example, basis is increased by the cost
of capital improvements made to the property and decreased by
depreciation deductions taken with respect to the property.
Property received from a donor of a lifetime gift takes a
carryover basis. ``Carryover basis'' means that the basis in
the hands of the donee is the same as it was in the hands of
the donor. The basis of property transferred by lifetime gift
also is increased, but not above fair market value, by any gift
tax paid by the donor. The basis of a lifetime gift, however,
generally cannot exceed the property's fair market value on the
date of the gift. If the basis of the property is greater than
the fair market value of the property on the date of gift,
then, for purposes of determining loss, the basis is the
property's fair market value on the date of gift.
Property passing from a decedent's estate generally takes
a stepped-up basis. ``Stepped-up basis'' for estate tax
purposes means that the basis of property passing from a
decedent's estate generally is the fair market value on the
date of the decedent's death (or, if the alternate valuation
date is elected, the earlier of six months after the decedent's
death or the date the property is sold or distributed by the
estate). This step up (or step down) in basis eliminates the
recognition of income on any appreciation of the property that
occurred prior to the decedent's death, and has the effect of
eliminating the tax benefit from any unrealized loss.
Special rule for community property.--In community
property states, a surviving spouse's one-half share of
community property held by the decedent and the surviving
spouse (under the community property laws of any State, U.S.
possession, or foreign country) generally is treated as having
passed from the decedent, and thus is eligible for stepped-up
basis. This rule applies if at least one-half of the whole of
the community interest is includible in the decedent's gross
estate.
Special rules for interests in certain foreign
entities.--Stepped-up basis treatment generally is denied to
certain interests in foreign entities. Under present law, stock
or securities in a foreign personal holding company take a
carryover basis. Stock in a foreign investment company takes a
stepped up basis reduced by the decedent's ratable share of the
company's accumulated earnings and profits. In addition, stock
in a passive foreign investment company (including those for
which a mark-to-market election has been made) generally takes
a carryover basis, except that a passive foreign investment
company for which a decedent shareholder had made a qualified
electing fund election is allowed a stepped-up basis. Stock
owned by a decedent in a domestic international sales
corporation (or former domestic international sales
corporation) takes a stepped-up basis reduced by the amount (if
any) which would have been included in gross income under
section 995(c) as a dividend if the decedent had lived and sold
the stock at its fair market value on the estate tax valuation
date (i.e., generally the date of the decedent's death unless
an alternate valuation date is elected).
Provisions affecting small and family-owned businesses and
farms
Special-use valuation.--An executor can elect to value
for estate tax purposes certain ``qualified real property''
used in farming or another qualifying closely-held trade or
business at its current-use value, rather than its fair market
value. The maximum reduction in value for such real property is
$750,000 (adjusted for inflation occurring after 1997; the
inflation-adjusted amount for 2001 is $800,000). Real property
generally can qualify for special-use valuation if at least 50
percent of the adjusted value of the decedent's gross estate
consists of a farm or closely-held business assets in the
decedent's estate (including both real and personal property)
and at least 25 percent of the adjusted value of the gross
estate consists of farm or closely-held business property. In
addition, the property must be used in a qualified use (e.g.,
farming) by the decedent or a member of the decedent's family
for five of the eight years before the decedent's death.
If, after a special-use valuation election is made, the
heir who acquired the real property ceases to use it in its
qualified use within 10 years of the decedent's death, an
additional estate tax is imposed in order to recapture the
entire estate-tax benefit of the special-use valuation.
Family-owned business deduction.--An estate is permitted
to deduct the adjusted value of a qualified-family owned
business interest of the decedent, up to $675,000.\48\ A
qualified family-owned business interest is defined as any
interest in a trade or business (regardless of the form in
which it is held) with a principal place of business in the
United States if the decedent's family owns at least 50 percent
of the trade or business, two families own 70 percent, or three
families own 90 percent, as long as the decedent's family owns
at least 30 percent of the trade or business. An interest in a
trade or business does not qualify if any interest in the
business (or a related entity) was publicly-traded at any time
within three years of the decedent's death. An interest in a
trade or business also does not qualify if more than 35 percent
of the adjusted ordinary gross income of the business for the
year of the decedent's death was personal holding company
income. In the case of a trade or business that owns an
interest in another trade or business (i.e., ``tiered
entities''), special look-through rules apply. The value of a
trade or business qualifying as a family-owned business
interest is reduced to the extent the business holds passive
assets or excess cash or marketable securities.
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\48\ The qualified family-owned business deduction and the unified
credit effective exemption amount are coordinated. If the maximum
deduction amount of $675,000 is elected, then the unified credit
effective exemption amount is $625,000, for a total of $1.3 million. If
the qualified family-owned business deduction is less than $675,000,
then the unified credit effective exemption amount is equal to
$625,000, increased by the difference between $675,000 and the amount
of the qualified family-owned business deduction. However, the unified
credit effective exemption amount cannot be increased above such amount
in effect for the taxable year.
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To qualify for the exclusion, the decedent (or a member
of the decedent's family) must have owned and materially
participated in the trade or business for at least five of the
eight years preceding the decedent's date of death. In
addition, at least one qualified heir (or member of the
qualified heir's family) is required to materially participate
in the trade or business for at least 10 years following the
decedent's death.
The qualified family-owned business rules provide a
graduated recapture based on the number of years after the
decedent's death in which the disqualifying event occurred.
Under the provision, if the disqualifying event occurred within
six years of the decedent's death, then 100 percent of the tax
is recaptured. The remaining percentage of recapture based on
the year afterthe decedent's death in which a disqualifying
event occurs is as follows: the disqualifying event occurs during the
seventh year after the decedent's death, 80 percent; during the eighth
year after the decedent's death, 60 percent; during the ninth year
after the decedent's death, 40 percent; and during the tenth year after
the decedent's death, 20 percent. For purposes of the qualified family-
owned business deduction, the contribution of a qualified conservation
easement is not considered a disposition that would trigger recapture
of estate tax.
In general, there is no requirement that the qualified
heir (or members of his or her family) continue to hold or
participate in the trade or business more than 10 years after
the decedent's death. However, the 10-year recapture period can
be extended for a period of up to two years if the qualified
heir does not begin to use the property for a period of up to
two years after the decedent's death.
An estate can claim the benefits of both the qualified
family-owned business deduction and special-use valuation. For
purposes of determining whether the value of the trade or
business exceeds 50 percent of the decedent's gross estate,
then the property's special-use value is used if the estate
claimed special-use valuation.
State death tax credit
A credit is allowed against the Federal estate tax for
any estate, inheritance, legacy, or succession taxes actually
paid to any State or the District of Columbia with respect to
any property included in the decedent's gross estate. The
maximum amount of credit allowable for State death taxes is
determined under a graduated rate table, the top rate of which
is 16 percent, based on the size of the decedent's adjusted
taxable estate. Most States impose a ``pick-up'' or ``soak-up''
estate tax, which serves to impose a State tax equal to the
maximum Federal credit allowed.
Estate and gift taxation of nonresident noncitizens
Nonresident noncitizens are subject to gift tax with
respect to certain transfers by gift of U.S.-situated property.
Such property includes real estate and tangible property
located within the United States. Nonresident noncitizens
generally are not subject to U.S. gift tax on the transfer of
intangibles, such as stock or securities, regardless of where
such property is situated.
Estates of nonresident noncitizens generally are taxed at
the same estate tax rates applicable to U.S. citizens, but the
taxable estate includes only property situated within the
United States that is owned by the decedent at death. This
includes the value at death of all property, real or personal,
tangible or intangible, situated in the United States. Special
rules apply which treat certain property as being situated
within and without the United States for these purposes.
Unless modified by a treaty, a nonresident who is not a
U.S. citizen generally is allowed a unified credit of $13,000,
which effectively exempts $60,000 in assets from estate tax.
Generation-skipping transfer tax
A generation-skipping transfer tax generally is imposed
on transfers, either directly or through a trust or similar
arrangement, to a ``skip person'' (i.e., a beneficiary in a
generation more than one generation below that of the
transferor). Transfers subject to the generation-skipping
transfer tax include direct skips, taxable terminations, and
taxable distributions. The generation-skipping transfer tax is
imposed at a flat rate of 55 percent (i.e., the top estate and
gift tax rate) on cumulative generation-skipping transfers in
excess of $1 million (indexed for inflation occurring after
1997; the inflation-adjusted amount for 2001 is $1,060,000).
Selected income tax provisions
Transfers to certain foreign trusts and estates
A transfer (during life or at death) by a U.S. person to
a foreign trust or estate generally is treated as a sale or
exchange of the property for an amount equal to the fair market
value of the transferred property. The amount of gain that must
be recognized by the transferor is equal to the excess of the
fair market value of the property transferred over the adjusted
basis (for purposes of determining gain) of such property in
the hands of the transferor.
Net operating loss and capital loss carryovers
Under present law, a capital loss and net operating loss
from business operations sustained by a decedent during his
last taxable year are deductible only on the final return filed
in his or her behalf. Such losses are not deductible by his or
her estate.
Transfers of property in satisfaction of a pecuniary
bequest
Under present law, gain or loss is recognized on the
transfer of property in satisfaction of a pecuniary bequest
(i.e., a bequest of a specific dollar amount) to the extent
that the fair market value of the property at the time of the
transfer exceeds the basis of the property, which generally is
the basis stepped up to fair market value on the date of the
decedent's death.
Income tax exclusion for the gain on the sale of a
principal residence
A taxpayer generally can exclude up to $250,000 ($500,000
if married filing a joint return) of gain realized on the sale
or exchange of a principal residence. The exclusion is allowed
each time a taxpayer sells or exchanges a principal residence
that meets the eligibility requirements, but generally no more
frequently than once every two years.
To be eligible, a taxpayer must have owned the residence
and occupied it as a principal residence for at least two of
the five years prior to the sale or exchange. A taxpayer who
fails to meet these requirements by reason of a change of place
of employment, health, or other unforeseen circumstances is
able to exclude the fraction of the $250,000 ($500,000 if
married filing a joint return) equal to the fraction of two
years that these requirements are met.
Excise tax on non-exempt trusts
Under present law, non-exempt split-interest trusts are
subject to certain restrictions that are applicable to private
foundations if an income, estate, or gift tax charitable
deduction was allowed with respect to the trust. A non-exempt
split-interest trust subject to these rules would be prohibited
from engaging in self-dealing, retaining any excess business
holdings, and from making certain investments or taxable
expenditures. Failure to comply with these restrictionswould
subject the trust to certain excise taxes imposed on private
foundations, which include excise taxes on self-dealing, excess
business holdings, investments which jeopardize charitable purposes,
and certain taxable expenditures.
house bill
No provision. However, H.R. 8, as passed by the House,
provides as follows:
Overview of H.R. 8
Beginning in 2011, the estate, gift, and generation-
skipping transfers taxes are repealed. After repeal, the basis
of assets received from a decedent generally will equal the
basis of the decedent (i.e., carryover basis) at death.
However, a decedent's estate is permitted to increase the basis
of appreciated assets transferred by up to a total of $1.3
million. The basis of appreciated property transferred to a
surviving spouse can be increased (i.e., stepped up) by an
additional $3 million. Thus, the basis of property transferred
to a surviving spouse can be increased (i.e., stepped up) by a
total of $4.3 million. In no case can the basis of an asset be
adjusted above its fair market value. For these purposes, the
executor will determine which assets and to what extent each
asset receives a basis increase. The $1.3 million and $3
million amounts are adjusted annually for inflation occurring
after 2010.
In 2002, the unified credit is replaced with a unified
exemption, and the 5-percent surtax (which phases out the
benefit of the graduated rates) and the rates in excess of 53
percent are repealed. Beginning in 2003, the estate, gift, and
generation-skipping transfer tax rates are further reduced each
year until the estate, gift, and generation-skipping transfer
taxes are repealed in 2011.
Phaseout and repeal of estate, gift, and generation-skipping transfer
taxes
In general
In 2002, the top estate and gift tax rates above 53
percent are repealed, as is the 5-percent surtax, which phases
out the benefit of the graduated rates. In 2003, all rates in
excess of 50 percent are repealed. In each year 2004 through
2006, each of the rates of tax is reduced by one percentage
point. In each year 2007 through 2010, each of the rates of tax
is reduced by two percentage points. The generation-skipping
transfer tax rate in effect for a given year is the highest
estate and gift tax rate in effect for that year. The reduction
in estate and gift tax rates is coordinated with the income tax
rates such that the highest estate and gift tax rate (and,
thus, the generation-skipping transfer tax rate) will not be
reduced below the top individual rate, and the lower estate and
gift tax rates will not be reduced below the lowest individual
tax rate. For each year 2002 through 2010, the State death tax
credit rates are reduced in proportion to the reduction in the
estate and gift tax rates.
Beginning in 2011, the estate, gift, and generation-
skipping transfer taxes are repealed.
Replace unified credit with unified exemption
Beginning in 2002, the unified credit is replaced with a
unified exemption amount. The unified exemption amount, which
will follow the dollar amounts of the present-law unified
credit effective exemption amounts, will be determined as
follows: in 2002 and 2003, $700,000; in 2004, $850,000; in
2005, $950,000; and in 2006 and thereafter (until repeal in
2011), $1 million. For decedents who are not residents and not
citizens of the United States, the exemption is $60,000.
Basis of property acquired from a decedent
In general
Beginning in 2011, after the estate, gift, and
generation-skipping transfer taxes have been repealed, the
present-law rules providing for a fair market value basis for
property acquired from a decedent are repealed. Instead, a
modified carryover basis regime generally takes effect.
Recipients of property transferred at the decedent's death will
receive a basis equal the lesser of the adjusted basis of the
decedent or the fair market value of the property on the date
of the decedent's death.
The modified carryover basis rules apply to property
acquired by bequest, devise, or inheritance, or by the
decedent's estate from the decedent, property passing from the
decedent to the extent such property passed without
consideration, and certain other property to which the present
law rules apply.\49\
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\49\ Sec. 1014(b)(2) and (3).
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Property acquired from a decedent is treated as if the
property had been acquired by gift. Thus, the character of gain
on the sale of property received from a decedent's estate is
carried over to the heir. For example, real estate that has
been depreciated and would be subject to recapture if sold by
the decedent will be subject to recapture if sold by the heir.
Property to which the modified carryover basis rules apply
The modified carryover basis rules apply to property
acquired from the decedent. Property acquired from the decedent
is (1) property acquired by bequest, devise, or inheritance,
(2) property acquired by the decedent's estate from the
decedent, (3) property transferred by the decedent during his
or her lifetime in trust to pay the income for life to or on
the order or direction of the decedent, with the right reserved
to the decedent at all times before his death to revoke the
trust,\50\ (4) property transferred by the decedent during his
lifetime in trust to pay the income for life to or on the order
or direction of the decedent with the right reserved to the
decedent at all times before his death to make any change to
the enjoyment thereof through the exercise of a power to alter,
amend, or terminate the trust,\51\ (5) property passing from
the decedent by reason of the decedent's death to the extent
such property passed without consideration (e.g., property held
as joint tenants with right of survivorship or as tenants by
the entireties), and (6) the surviving spouse's one-half share
of certain community property held by the decedent and the
surviving spouse as community property.
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\50\ This is the same property the basis of which is stepped up to
date of death fair market value under present law sec. 1014(b)(2).
\51\ This is the same property the basis of which is stepped up to
date of death fair market value under present law sec. 1014(b)(3).
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Basis increase for certain property
Amount of basis increase.--The bill allows an executor to
increase (i.e., step up) the basis in assets owned by the
decedent and acquired by the beneficiaries at death. Under this
rule, each decedent's estate generally is permitted to increase
(i.e., step up) the basis of assets transferred by up to a
total of $1.3 million. The $1.3 million is increased by the
amount of unused capital losses, net operating losses, and
certain ``built-in'' losses of the decedent. In addition, the
basis of property transferred to a surviving spouse can be
increased by an additional $3 million. Thus, the basis of
property transferred to surviving spouses can be increased by a
total of $4.3 million. Nonresidents who are not U.S. citizens
will be allowed to increase the basis of property by up to
$60,000. The $60,000, $1.3 million, and $3 million amounts are
adjusted annually for inflation occurring after 2010.
Property eligible for basis increase.--In general, the
basis of property may be increased above the decedent's
adjusted basis in that property only if the property is owned,
or is treated as owned, by the decedent at the time of the
decedent's death. In the case of property held as joint tenants
or tenants by the entireties with the surviving spouse, one-
half of the property is treated having been owned by the
decedent and is thus eligible for the basis increase. In the
case of property held jointly with a person other than the
surviving spouse, the portion of the property attributable to
the decedent's consideration furnished is treated as having
been owned by the decedent and will be eligible for a basis
increase. The decedent also is treated as the owner of property
(which will be eligible for a basis increase) if the property
was transferred by the decedent during his lifetime to a
revocable trust that pays all of its income during the
decedent's life to the decedent or at the direction of the
decedent. The decedent also is treated as having owned the
surviving spouse's one-half share of community property (which
will be eligible for a basis increase) if at least one-half of
the property was owned by, and acquired from, the decedent.\52\
The decedent shall not, however, be treated as owning any
property solely by reason of holding a power of appointment
with respect to such property.
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\52\ Thus, similar to the present law rule in sec. 1014(b)(6), both
the decedent's and the surviving spouse's share of community property
could be eligible for a basis increase.
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Property not eligible for a basis increase includes: (1)
property that was acquired by the decedent by gift (other than
from his or her spouse) during the three-year period ending on
the date of the decedent's death; (2) property that constitutes
a right to receive income in respect of a decedent; (3) stock
or securities of a foreign personal holding company; (4) stock
of a domestic international sales corporation (or former
domestic international sales corporation); (5) stock of
aforeign investment company; and (6) stock of a passive foreign
investment company (except for which a decedent shareholder had made a
qualified electing fund election).
Rules applicable to basis increase.--Basis increase will
be allocable on an asset-by-asset basis (e.g., basis increase
can be allocated to a share of stock or a block of stock).
However, in no case can the basis of an asset be adjusted above
its fair market value. If the amount of basis increase is less
than the fair market value of assets whose bases are eligible
to be increased under these rules, the executor will determine
which assets and to what extent each asset receives a basis
increase.
Reporting requirements
Lifetime gifts
A donor is required to report to the Internal Revenue
Service (``IRS'') the basis and character of any non-cash
property transferred by gift with a value in excess of $25,000
(except for gifts to charitable organizations). The donor is
required to report to the IRS:
The name and taxpayer identification number of the
donee,
An accurate description of the property,
The adjusted basis of the property in the hands of
the donor at the time of gift,
The donor's holding period for such property,
Sufficient information to determine whether any
gain on the sale of the property would be treated as
ordinary income,
And any other information as the Treasury Secretary
may prescribe.
Similar information (including the name, address, and
phone number of the person making the return) is required to be
provided to recipients of such property.
Transfers at death
For transfers at death of non-cash assets in excess of
$1.3 million and for appreciated property the value of which
exceeds $25,000 received by a decedent within three years of
death, the executor of the estate (or the trustee of a
revocable trust) would report to the IRS:
The name and taxpayer identification number of the
recipient of the property,
An accurate description of the property,
The adjusted basis of the property in the hands of
the decedent and its fair market value at the time of
death,
The decedent's holding period for the property,
Sufficient information to determine whether any
gain on the sale of the property would be treated as
ordinary income,
The amount of basis increase allocated to the
property, and
Any other information as the Treasury Secretary may
prescribe.
Penalties for failure to file required information
Any donor required to report the basis and character of
any non-cash property with a value in excess of $25,000 who
fails to do so is liable for a penalty of $500 for each failure
to report such information to the IRS and $50 for each failure
to report such information to a beneficiary.
Any person required to report to the IRS transfers at
death of non-cash assets in excess of $1.3 million in value who
fails to do so is liable for a penalty of $10,000 for the
failure to report such information. Any person required to
report to the IRS the receipt by a decedent of appreciated
property valued in excess of $25,000 within three years of
death who fails to do so is liable for a penalty of $500 for
the failure to report such information to the IRS. There also
is a penalty of $50 for each failure to report such information
to a beneficiary.
No penalty is imposed with respect to any failure that is
due to reasonable cause. If any failure to report to the IRS or
a beneficiary under the bill is due to intentional disregard of
the rules, then the penalty is five percent of the fair market
value of the property for which reporting was required,
determined at the date of the decedent's death (for property
passing at death) or determined at the time of gift (for a
lifetime gift).
Certain tax benefits extending past the date for repeal of the estate
tax
Prior to repeal of the estate tax, many estates may have
claimed certain estate tax benefits which, upon certain events,
may trigger a recapture tax. Because repeal of the estate tax
is effective for decedents dying after December 31, 2010, these
estate tax recapture provisions will continue to apply to
estates of decedents dying before January 1, 2011.
Qualified conservation easements
A donor may have retained a development right in the
conveyance of a conservation easement that qualified for the
estate tax exclusion. Those with an interest in the land may
later execute an agreement to extinguish the right. If an
agreement to extinguish development rights is not entered into
within the earlier of (1) two years after the date of the
decedent's death or (2) the date of the sale of such land
subject to the conservation easement, then those with an
interest in the land are personally liable for an additional
tax. This provision is retained after repeal of the estate tax,
which will ensure that those persons with an interest in the
land who fail to execute the agreement remain liable for any
additional tax which may be due after repeal.
Special-use valuation
Property may have qualified for special-use valuation
prior to repeal of the estate tax. If such property ceases to
qualify for special-use valuation, for example, because an heir
ceases to use the property in its qualified use within 10 years
of the decedent's death, then the estate tax benefit is
required to be recaptured. The recapture provision is retained
after repeal of the estate tax, which will ensure that those
estates that claimed this benefit prior to repeal of the estate
tax will be subject to recapture if a disqualifying event
occurs after repeal.
Qualified family-owned business deduction
Property may have qualified for the family-owned business
deduction prior to repeal of the estate tax. If such property
ceases to qualify for the family-owned business deduction, for
example, because an heir ceases to use the property in its
qualified use within 10 years of the decedent's death, then the
estate-tax benefit is required to be recaptured. The recapture
provision is retained after repeal of the estate tax, which
will ensure that those estates that claimed this benefit prior
to repeal of the estate tax would be subject to recapture if a
disqualifying event occurs after repeal.
Installment payment of estate tax for estates with an
interest in a closely-held business
The present-law installment payment rules are retained so
that those estates that entered into an installment payment
arrangement prior to repeal of the estate tax will continue to
make their payments past the date for repeal.
If more than 50 percent of the value of the closely-held
business is distributed, sold, exchanged, or otherwise disposed
of, the unpaid portion of the tax payable in installments must
be paid upon notice and demand from the Treasury Secretary.
This rule is retained after repeal of the estate tax, which
will ensure that such dispositions that occur after repeal of
the estate tax will continue to subject the estate to the
unpaid portion of the tax upon notice and demand.
Transfers to foreign trusts, estates, and nonresidents who are not U.S.
citizens
The present-law rule providing that transfers by a U.S.
person to a foreign trust or estate generally is treated as a
sale or exchange is expanded. Under the bill, transfers by a
U.S. person to a nonresident who is not a U.S. citizen is
treated as a sale or exchange of the property for an amount
equal to the fair market value of the transferred property. The
amount of gain that must be recognized by the transferor is
equal to the excess of the fair market value of the property
transferred over the adjusted basis of such property in the
hands of the transferor.
Transfers of property in satisfaction of a pecuniary bequest
Under the bill, gain or loss on the transfer of property
in satisfaction of a pecuniary bequest is recognized only to
the extent that the fair market value of the property at the
time of the transfer exceeds the fair market value of the
property on the date of the decedent's death (not the
property's carryover basis).
Transfer of property subject to a liability
The bill clarifies that gain is not recognized at the
time of death when the estate or heir acquires from the
decedent property subject to a liability that is greater than
the decedent's basis in the property. Similarly, no gain is
recognized by the estate on the distribution of such property
to a beneficiary of the estate by reason of the liability.
Income tax exclusion for the gain on the sale of a principal residence
The income tax exclusion of up to $250,000 of gain on the
sale of a principal residence is extended to estates and heirs.
Under the bill, if the decedent's estate or an heir sells the
decedent's principal residence, $250,000 of gain can be
excluded on the sale of the residence, provided the decedent
used the property as a principal residence for two or more
years during the five-year period prior to the sale. In
addition, if an heir occupies the property as a principal
residence, the decedent's period of ownership and occupancy of
the property as a principal residence can be added to the
heir's subsequent ownership and occupancy in determining
whether the property was owned and occupied for two years as a
principal residence.
Excise tax on nonexempt trusts
Under the bill, split-interest trusts are subject to
certain restrictions that are applicable to private foundations
if an income tax charitable deduction, including an income tax
charitable deduction by an estate or trust, was allowed with
respect to transfers to the trust.
Anti-abuse rules
The Treasury Secretary is given authority to treat a
transfer that purports to be a gift as having never been
transferred, if, in connection with such transfer, such
treatment is appropriate to prevent income tax avoidance and
(1) the transferor (or any person related to or designated by
the transferor or such person) has received anything of value
in connection with the transfer from the transferee directly or
indirectly or (2) there is an understanding or expectation that
the transferor (or any person related to or designated by the
transferor or such person) will receive anything of value in
connection with the transfer from the transferee directly or
indirectly.
Study mandated by the bill
The bill requires the Treasury Secretary to conduct a
study of opportunities for avoidance of the income tax, if any,
and potential increases in income tax revenues by reason of
enactment of the bill. The results of such study are required
to be submitted to the House Committee on Ways and Means and
the Senate Committee on Finance no later than December 31,
2002.
Interaction of the bill with death tax treaties
The Committee expects that, where applicable, references
in U.S. tax treaties to the unified credit under section 2010
(as in effect prior to January 1, 2002) will be construed as
applying, in a similar manner, to the unified exemption amount
(as in effect for decedents dying and gifts made after December
31, 2001).\53\
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\53\ See, e.g., Article 3, Protocol Amending the Convention Between
the United States of America and the Federal Republic of Germany for
the Avoidance of Double Taxation with Respect to Taxes on Estates,
Inheritances, and Gifts (Senate Treaty Doc. 106-13, September 21,
1999.) Under the protocol, a pro rata unified credit is provided to the
estate of an individual domiciled in Germany (who is not a U.S.
citizen) for purposes of computing U.S. estate tax. Such an individual
domiciled in Germany is entitled to a credit against U.S. estate tax
based on the extent to which the assets of the estate are situated in
the United States.
---------------------------------------------------------------------------
Effective date.--The unified credit is replaced with a
unified exemption, the 5-percent surtax is repealed, and the
rates in excess of 53 percent are repealed for estates of
decedents dying and gifts and generation-skipping transfers
made after December 31, 2001. The estate and gift tax rates in
excess of 50 percent are repealed for estates of decedents
dying and gifts and generation-skipping transfers made after
December 31, 2002.
The additional reductions in estate and gift tax rates
and of the State death tax credit occur for decedents dying and
gifts and generation-skipping transfers made in 2004 through
2010.
The estate, gift, and generation-skipping transfer taxes
are repealed and the carryover basis regime takes effect for
estates of decedents dying and gifts and generation-skipping
transfers made after December 31, 2010.
The provisions relating to purported gifts and
recognition of gain on transfers to nonresidents who are not
U.S. citizens are effective for transfers made after December
31, 2010.
senate amendment
The Senate amendment is similar to the provision in H.R.
8; however, under the Senate amendment, the gift tax will not
be repealed.
The Senate amendment also includes the following
modifications:
Phaseout and repeal of estate and generation-skipping transfer taxes;
modifications to gift tax
The Senate amendment provides that the unified credit
effective exemption amount will be increased and the estate and
gift tax rates will be reduced over time. The unified credit
effective exemption amount (for estate and gift tax purposes)
will be increased to $1 million in 2002. For gift tax purposes,
the unified credit effective exemption amount will remain at $1
million in 2002 and thereafter. For estate tax purposes, the
unified credit effective exemption amount and generation-
skipping transfer tax exemption will increase over time.
TABLE 18.--UNIFIED CREDIT EXEMPTION AMOUNTS AND HIGHEST ESTATE AND GIFT
TAX RATES
------------------------------------------------------------------------
Estate and GST tax
Calendar year deathtime transfer Highest estate and gift
exemption tax rates
------------------------------------------------------------------------
2002................ $1 million............... 50%
2003................ $1 million............... 49%
2004................ $2 million............... 48%
2005................ $3 million............... 47%
2006................ $3 million............... 46%
2007................ $3 million............... 45%
2008................ $3 million............... 45%
2009................ $3.5 million............. 45%
2010................ $4 million............... 45%
2011................ N/A (taxes repealed)..... 40% (gift tax only)
------------------------------------------------------------------------
Under the Senate amendment, except as provided in
regulations, a transfer to a trust will be treated as a taxable
gift beginning in 2011, unless the trust is treated as wholly
owned by the donor or the donor's spouse under the grantor
trust provisions of the Code.
After repeal of the estate tax, the modified carryover
basis rules provided in the House bill also apply under the
Senate amendment.
Reduction in State death tax credit; deduction for State death taxes
paid
The Senate amendment provides that, from 2002 through
2004, the top State death tax credit rate is decreased from 16
percent as follows: to 8 percent in 2002, to 7.2 percent in
2003, and to 7.04 percent in 2004. In 2005, after the state
death tax credit is repealed, there will be a deduction for
death taxes (e.g., any estate, inheritance, legacy, or
succession taxes) actually paid to any State or the District of
Columbia, in respect of property included in the gross estate
of the decedent. Such State taxes must have been paid and
claimed before the later of: (1) four years after the filing of
the estate tax return; or (2) (a) 60 days after a decision of
the U.S. Tax Court determining the estate tax liability becomes
final, (b) the expiration of the period of extension to pay
estate taxes over time under section 6166, or (c) the
expiration of the period of limitations in which to file a
claim for refund or 60 days after a decision of a court in
which such refund suit has been filed becomes final.
Reporting requirements
In general
For transfers at death, the Senate amendment contains
reporting requirements identical to those provided in the House
bill. For transfers during life, the Senate amendment provides
that a donor is required to provide to recipients of property
by gift the information relating to the property (e.g., the
fair market value and basis of property) that was reported on
the donor's gift tax return with respect to such property.
Penalties for failure to comply with the reporting
requirements
Any donor required to provide to recipients of property
by gift the information relating to the property that was
reported on the donor's gift tax return (e.g., the fair market
value and basis of property) with respect to such property who
fails to do so is liable for a penalty of $50 for each failure
to report such information to a donee.
Any person required to report to the IRS transfers at
death of non-cash assets in excess of $1.3 million in value who
fails to do so is liable for a penalty of $10,000 for the
failure to report such information. Any person required to
report to the IRS the receipt by a decedent of appreciated
property acquired by the decedent within three years of death
for which a gift tax return was required to have been filed by
the donor who fails to do so is liable for a penalty of $500
for the failure to report such information to the IRS. There
also is a penalty of $50 for each failure to report such
information to a beneficiary.
No penalty is imposed with respect to any failure that is
due to reasonable cause. If any failure to report to the IRS or
a beneficiary under the bill is due to intentional disregard of
the rules, then the penalty is five percent of the fair market
value of the property for which reporting was required,
determined at the date of the decedent's death (for property
passing at death) or determined at the time of gift (for a
lifetime gift).
Certain tax benefits extending past the date for repeal of the estate
tax
As under the House bill, there will continue to be (1)
the additional estate tax for those with a retained development
right with respect to property for which a conservation
easement was claimed, (2) the additional estate tax imposed
under the special-use valuation rules, (3) the additional tax
imposed under the qualified family-owned business deduction
rules, and (4) acceleration of tax under the installment
payment of estate tax provisions.
In addition, under the Senate amendment, there will
continue to be an estate tax imposed on (1) any distribution
prior to January 1, 2022, from a qualified domestic trust
before the date of the death of the noncitizen surviving spouse
and (2) the value of the property remaining in a qualified
domestic trust on the date of death of the noncitizen surviving
spouse if such surviving spouse dies before January 1, 2011.
Effective date.--The estate and gift rate reductions,
increases in the estate tax unified credit exemption equivalent
amounts and generation-skipping transfer tax exemption amount,
and reductions in and repeal of the state death tax credit are
phased-in over time, beginning with estates of decedents dying
and gifts and generation-skipping transfers made after December
31, 2001. The repeal of the qualified family-owned business
deduction is effective for estates of decedents dying after
December 31, 2003.
The estate and generation-skipping transfer taxes are
repealed, and the carryover basis regime takes effect for
estates of decedents dying and generation-skipping transfers
made after December 31, 2010. The provisions relating to
recognition of gain on transfers to nonresident noncitizens are
effective for transfers made after December 31, 2010.
The top gift tax rate will be 40 percent, and transfers
to trusts generally will be treated as a taxable gift unless
the trust is treated as wholly owned by the donor or the
donor's spouse, effective for gifts made after December 31,
2010.
An estate tax on distributions made from a qualified
domestic trust before the date of the death of the surviving
spouse will no longer apply for distributions made after
December 31, 2021. An estate tax on the value of property
remaining in a qualified domestic trust on the date of death of
the surviving spouse will no longer apply after December 31,
2010.
Conference Agreement
Overview
The conference agreement follows the Senate amendment
with modifications. Under the conference agreement, the estate,
gift, and generation-skipping transfer taxes are reduced
between 2002 and 2009, and the estate and generation-skipping
transfer taxes are repealed in 2010.
Phaseout and repeal of estate and generation-skipping transfer taxes
In general
Under the conference agreement, in 2002, the 5-percent
surtax (which phases out the benefit of the graduated rates)
and the rates in excess of 50 percent are repealed. In
addition, in 2002, the unified credit effective exemption
amount (for both estate and gift tax purposes) is increased to
$1 million. In 2003, the estate and gift tax rates in excess of
49 percent are repealed. In 2004, the estate and gift tax rates
in excess of 48 percent are repealed, and the unified credit
effective exemption amount for estate tax purposes is increased
to $1.5 million. (The unified credit effective exemption amount
for gift tax purposes remains at $1 million as increased in
2002.) In addition, in 2004, the family-owned business
deduction is repealed. In 2005, the estate and gift tax rates
in excess of 47 percent are repealed. In 2006, the estate and
gift tax rates in excess of 46 percent are repealed, and the
unified credit effective exemption amount for estate tax
purposes is increased to $2 million. In 2007, the estate and
gift tax rates in excess of 45 percent are repealed. In 2009,
the unified credit effective exemption amount is increased to
$3.5 million. In 2010, the estate and generation-skipping
transfer taxes are repealed.
From 2002 through 2009, the estate and gift tax rates and
unified credit effective exemption amount for estate tax
purposes are as follows:
------------------------------------------------------------------------
Estate and GST tax
Calendar year deathtime transfer Highest estate and gift tax
exemption rates
------------------------------------------------------------------------
2002.............. $1 million............. 50%
2003.............. $1 million............. 49%
2004.............. $1.5 million........... 48%
2005.............. $1.5 million........... 47%
2006.............. $2 million............. 46%
2007.............. $2 million............. 45%
2008.............. $2 million............. 45%
2009.............. $3.5 million........... 45%
2010.............. N/A (taxes repealed)... top individual rate under
the bill (gift tax only)
------------------------------------------------------------------------
The generation-skipping transfer tax exemption for a
given year (prior to repeal) is equal to the unified credit
effective exemption amount for estate tax purposes. In
addition, as under present law, the generation-skipping
transfer tax rate for a given year will be the highest estate
and gift tax rate in effect for such year.
Repeal of estate and generation-skipping transfer taxes;
modifications to gift tax
In 2010, the estate and generation-skipping transfer
taxes are repealed. Also beginning in 2010, the top gift tax
rate will be the top individual income tax rate as provided
under the bill, and, except as provided in regulations, a
transfer to trust will be treated as a taxable gift, unless the
trust is treated as wholly owned by the donor or the donor's
spouse under the grantor trust provisions of the Code.
Reduction in State death tax credit; deduction for State
death taxes paid
Under the conference agreement, from 2002 through 2004,
the State death tax credit allowable under present law is
reduced as follows: in 2002, the State death tax credit is
reduced by 25 percent (from present law amounts); in 2003, the
State death tax credit is reduced by 50 percent (from present
law amounts); and in 2004, the State death tax credit is
reduced by 75 percent (from present law amounts). In 2005, the
State death tax credit is repealed, after which there will be a
deduction for death taxes (e.g., any estate, inheritance,
legacy, or succession taxes) actually paid to any State or the
District of Columbia, in respect of property included in the
gross estate of the decedent. Such State taxes must have been
paid and claimed before the later of: (1) four years after the
filing of the estate tax return; or (2) (a) 60 days after a
decision of the U.S. Tax Court determining the estate tax
liability becomes final, (b) the expiration of the period of
extension to pay estate taxes over time under section 6166, or
(c) the expiration of the period of limitations in which to
file a claim for refund or 60 days after a decision of a court
in which such refund suit has become final.
Basis of property acquired from a decedent
The conference agreement includes the rules regarding the
determination of basis of property acquired from a decedent
after repeal of the estate tax included in H.R. 8 and the
Senate amendment; however, these rules will be in effect
beginning in 2010 (i.e., when the estate tax is repealed under
the conference agreement).
Reporting requirements
The conference agreement follows the Senate amendment.
Certain tax benefits extending past the date for repeal of the estate
tax
The conference agreement follows the Senate amendment,
with a modification regarding property in a qualified domestic
trust. There will continue to be an estate tax imposed on (1)
any distribution prior to January 1, 2021, from a qualified
domestic trust before the date of the death of the noncitizen
surviving spouse and (2) the value of the property remaining in
a qualified domestic trust on the date of death of the
noncitizen surviving spouse if such surviving spouse dies
before January 1, 2010.
Transfers to foreign trusts, foreign estates, and nonresidents who are
not U.S. citizens
The conference agreement follows H.R. 8 and the Senate
amendment, with a modification. Under the conference agreement,
beginning in 2010, only a transfer by a U.S. person's estate
(i.e., by a U.S. person at death) to a nonresident who is not a
U.S. citizen is treated as a sale or exchange of the property
for an amount equal to the fair market value of the transferred
property. The amount of gain that must be recognized by the
transferor is equal to the excess of the fair market value of
the property transferred over the adjusted basis of such
property in the hands of the transferor.
Transfers of property in satisfaction of a pecuniary bequest
The conference agreement follows H.R. 8 and the Senate
amendment.
Transfer of property subject to a liability
The conference agreement follows H.R. 8 and the Senate
amendment.
Income tax exclusion for the gain on the sale of a principal residence
The conference agreement follows H.R. 8 and the Senate
amendment, with a modification. Under the conference agreement,
the income tax exclusion for the gain on the sale of a
principal residence applies to property sold by a trust that
was a qualified revocable trust under section 645 of the Code
immediately prior to the decedent's death. The decedent's
period of occupancy of the property as a principal residence
can be added to an heir's subsequent ownership and occupancy in
determining whether the property was owned and occupied for two
years as a principal residence, regardless of whether the
residence was owned by such trust during the decedent's
occupancy.
Excise tax on non-exempt trusts
The conference agreement follows H.R. 8 and the Senate
amendment.
Effective date.--The estate and gift rate reductions,
increases in the estate tax unified credit exemption equivalent
amounts and generation-skipping transfer tax exemption amount,
and reductions in and repeal of the state death tax credit are
phased-in over time, beginning with estates of decedents dying
and gifts and generation-skipping transfers after December 31,
2001. The repeal of the qualified family-owned business
deduction is effective for estates of decedents dying after
December 31, 2003.
The estate and generation-skipping transfer taxes are
repealed, and the carryover basis regime takes effect for
estates of decedents dying and generation-skipping transfers
after December 31, 2009. The provisions relating to recognition
of gain on transfers by the estate of a U.S. person (i.e., at
death) to nonresidents who are not U.S. citizens is effective
for transfers made after December 31, 2009.
The top gift tax rate will be the top individual income
tax rate as provided in the bill, and transfers to trusts
generally will be treated as a taxable gift unless the trust is
treated as wholly owned by the donor or the donor's spouse,
effective for gifts made after December 31, 2009.
An estate tax on distributions made from a qualified
domestic trust before the date of the death of the surviving
spouse will no longer apply for distributions made after
December 31, 2020. An estate tax on the value of property
remaining in a qualified domestic trust on the date of death of
the surviving spouse will no longer apply after December 31,
2009.
B. Expand Estate Tax Rule for Conservation Easements (Sec. 501 of H.R.
8, Sec. 551 of the Senate Amendment, and Sec. 2031 of the Code)
Present Law
In general
An executor can elect to exclude from the taxable estate
40 percent of the value of any land subject to a qualified
conservation easement, up to a maximum exclusion of $100,000 in
1998, $200,000 in 1999, $300,000 in 2000, $400,000 in 2001, and
$500,000 in 2002 and thereafter (sec. 2031(c)). The exclusion
percentage is reduced by 2 percentage points for each
percentage point (or fraction thereof) by which the value of
the qualified conservation easement is less than 30 percent of
the value of the land (determined without regard to the value
of such easement and reduced by the value of any retained
development right).
A qualified conservation easement is one that meets the
following requirements: (1) the land is located within 25 miles
of a metropolitan area (as defined by the Office of Management
and Budget) or a national park or wilderness area, or within 10
miles of an Urban National Forest (as designated by the Forest
Service of the U.S. Department of Agriculture); (2) the land
has been owned by the decedent or a member of the decedent's
family at all times during the three-year period ending on the
date of the decedent's death; and (3) a qualified conservation
contribution (within the meaning of sec. 170(h)) of a qualified
real property interest (as generally defined in sec.
170(h)(2)(C)) was granted by the decedent or a member of his or
her family. For purposes of the provision, preservation of a
historically important land area or a certified historic
structure does not qualify as a conservation purpose.
In order to qualify for the exclusion, a qualifying
easement must have been granted by the decedent, a member of
the decedent's family, the executor of the decedent's estate,
or the trustee of a trust holding the land, no later than the
date of the election. To the extent that the value of such land
is excluded from the taxable estate, the basis of such land
acquired at death is a carryover basis (i.e., the basis is not
stepped-up to its fair market value at death). Property
financed with acquisition indebtedness is eligible for this
provision only to the extent of the net equity in the property.
Retained development rights
The exclusion for land subject to a conservation easement
does not apply to any development right retained by the donor
in the conveyance of the conservation easement. An example of
such a development right would be the right to extract minerals
from the land. If such development rights exist, then the value
of the conservation easement must be reduced by the value of
any retained development right.
If the donor or holders of the development rights agree
in writing to extinguish the development rights in the land,
then the value of the easement need not be reduced by the
development rights. In such case, those persons with an
interest in the land must execute the agreement no later than
the earlier of (1) two years after the date of the decedent's
death or (2) the date of the sale of such land subject to the
conservation easement. If such agreement is not entered into
within this time, then those with an interest in the land are
personally liable for an additional tax, which is the amount of
tax which would have been due on the retained development
rights subject to the termination agreement.
House Bill
No provision. However, H.R. 8, as passed by the House
expands the availability of qualified conservation easements by
modifying the distance requirements. Under the bill, the
distance within which the land must be situated from a
metropolitan area, national park, or wilderness area is
increased from 25 to 50 miles, and the distance from which the
land must be situated from an Urban National Forest is
increased from 10 to 25 miles. The bill also clarifies that the
date for determining easement compliance is the date on which
the donation was made.
Effective date.--The provisions are effective for estates
of decedents dying after December 31, 2000.
Senate Amendment
The Senate amendment expands availability of qualified
conservation easements by eliminating the requirement that the
land be located within a certain distance from a metropolitan
area, national park, wilderness area, or Urban National Forest.
Thus, under the Senate amendment, a qualified conservation
easement may be claimed with respect to any land that is
located in the United States or its possessions. The Senate
amendment also clarifies that the date for determining easement
compliance is the date on which the donation was made.
Effective date.--The provisions are effective for estates
of decedents dying after December 31, 2000.
Conference Agreement
The conference agreement follows the Senate amendment.
C. Modify Generation-Skipping Transfer Tax Rules
1. Deemed allocation of the generation-skipping transfer tax exemption
to lifetime transfers to trusts that are not direct skips (sec.
601 of H.R. 8, sec. 561 of the Senate amendment, and sec. 2632
of the Code)
Present Law
A generation-skipping transfer tax generally is imposed
on transfers, either directly or through a trust or similar
arrangement, to a ``skip person'' (i.e., a beneficiary in a
generation more than one generation below that of the
transferor). Transfers subject to the generation-skipping
transfer tax include direct skips, taxable terminations, and
taxable distributions. An exemption of $1 million (indexed
beginning in 1999; the inflation-adjusted amount for 2001 is
$1,060,000) is provided for each person making generation-
skipping transfers. The exemption can be allocated by a
transferor (or his or her executor) to transferred property.
A direct skip is any transfer subject to estate or gift
tax of an interest in property to a skip person. A skip person
may be a natural person or certain trusts. All persons assigned
to the second or more remote generation below the transferor
are skip persons (e.g., grandchildren and great-grandchildren).
Trusts are skip persons if (1) all interests in the trust are
held by skip persons, or (2) no person holds an interest in the
trust and at no time after the transfer may a distribution
(including distributions and terminations) be made to a non-
skip person.
A taxable termination is a termination (by death, lapse
of time, release of power, or otherwise) of an interest in
property held in trust unless, immediately after such
termination, a non-skip person has an interest in the property,
or unless at no time after the termination may a distribution
(including a distribution upon termination) be made from the
trust to a skip person. A taxable distribution is a
distribution from a trust to a skip person (other than a
taxable termination or direct skip).
The tax rate on generation-skipping transfers is a flat
rate of tax equal to the maximum estate and gift tax rate in
effect at the time of the transfer (55 percent under present
law) multiplied by the ``inclusion ratio.'' The inclusion ratio
with respect to any property transferred in a generation-
skipping transfer indicates the amount of ``generation-skipping
transfer tax exemption'' allocated to a trust. The allocation
of generation-skipping transfer tax exemption reduces the 55-
percent tax rate on a generation-skipping transfer.
If an individual makes a direct skip during his or her
lifetime, any unused generation-skipping transfer tax exemption
is automatically allocated to a direct skip to the extent
necessary to make the inclusion ratio for such property equal
to zero. An individual can elect out of the automatic
allocation for lifetime direct skips.
For lifetime transfers made to a trust that are not
direct skips, the transferor must allocate generation-skipping
transfer tax exemption--the allocation is not automatic. If
generation-skipping transfer tax exemption is allocated on a
timely-filed gift tax return, then the portion of the trust
which is exempt from generation-skipping transfer tax is based
on the value of the property at the time of the transfer. If,
however, the allocation is not made on a timely-filed gift tax
return, then the portion of the trust which is exempt from
generation-skipping transfer tax is based on the value of the
property at the time the allocation of generation-skipping
transfer tax exemption was made.
Treas. Reg. sec. 26.2632-1(d) further provides that any
unused generation-skipping transfer tax exemption, which has
not been allocated to transfers made during an individual's
life, is automatically allocated on the due date for filing the
decedent's estate tax return. Unused generation-skipping
transfer tax exemption is allocated pro rata on the basis of
the value of the property as finally determined for estate tax
purposes, first to direct skips treated as occurring at the
transferor's death. The balance, if any, of unused generation-
skipping transfer tax exemption is allocated pro rata, on the
basis of the estate tax value of the nonexempt portion of the
trust property (or in the case of trusts that are not included
in the gross estate, on the basis of the date of death value of
the trust) to trusts with respect to which a taxable
termination may occur or from which a taxable distribution may
be made.
House Bill
No provision. However, H.R. 8, as passed by the house
provides that generation-skipping transfer tax exemption will
be automatically allocated to transfers made during life that
are ``indirect skips.'' An indirect skip is any transfer of
property (that is not a direct skip) subject to the gift tax
that is made to a generation-skipping transfer trust.
A generation-skipping transfer trust is defined as a
trust that could have a generation-skipping transfer with
respect to the transferor (e.g., a taxable termination or
taxable distribution), unless:
The trust instrument provides that more than 25
percent of the trust corpus must be distributed to or
may be withdrawn by one or more individuals who are
non-skip persons (a) before the date that the
individual attains age 46, (b) on or before one or more
dates specified in the trust instrument that will occur
before the date that such individual attains age 46, or
(c) upon the occurrence of an event that, in accordance
with regulations prescribed by the Treasury Secretary,
may reasonably be expected to occur before the date
that such individual attains age 46;
The trust instrument provides that more than 25
percent of the trust corpus must be distributed to or
may be withdrawn by one or more individuals who are
non-skip persons and who are living on the date of
death of another person identified in the instrument
(by name or by class) who is more than 10 years older
than such individuals;
The trust instrument provides that, if one or more
individuals who are non-skip persons die on or before a
date or event described in clause (1) or (2), more than
25 percent of the trust corpus either must be
distributed to the estate or estates of one or more of
such individuals or is subject to a general power of
appointment exercisable by one or more of such
individuals;
The trust is a trust any portion of which would be
included in the gross estate of a non-skip person
(other than the transferor) if such person died
immediately after the transfer;
The trust is a charitable lead annuity trust or a
charitable remainder annuity trust or a charitable
unitrust; or
The trust is a trust with respect to which a
deduction was allowed under section 2522 for the amount
of an interest in the form of the right to receive
annual payments of a fixed percentage of the net fair
market value of the trust property (determined yearly)
and which is required to pay principal to a non-skip
person if such person is alive when the yearly payments
for which the deduction was allowed terminate.
If any individual makes an indirect skip during the
individual's lifetime, then any unused portion of such
individual's generation-skipping transfer tax exemption is
allocated to the property transferred to the extent necessary
to produce the lowest possible inclusion ratio for such
property.
An individual can elect not to have the automatic
allocation rules apply to an indirect skip, and such elections
will be deemed timely if filed on a timely-filed gift tax
return for the calendar year in which the transfer was made or
deemed to have been made or on such later date or dates as may
be prescribed by the Treasury Secretary. An individual can
elect not to have the automatic allocation rules apply to any
or all transfers made by such individual to a particular trust
and can elect to treat any trust as a generation-skipping
transfer trust with respect to any or all transfers made by the
individual to such trust, and such election can be made on a
timely-filed gift tax return for the calendar year for which
the election is to become effective.
Effective date.--The provision applies to transfers
subject to estate or gift tax made after December 31, 2000, and
to estate tax inclusion periods ending after December 31, 2000.
Senate Amendment
The Senate amendment is the same as the provision in H.R.
8.
Conference Agreement
The conference agreement follows H.R. 8 and the Senate
amendment.
2. Retroactive allocation of the generation-skipping transfer tax
exemption (sec. 601 of H.R. 8, sec. 561 of the Senate
amendment, and sec. 2632 of the Code)
Present Law
A taxable termination is a termination (by death, lapse
of time, release of power, or otherwise) of an interest in
property held in trust unless, immediately after such
termination, a non-skip person has an interest in the property,
or unless at no time after the termination may a distribution
(including a distribution upon termination) be made from the
trust to a skip person. A taxable distribution is a
distribution from a trust to a skip person (other than a
taxable termination or direct skip). If a transferor allocates
generation-skipping transfer tax exemption to a trust prior to
the taxable termination or taxable distribution, generation-
skipping transfer tax may be avoided.
A transferor likely will not allocate generation-skipping
transfer tax exemption to a trust that the transferor expects
will benefit only non-skip persons. However, if a taxable
termination occurs because, for example, the transferor's child
unexpectedly dies such that the trust terminates in favor of
the transferor's grandchild, and generation-skipping transfer
tax exemption had not been allocated to the trust, then
generation-skipping transfer tax would be due even if the
transferor had unused generation-skipping transfer tax
exemption.
House Bill
No provision. However, H.R. 8, as passed by the House,
provided that generation-skipping transfer tax exemption can be
allocated retroactively when there is an unnatural order of
death. If a lineal descendant of the transferor predeceases the
transferor, then the transferor can allocate any unused
generation-skipping transfer exemption to any previous transfer
or transfers to the trust on a chronological basis. The
provision allows a transferor to retroactively allocate
generation-skipping transfer exemption to a trust where a
beneficiary (a) is a non-skip person, (b) is a lineal
descendant of the transferor's grandparent or a grandparent of
the transferor's spouse, (c) is a generation younger than the
generation of the transferor, and (d) dies before the
transferor. Exemption is allocated under this rule
retroactively, and the applicable fraction and inclusion ratio
would be determined based on the value of the property on the
date that the property was transferred to trust.
Effective date.--The provision applies to deaths of non-
skip persons occurring after December 31, 2000.
Senate Amendment
The Senate amendment is the same as the provision in H.R.
8.
Conference Agreement
The conference agreement follows H.R. 8 and the Senate
amendment.
3. Severing of trusts holding property having an inclusion ratio of
greater than zero (sec. 602 of H.R. 8, sec. 562 of the Senate
amendment, and sec. 2642 of the Code)
Present Law
A generation-skipping transfer tax generally is imposed
on transfers, either directly or through a trust or similar
arrangement, to a ``skip person'' (i.e., a beneficiary in a
generation more than one generation below that of the
transferor). Transfers subject to the generation-skipping
transfer tax include direct skips, taxable terminations, and
taxable distributions. An exemption of $1 million (indexed
beginning in 1999; the inflation-adjusted amount for 2001 is
$1,060,000) is provided for each person making generation-
skipping transfers. The exemption can be allocated by a
transferor (or his or her executor) to transferred property.
If the value of transferred property exceeds the amount
of the generation-skipping transfer tax exemption allocated to
that property, then the generation-skipping transfer tax
generally is determined by multiplying a flat tax rate equal to
the highest estate tax rate (which is currently 55 percent) by
the ``inclusion ratio'' and the value of the taxable property
at the time of the taxable event. The ``inclusion ratio'' is
the number one minus the ``applicable fraction.'' The
applicable fraction is a fraction calculated by dividing the
amount of the generation-skipping transfer tax exemption
allocated to the property by the value of the property.
Under Treas. Reg. 26.2654-1(b), a trust may be severed
into two or more trusts (e.g., one with an inclusion ratio of
zero and one with an inclusion ratio of one) only if (1) the
trust is severed according to a direction in the governing
instrument or (2) the trust is severed pursuant to the
trustee's discretionary powers, but only if certain other
conditions are satisfied (e.g., the severance occurs or a
reformation proceeding begins before the estate tax return is
due). Under current Treasury regulations, however, a trustee
cannot establish inclusion ratios of zero and one by severing a
trust that is subject to the generation-skipping transfer tax
after the trust has been created.
House Bill
No provision. However, H.R. 8, as passed by the House,
provides that a trust can be severed in a ``qualified
severance.'' A qualified severance is defined as the division
of a single trust and the creation of two or more trusts if (1)
the single trust was divided on a fractional basis, and (2) the
terms of the new trusts, in the aggregate, provide for the same
succession of interests of beneficiaries as are provided in the
original trust. If a trust has an inclusion ratio of greater
than zero and less than one, a severance is a qualified
severance only if the single trust is divided into two trusts,
one of which receives a fractional share of the total value of
all trust assets equal to the applicable fraction of the single
trust immediately before the severance. In such case, the trust
receiving such fractional share shall have an inclusion ratio
of zero and the other trust shall have an inclusion ratio of
one. Under the provision, a trustee may elect to sever a trust
in a qualified severance at any time.
Effective date.--The provision is effective for
severances of trusts occurring after December 31, 2000.
Senate Amendment
The Senate amendment is the same as the provision in H.R.
8.
Conference Agreement
The conference agreement follows the provision in H.R. 8
and the Senate amendment.
4. Modification of certain valuation rules (sec. 603 of H.R. 8, sec.
563 of the Senate amendment, and sec. 2642 of the Code)
Present Law
Under present law, the inclusion ratio is determined
using gift tax values for allocations of generation-skipping
transfer tax exemption made on timely filed gift tax returns.
The inclusion ratio generally is determined using estate tax
values for allocations of generation-skipping transfer tax
exemption made to transfers at death. Treas. Reg. 26.2642-5(b)
provides that, with respect to taxable terminations and taxable
distributions, the inclusion ratio becomes final on the later
of the period of assessment with respect to the first transfer
using the inclusion ratio or the period for assessing the
estate tax with respect to the transferor's estate.
House Bill
No provision. However, H.R. 8, as passed by the House,
provides that in connection with timely and automatic
allocations of generation-skipping transfer tax exemption, the
value of the property for purposes of determining the inclusion
ratio shall be its finally determined gift tax value or estate
tax value depending on the circumstances of the transfer. In
the case of a generation-skipping transfer tax exemption
allocation deemed to be made at the conclusion of an estate tax
inclusion period, the value for purposes of determining the
inclusion ratio shall be its value at that time.
Effective date.--The provision is effective for transfers
subject to estate or gift tax made after December 31, 2000.
Senate Amendment
The Senate amendment is the same as the provision in H.R.
8.
Conference Agreement
The conference agreement follows H.R. 8 and the Senate
amendment.
5. Relief from late elections (sec. 604 of H.R. 8, sec. 564 of the
Senate amendment, and sec. 2642 of the Code)
Present Law
Under present law, an election to allocate generation-
skipping transfer tax exemption to a specific transfer may be
made at any time up to the time for filing the transferor's
estate tax return. If an allocation is made on a gift tax
return filed timely with respect to the transfer to trust, then
the value on the date of transfer to the trust is used for
determining generation-skipping transfer tax exemption
allocation. However, if the allocation relating to a specific
transfer is not made on a timely-filed gift tax return, then
the value on the date of allocation must be used. There is no
statutory provision allowing relief for an inadvertent failure
to make an election on a timely-filed gift tax return to
allocate generation-skipping transfer tax exemption.
House Bill
No provision. However, H.R. 8, as passed by the House,
provides that the Treasury Secretary is authorized and directed
to grant extensions of time to make the election to allocate
generation-skipping transfer tax exemption and to grant
exceptions to the time requirement, without regard to whether
any period of limitations has expired. If such relief is
granted, then the gift tax or estate tax value of the transfer
to trust would be used for determining generation-skipping
transfer tax exemption allocation.
In determining whether to grant relief for late
elections, the Treasury Secretary is directed to consider all
relevant circumstances, including evidence of intent contained
in the trust instrument or instrument of transfer and such
other factors as the Treasury Secretary deems relevant. For
purposes of determining whether to grant relief, the time for
making the allocation (or election) is treated as if not
expressly prescribed by statute.
Effective date.--The provision applies to requests
pending on, or filed after, December 31, 2000. No inference is
intended with respect to the availability of relief from late
elections prior to the effective date of the provision.
Senate Amendment
The Senate amendment is the same as the provision in H.R.
8.
Conference Agreement
The conference agreement follows the provision in H.R. 8
and the Senate amendment.
6. Substantial compliance (sec. 604 of the House bill, sec. 564 of the
Senate amendment, and sec. 2642 of the Code)
Present Law
Under present law, there is no statutory rule which
provides that substantial compliance with the statutory and
regulatory requirements for allocating generation-skipping
transfer tax exemption will suffice to establish that
generation-skipping transfer tax exemption was allocated to a
particular transfer or trust.
House Bill
No provision. However, H.R. 8, as passed by the House,
provides that substantial compliance with the statutory and
regulatory requirements for allocating generation-skipping
transfer tax exemption will suffice to establish that
generation-skipping transfer tax exemption was allocated to a
particular transfer or a particular trust. If a taxpayer
demonstrates substantial compliance, then so much of the
transferor's unused generation-skipping transfer tax exemption
will be allocated to the extent it produces the lowest possible
inclusion ratio. In determining whether there has been
substantial compliance, all relevant circumstances will be
considered, including evidence of intent contained in the trust
instrument or instrument of transfer and such other factors as
the Treasury Secretary deems appropriate.
Effective date.--The provision applies to transfers
subject to estate or gift tax made after December 31, 2000. No
inference is intended with respect to the availability of a
rule of substantial compliance prior to the effective date of
the provision.
Senate Amendment
The Senate amendment is the same as the provision in H.R.
8.
Conference Agreement
The conference agreement follows H.R. 8 and the Senate
amendment.
D. Expand and Modify Availability of Installment Payment of Estate Tax
for Closely-Held Businesses (Sec. 701 of H.R. 8, Secs. 571 and 572 of
the Senate amendment, and Sec. 6166 of the Code)
PRESENT LAW
Under present law, the estate tax generally is due within
nine months of a decedent's death. However, an executor
generally may elect to pay estate tax attributable to an
interest in a closely-held business in two or more installments
(but no more than 10). An estate is eligible for payment of
estate tax in installments if the value of the decedent's
interest in a closely-held business exceeds 35 percent of the
decedent's adjusted gross estate (i.e., the gross estate less
certain deductions). If the election is made, the estate may
defer payment of principal and pay only interest for the first
five years, followed by up to 10 annual installments of
principal and interest. This provision effectively extends the
time for paying estate tax by 14 years from the original due
date of the estate tax.\54\ A special two-percent interest rate
applies to the amount of deferred estate tax attributable to
the first $1 million (adjusted annually for inflation occurring
after 1998; the inflation-adjusted amount for 2001 is
$1,060,000) in taxable value of a closely-held business. The
interest rate applicable to the amount of estate tax
attributable to the taxable value of the closely-held business
in excess of $1 million is equal to 45 percent of the rate
applicable to underpayments of tax under section 6621 (i.e., 45
percent of the Federal short-term rate plus 3 percentage
points). Interest paid on deferred estate taxes is not
deductible for estate or income tax purposes.
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\54\ For example, assume estate tax is due in 2001. If interest
only is paid each year for the first five years (2001 through 2005),
and if 10 installments of both principal and interest are paid for the
10 years thereafter (2006 through 2015), then payment of estate tax
would be extended by 14 years from the original due date of 2001.
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For purposes of these rules, an interest in a closely-
held business is: (1) an interest as a proprietor in a sole
proprietorship, (2) an interest as a partner in a partnership
carrying on a trade or business if 20 percent or more of the
total capital interest of such partnership is included in the
decedent's gross estate or the partnership had 15 or fewer
partners, and (3) stock in a corporation carrying on a trade or
business if 20 percent or more of the value of the voting stock
of the corporation is included in the decedent's gross estate
or such corporation had 15 or fewer shareholders. The decedent
may own the interest directly or, in certain cases, ownership
may be indirect, through a holding company. If ownership is
through a holding company, the stock must be non-readily
tradable. If stock in a holding company is treated as business
company stock for purposes of the installment payment
provisions, the five-year deferral for principal and the 2-
percent interest rate do not apply. The value of any interest
in a closely-held business does not include the value of that
portion of such interest attributable to passive assets held by
such business.
HOUSE BILL
No provision. However, H.R. 8, as passed by the House,
expands the definition of a closely-held business for purposes
of installment payment of estate tax. The bill increases from
15 to 45 the number of partners in a partnership and
shareholders in a corporation that is considered a closely-held
business in which a decedent held an interest, and thus will
qualify the estate for installment payment of estate tax.
Effective date.--The provision is effective for decedents
dying after December 31, 2001.
SENATE AMENDMENT
The Senate amendment expands availability of the
installment payment provisions by providing that an estate of a
decedent with an interest in a qualifying lending and financing
business is eligible for installment payment of the estate tax.
The bill also provides that an estate with an interest in a
qualifying lending and financing business that claims
installment payment of estate tax must make installment
payments of estate tax (which will include both principal and
interest) relating to the interest in a qualifying lending and
financing business over five years.
The Senate amendment also clarifies that the installment
payment provisions require that only the stock of holding
companies, not that of operating subsidiaries, must be non-
readily tradable in order to qualify for installment payment of
the estate tax. The bill also provides that an estate with a
qualifying property interest held through holding companies
that claims installment payment of estate tax must make all
installment payments of estate tax (which will include both
principal and interest) relating to a qualifying property
interest held through holding companies over five years.
Effective date.--The provision is effective for decedents
dying after December 31, 2001.
CONFERENCE AGREEMENT
The conference agreement includes the provision in H.R. 8
and the provisions in the Senate amendment.
No inference is intended as to whether one or more of the
specified activities of a qualified lending and financing
business would be a trade or business eligible for installment
payment of estate tax under present law.
VI. PENSION AND INDIVIDUAL RETIREMENT ARRANGEMENT PROVISIONS \55\
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\55\ The provisions of the bill as passed by the House did not
contain provisions relating to pensions and individual retirement
arrangements. Provisions described under the House bill refer to the
provisions of H.R. 10, the ``Comprehensive Retirement Security and
Pension Reform Act of 2001,'' as passed by the House.
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A. Individual Retirement Arrangements (``IRAs'') (Sec. 101 of the House
bill, Secs. 601-603 of the Senate amendment and Secs. 219, 408, and
408A of the Code)
PRESENT LAW
In general
There are two general types of individual retirement
arrangements (``IRAs'') under present law: traditional IRAs, to
which both deductible and nondeductible contributions may be
made, and Roth IRAs. The Federal income tax rules regarding
each type of IRA (and IRA contribution) differ.
Traditional IRAs
Under present law, an individual may make deductible
contributions to an IRA up to the lesser of $2,000 or the
individual's compensation if neither the individual nor the
individual's spouse is an active participant in an employer-
sponsored retirement plan. In the case of a married couple,
deductible IRA contributions of up to $2,000 can be made for
each spouse (including, for example, a homemaker who does not
work outside the home), if the combined compensation of both
spouses is at least equal to the contributed amount. If the
individual (or the individual's spouse) is an active
participant in an employer-sponsored retirement plan, the
$2,000 deduction limit is phased out for taxpayers with
adjusted gross income (``AGI'') over certain levels for the
taxable year.
The AGI phase-out limits for taxpayers who are active
participants in employer-sponsored plans are as follows.
Single Taxpayers
Taxable years beginning in: Phase-out range
2001.................................................... $33,000-43,000
2002.................................................... 34,000-44,000
2003.................................................... 40,000-50,000
2004.................................................... 45,000-55,000
2005 and thereafter..................................... 50,000-60,000
Joint Returns
Taxable years beginning in: Phase-out range
2001.................................................... $53,000-63,000
2002.................................................... 54,000-64,000
2003.................................................... 60,000-70,000
2004.................................................... 65,000-75,000
2005.................................................... 70,000-80,000
2006.................................................... 75,000-85,000
2007 and thereafter..................................... 80,000-100,000
The AGI phase-out range for married taxpayers filing a
separate return is $0 to $10,000.
If the individual is not an active participant in an
employer-sponsored retirement plan, but the individual's spouse
is, the $2,000 deduction limit is phased out for taxpayers with
AGI between $150,000 and $160,000.
To the extent an individual cannot or does not make
deductible contributions to an IRA or contributions to a Roth
IRA, the individual may make nondeductible contributions to a
traditional IRA.
Amounts held in a traditional IRA are includible in
income when withdrawn (except to the extent the withdrawal is a
return of nondeductible contributions). Includible amounts
withdrawn prior to attainment of age 59\1/2\ are subject to an
additional 10-percent early withdrawal tax, unless the
withdrawal is due to death or disability, is made in the form
of certain periodic payments, is used to pay medical expenses
in excess of 7.5 percent of AGI, is used to purchase health
insurance of an unemployed individual, is used for education
expenses, or is used for first-time homebuyer expenses of up to
$10,000.
Roth IRAs
Individuals with AGI below certain levels may make
nondeductible contributions to a Roth IRA. The maximum annual
contribution that may be made to a Roth IRA is the lesser of
$2,000 or the individual's compensation for the year. The
contribution limit is reduced to the extent an individual makes
contributions to any other IRA for the same taxable year. As
under the rules relating to IRAs generally, a contribution of
up to $2,000 for each spouse may be made to a Roth IRA provided
the combined compensation of the spouses is at least equal to
the contributed amount. The maximum annual contribution that
can be made to a Roth IRA is phased out for single individuals
with AGI between $95,000 and $110,000 and for joint filers with
AGI between $150,000 and $160,000.
Taxpayers with modified AGI of $100,000 or less generally
may convert a traditional IRA into a Roth IRA. The amount
converted is includible in income as if a withdrawal had been
made, except that the 10-percent early withdrawal tax does not
apply and, if the conversion occurred in 1998, the income
inclusion may be spread ratably over four years. Married
taxpayers who file separate returns cannot convert a
traditional IRA into a Roth IRA.
Amounts held in a Roth IRA that are withdrawn as a
qualified distribution are not includible in income, or subject
to the additional 10-percent tax on early withdrawals. A
qualified distribution is a distribution that (1) is made after
the five-taxable year period beginning with the first taxable
year for which the individual made a contribution to a Roth
IRA, and (2) which is made after attainment of age 59\1/2\, on
account of death or disability, or is made for first-time
homebuyer expenses of up to $10,000.
Distributions from a Roth IRA that are not qualified
distributions are includible in income to the extent
attributable to earnings, and subject to the 10-percent early
withdrawal tax (unless an exception applies).\56\ The same
exceptions to the early withdrawal tax that apply to IRAs apply
to Roth IRAs.
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\56\ Early distribution of converted amounts may also accelerate
income inclusion of converted amounts that are taxable under the four-
year rule applicable to 1998 conversions.
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Taxation of charitable contributions
Generally, a taxpayer who itemizes deductions may deduct
cash contributions to charity, as well as the fair market value
of contributions of property. The amount of the deduction
otherwise allowable for the taxable year with respect to a
charitable contribution may be reduced, depending on the type
of property contributed, the type of charitable organization to
which the property is contributed, and the income of the
taxpayer.
For donations of cash by individuals, total deductible
contributions to public charities may not exceed 50 percent of
a taxpayer's adjusted gross income (``AGI'') for a taxable
year. To the extent a taxpayer has not exceeded the 50-percent
limitation, contributions of cash to private foundations and
certain other nonprofit organizations and contributions of
capital gain property to public charities generally may be
deducted up to 30 percent of the taxpayer's AGI. If a taxpayer
makes a contribution in one year that exceeds the applicable
50-percent or 30-percent limitation, the excess amount of the
contribution may be carried over and deducted during the next
five taxable years.
In addition to the percentage limitations imposed
specifically on charitable contributions, present law imposes a
reduction on most itemized deductions, including charitable
contribution deductions, for taxpayers with adjusted gross
income in excess of a threshold amount, which is adjusted
annually for inflation. The threshold amount for 2001 is
$132,950 ($66,475 for married individuals filing separate
returns). For those deductions that are subject to the limit,
the total amount of itemized deductions is reduced by three
percent of AGI over the threshold amount, but not by more than
80 percent of itemized deductions subject to the limit. The
effect of this reduction may be to limit a taxpayer's ability
to deduct some of his or her charitable contributions.
House Bill
Increase in annual contribution limits
The House bill increases the maximum annual dollar
contribution limit for IRA contributions from $2,000 to $3,000
in 2002, $4,000 in 2003, and $5,000 in 2004. The limit is
indexed in $500 increments in 2005 and thereafter.
Additional catch-up contributions
The House bill accelerates the increase of the IRA
maximum contribution limit for individuals who have attained
age 50 before the end of the taxable year. The maximum dollar
contribution limit (before application of the AGI phase-out
limits) for such an individual is increased to $5,000 in 2002
and 2003. In 2004 and thereafter, the general limit applies to
all individuals.
Deemed IRAs under qualified plans
No provision.
Tax-free IRA withdrawals for charitable purposes
No provision.
Effective date.--The provision is effective for taxable
years beginning after December 31, 2001.
Senate Amendment
Increase in annual contribution limits
The Senate amendment increases the maximum annual dollar
contribution limit for IRA contributions from $2,000 to $2,500
for 2002 through 2005, $3,000 for 2006 and 2007, $3,500 for
2008 and 2009, $4,000 for 2010, and $5,000 for 2011. After
2011, the limit is adjusted annually for inflation in $500
increments.
Additional catch-up contributions
The Senate amendment provides that individuals who have
attained age 50 may make additional catch-up IRA contributions.
The otherwise maximum contribution limit (before application of
the AGI phase-out limits) for an individual who has attained
age 50 before the end of the taxable year is increased by $500
for 2002 through 2005, $1,000 for 2006 through 2009, $1,500 for
2010, and $2,000 for 2011 and thereafter.
Deemed IRAs under employer plans
The Senate amendment provides that, if an eligible
retirement plan permits employees to make voluntary employee
contributions to a separate account or annuity that (1) is
establishedunder the plan, and (2) meets the requirements
applicable to either traditional IRAs or Roth IRAs, then the separate
account or annuity is deemed a traditional IRA or a Roth IRA, as
applicable, for all purposes of the Code. For example, the reporting
requirements applicable to IRAs apply. The deemed IRA, and
contributions thereto, are not subject to the Code rules pertaining to
the eligible retirement plan. In addition, the deemed IRA, and
contributions thereto, are not taken into account in applying such
rules to any other contributions under the plan. The deemed IRA, and
contributions thereto, are subject to the exclusive benefit and
fiduciary rules of ERISA to the extent otherwise applicable to the
plan, and are not subject to the ERISA reporting and disclosure,
participation, vesting, funding, and enforcement requirements
applicable to the eligible retirement plan.\57\ An eligible retirement
plan is a qualified plan (sec. 401(a)), tax-sheltered annuity (sec.
403(b)), or a governmental section 457 plan.
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\57\ The Senate amendment does not specify the treatment of deemed
IRAs for purposes other than the Code and ERISA.
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Tax-free IRA withdrawals for charitable purposes
The Senate amendment provides an exclusion from gross
income for qualified charitable distributions from an IRA: (1)
to a charitable organization (as described in sec. 170(c)) to
which deductible contributions may be made; (2) to a charitable
remainder annuity trust or charitable remainder unitrust; (3)
to a pooled income fund (as defined in sec. 642(c)(5)); or (4)
for the issuance of a charitable gift annuity. The exclusion
applies with respect to distributions described in (2), (3), or
(4) only if no person holds an income interest in the trust,
fund, or annuity attributable to such distributions other than
the IRA owner, his or her spouse, or a charitable organization.
In determining the character of distributions from a
charitable remainder annuity trust or a charitable remainder
unitrust to which a qualified charitable distribution from an
IRA is made, the charitable remainder trust is required to
treat as ordinary income the portion of the distribution from
the IRA to the trust which would have been includible in income
but for the Senate amendment, and as corpus any remaining
portion of the distribution. Similarly, in determining the
amount includible in gross income by reason of a payment from a
charitable gift annuity purchased with a qualified charitable
distribution from an IRA, the taxpayer is not permitted to
treat the portion of the distribution from the IRA that would
have been taxable but for the Senate amendment and that is used
to purchase the annuity as an investment in the annuity
contract.
A qualified charitable distribution is any distribution
from an IRA that is made after age 70\1/2\, that qualifies as a
charitable contribution (within the meaning of sec. 170(c)),
and that is made directly to the charitable organization or to
a charitable remainder annuity trust, charitable remainder
unitrust, pooled income fund, or charitable gift annuity (as
described above).\58\ A taxpayer is not permitted to claim a
charitable contribution deduction for amounts transferred from
his or her IRA to a charity or to a trust, fund, or annuity
that, because of the Senate amendment, are excluded from the
taxpayer's income. Conversely, if the amounts transferred are
otherwise nontaxable, e.g., a qualified distribution from a
Roth IRA, the regularly applicable deduction rules apply.
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\58\ It is intended that, in the case of transfer to a trust, fund,
or annuity, the full amount distributed from an IRA will meet the
definition of a qualified charitable distribution if the charitable
organization's interest in the distribution would qualify as a
charitable contribution under section 170.
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Effective date.--The Senate amendment is generally
effective for taxable years beginning after December 31, 2001.
The provision relating to deemed IRAs under employer plans is
effective for plan years beginning after December 31, 2002. The
provision relating to tax-free IRA withdrawals for charitable
purposes is effective for taxable years beginning after
December 31, 2009.
Conference Agreement
Increase in annual contribution limits
The conference agreement increases the maximum annual
dollar contribution limit for IRA contributions from $2,000 to
$3,000 for 2002 through 2004, $4,000 for 2005 through 2007, and
$5,000 for 2008. After 2008, the limit is adjusted annually for
inflation in $500 increments.
Additional catch-up contributions
The conference agreement provides that individuals who
have attained age 50 may make additional catch-up IRA
contributions. The otherwise maximum contribution limit (before
application of the AGI phase-out limits) for an individual who
has attained age 50 before the end of the taxable year is
increased by $500 for 2002 through 2005, and $1,000 for 2006
and thereafter.
Deemed IRAs under employer plans
The conference agreement follows the Senate amendment.
Tax-free IRA withdrawals for charitable purposes
The conference agreement does not include the Senate
amendment.
Effective date.--The conference agreement is generally
effective for taxable years beginning after December 31, 2001.
The provision relating to deemed IRAs under employer plans is
effective for plan years beginning after December 31, 2002.
B. Pension Provisions
1. Expanding Coverage
(a) Increase in benefit and contribution limits (secs. 201
and 209 of the House bill, sec. 611 of the Senate
amendment, and secs. 401(a)(17), 401(c)(2), 402(g),
408(p), 415 and 457 of the Code)
present law
In general
Present law imposes limits on contributions and benefits
under qualified plans (sec. 415), the amount of compensation
that may be taken into account under a plan for determining
benefits (sec. 401(a)(17)), the amount of elective deferrals
that an individual may make to a salary reduction plan or tax
sheltered annuity (sec. 402(g)), and deferrals under an
eligible deferred compensation plan of a tax-exempt
organization or a State or local government (sec. 457).
Limitations on contributions and benefits
Under present law, the limits on contributions and
benefits under qualified plans are based on the type of plan.
Under a defined contribution plan, the qualification rules
limit the annual additions to the plan with respect to each
plan participant to the lesser of (1) 25 percent of
compensation or (2) $35,000 (for 2001). Annual additions are
the sum of employer contributions, employee contributions, and
forfeitures with respect to an individual under all defined
contribution plans of the same employer. The $35,000 limit is
indexed for cost-of-living adjustments in $5,000 increments.
Under a defined benefit plan, the maximum annual benefit
payable at retirement is generally the lesser of (1) 100
percent of average compensation, or (2) $140,000 (for 2001).
The dollar limit is adjusted for cost-of-living increases in
$5,000 increments.
Under present law, in general, the dollar limit on annual
benefits is reduced if benefits under the plan begin before the
social security retirement age (currently, age 65) and
increased if benefits begin after social security retirement
age.
Compensation limitation
Under present law, the annual compensation of each
participant that may be taken into account for purposes of
determining contributions and benefits under a plan, applying
the deduction rules, and for nondiscrimination testing purposes
is limited to $170,000 (for 2001). The compensation limit is
indexed for cost-of-living adjustments in $10,000 increments.
In general, contributions to qualified plans and IRAs are
based on compensation. For a self-employed individual,
compensation generally means net earnings subject to self-
employment taxes (``SECA taxes''). Members of certain religious
faiths may elect to be exempt from SECA taxes on religious
grounds. Because the net earnings of such individuals are not
subject to SECA taxes, these individuals are considered to have
no compensation on which to base contributions to a retirement
plan. Under an exception to this rule, net earnings of such
individuals are treated as compensation for purposes of making
contributions to an IRA.
Elective deferral limitations
Under present law, under certain salary reduction
arrangements, an employee may elect to have the employer make
payments as contributions to a plan on behalf of the employee,
or to the employee directly in cash. Contributions made at the
election of the employee are called elective deferrals.
The maximum annual amount of elective deferrals that an
individual may make to a qualified cash or deferred arrangement
(a ``section 401(k) plan''), a tax-sheltered annuity (``section
403(b) annuity'') or a salary reduction simplified employee
pension plan (``SEP'') is $10,500 (for 2001). The maximum
annual amount of elective deferrals that an individual may make
to a SIMPLE plan is $6,500 (for 2001). These limits are indexed
for inflation in $500 increments.
Section 457 plans
The maximum annual deferral under a deferred compensation
plan of a State or local government or a tax-exempt
organization (a ``section 457 plan'') is the lesser of (1)
$8,500 (for 2001) or (2) 33\1/3\ percent of compensation. The
$8,500 dollar limit is increased for inflation in $500
increments. Under a special catch-up rule, the section 457 plan
may provide that, for one or more of the participant's last
three years before retirement, the otherwise applicable limit
is increased to the lesser of (1) $15,000 or (2) the sum of the
otherwise applicable limit for the year plus the amount by
which the limit applicable in preceding years of participation
exceeded the deferrals for that year.
house bill
Limits on contributions and benefits
The House bill increases the $35,000 limit on annual
additions to a defined contribution plan to $40,000. This
amount is indexed in $1,000 increments.\59\
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\59\ The 25 percent of compensation limitation is increased to 100
percent of compensation under another provision of the House bill.
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The House bill increases the $140,000 annual benefit
limit under a defined benefit plan to $160,000. The dollar
limit is reduced for benefit commencement before age 62 and
increased for benefit commencement after age 65.\60\ In
adopting rules regarding the application of the increase in the
defined benefit plan limits under the House bill, it is
intended that the Secretary will apply rules similar to those
adopted in Notice 99-44 regarding benefit increases due to the
repeal of the combined plan limit under former section 415(e).
Thus, for example, a defined benefit plan could provide for
benefit increases to reflect the provisions of the House bill
for a current or former employee who has commenced benefits
under the plan prior to the effective date of the bill if the
employee or former employee has an accrued benefit under the
plan (other than an accrued benefit resulting from a benefit
increase solely as a result of the increases in the section 415
limits under the bill). As under the notice, the maximum amount
of permitted increase is generally the amount that could have
been provided had the provisions of the House bill been in
effect at the time of the commencement of benefit. In no case
may benefits reflect increases that could not be paid prior to
the effective date because of the limits in effect under
present law. In addition, in no case may plan amendments
providing increased benefits under the relevant provision of
the House bill be effective prior to the effective date of the
House bill.
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\60\ Another provision of the House bill modifies the defined
benefit pension plan limits for multiemployer plans.
---------------------------------------------------------------------------
Compensation limitation
The House bill increases the limit on compensation that
may be taken into account under a plan to $200,000. This amount
is indexed in $5,000 increments. The House bill also amends the
definition of compensation for purposes of all qualified plans
and IRAs (including SIMPLE arrangements) to include an
individual's net earnings that would be subject to SECA taxes
but for the fact that the individual is covered by a religious
exemption.
Elective deferral limitations
The House bill increases the dollar limit on annual
elective deferrals under section 401(k) plans, section 403(b)
annuities and salary reduction SEPs to $11,000 in 2002. In 2003
and thereafter, the limits are increased in $1,000 annual
increments until the limits reach $15,000 in 2006, with
indexing in $500 increments thereafter. The House bill
increases the maximum annual elective deferrals that may be
made to a SIMPLE plan to $7,000 in 2002. In 2003 and
thereafter, the SIMPLE plan deferral limit is increased in
$1,000 annual increments until the limit reaches $10,000 in
2005. Beginning after 2005, the $10,000 dollar limit is indexed
in $500 increments.
Section 457 plans
The House bill increases the dollar limit on deferrals
under a section 457 plan to conform to the elective deferral
limitation. Thus, the limit is $11,000 in 2002, and is
increased in $1,000 annual increments thereafter until the
limit reaches $15,000 in 2006. The limit is indexed thereafter
in $500 increments. The limit is twice the otherwise applicable
dollar limit in the three years prior to retirement.\61\
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\61\ Another provision of the House bill increases the 33\1/3\
percentage of compensation limit to 100 percent.
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Effective date.--The House bill is effective for years
beginning after December 31, 2001.
senate amendment
Limits on contributions and benefits
The Senate amendment provides faster annual adjusting for
inflation of the $35,000 limit on annual additions to a defined
contribution plan. Under the Senate amendment this limit amount
is adjusted annually for inflation in $1,000 increments.\62\
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\62\ The 25 percent of compensation limitation is increased to 100
percent of compensation under another provision of the Senate
amendment.
---------------------------------------------------------------------------
The Senate amendment increases the $140,000 annual
benefit limit under a defined benefit plan to $150,000 for 2002
through 2004 and to $160,000 for 2005 and thereafter. The
dollar limit is reduced for benefit commencement before age 62
and increased for benefit commencement after age 65.
Compensation limitation
The Senate amendment increases the limit on compensation
that may be taken into account under a plan to $180,000 for
2002, $190,000 for 2003, and $200,000 for 2004 and 2005. After
2005, this amount is adjusted annually for inflation in $5,000
increments.
Elective deferral limitations
In 2002, the Senate amendment increases the dollar limit
on annual elective deferrals under section 401(k) plans,
section 403(b) annuities, and salary reduction SEPs to $11,000.
In 2003 and thereafter, the limits increase in $500 annual
increments until the limits reach $15,000 in 2010, with annual
adjustments for inflation in $500 increments thereafter. The
Senate amendment increases the maximum annual elective
deferrals that may be made to a SIMPLE plan to $7,000 for 2002
and 2003, $8,000 for 2004 and 2005, $9,000 for 2006 and 2007,
and $10,000 for 2008. After 2008, the $10,000 dollar limit is
adjusted annually for inflation in $500 increments.
Section 457 plans
The dollar limit on deferrals under a section 457 plan is
increased to $9,000 in 2002, and is increased in $500 annual
increments thereafter until the limit reaches $11,000 in 2006.
Beginning in 2007, the limit is increased in $1,000 annual
increments until it reaches $15,000 in 2010. After 2010, the
limit is adjusted annually for inflation thereafter in $500
increments. The limit is twice the otherwise applicable dollar
limit in the three years prior to retirement.\63\
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\63\ Another provision increases the 33\1/3\ percentage of
compensation limit to 100 percent.
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effective date
The Senate amendment is effective for years beginning
after December 31, 2001.
conference agreement
Limits on contributions and benefits
The conference agreement follows the House bill.
Compensation limitation
The conference agreement follows the House bill.
Elective deferral limitations
The conference agreement follows the House bill.
Section 457 plans
The conference agreement follows the House bill.
Effective date.--The conference agreement generally is
effective for years beginning after December 31, 2001. The
provisions relating to defined benefit plans are effective for
years ending after December 31, 2001.
(b) Plan loans for S corporation shareholders, partners,
and sole proprietors (sec. 202 of the House bill,
sec. 612 of the Senate amendment, and sec. 4975 of
the Code)
present law
The Internal Revenue Code prohibits certain transactions
(``prohibited transactions'') between a qualified plan and a
disqualified person in order to prevent persons with a close
relationship to the qualified plan from using that relationship
to the detriment of plan participants and beneficiaries.\64\
Certain types of transactions are exempted from the prohibited
transaction rules, including loans from the plan to plan
participants, if certain requirements are satisfied. In
addition, the Secretary of Labor can grant an administrative
exemption from the prohibited transaction rules if the
Secretary finds the exemption is administratively feasible, in
the interest of the plan and plan participants and
beneficiaries, and protective of the rights of participants and
beneficiaries of the plan. Pursuant to this exemption process,
the Secretary of Labor grants exemptions both with respect to
specific transactions and classes of transactions.
---------------------------------------------------------------------------
\64\ Title I of the Employee Retirement Income Security Act of
1974, as amended (``ERISA''), also contains prohibited transaction
rules. The Code and ERISA provisions are substantially similar,
although not identical.
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The statutory exemptions to the prohibited transaction
rules do not apply to certain transactions in which the plan
makes a loan to an owner-employee.\65\ Loans to participants
other than owner-employees are permitted if loans are available
to all participants on a reasonably equivalent basis, are not
made available to highly compensated employees in an amount
greater than made available to other employees, are made in
accordance with specific provisions in the plan, bear a
reasonable rate of interest, and are adequately secured. In
addition, the Code places limits on the amount of loans and
repayment terms.
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\65\ Certain transactions involving a plan and S corporation
shareholders are permitted.
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For purposes of the prohibited transaction rules, an
owner-employee means (1) a sole proprietor, (2) a partner who
owns more than 10 percent of either the capital interest or the
profits interest in the partnership, (3) an employee or officer
of a Subchapter S corporation who owns more than five percent
of the outstanding stock of the corporation, and (4) the owner
of an individual retirement arrangement (``IRA''). The term
owner-employee also includes certain family members of an
owner-employee and certain corporations owned by an owner-
employee.
Under the Internal Revenue Code, a two-tier excise tax is
imposed on disqualified persons who engage in a prohibited
transaction. The first level tax is equal to 15 percent of the
amount involved in the transaction. The second level tax is
imposed if the prohibited transaction is not corrected within a
certain period, and is equal to 100 percent of the amount
involved.
house bill
The House bill generally eliminates the special present-
law rules relating to plan loans made to an owner-employee
(other than the owner of an IRA). Thus, the general statutory
exemption applies to such transactions. Present law continues
to apply with respect to IRAs.
Effective date.--The House bill is effective with respect
to years beginning after December 31, 2001.
Senate Amendment
The Senate amendment is the same as the House bill.
Conference Agreement
The conference agreement follows the House bill and the
Senate amendment. The conferees intend that the Secretary of
the Treasury and the Secretary of Labor will waive any penalty
or excise tax in situations where a loan made prior to the
effective date of the provision was exempt when initially made
(treating any refinancing as a new loan) and the loan would
have been exempt throughout the period of the loan if the
provision had been in effect during the period of the loan.
(c) Modification of top-heavy rules (sec. 203 of the House
bill, sec. 613 of the Senate amendment, and sec.
416 of the Code)
Present Law
In general
Under present law, additional qualification requirements
apply to plans that primarily benefit an employer's key
employees (``top-heavy plans''). These additional requirements
provide (1) more rapid vesting for plan participants who are
nonkey employees and (2) minimum nonintegrated employer
contributions or benefits for plan participants who are non-key
employees.
Definition of top-heavy plan
A defined benefit plan is a top-heavy plan if more than
60 percent of the cumulative accrued benefits under the plan
are for key employees. A defined contribution plan is top heavy
if the sum of the account balances of key employees is more
than 60 percent of the total account balances under the plan.
For each plan year, the determination of top-heavy status
generally is made as of the last day of the preceding plan year
(``the determination date'').
For purposes of determining whether a plan is a top-heavy
plan, benefits derived both from employer and employee
contributions, including employee elective contributions, are
taken into account. In addition, the accrued benefit of a
participant in a defined benefit plan and the account balance
of a participant in a defined contribution plan includes any
amount distributed within the five-year period ending on the
determination date.
An individual's accrued benefit or account balance is not
taken into account in determining whether a plan is top-heavy
if the individual has not performed services for the employer
during the five-year period ending on the determination date.
In some cases, two or more plans of a single employer
must be aggregated for purposes of determining whether the
group of plans is top-heavy. The following plans must be
aggregated: (1) plans which cover a key employee (including
collectively bargained plans); and (2) any plan upon which a
plan covering a key employee depends for purposes of satisfying
the Code's nondiscrimination rules. The employer may be
required to include terminated plans in the required
aggregation group. In some circumstances, an employer may elect
to aggregate plans for purposes of determining whether they are
top heavy.
SIMPLE plans are not subject to the top-heavy rules.
Definition of key employee
A key employee is an employee who, during the plan year
that ends on the determination date or any of the four
preceding plan years, is (1) an officer earning over one-half
of the defined benefit plan dollar limitation of section 415
($70,000 for 2001), (2) a five-percent owner of the employer,
(3) a one-percent owner of the employer earning over $150,000,
or (4) one of the 10 employees earning more than the defined
contribution plan dollar limit ($35,000 for 2001) with the
largest ownership interests in the employer. A family ownership
attribution rule applies to the determination of one-percent
owner status, five-percent owner status, and largest ownership
interest. Under this attribution rule, an individual is treated
as owning stock owned by the individual's spouse, children,
grandchildren, or parents.
Minimum benefit for non-key employees
A minimum benefit generally must be provided to all non-
key employees in a top-heavy plan. In general, a top-heavy
defined benefit plan must provide a minimum benefit equal to
the lesser of (1) two percent of compensation multiplied by the
employee's years of service, or (2) 20 percent of compensation.
A top-heavy defined contribution plan must provide a minimum
annual contribution equal to the lesser of (1) three percent of
compensation, or (2) the percentage of compensation at which
contributions were made for key employees (including employee
elective contributions made by key employees and employer
matching contributions).
For purposes of the minimum benefit rules, only benefits
derived from employer contributions (other than amounts
employees have elected to defer) to the plan are taken into
account, and an employee's social security benefits are
disregarded (i.e., the minimum benefit is nonintegrated).
Employer matching contributions may be used to satisfy the
minimum contribution requirement; however, in such a case the
contributions are not treated as matching contributions for
purposes of applying the special nondiscrimination requirements
applicable to employee elective contributions and matching
contributions under sections 401(k) and (m). Thus, such
contributions would have to meet the general nondiscrimination
test of section 401(a)(4).\66\
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\66\ Treas. Reg. sec. 1.416-1 Q&A M-19.
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Top-heavy vesting
Benefits under a top-heavy plan must vest at least as
rapidly as under one of the following schedules: (1) three-year
cliff vesting, which provides for 100 percent vesting after
three years of service; and (2) two-six year graduated vesting,
which provides for 20 percent vesting after two years of
service, and 20 percent more each year thereafter so that a
participant is fully vested after six years of service.\67\
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\67\ Benefits under a plan that is not top heavy must vest at least
as rapidly as under one of the following schedules: (1) five-year cliff
vesting; and (2) three-seven year graded vesting, which provides for 20
percent vesting after three years and 20 percent more each year
thereafter so that a participant is fully vested after seven years of
service.
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Qualified cash or deferred arrangements
Under a qualified cash or deferred arrangement (a
``section 401(k) plan''), an employee may elect to have the
employer make payments as contributions to a qualified plan on
behalf of the employee, or to the employee directly in cash.
Contributions made at the election of the employee are called
elective deferrals. A special nondiscrimination test applies to
elective deferrals under cash or deferred arrangements, which
compares the elective deferrals of highly compensated employees
with elective deferrals of nonhighly compensated employees.
(This test is called the actual deferral percentage test or the
``ADP'' test). Employer matching contributionsunder qualified
defined contribution plans are also subject to a similar
nondiscrimination test. (This test is called the actual contribution
percentage test or the ``ACP'' test.)
Under a design-based safe harbor, a cash or deferred
arrangement is deemed to satisfy the ADP test if the plan
satisfies one of two contribution requirements and satisfies a
notice requirement. A plan satisfies the contribution
requirement under the safe harbor rule for qualified cash or
deferred arrangements if the employer either (1) satisfies a
matching contribution requirement or (2) makes a nonelective
contribution to a defined contribution plan of at least three
percent of an employee's compensation on behalf of each
nonhighly compensated employee who is eligible to participate
in the arrangement without regard to the permitted disparity
rules (sec. 401(1)). A plan satisfies the matching contribution
requirement if, under the arrangement: (1) the employer makes a
matching contribution on behalf of each nonhighly compensated
employee that is equal to (a) 100 percent of the employee's
elective deferrals up to three percent of compensation and (b)
50 percent of the employee's elective deferrals from three to
five percent of compensation; and (2), the rate of match with
respect to any elective contribution for highly compensated
employees is not greater than the rate of match for nonhighly
compensated employees. Matching contributions that satisfy the
design-based safe harbor for cash or deferred arrangements are
deemed to satisfy the ACP test. Certain additional matching
contributions are also deemed to satisfy the ACP test.
House Bill
Definition of top-heavy plan
The House bill provides that a plan consisting of a cash-
or-deferred arrangement that satisfies the design-based safe
harbor for such plans and matching contributions that satisfy
the safe harbor rule for such contributions is not a top-heavy
plan. Matching or nonelective contributions provided under such
a plan may be taken into account in satisfying the minimum
contribution requirements applicable to top-heavy plans.\68\
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\68\ This provision is not intended to preclude the use of
nonelective contributions that are used to satisfy the safe harbor
rules from being used to satisfy other qualified retirement plan
nondiscrimination rules, including those involving cross-testing.
---------------------------------------------------------------------------
In determining whether a plan is top-heavy, distributions
during the year ending on the date the top-heavy determination
is being made are taken into account. The present-law five-year
rule applies with respect to in-service distributions.
Similarly, the House bill provides that an individual's accrued
benefit or account balance is not taken into account if the
individual has not performed services for the employer during
the one-year period ending on the date the top-heavy
determination is being made.
Definition of key employee
The House bill (1) provides that an employee is not
considered a key employee by reason of officer status unless
the employee earns more than $150,000 and (2) repeals the top-
10 owner key employee category. The House bill repeals the
four-year lookback rule for determining key employee status and
provides that an employee is a key employee only if he or she
is a key employee during the preceding plan year.
Thus, under the House bill, an employee is considered a
key employee if, during the prior year, the employee was (1) an
officer with compensation in excess of $150,000, (2) a five-
percent owner, or (3) a one-percent owner with compensation in
excess of $150,000. The present-law limits on the number of
officers treated as key employees under (1) continue to apply.
The family ownership attribution rule no longer applies
in determining whether an individual is a five-percent owner of
the employer for purposes of the top-heavy rules only. The
family ownership attribution rule continues to apply to other
provisions that cross reference the top-heavy rules, such as
the definition of highly compensated employee and the
definition of one-percent owner under the top-heavy rules.
Minimum benefit for nonkey employees
Under the House bill, matching contributions are taken
into account in determining whether the minimum benefit
requirement has been satisfied.\69\
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\69\ Thus, this provision overrides the provision in Treasury
regulations that, if matching contributions are used to satisfy the
minimum benefit requirement, then they are not treated as matching
contributions for purposes of the section 401(m) nondiscrimination
rules.
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The House bill provides that, in determining the minimum
benefit required under a defined benefit plan, a year of
service does not include any year in which no key employee or
former key employee benefits under the plan (as determined
under sec. 410).
Effective date.--The House bill is effective for years
beginning after December 31, 2001.
Senate Amendment
The Senate amendment is the same as the House bill, with
the following modifications.
Under the Senate amendment, an employee is considered a
key employee if, during the prior year, the employee was (1) an
officer with compensation in excess of $85,000 (for 2001), (2)
a five-percent owner, or (3) a one-percent owner with
compensation in excess of $150,000. The present-law limits on
the number of officers treated as key employees under (1)
continue to apply. An employee who was not an employee in the
preceding plan year, or who was an employee only for part of
the year, is treated as a key employee if it can be reasonably
anticipated that the employee will meet the definition of a key
employee for the current plan year.
Under the Senate amendment, the family ownership
attribution rule continues to apply in determining whether an
individual is a five-percent owner of the employer for purposes
of thetop-heavy rules. In addition, the Senate amendment does
not provide that a plan consisting of a cash-or-deferred arrangement
that satisfies the design-based safe harbor for such plans and matching
contributions that satisfy the safe harbor rule for such contributions
is not a top-heavy plan.
Effective date.--The Senate amendment is effective for
years beginning after December 31, 2001.
Conference Agreement
The conference agreement follows the House bill, with the
following modifications.
Under the conference agreement, an employee is considered
a key employee if, during the prior year, the employee was (1)
an officer with compensation in excess of $130,000 (adjusted
for inflation in $5,000 increments), (2) a five-percent owner,
or (3) a one-percent owner with compensation in excess of
$150,000. The present-law limits on the number of officers
treated as key employees under (1) continue to apply.
Under the conference agreement, the family ownership
attribution rule continues to apply in determining whether an
individual is a five-percent owner of the employer for purposes
of the top-heavy rules.
Effective date.--The conference agreement is effective
for years beginning after December 31, 2001.
(d) Elective deferrals not taken into account for purposes
of deduction limits (sec. 204 of the House bill,
sec. 614 of the Senate amendment, and sec. 404 of
the Code)
Present Law
Employer contributions to one or more qualified
retirement plans are deductible subject to certain limits. In
general, the deduction limit depends on the kind of plan.
In the case of a defined benefit pension plan or a money
purchase pension plan, the employer generally may deduct the
amount necessary to satisfy the minimum funding cost of the
plan for the year. If a defined benefit pension plan has more
than 100 participants, the maximum amount deductible is at
least equal to the plan's unfunded current liabilities.
In the case of a profit-sharing or stock bonus plan, the
employer generally may deduct an amount equal to 15 percent of
compensation of the employees covered by the plan for the year.
If an employer sponsors both a defined benefit pension
plan and a defined contribution plan that covers some of the
same employees (or a money purchase pension plan and another
kind of defined contribution plan), the total deduction for all
plans for a plan year generally is limited to the greater of
(1) 25 percent of compensation or (2) the contribution
necessary to meet the minimum funding requirements of the
defined benefit pension plan for the year (or the amount of the
plan's unfunded current liabilities, in the case of a plan with
more than 100 participants).
For purposes of the deduction limits, employee elective
deferral contributions to a section 401(k) plan are treated as
employer contributions and, thus, are subject to the generally
applicable deduction limits.
Subject to certain exceptions, nondeductible
contributions are subject to a 10-percent excise tax.
House Bill
Under the House bill, elective deferral contributions are
not subject to the deduction limits, and the application of a
deduction limitation to any other employer contribution to a
qualified retirement plan does not take into account elective
deferral contributions.
Effective date.--The House bill is effective for years
beginning after December 31, 2001.
Senate Amendment
The Senate amendment is the same as the House bill, with
the following modification.
Under the Senate amendment, the applicable percentage of
elective deferral contributions is not subject to the deduction
limits, and the application of a deduction limitation to any
other employer contribution to a qualified retirement plan does
not take into account the applicable percentage of elective
deferral contributions. The applicable percentage is 25 percent
for 2002 through 2010, and 100 percent for 2011 and thereafter.
Conference Agreement
The conference agreement follows the House bill.
(e) Repeal of coordination requirements for deferred
compensation plans of state and local governments
and tax-exempt organizations (sec. 205 of the House
bill, sec. 615 of the Senate amendment, and sec.
457 of the Code)
Present Law
Compensation deferred under an eligible deferred
compensation plan of a tax-exempt or State and local government
employer (a ``section 457 plan'') is not includible in gross
income until paid or made available. In general, the maximum
permitted annual deferral under such a plan is the lesser of
(1) $8,500 (in 2001) or (2) 33\1/3\ percent of compensation.
The $8,500 limit is increased for inflation in $500 increments.
Under a special catch-up rule, a section 457 plan may provide
that, for one or more of the participant's last three years
before retirement, the otherwise applicable limit is increased
to the lesser of (1) $15,000 or (2) the sum of the otherwise
applicable limit for the year plus the amount by which the
limit applicable in preceding years of participation exceeded
the deferrals for that year.
The $8,500 limit (as modified under the catch-up rule),
applies to all deferrals under all section 457 plans in which
the individual participates. In addition, in applying the
$8,500 limit, contributions under a tax-sheltered annuity
(``section 403(b) annuity''), elective deferrals under a
qualified cash or deferred arrangement (``section 401(k)
plan''), salary reduction contributions under a simplified
employee pension plan (``SEP''), and contributions under a
SIMPLE plan are taken into account. Further, the amount
deferred under a section 457 plan is taken into account in
applying a special catch-up rule for section 403(b) annuities.
House Bill
The House bill repeals the rules coordinating the section
457 dollar limit with contributions under other types of
plans.\70\
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\70\ The limits on deferrals under a section 457 plan are modified
under other provisions of the House bill.
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Effective date.--The House bill is effective for years
beginning after December 31, 2001.
Senate Amendment
The Senate amendment is the same as the House bill.
Conference Agreement
The conference agreement follows the House bill and the
Senate amendment.
(f) Eliminate IRS user fees for certain determination
letter requests regarding employer plans (sec. 206
of the House bill and sec. 621 of the Senate
amendment)
Present Law
An employer that maintains a retirement plan for the
benefit of its employees may request from the IRS a
determination as to whether the form of the plan satisfies the
requirements applicable to tax-qualified plans (sec. 401(a)).
In order to obtain from the IRS a determination letter on the
qualified status of the plan, the employer must pay a user fee.
The Secretary determines the user fee applicable for various
types of requests, subject to statutory minimum requirements
for average fees based on the category of the request. The user
fee may range from $125 to $1,250, depending upon the scope of
the request and the type and format of the plan.\71\
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\71\ Authorization for the user fees was originally enacted in
section 10511 of the Revenue Act of 1987 (Pub. L. No. 100-203, December
22, 1987). The authorization was extended through September 30, 2003,
by Public Law Number 104-117 (An Act to provide that members of the
Armed Forces performing services for the peacekeeping efforts in Bosnia
and Herzegovina, Croatia, and Macedonia shall be entitled to tax
benefits in the same manner as if such services were performed in a
combat zone, and for other purposes (March 20, 1996)).
---------------------------------------------------------------------------
Present law provides that plans that do not meet the
qualification requirements will be treated as meeting such
requirements if appropriate retroactive plan amendments are
made during the remedial amendment period. In general, the
remedial amendment period ends on the due date for the
employer's tax return (including extensions) for the taxable
year in which the event giving rise to the disqualifying
provision occurred (e.g., a plan amendment or a change in the
law). The Secretary may provide for general extensions of the
remedial amendment period or for extensions in certain cases.
For example, the remedial amendment period with respect to
amendments relating to the qualification requirements affected
by the General Agreements on Tariffs and Trade, the Uniformed
Services Employment and Reemployment Rights Act of 1994, the
Small Business Job Protection Act of 1996, the Taxpayer Relief
Act of 1997, and the Internal Revenue Service Restructuring and
Reform Act of 1998 generally ends the last day of the first
plan year beginning on or after January 1, 2001.\72\
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\72\ Rev. Proc. 2000-27, 2000-26 I.R.B. 1272.
---------------------------------------------------------------------------
House Bill
A small employer (100 or fewer employees) is not required
to pay a user fee for a determination letter request with
respect to the qualified status of a retirement plan that the
employer maintains if the request is made before the later of
(1) the last day of the fifth plan year of the plan or (2) the
end of any applicable remedial amendment period with respect to
the plan that begins before the end of the fifth plan year of
the plan. In addition, determination letter requests for which
user fees are not required under the House bill are not taken
into account in determining average user fees. The House bill
applies only to requests by employers for determination letters
concerning the qualified retirement plans they maintain.
Therefore, a sponsor of a prototype plan is required to pay a
user fee for a request for a notification letter, opinion
letter, or similar ruling. A small employer that adopts a
prototype plan, however, is not required to pay a user fee for
a determination letter request with respect to the employer's
plan.
Effective date.--The House bill is effective for
determination letter requests made after December 31, 2001.
Senate Amendment
The Senate amendment is the same as the House bill, with
the following modifications. An eligible employer is not
required to pay a user fee for a ruling letter, opinion letter,
determination letter, or similar request with respect to the
qualified status of a new retirement plan that the employer
maintains and with respect to which the employer has not
previously made a request. An employer is eligible under the
Senate amendment if (1) the employer has no more than 100
employees, (2) the employer has at least one nonhighly
compensated employee who is participating in the plan, and (3)
during the three-taxable year period immediately preceding the
taxable year in which the request is made, neither the employer
nor a related employer established or maintained a qualified
plan with respect to which contributions were made or benefits
were accrued for substantially the same employees covered under
the plan with respect to which the request is made.
Conference Agreement
The conference agreement follows the House bill, with the
following modification. An employer is eligible under the
conference agreement if the employer has no more than 100
employees and has at least one nonhighly compensated employee
who is participating in the plan.
(g) Deduction limits (sec. 207 of the House bill, sec. 616
of the Senate amendment, and sec. 404 of the Code)
Present Law
Employer contributions to one or more qualified
retirement plans are deductible subject to certain limits. In
general, the deduction limit depends on the kind of plan.
Subject to certain exceptions, nondeductible contributions are
subject to a 10-percent excise tax.
In the case of a defined benefit pension plan or a money
purchase pension plan, the employer generally may deduct the
amount necessary to satisfy the minimum funding cost of the
plan for the year. If a defined benefit pension plan has more
than 100 participants, the maximum amount deductible is at
least equal to the plan's unfunded current liabilities.
In some cases, the amount of deductible contributions is
limited by compensation. In the case of a profit-sharing or
stock bonus plan, the employer generally may deduct an amount
equal to 15 percent of compensation of the employees covered by
the plan for the year.
If an employer sponsors both a defined benefit pension
plan and a defined contribution plan that covers some of the
same employees (or a money purchase pension plan and another
kind of defined contribution plan), the total deduction for all
plans for a plan year generally is limited to the greater of
(1) 25 percent of compensation or (2) the contribution
necessary to meet the minimum funding requirements of the
defined benefit pension plan for the year (or the amount of the
plan's unfunded current liabilities, in the case of a plan with
more than 100 participants).
In the case of an employee stock ownership plan
(``ESOP''), principal payments on a loan used to acquire
qualifying employer securities are deductible up to 25 percent
of compensation.
For purposes of the deduction limits, employee elective
deferral contributions to a qualified cash or deferred
arrangement (``section 401(k) plan'') are treated as employer
contributions and, thus, are subject to the generally
applicable deduction limits.\73\
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\73\ Another provision of the House bill provides that elective
deferrals are not subject to the deduction limits.
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For purposes of the deduction limits, compensation means
the compensation otherwise paid or accrued during the taxable
year to the beneficiaries under the plan, and the beneficiaries
under a profit-sharing or stock bonus plan are the employees
who benefit under the plan with respect to the employer's
contribution.\74\ An employee who is eligible to make elective
deferrals under a section 401(k) plan is treated as benefitting
under the arrangement even if the employee elects not to
defer.\75\
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\74\ Rev. Rul. 65-295, 1965-2 C.B. 148.
\75\ Treas. Reg. sec. 1.410(b)-3.
---------------------------------------------------------------------------
For purposes of the deduction rules, compensation
generally includes only taxable compensation, and thus does not
include salary reduction amounts, such as elective deferrals
under a section 401(k) plan or a tax-sheltered annuity
(``section 403(b) annuity''), elective contributions under a
deferred compensation plan of a tax-exempt organization or a
State or local government (``section 457 plan''), and salary
reduction contributions under a section 125 cafeteria plan. For
purposes of the contribution limits under section 415,
compensation does include such salary reduction amounts.
House Bill
Under the House bill, the definition of compensation for
purposes of the deduction rules includes salary reduction
amounts treated as compensation under section 415. In addition,
the annual limitation on the amount of deductible contributions
to a profit-sharing or stock bonus plan is increased from 15
percent to 20 percent of compensation of the employees covered
by the plan for the year.
Effective date.--The House bill is effective for years
beginning after December 31, 2001.
Senate Amendment
Under the Senate amendment, the definition of
compensation for purposes of the deduction rules includes
salary reduction amounts treated as compensation under section
415. In addition, the annual limitation on the amount of
deductible contributions to a profit-sharing or stock bonus
plan is increased from 15 percent to 25 percent of compensation
of the employees covered by the plan for the year. Also, except
to the extent provided in regulations, a money purchase pension
plan is treated like a profit-sharing or stock bonus plan for
purposes of the deduction rules.
Effective date.--The Senate amendment is effective for
years beginning after December 31, 2001.
Conference Agreement
The conference agreement follows the Senate amendment.
(h) Option to treat elective deferrals as after-tax
contributions (sec. 208 of the bill, sec. 617 of
the Senate amendment, and new sec. 402A of the
Code)
Present Law
A qualified cash or deferred arrangement (``section
401(k) plan'') or a tax-sheltered annuity (``section 403(b)
annuity'') may permit a participant to elect to have the
employer make payments as contributions to the plan or to the
participant directly in cash. Contributions made to the plan at
the election of a participant are elective deferrals. Elective
deferrals must be nonforfeitable and are subject to an annual
dollar limitation (sec. 402(g)) and distribution restrictions.
In addition, elective deferrals under a section 401(k) plan are
subject to special nondiscrimination rules. Elective deferrals
(and earnings attributable thereto) are not includible in a
participant's gross income until distributed from the plan.
Elective deferrals for a taxable year that exceed the
annual dollar limitation (``excess deferrals'') are includible
in gross income for the taxable year. If an employee makes
elective deferrals under a plan (or plans) of a single employer
that exceed the annual dollar limitation (``excess
deferrals''), then the plan may provide for the distribution of
the excess deferrals, with earnings thereon. If the excess
deferrals are made to more than one plan of unrelated
employers, then the plan may permit the individual to allocate
excess deferrals among the various plans, no later than the
March 1 (April 15 under the applicable regulations) following
the end of the taxable year. If excess deferrals are
distributed not later than April 15 following the end of the
taxable year, along with earnings attributable to the excess
deferrals, then the excess deferrals are not again includible
in income when distributed. The earnings are includible in
income in the year distributed. If excess deferrals (and income
thereon) are not distributed by the applicable April 15, then
the excess deferrals (and income thereon) are includible in
income when received by the participant. Thus, excess deferrals
that are not distributed by the applicable April 15th are
taxable both in the taxable year when the deferral was made and
in the year the participant receives a distribution of the
excess deferral.
Individuals with adjusted gross income below certain
levels generally may make nondeductible contributions to a Roth
IRA and may convert a deductible or nondeductible IRA into a
Roth IRA. Amounts held in a Roth IRA that are withdrawn as a
qualified distribution are not includible in income, nor
subject to the additional 10-percent tax on early withdrawals.
A qualified distribution is a distribution that (1) is made
after the five-taxable year period beginning with the first
taxable year for which the individual made a contribution to a
Roth IRA, and (2) is made after attainment of age 59\1/2\, is
made on account of death or disability, or is a qualified
special purpose distribution (i.e., for first-time homebuyer
expenses of up to $10,000). A distribution from a Roth IRA that
is not a qualified distribution is includible in income to the
extent attributable to earnings, and is subject to the 10-
percent tax on early withdrawals (unless an exception
applies).\76\
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\76\ Early distributions of converted amounts may also accelerate
income inclusion of converted amounts that are taxable under the four-
year rule applicable to 1998 conversions.
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House Bill
A section 401(k) plan or a section 403(b) annuity is
permitted to include a ``qualified plus contribution program''
that permits a participant to elect to have all or a portion of
the participant's elective deferrals under the plan treated as
designated plus contributions. Designated plus contributions
are elective deferrals that the participant designates (at such
time and in such manner as the Secretary may prescribe) \77\ as
not excludable from the participant's gross income.
---------------------------------------------------------------------------
\77\ It is intended that the Secretary will generally not permit
retroactive designations of elective deferrals as designated plus
contributions.
---------------------------------------------------------------------------
The annual dollar limitation on a participant's
designated plus contributions is the section 402(g) annual
limitation on elective deferrals, reduced by the participant's
elective deferrals that the participant does not designate as
designated plus contributions. Designated plus contributions
are treated as any other elective deferral for purposes of
nonforfeitability requirements and distribution
restrictions.\78\ Under a section 401(k) plan, designated plus
contributions also are treated as any other elective deferral
for purposes of the special nondiscrimination requirements.\79\
---------------------------------------------------------------------------
\78\ Similarly, designated plus contributions to a section 403(b)
annuity are treated the same as other salary reduction contributions to
the annuity (except that designated plus contributions are includible
in income).
\79\ It is intended that the Secretary provide ordering rules
regarding the return of excess contributions under the special
nondiscrimination rules (pursuant to sec. 401(k)(8)) in the event a
participant makes both regular elective deferrals and designated plus
contributions. It is intended that such rules will generally permit a
plan to allow participants to designate which contributions are
returned first or to permit the plan to specify which contributions are
returned first. It is also intended that the Secretary will provide
ordering rules to determine the extent to which a distribution consists
of excess Roth contributions.
---------------------------------------------------------------------------
The plan is required to establish a separate account, and
maintain separate recordkeeping, for a participant's designated
plus contributions (and earnings allocable thereto). A
qualified distribution from a participant's designated plus
contributions account is not includible in the participant's
gross income. A qualified distribution is a distribution that
is made after the end of a specified nonexclusion period and
that is (1) made on or after the date on which the participant
attains age 59\1/2\, (2) made to a beneficiary (or to the
estate of the participant) on or after the death of the
participant, or (3) attributable to the participant's being
disabled.\80\ The nonexclusion period is the five-year-taxable
period beginning with the earlier of (1) the first taxable year
for which the participant made a designated plus contribution
to any designated plus contribution account established for the
participant under the plan, or (2) if the participant has made
a rollover contribution to the designated plus contribution
account that is the source of the distribution from a
designated plus contribution account established for the
participant under another plan, the first taxable year for
which the participant made a designated plus contribution to
the previously established account.
---------------------------------------------------------------------------
\80\ A qualified special purpose distribution, as defined under the
rules relating to Roth IRAs, does not qualify as a tax-free
distribution from a designated plus contributions account.
---------------------------------------------------------------------------
A distribution from a designated plus contributions
account that is a corrective distribution of an elective
deferral (and income allocable thereto) that exceeds the
section 402(g) annual limit on elective deferrals or a
corrective distribution of an excess contribution under the
special nondiscrimination rules (pursuant to sec. 401(k)(8)
(and income allocable thereto) is not a qualified distribution.
In addition, the treatment of excess designated plus
contributions is similar to the treatment of excess deferrals
attributable to non-designated plus contributions. If excess
designated plus contributions (including earnings thereon) are
distributed no later than the April 15th following the taxable
year, then the designated plus contributions is not includible
in gross income as a result of the distribution, because such
contributions are includible in gross income when made.
Earnings on such excess designated plus contributions are
treated the same as earnings on excess deferrals distributed no
later than April 15th, i.e., they are includible in income when
distributed. If excess designated plus contributions are not
distributed no later than the applicable April 15th, then such
contributions (and earnings thereon) are taxable when
distributed. Thus, as is the case with excess elective
deferrals that are not distributed by the applicable April
15th, the contributions are includible in income in the year
when made and again when distributed from the plan. Earnings on
such contributions are taxable when received.
A participant is permitted to roll over a distribution
from a designated plus contributions account only to another
designated plus contributions account or a Roth IRA of the
participant.
The Secretary of the Treasury is directed to require the
plan administrator of each section 401(k) plan or section
403(b) annuity that permits participants to make designated
plus contributions to make such returns and reports regarding
designated plus contributions to the Secretary, plan
participants and beneficiaries, and other persons that the
Secretary may designate.
Effective date.--The House bill is effective for taxable
years beginning after December 31, 2001.
Senate Amendment
The Senate amendment is the same as the House bill,
except that the Senate amendment refers to designated plus
contributions as ``Roth contributions.''
Effective date.--The Senate amendment is effective for
taxable years beginning after December 31, 2003.
Conference Agreement
The conference agreement follows the Senate amendment,
with a modification of the effective date.
Effective date.--The conference agreement is effective
for taxable years beginning after December 31, 2005.
(i) Certain nonresident aliens excluded in applying minimum
coverage requirements (sec. 210 of the House bill,
sec. 622 of the Senate amendment, and secs.
410(b)(3) and 861(a)(3) of the Code)
Present Law
Under the minimum coverage requirements (sec. 410(b)), a
qualified plan must benefit a minimum number of the employer's
nonhighly compensated employees. In applying the minimum
coverage requirements, employees who are nonresident aliens are
disregarded if they have no earned income from sources within
the United States (``U.S. source income'').
Generally, compensation for services performed in the
United States is treated as U.S. source income. Under a special
rule, compensation is not treated as U.S. source income if the
compensation is paid for labor or services performed by a
nonresident alien in connection with the individual's temporary
presence in the United States as a regular member of the crew
of a foreign vessel engaged in transportation between the
United States and a foreign country or a possession of the
United States. However, this special rule does not apply for
purposes of qualified retirement plans (including the minimum
coverage and nondiscrimination requirements applicable to such
plans), employer-provided group-term life insurance, or
employer-provided accident and health plans. As a result, such
compensation is treated as U.S. source income for purposes of
such plans, including the application of the qualified
retirement plan minimum coverage and nondiscrimination
requirements. As a result, such nonresident aliens must be
taken into account in determining whether the plan satisfies
the minimum coverage requirements.
House Bill
For purposes of the application of the minimum coverage
requirements (sec. 410(b)), compensation is not treated as U.S.
source income if the compensation is paid for labor or services
performed by a nonresident alien in connection with the
individual's temporary presence in the United States as a
regular member of the crew of a foreign vessel engaged in
transportation between the United States and a foreign country
or a possession of the United States. As a result, such
nonresident aliens are excluded from consideration in the
application of the minimum coverage requirements.
Effective date.--The House bill is effective with respect
to plan years beginning after December 31, 2001.
Senate Amendment
Under the Senate amendment, the special rule relating to
compensation paid for labor or services performed by a
nonresident alien in connection with the individual's temporary
presence in the United States as a regular member of the crew
of a foreign vessel engaged in transportation between the
United States and a foreign country or a possession of the
United States compensation is extended in order to apply for
purposes of qualified retirement plans, employer-provided
group-term life insurance, and employer-provided accident and
health plans. Therefore, such compensation is not treated as
U.S. source income for any purpose under such plans, including
the application of the qualified retirement plan minimum
coverage and nondiscrimination requirements.
Effective date.--The Senate amendment is effective with
respect to plan years beginning after December 31, 2001.
Conference Agreement
The conference agreement follows the Senate amendment.
(j) Nonrefundable credit to certain individuals for
elective deferrals and IRA contributions (sec. 618
of the Senate amendment and new sec. 25B of the
Code)
Present Law
Present law provides favorable tax treatment for a
variety of retirement savings vehicles, including employer-
sponsored retirement plans and individual retirement
arrangements (``IRAs'').
Several different types of tax-favored employer-sponsored
retirement plans exist, such as section 401(a) qualified plans
(including plans with a section 401(k) qualified cash-or-
deferred arrangement), section 403(a) qualified annuity plans,
section 403(b) annuities, section 408(k) simplified employee
pensions (``SEPs''), section 408(p) SIMPLE retirement accounts,
and section 457(b) eligible deferred compensation plans. In
general, an employer and, in certain cases, employees,
contribute to the plan. Taxation of the contributions and
earnings thereon is generally deferred until benefits are
distributed from the plan to participants or their
beneficiaries.\81\ Contributions and benefits under tax-favored
employer-sponsored retirement plans are subject to specific
limitations.
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\81\ In the case of after-tax employee contributions, only earnings
are taxed upon withdrawal.
---------------------------------------------------------------------------
Coverage and nondiscrimination rules also generally apply
to tax-favored employer-sponsored retirement plans to ensure
that plans do not disproportionately cover higher-paid
employees and that benefits provided to moderate- and lower-
paid employees are generally proportional to those provided to
higher-paid employees.
IRAs include both traditional IRAs and Roth IRAs. In
general, an individual makes contributions to an IRA, and
investment earnings on those contributions accumulate on a tax-
deferred basis. Total annual IRA contributions per individual
are limited to $2,000 (or the compensation of the individual or
the individual's spouse, if smaller). Contributions to a
traditional IRA may be deducted from gross income if an
individual's adjusted gross income (``AGI'') is below certain
levels or the individual is not an active participant in
certain employer-sponsored retirement plans. Contributions to a
Roth IRA are not deductible from gross income, regardless of
adjusted gross income. A distribution from a traditional IRA is
includible in the individual's gross income except to the
extent of individual contributions made on a nondeductible
basis. A qualified distribution from a Roth IRA is excludable
from gross income.
Taxable distributions made from employer retirement plans
and IRAs before the employee or individual has reached age
59\1/2\ are subject to a 10-percent additional tax, unless an
exception applies.
House Bill
No provision.
Senate Amendment
The Senate amendment provides a temporary nonrefundable
tax credit for contributions made by eligible taxpayers to a
qualified plan. The maximum annual contribution eligible for
the credit is $2,000. The credit rate depends on the adjusted
gross income (``AGI'') of the taxpayer. Only joint returns with
AGI of $50,000 or less, head of household returns of $37,500 or
less, and single returns of $25,000 or less are eligible for
the credit. The AGI limits applicable to single taxpayers apply
to married taxpayers filing separate returns. The credit is in
addition to any deduction or exclusion that would otherwise
apply with respect to the contribution. The credit offsets
minimum tax liability as well as regular tax liability. The
credit is available to individuals who are 18 or over, other
than individuals who are full-time students or claimed as a
dependent on another taxpayer's return.
The credit is available with respect to elective
contributions to a section 401(k) plan, section 403(b) annuity,
or eligible deferred compensation arrangement of a State or
local government (a ``sec. 457 plan''), SIMPLE, or SEP,
contributions to a traditional or Roth IRA, and voluntary
after-tax employee contributions to a qualified retirement
plan. The present-law rules governing such contributions
continue to apply.
The amount of any contribution eligible for the credit is
reduced by taxable distributions received by the taxpayer and
his or her spouse from any savings arrangement described above
or any other qualified retirement plan during the taxable year
for which the credit is claimed, the two taxable years prior to
the year the credit is claimed, and during the period after the
end of the taxable year and prior to the due date for filing
the taxpayer's return for the year. In the case of a
distribution from a Roth IRA, this rule applies to any such
distributions, whether or not taxable.
The credit rates based on AGI are as follows.
------------------------------------------------------------------------
Heads of
Joint filers households All other filers Credit rate
------------------------------------------------------------------------
$0-$30,000 $0-$22,500 $0-$15,000 50 percent
$30,000-$32,500 $22,500-$24,375 $15,000-$16,250 20 percent
$32,500-$50,000 $24,375-$37,500 $16,250-$25,000 10 percent
Over $50,000 Over $37,500 Over $25,000 0 percent
------------------------------------------------------------------------
The Senate amendment directs the Secretary of the
Treasury to report annually to the Senate Finance Committee and
the House Committee on Ways and Means regarding the number of
individuals who claim the credit.
Effective date.--The Senate amendment is effective for
taxable years beginning after December 31, 2001, and before
January 1, 2007.
Conference Agreement
The conference agreement follows the Senate amendment.
(k) Small business tax credit for qualified retirement plan
contributions (sec. 619 of the Senate amendment and
new sec. 45E of the Code)
Present Law
The timing of an employer's deduction for compensation
paid to an employee generally corresponds to the employee's
recognition of the compensation. However, an employer that
contributes to a qualified retirement plan is entitled to a
deduction (within certain limits) for the employer's
contribution to the plan on behalf of an employee even though
the employee does not recognize income with respect to the
contribution until the amount is distributed to the employee.
House Bill
No provision.
Senate Amendment
The Senate amendment provides a nonrefundable income tax
credit for small employers equal to 50 percent of certain
qualifying employer contributions made to qualified retirement
plans on behalf of nonhighly compensated employees. The credit
is not available with respect to contributions to a SIMPLE IRA
or SEP. For purposes of the Senate amendment, a small employer
means an employer with no more than 20 employees who received
at least $5,000 of earnings in the preceding year. A nonhighly
compensated employee is defined as an employee who neither (1)
was a five-percent owner of the employer at any time during the
current year or the preceding year, or (2) for the preceding
year, had compensation in excess of $80,000 (adjusted annually
for inflation, this amount is $85,000 for 2001).\82\ The credit
is available for the first three plan years of the plan.\83\
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\82\ The top paid group election, which under present law permits
an employer to classify an employee as a nonhighly compensated employee
if the employee had compensation in excess of $80,000 (adjusted
annually for inflation) during the preceding year but was not among the
top 20 percent of employees of the employer when ranked on the basis of
compensation paid to employees during the preceding year, is not taken
into account in determining nonhighly compensated employees for
purposes of the Senate amendment.
\83\ The credit only applies if the employer has not had another
qualified retirement plan in the prior three taxable years with respect
to which contributions or accruals were made for substantially the same
employees. It is intended that a plan will be for substantially the
same employees if half or more of the employees for whom contributions
or accruals are made under the new plan are employees for whom
contributions or accruals were made under a prior plan.
---------------------------------------------------------------------------
The Senate amendment requires a small employer to make
nonelective contributions equal to at least one percent of
compensation to qualify for the credit. The credit applies to
both qualifying nonelective employer contributions and
qualifying employer matching contributions, but only up to a
total of three percent of the nonhighly compensated employee's
compensation. The credit is available for 50 percent of
qualifying benefit accruals under a nonintegrated defined
benefit plan if the benefits are equivalent, as defined in
regulations, to a three-percent nonelective contribution to a
defined contribution plan.
To qualify for the credit, the nonelective and matching
contributions to a defined contribution plan and the benefit
accruals under a defined benefit plan are required to vest at
least as rapidly as under either a three-year cliff vesting
schedule or a graded schedule that provides 20-percent vesting
per year for the first five years. In order to qualify for the
credit, contributions to plans other than pension plans must be
subject to the same distribution restrictions that apply to
qualified nonelective employer contributions to a section
401(k) plan, i.e., distribution only upon separation from
service, death, disability, attainment of age 59\1/2\, plan
termination without a successor plan, or acquisition of a
subsidiary or substantially all the assets of a trade or
business that employs the participant.\84\ Qualifying
contributions to pension plans are subject to the distribution
restrictions applicable to such plans.
---------------------------------------------------------------------------
\84\ The rules relating to distribution upon separation from
service are modified under another provision of the Senate amendment.
---------------------------------------------------------------------------
A defined contribution plan to which the small employer
makes the qualifying contributions (and any plan aggregated
with that plan for nondiscrimination testing purposes) is
required to allocate any nonelective employer contributions
proportionally to participants' compensation from the employer
(or on a flat-dollar basis) and, accordingly, without the use
of permitted disparity or cross-testing. An equivalent
requirement must be met with respect to a defined benefit plan.
Forfeited nonvested qualifying contributions or accruals
for which the credit was claimed generally result in recapture
of the credit at a rate of 35 percent. However, recapture does
not apply to the extent that forfeitures of contributions are
reallocated to nonhighly compensated employees or applied to
future contributions on behalf of nonhighly compensated
employees. The Secretary of the Treasury is authorized to issue
administrative guidance, including de minimis rules, to
simplify or facilitate claiming and recapturing the credit.
The credit is a general business credit.\85\ The 50
percent of qualifying contributions that are effectively offset
by the tax credit are not deductible; the other 50 percent of
the qualifying contributions (and other contributions) are
deductible to the extent permitted under present law.
---------------------------------------------------------------------------
\85\ The credit cannot be carried back to years before the
effective date.
---------------------------------------------------------------------------
Effective date.--The Senate amendment is effective with
respect to contributions paid or incurred in taxable years
beginning after December 31, 2002.
Conference Agreement
The conference agreement does not include the Senate
amendment.
(l) Small business tax credit for new retirement plan
expenses (sec. 620 of the Senate amendment and new
sec. 45E of the Code)
present law
The costs incurred by an employer related to the
establishment and maintenance of a retirement plan (e.g.,
payroll system changes, investment vehicle set-up fees,
consulting fees) generally are deductible by the employer as
ordinary and necessary expenses in carrying on a trade or
business.
house bill
No provision.
senate amendment
The Senate amendment provides a nonrefundable income tax
credit for 50 percent of the administrative and retirement-
education expenses for any small business that adopts a new
qualified defined benefit or defined contribution plan
(including a section 401(k) plan), SIMPLE plan, or simplified
employee pension (``SEP''). The credit applies to 50 percent of
the first $1,000 in administrative and retirement-education
expenses for the plan for each of the first three years of the
plan.
The credit is available to an employer that did not
employ, in the preceding year, more than 100 employees with
compensation in excess of $5,000. In order for an employer to
be eligible for the credit, the plan must cover at least one
nonhighly compensated employee. In addition, if the credit is
for the cost of a payroll deduction IRA arrangement, the
arrangement must be made available to all employees of the
employer who have worked with the employer for at least three
months.
The credit is a general business credit.\86\ The 50
percent of qualifying expenses that are effectively offset by
the tax credit are not deductible; the other 50 percent of the
qualifying expenses (and other expenses) are deductible to the
extent permitted under present law.
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\86\ The credit cannot be carried back to years before the
effective date.
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Effective date.--The Senate amendment is effective with
respect to costs paid or incurred in taxable years beginning
after December 31, 2001, with respect to plans established
after such date.
conference agreement
The conference agreement follows the Senate amendment.
2. Enhancing Fairness for Women
(a) Additional salary reduction catch-up contributions
(sec. 301 of the House bill, sec. 631 of the Senate
amendment, and sec. 414 of the Code)
present law
Elective deferral limitations
Under present law, under certain salary reduction
arrangements, an employee may elect to have the employer make
payments as contributions to a plan on behalf of the employee,
or to the employee directly in cash. Contributions made at the
election of the employee are called elective deferrals.
The maximum annual amount of elective deferrals that an
individual may make to a qualified cash or deferred arrangement
(a ``401(k) plan''), a tax-sheltered annuity (``section 403(b)
annuity'') or a salary reduction simplified employee pension
plan (``SEP'') is $10,500 (for 2001). The maximum annual amount
of elective deferrals that an individual may make to a SIMPLE
plan is $6,500 (for 2001). These limits are indexed for
inflation in $500 increments.
Section 457 plans
The maximum annual deferral under a deferred compensation
plan of a State or local government or a tax-exempt
organization (a ``section 457 plan'') is the lesser of (1)
$8,500 (for 2001) or (2) 33\1/3\ percent of compensation. The
$8,500 dollar limit is increased for inflation in $500
increments. Under a special catch-up rule, the section 457 plan
may provide that, for one or more of the participant's last
three years before retirement, the otherwise applicable limit
is increased to the lesser of (1) $15,000 or (2) the sum of the
otherwise applicable limit for the year plus the amount by
which the limit applicable in preceding years of participation
exceeded the deferrals for that year.
house bill
The House bill provides that the otherwise applicable
dollar limit on elective deferrals under a section 401(k) plan,
section 403(b) annuity, SEP, or SIMPLE, or deferrals under a
section 457 plan are increased for individuals who have
attained age 50 by the end of the year.\87\ Additional
contributions are permitted by an individual who has attained
age 50 before the end of the plan year and with respect to whom
no other elective deferrals may otherwise be made to the plan
for the year because of the application of any limitation of
the Code (e.g., the annual limit on elective deferrals) or of
the plan. Under the House bill, the additional amount of
elective contributions that are permitted to be made by an
eligible individual participating in such a plan is the lesser
of (1) $5,000, or (2) the participant's compensation for the
year reduced by any other elective deferrals of the participant
for the year. This $5,000 amount is indexed for inflation in
$500 increments in 2007 and thereafter.\88\
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\87\ Another provision of the House bill increases the dollar limit
on elective deferrals under such arrangements.
\88\ In the case of a section 457 plans, this catch-up rule does
not apply during the participant's last three years before retirement
(in those years, the regularly applicable dollar limit is doubled).
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Catch-up contributions made under the House bill are not
subject to any other contribution limits and are not taken into
account in applying other contribution limits. Such
contributions are subject to applicable nondiscrimination
rules. Although catch-up contributions are subject to
applicable nondiscrimination rules, a plan does not fail to
meet the applicable nondiscrimination requirements under
section 401(a)(4) with respect to benefits, rights, and
features if the plan allows all eligible individuals
participating in the plan to make the same election with
respect to catch-up contributions. For purposes of this rule,
all plans of related employers are treated as a single plan.
An employer is permitted to make matching contributions
with respect to catch-up contributions. Any such matching
contributions are subject to the normally applicable rules.
Effective date.--The House bill is effective for taxable
years beginning after December 31, 2001.
senate amendment
The Senate amendment provides that the otherwise
applicable dollar limit on elective deferrals under a section
401(k) plan, section 403(b) annuity, SEP, or SIMPLE, or
deferrals under a section 457 plan is increased for individuals
who have attained age 50 by the end of the year.\89\ Additional
contributions could be made by an individual who has attained
age 50 before the end of the plan year and with respect to whom
no other elective deferrals may otherwise be made to the plan
for the year because of the application of any limitation of
the Code (e.g., the annual limit on elective deferrals) or of
the plan. Under the Senate amendment, the additional amount of
elective contributions that could be made by an eligible
individual participating in such a plan is the lesser of (1)
the applicable dollar amount or (2) the participant's
compensation for the year reduced by any other elective
deferrals of the participant for the year.\90\ The applicable
dollar amount is $500 for 2002 through 2004, $1,000 for 2005
and 2006, $2,000 for 2007, $3,000 for 2008, $4,000 for 2009,
and $7,500 for 2010 and thereafter.
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\89\ Another provision of the Senate amendment increases the dollar
limit on elective deferrals under such arrangements.
\90\ In the case of a section 457 plan, this catch-up rule does not
apply during the participant's last three years before retirement (in
those years, the regularly applicable dollar limit is doubled).
---------------------------------------------------------------------------
Catch-up contributions made under the Senate amendment
are not subject to any other contribution limits and are not
taken into account in applying other contribution limits. In
addition, such contributions are not subject to applicable
nondiscrimination rules.\91\
---------------------------------------------------------------------------
\91\ Another provision increases the dollar limit on elective
deferrals under such arrangements.
---------------------------------------------------------------------------
An employer is permitted to make matching contributions
with respect to catch-up contributions. Any such matching
contributions are subject to the normally applicable rules.
The following examples illustrate the application of the
Senate amendment, after the catch-up is fully phased-in.
Example 1: Employee A is a highly compensated employee
who is over 50 and who participates in a section 401(k) plan
sponsored by A's employer. The maximum annual deferral limit
(without regard to the provision) is $15,000. After application
of the special nondiscrimination rules applicable to section
401(k) plans, the maximum elective deferral A may make for the
year is $8,000. Under the provision, A is able to make
additional catch-up salary reduction contributions of $7,500.
Example 2: Employee B, who is over 50, is a participant
in a section 401(k) plan. B's compensation for the year is
$30,000. The maximum annual deferral limit (without regard to
the provision) is $15,000. Under the terms of the plan, the
maximum permitted deferral is 10 percent of compensation or, in
B's case, $3,000. Under the provision, B can contribute up to
$10,500 for the year ($3,000 under the normal operation of the
plan, and an additional $7,500 under the provision).
Effective date.--The Senate amendment is effective for
taxable years beginning after December 31, 2001.
conference agreement
The conference agreement provides that the otherwise
applicable dollar limit on elective deferrals under a section
401(k) plan, section 403(b) annuity, SEP, or SIMPLE, or
deferrals under a section 457 plan is increased for individuals
who have attained age 50 by the end of the year.\92\ The catch-
up contribution provision does not apply to after-tax employee
contributions. Additional contributions may be made by an
individual who has attained age 50 before the end of the plan
year and with respect to whom no other elective deferrals may
otherwise be made to the plan for the year because of the
application of any limitation of the Code (e.g., the annual
limit on elective deferrals) or of the plan. Under the
conference agreement, the additional amount of elective
contributions that may be made by an eligible individual
participating in such a plan is the lesser of (1) the
applicable dollar amount or (2) the participant's compensation
for the year reduced by any other elective deferrals of the
participant for the year.\93\ The applicable dollar amount
under a section 401(k) plan, section 403(b) annuity, SEP, or
section 457 plan is $1,000 for 2002, $2,000 for 2003, $3,000
for 2004, $4,000 for 2005, and $5,000 for 2006 and thereafter.
The applicable dollar amount under a SIMPLE is $500 for 2002,
$1,000 for 2003, $1,500 for 2004, $2,000 for 2005, and $2,500
for 2006 and thereafter. The $5,000 and $2,500 amounts are
adjusted for inflation in $500 increments in 2007 and
thereafter.\94\
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\92\ Another provision of the conference agreement increases the
dollar limit on elective deferrals under such arrangements.
\93\ In the case of a section 457 plan, this catch-up rule does not
apply during the participant's last three years before retirement (in
those years, the regularly applicable dollar limit is doubled).
\94\ In the case of a section 457 plans, this catch-up rule does
not apply during the participant's last three years before retirement
(in those years, the regularly applicable dollar limit is doubled).
---------------------------------------------------------------------------
Catch-up contributions made under the conference
agreement are not subject to any other contribution limits and
are not taken into account in applying other contribution
limits. In addition, such contributions are not subject to
applicable nondiscrimination rules. However, a plan fails to
meet the applicable nondiscrimination requirements under
section 401(a)(4) with respect to benefits, rights, and
features unless the plan allows all eligible individuals
participating in the plan to make the same election with
respect to catch-up contributions. For purposes of this rule,
all plans of related employers are treated as a single plan.
An employer is permitted to make matching contributions
with respect to catch-up contributions. Any such matching
contributions are subject to the normally applicable rules.
The following examples illustrate the application of the
conference agreement, after the catch-up is fully phased-in.
Example 1: Employee A is a highly compensated employee
who is over 50 and who participates in a section 401(k) plan
sponsored by A's employer. The maximum annual deferral limit
(without regard to the provision) is $15,000. After application
of the special nondiscrimination rules applicable to section
401(k) plans, the maximum elective deferral A may make for the
year is $8,000. Under the provision, A is able to make
additional catch-up salary reduction contributions of $5,000.
Example 2: Employee B, who is over 50, is a participant
in a section 401(k) plan. B's compensation for the year is
$30,000. The maximum annual deferral limit (without regard to
the provision) is $15,000. Under the terms of the plan, the
maximum permitted deferral is 10 percent of compensation or, in
B's case, $3,000. Under the provision, B can contribute up to
$8,000 for the year ($3,000 under the normal operation of the
plan, and an additional $5,000 under the provision).
Effective date.--The Senate amendment is effective for
taxable years beginning after December 31, 2001.
(b) Equitable treatment for contributions of employees to
defined contribution plans (sec. 302 of the House
bill, sec. 632 of the Senate amendment, and secs.
403(b), 415, and 457 of the Code)
Present Law
Present law imposes limits on the contributions that may
be made to tax-favored retirement plans.
Defined contribution plans
In the case of a tax-qualified defined contribution plan,
the limit on annual additions that can be made to the plan on
behalf of an employee is the lesser of $35,000 (for 2001) or 25
percent of the employee's compensation (sec. 415(c)). Annual
additions include employer contributions, including
contributions made at the election of the employee (i.e.,
employee elective deferrals), after-tax employee contributions,
and any forfeitures allocated to the employee. For this
purpose, compensation means taxable compensation of the
employee, plus elective deferrals, and similar salary reduction
contributions. A separate limit applies to benefits under a
defined benefit plan.
For years before January 1, 2000, an overall limit
applied if an employee was a participant in both a defined
contribution plan and a defined benefit plan of the same
employer.
Tax-sheltered annuities
In the case of a tax-sheltered annuity (a ``section
403(b) annuity''), the annual contribution generally cannot
exceed the lesser of the exclusion allowance or the section
415(c) defined contribution limit. The exclusion allowance for
a year is equal to 20 percent of the employee's includible
compensation, multiplied by the employee's years of service,
minus excludable contributions for prior years under qualified
plans, tax-sheltered annuities or section 457 plans of the
employer.
In addition to this general rule, employees of nonprofit
educational institutions, hospitals, home health service
agencies, health and welfare service agencies, and churches may
elect application of one of several special rules that increase
the amount of the otherwise permitted contributions. The
election of a special rule is irrevocable; an employee may not
elect to have more than one special rule apply.
Under one special rule, in the year the employee
separates from service, the employee may elect to contribute up
to the exclusion allowance, without regard to the 25 percent of
compensation limit under section 415. Under this rule, the
exclusion allowance is determined by taking into account no
more than 10 years of service.
Under a second special rule, the employee may contribute
up to the lesser of: (1) the exclusion allowance; (2) 25
percent of the participant's includible compensation; or (3)
$15,000.
Under a third special rule, the employee may elect to
contribute up to the section 415(c) limit, without regard to
the exclusion allowance. If this option is elected, then
contributions to other plans of the employer are also taken
into account in applying the limit.
For purposes of determining the contribution limits
applicable to section 403(b) annuities, includible compensation
means the amount of compensation received from the employer for
the most recent period which may be counted as a year of
service under the exclusion allowance. In addition, includible
compensation includes elective deferrals and similar salary
reduction amounts.
Treasury regulations include provisions regarding
application of the exclusion allowance in cases where the
employee participates in a section 403(b) annuity and a defined
benefit plan. The Taxpayer Relief Act of 1997 directed the
Secretary of the Treasury to revise these regulations,
effective for years beginning after December 31, 1999, to
reflect the repeal of the overall limit on contributions and
benefits.
Section 457 plans
Compensation deferred under an eligible deferred
compensation plan of a tax-exempt or State and local
governmental employer (a ``section 457 plan'') is not
includible in gross income until paid or made available. In
general, the maximum permitted annual deferral under such a
plan is the lesser of (1) $8,500 (in 2001) or (2) 33\1/3\
percent of compensation. The $8,500 limit is increased for
inflation in $500 increments.
House Bill
Increase in defined contribution plan limit
The House bill increases the 25 percent of compensation
limitation on annual additions under a defined contribution
plan \95\ to 100 percent.\96\
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\95\ Another provision of the House bill increases the defined
contribution plan dollar limit.
\96\ The House bill preserves the present-law deduction rules for
money purchase pension plans. Thus, for purposes of such rules, the
limitation on the amount the employer generally may deduct is an amount
equal to 25 percent of compensation of the employees covered by the
plan for the year.
---------------------------------------------------------------------------
Conforming limits on tax-sheltered annuities
The House bill repeals the exclusion allowance applicable
to contributions to tax-sheltered annuities. Thus, such
annuities are subject to the limits applicable to tax-qualified
plans.
The House bill also directs the Secretary of the Treasury
to revise the regulations relating to the exclusion allowance
under section 403(b)(2) to render void the requirement
thatcontributions to a defined benefit plan be treated as previously
excluded amounts for purposes of the exclusion allowance. For taxable
years beginning after December 31, 1999, the regulatory provisions
regarding the exclusion allowance are to be applied as if the
requirement that contributions to a defined benefit plan be treated as
previously excluded amounts for purposes of the exclusion allowance
were void.
Section 457 plans
The House bill increases the 33\1/3\ percent of
compensation limitation on deferrals under a section 457 plan
to 100 percent of compensation.
Effective date.--The House bill generally is effective
for years beginning after December 31, 2001. The provision
regarding the regulations under section 403(b)(2) is effective
on the date of enactment.
Senate Amendment
The Senate amendment is the same as the House bill, with
the following modifications.
The Senate amendment increases the 25 percent of
compensation limitation on annual additions under a defined
contribution plan to 50 percent for 2002 through 2010, and 100
percent for 2011 and thereafter.\97\ The Senate amendment
increases the 33\1/3\ percent of compensation limitation on
deferrals under a section 457 plan to 50 percent for 2002
through 2010, and 100 percent for 2011 and thereafter.
---------------------------------------------------------------------------
\97\ Another provision of the Senate amendment increases the
defined contribution plan dollar limit.
---------------------------------------------------------------------------
With respect to the direction to the Secretary of the
Treasury to revise the regulations relating to the exclusion
allowance under section 403(b)(2) to render void the
requirement that contributions to a defined benefit plan be
treated as previously excluded amounts for purposes of the
exclusion allowance, the regulatory provisions regarding the
exclusion allowance are to be applied as if the requirement
that contributions to a defined benefit plan be treated as
previously excluded amounts for purposes of the exclusion
allowance were void for taxable years beginning after December
31, 2000.
Effective date.--The Senate amendment generally is
effective for years beginning after December 31, 2001. The
provision regarding the regulations under section 403(b)(2) is
effective on the date of enactment. The provision regarding the
repeal of the exclusion allowance applicable to tax-sheltered
annuities is effective for years beginning after December 31,
2010.
Conference Agreement
The conference agreement follows the House bill, with the
following modifications.
With respect to the increase in the defined contribution
plan limit, the conferees intend that the Secretary of the
Treasury will use the Secretary's existing authority to address
situations where qualified nonelective contributions are
targeted to certain participants with lower compensation in
order to increase the average deferral percentage of nonhighly
compensated employees.
For taxable years beginning after December 31, 1999, a
plan may disregard the requirement that contributions to a
defined benefit plan be treated as previously excluded amounts
for purposes of the exclusion allowance.
(c) Faster vesting of employer matching contributions (sec.
303 of the House bill, sec. 633 of the Senate
amendment, and sec. 411 of the Code)
Present Law
Under present law, a plan is not a qualified plan unless
a participant's employer-provided benefit vests at least as
rapidly as under one of two alternative minimum vesting
schedules. A plan satisfies the first schedule if a participant
acquires a nonforfeitable right to 100 percent of the
participant's accrued benefit derived from employer
contributions upon the completion of five years of service. A
plan satisfies the second schedule if a participant has a
nonforfeitable right to at least 20 percent of the
participant's accrued benefit derived from employer
contributions after three years of service, 40 percent after
four years of service, 60 percent after five years of service,
80 percent after six years of service, and 100 percent after
seven years of service.\98\
---------------------------------------------------------------------------
\98\ The minimum vesting requirements are also contained in Title I
of ERISA.
---------------------------------------------------------------------------
House Bill
The House bill applies faster vesting schedules to
employer matching contributions. Under the House bill, employer
matching contributions are required to vest at least as rapidly
as under one of the following two alternative minimum vesting
schedules. A plan satisfies the first schedule if a participant
acquires a nonforfeitable right to 100 percent of employer
matching contributions upon the completion of three years of
service. A plan satisfies the second schedule if a participant
has a nonforfeitable right to 20 percent of employer matching
contributions for each year of service beginning with the
participant's second year of service and ending with 100
percent after six years of service.
Effective date.--The House bill is effective for
contributions for plan years beginning after December 31, 2001,
with a delayed effective date for plans maintained pursuant to
a collective bargaining agreement. The House bill does not
apply to any employee until the employee has an hour of service
after the effective date. In applying the new vesting schedule,
service before the effective date is taken into account.
Senate Amendment
The Senate amendment is the same as the House bill.
Conference Agreement
The conference agreement follows the House bill and the
Senate amendment.
(d) Modifications to minimum distribution rules (sec. 304
of the House bill, sec. 634 of the Senate
amendment, and sec. 401(a)(9) of the Code)
Present Law
In general
Minimum distribution rules apply to all types of tax-
favored retirement vehicles, including qualified plans,
individual retirement arrangements (``IRAs''), tax-sheltered
annuities (``section 403(b) annuities''), and eligible deferred
compensation plans of tax-exempt and State and local government
employers (``section 457 plans''). In general, under these
rules, distribution of minimum benefits must begin no later
than the required beginning date. Minimum distribution rules
also apply to benefits payable with respect to a plan
participant who has died. Failure to comply with the minimum
distribution rules results in an excise tax imposed on the
individual plan participant equal to 50 percent of the required
minimum distribution not distributed for the year. The excise
tax may be waived if the individual establishes to the
satisfaction of the Commissioner that the shortfall in the
amount distributed was due to reasonable error and reasonable
steps are being taken to remedy the shortfall. Under certain
circumstances following the death of a participant, the excise
tax is automatically waived under proposed Treasury
regulations.
Distributions prior to the death of the individual
In the case of distributions prior to the death of the
plan participant, the minimum distribution rules are satisfied
if either (1) the participant's entire interest in the plan is
distributed by the required beginning date, or (2) the
participant's interest in the plan is to be distributed (in
accordance with regulations), beginning not later than the
required beginning date, over a permissible period. The
permissible periods are (1) the life of the participant, (2)
the lives of the participant and a designated beneficiary, (3)
the life expectancy of the participant, or (4) the joint life
and last survivor expectancy of the participant and a
designated beneficiary. In calculating minimum required
distributions, life expectancies of the participant and the
participant's spouse may be recomputed annually.
In the case of qualified plans, tax-sheltered annuities,
and section 457 plans, the required beginning date is the April
1 of the calendar year following the later of (1) the calendar
year in which the employee attains age 70\1/2\ or (2) the
calendar year in which the employee retires. However, in the
case of a five-percent owner of the employer, distributions are
required to begin no later than the April 1 of the calendar
year following the year in which the five-percent owner attains
age 70\1/2\. If commencement of benefits is delayed beyond age
70\1/2\ from a defined benefit plan, then the accrued benefit
of the employee must be actuarially increased to take into
account the period after age 70\1/2\ in which the employee was
not receiving benefits under the plan.\99\ In the case of
distributions from an IRA other than a Roth IRA, the required
beginning date is the April 1 of the calendar year following
the calendar year in which the IRA owner attains age 70\1/2\.
The pre-death minimum distribution rules do not apply to Roth
IRAs.
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\99\ State and local government plans and church plans are not
required to actuarially increase benefits that begin after age 70\1/2\.
---------------------------------------------------------------------------
In general, under the proposed Treasury regulations, in
order to satisfy the minimum distribution rules, annuity
payments under a defined benefit plan must be paid in periodic
payments made at intervals not longer than one year over a
permissible period, and must be nonincreasing, or increase only
as a result of the following: (1) cost-of-living adjustments;
(2) cash refunds of employee contributions; (3) benefit
increases under the plan; or (4) an adjustment due to death of
the employee's beneficiary. In the case of a defined
contribution plan, the minimum required distribution is
determined by dividing the employee's benefit by an amount from
the uniform table provided in the proposed regulations.
Distributions after the death of the plan participant
The minimum distribution rules also apply to
distributions to beneficiaries of deceased participants. In
general, if the participant dies after minimum distributions
have begun, the remaining interest must be distributed at least
as rapidly as under the minimum distribution method being used
as of the date of death. If the participant dies before minimum
distributions have begun, then the entire remaining interest
must generally be distributed within five years of the
participant's death. The five-year rule does not apply if
distributions begin within one year of the participant's death
and are payable over the life of a designated beneficiary or
over the life expectancy of a designated beneficiary. A
surviving spouse beneficiary is not required to begin
distribution until the date the deceased participant would have
attained age 70\1/2\.
House Bill
Modification of post-death distribution rules
The House bill applies the present-law rules applicable
if the participant dies before distribution of minimum benefits
has begun to all post-death distributions. Thus, in general, if
the employee dies before his or her entire interest has been
distributed, distribution of the remaining interest is required
to be made within five years of the date of death, or begin
within one year of the date of death and paid over the life or
life expectancy of a designated beneficiary. In the case of a
surviving spouse, distributions are not required to begin until
April 1 of the calendar year following the calendar year in
which the surviving spouse attains age 70\1/2\. The House bill
includes a transition rule with respect to the provision
providing that the required beginning date in the case of a
surviving spouse is no earlier than the April 1 of the calendar
year following the calendar year in which the surviving spouse
attains age 70\1/2\. In the case of an individual who died
before the date of enactment and prior to his or her required
beginning date and whose beneficiary is the surviving spouse,
minimum distributions to the surviving spouse are not required
to begin earlier than the date distributions would have been
required to begin under present law.
Reduction in excise tax
The House bill reduces the excise tax on failures to
satisfy the minimum distribution rules to 10 percent of the
amount that was required to be distributed but was not
distributed.
Treasury regulations
The Treasury is directed to revise the life expectancy
tables under the applicable regulations to reflect current life
expectancy.
Effective date.--In general, the House bill is effective
for years beginning after December 31, 2001.
Senate Amendment
The Senate amendment is the same as the House bill, with
the following modification. The Senate amendment does not
modify the excise tax on failures to satisfy the minimum
distribution rules.
Conference Agreement
The conference agreement directs the Treasury to revise
the life expectancy tables under the applicable regulations to
reflect current life expectancy.
Effective date.--The conference agreement is effective on
the date of enactment.
(e) Clarification of tax treatment of division of section
457 plan benefits upon divorce (sec. 305 of the
House bill, sec. 635 of the Senate amendment, and
secs. 414(p) and 457 of the Code)
Present Law
Under present law, benefits provided under a qualified
retirement plan for a participant may not be assigned or
alienated to creditors of the participant, except in very
limited circumstances. One exception to the prohibition on
assignment or alienation rule is a qualified domestic relations
order (``QDRO''). A QDRO is a domestic relations order that
creates or recognizes a right of an alternate payee to any plan
benefit payable with respect to a participant, and that meets
certain procedural requirements.
Under present law, a distribution from a governmental
plan or a church plan is treated as made pursuant to a QDRO if
it is made pursuant to a domestic relations order that creates
or recognizes a right of an alternate payee to any plan benefit
payable with respect to a participant. Such distributions are
not required to meet the procedural requirements that apply
with respect to distributions from qualified plans.
Under present law, amounts distributed from a qualified
plan generally are taxable to the participant in the year of
distribution. However, if amounts are distributed to the spouse
(or former spouse) of the participant by reason of a QDRO, the
benefits are taxable to the spouse (or former spouse). Amounts
distributed pursuant to a QDRO to an alternate payee other than
the spouse (or former spouse) are taxable to the plan
participant.
Section 457 of the Internal Revenue Code provides rules
for deferral of compensation by an individual participating in
an eligible deferred compensation plan (``section 457 plan'')
of a tax-exempt or State and local government employer. The
QDRO rules do not apply to section 457 plans.
House Bill
The House bill applies the taxation rules for qualified
plan distributions pursuant to a QDRO to distributions made
pursuant to a domestic relations order from a section 457 plan.
In addition, a section 457 plan does not violate the
restrictions on distributions from such plans due to payments
to an alternate payee under a QDRO. The special rule applicable
to governmental plans and church plans applies for purposes of
determining whether a distribution is pursuant to a QDRO.
Effective date.--The House bill is effective for
transfers, distributions, and payments made after December 31,
2001.
Senate Amendment
The Senate amendment is the same as the House bill, with
a modification of the effective date.
Effective date.--The provision of the Senate amendment
relating to tax treatment of distributions made pursuant to a
domestic relations order from a section 457 plan is effective
for transfers, distributions, and payments made after December
31, 2001. The provisions of the Senate amendment relating to
the waiver of restrictions on distributions and the application
of the special rule for determining whether a distribution is
pursuant to a QDRO are effective on January 1, 2002, except
that in the case of a domestic relations order entered before
January 1, 2002, the plan administrator (1) is required to
treat such order as a QDRO if the administrator is paying
benefits pursuant to such order on January 1, 2002, and (2) is
permitted to treat any other such order entered before January
1, 2002, as a QDRO even if such order does not meet the
relevant requirements of the provision.
Conference Agreement
The conference agreement follows the House bill.
(f) Provisions relating to hardship withdrawals (sec. 306
of the House bill, sec. 636 of the Senate
amendment, and sec. 401(k) and 402 of the Code)
Present Law
Elective deferrals under a qualified cash or deferred
arrangement (a ``section 401(k) plan'') may not be
distributable prior to the occurrence of one or more specified
events. Oneevent upon which distribution is permitted is the
financial hardship of the employee. Applicable Treasury regulations
\100\ provide that a distribution is made on account of hardship only
if the distribution is made on account of an immediate and heavy
financial need of the employee and is necessary to satisfy the heavy
need.
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\100\ Treas. Reg. sec. 1.401(k)-1.
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The Treasury regulations provide a safe harbor under
which a distribution may be deemed necessary to satisfy an
immediate and heavy financial need. One requirement of this
safe harbor is that the employee be prohibited from making
elective contributions and employee contributions to the plan
and all other plans maintained by the employer for at least 12
months after receipt of the hardship distribution.
Under present law, hardship withdrawals of elective
deferrals from a qualified cash or deferred arrangement (or
403(b) annuity) are not eligible rollover distributions. Other
types of hardship distributions, e.g., employer matching
contributions distributed on account of hardship, are eligible
rollover distributions. Different withholding rules apply to
distributions that are eligible rollover distributions and to
distributions that are not eligible rollover distributions.
Eligible rollover distributions that are not directly rolled
over are subject to withholding at a flat rate of 20-percent.
Distributions that are not eligible rollover distributions are
subject to elective withholding. Periodic distributions are
subject to withholding as if the distribution were wages;
nonperiodic distributions are subject to withholding at a rate
of 10 percent. In either case, the individual may elect not to
have withholding apply.
House Bill
The Secretary of the Treasury is directed to revise the
applicable regulations to reduce from 12 months to six months
the period during which an employee must be prohibited from
making elective contributions and employee contributions in
order for a distribution to be deemed necessary to satisfy an
immediate and heavy financial need. The revised regulations are
to be effective for years beginning after December 31, 2001.
In addition, any distribution made upon hardship of an
employee is not an eligible rollover distribution. Thus, such
distributions may not be rolled over, and are subject to the
withholding rules applicable to distributions that are not
eligible rollover distributions. The House bill does not modify
the rules under which hardship distributions may be made. For
example, as under present law, hardship distributions of
qualified employer matching contributions are only permitted
under the rules applicable to elective deferrals.
The House bill is intended to clarify that all assets
distributed as a hardship withdrawal, including assets
attributable to employee elective deferrals and those
attributable to employer matching or nonelective contributions,
are ineligible for rollover. This rule is intended to apply to
all hardship distributions from any tax qualified plan,
including those made pursuant to standards set forth in section
401(k)(2)(B)(i)(IV) (which are applicable to section 401(k)
plans and section 403(b) annuities) and to those treated as
hardship distributions under any profit-sharing plan (whether
or not in accordance with the standards set forth in section
401(k)(2)(B)(i)(IV)). For this purpose, a distribution that
could be made either under the hardship provisions of a plan or
under other provisions of the plan (such as provisions
permitting in-service withdrawal of assets attributable to
employer matching or nonelective contributions after a fixed
period of years) could be treated as made upon hardship of the
employee if the plan treats it that way. For example, if a plan
makes an in-service distribution that consists of assets
attributable to both elective deferrals (in circumstances where
those assets could be distributed only upon hardship) and
employer matching or nonelective contributions (which could be
distributed in nonhardship circumstances under the plan), the
plan is permitted to treat the distribution in its entirety as
made upon hardship of the employee.
Effective date.--The provision of the House bill
directing the Secretary to revise the rules relating to safe
harbor hardship distributions is effective on the date of
enactment. The provision that hardship distributions are not
eligible rollover distributions is effective for distributions
made after December 31, 2001. The Secretary has the authority
to issue transitional guidance with respect to the provision
that hardship distributions are not eligible rollover
distributions to provide sufficient time for plans to implement
the new rule.
Senate Amendment
The Senate amendment is the same as the House bill.
Conference Agreement
The conference agreement follows the House bill and the
Senate amendment.
(g) Pension coverage for domestic and similar workers (sec.
307 of the House bill, sec. 637 of the Senate
amendment, and sec. 4972(c)(6) of the Code)
Present Law
Under present law, within limits, employers may make
deductible contributions to qualified retirement plans for
employees. Subject to certain exceptions, a 10-percent excise
tax applies to nondeductible contributions to such plans.
Employers of household workers may establish a pension
plan for their employees. Contributions to such plans are not
deductible because they are not made in connection with a trade
or business of the employer.
House Bill
The 10-percent excise tax on nondeductible contributions
does not apply to contributions to a SIMPLE plan or a SIMPLE
IRA that are nondeductible solely because the contributions are
not a trade or business expense under section 162 because they
are not made in connection with a trade or business of the
employer. Thus, for example, employers of household workers are
able to make contributions to such plans without imposition of
the excise tax. As under present law, the contributions are not
deductible. The present-law rules applicable to such plans,
e.g., contribution limits and nondiscrimination rules, continue
to apply. The House bill does not apply with respect to
contributions on behalf of the individual and members of his or
her family.
No inference is intended with respect to the application
of the excise tax under present law to contributions that are
not deductible because they are not made in connection with a
trade or business of the employer.
As under present law, a plan covering domestic workers is
not qualified unless the coverage rules are satisfied by
aggregating all employees of family members taken into account
under the attribution rules in section 414(c), but disregarding
employees employed by a controlled group of corporations or a
trade or business.
It is intended that the House bill is restricted to
contributions made by employers of household workers with
respect to whom all applicable employment taxes have been and
are being paid.
Effective date.--The House bill is effective for taxable
years beginning after December 31, 2001.
Senate Amendment
The Senate amendment is the same as the House bill, with
the following modification. The legislative history of the
Senate amendment does not include a statement of intention that
the Senate amendment is restricted to contributions made by
employers of household workers with respect to whom all
applicable employment taxes have been and are being paid.
Conference Agreement
The conference agreement follows the House bill.
3. Increasing Portability for Participants
(a) Rollovers of retirement plan and IRA distributions
(secs. 401-403 and 409 of the House bill, secs.
641-643 and 649 of the Senate amendment, and secs.
401, 402, 403(b), 408, 457, and 3405 of the Code)
Present Law
In general
Present law permits the rollover of funds from a tax-
favored retirement plan to another tax-favored retirement plan.
The rules that apply depend on the type of plan involved.
Similarly, the rules regarding the tax treatment of amounts
that are not rolled over depend on the type of plan involved.
Distributions from qualified plans
Under present law, an ``eligible rollover distribution''
from a tax-qualified employer-sponsored retirement plan may be
rolled over tax free to a traditional individual retirement
arrangement (``IRA'') \101\ or another qualified plan.\102\ An
``eligible rollover distribution'' means any distribution to an
employee of all or any portion of the balance to the credit of
the employee in a qualified plan, except the term does not
include (1) any distribution which is one of a series of
substantially equal periodic payments made (a) for the life (or
life expectancy) of the employee or the joint lives (or joint
life expectancies) of the employee and the employee's
designated beneficiary, or (b) for a specified period of 10
years or more, (2) any distribution to the extent such
distribution is required under the minimum distribution rules,
and (3) certain hardship distributions. The maximum amount that
can be rolled over is the amount of the distribution includible
in income, i.e., after-tax employee contributions cannot be
rolled over. Qualified plans are not required to accept
rollovers.
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\101\ A ``traditional'' IRA refers to IRAs other than Roth IRAs or
SIMPLE IRAs. All references to IRAs refer only to traditional IRAs.
\102\ An eligible rollover distribution may either be rolled over
by the distributee within 60 days of the date of the distribution or,
as described below, directly rolled over by the distributing plan.
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Distributions from tax-sheltered annuities
Eligible rollover distributions from a tax-sheltered
annuity (``section 403(b) annuity'') may be rolled over into an
IRA or another section 403(b) annuity. Distributions from a
section 403(b) annuity cannot be rolled over into a tax-
qualified plan. Section 403(b) annuities are not required to
accept rollovers.
IRA distributions
Distributions from a traditional IRA, other than minimum
required distributions, can be rolled over into another IRA. In
general, distributions from an IRA cannot be rolled over into a
qualified plan or section 403(b) annuity. An exception to this
rule applies in the case of so-called ``conduit IRAs.'' Under
the conduit IRA rule, amounts can be rolled from a qualified
plan into an IRA and then subsequently rolled back to another
qualified plan if the amounts in the IRA are attributable
solely to rollovers from a qualified plan. Similarly, an amount
may be rolled over from a section 403(b) annuity to an IRA and
subsequently rolled back into a section 403(b) annuity if the
amounts in the IRA are attributable solely to rollovers from a
section 403(b) annuity.
Distributions from section 457 plans
A ``section 457 plan'' is an eligible deferred
compensation plan of a State or local government or tax-exempt
employer that meets certain requirements. In some cases,
different rules apply under section 457 to governmental plans
and plans of tax-exempt employers. For example, governmental
section 457 plans are like qualified plans in that plan assets
are required to be held in a trust for the exclusive benefit of
plan participants and beneficiaries. In contrast, benefits
under a section 457 plan of a tax-exempt employer are unfunded,
like nonqualified deferred compensation plans of private
employers.
Section 457 benefits can be transferred to another
section 457 plan. Distributions from a section 457 plan cannot
be rolled over to another section 457 plan, a qualified plan, a
section 403(b) annuity, or an IRA.
Rollovers by surviving spouses
A surviving spouse that receives an eligible rollover
distribution may roll over the distribution into an IRA, but
not a qualified plan or section 403(b) annuity.
Direct rollovers and withholding requirements
Qualified plans and section 403(b) annuities are required
to provide that a plan participant has the right to elect that
an eligible rollover distribution be directly rolled over to
another eligible retirement plan. If the plan participant does
not elect the direct rollover option, then withholding is
required on the distribution at a 20-percent rate.\103\
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\103\ Distributions from qualified plans and section 403(b)
annuities that are not eligible rollover distributions are subject to
elective withholding. Periodic distributions are subject to withholding
as if the distribution were wages; nonperiodic distributions are
subject to withholding at a rate of 10 percent. In either case, the
individual may elect not to have withholding apply.
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Notice of eligible rollover distribution
The plan administrator of a qualified plan or a section
403(b) annuity is required to provide a written explanation of
rollover rules to individuals who receive a distribution
eligible for rollover. In general, the notice is to be provided
within a reasonable period of time before making the
distribution and is to include an explanation of (1) the
provisions under which the individual may have the distribution
directly rolled over to another eligible retirement plan, (2)
the provision that requires withholding if the distribution is
not directly rolled over, (3) the provision under which the
distribution may be rolled over within 60 days of receipt, and
(4) if applicable, certain other rules that may apply to the
distribution. The Treasury Department has provided more
specific guidance regarding timing and content of the notice.
Taxation of distributions
As is the case with the rollover rules, different rules
regarding taxation of benefits apply to different types of tax-
favored arrangements. In general, distributions from a
qualified plan, section 403(b) annuity, or IRA are includible
in income in the year received. In certain cases, distributions
from qualified plans are eligible for capital gains treatment
and averaging. These rules do not apply to distributions from
another type of plan. Distributions from a qualified plan, IRA,
and section 403(b) annuity generally are subject to an
additional 10-percent early withdrawal tax if made before age
59\1/2\. There are a number of exceptions to the early
withdrawal tax. Some of the exceptions apply to all three types
of plans, and others apply only to certain types of plans. For
example, the 10-percent early withdrawal tax does not apply to
IRA distributions for educational expenses, but does apply to
similar distributions from qualified plans and section 403(b)
annuities. Benefits under a section 457 plan are generally
includible in income when paid or made available. The 10-
percent early withdrawal tax does not apply to section 457
plans.
House Bill
In general
The House bill provides that eligible rollover
distributions from qualified retirement plans, section 403(b)
annuities, and governmental section 457 plans generally could
be rolled over to any of such plans or arrangements.\104\
Similarly, distributions from an IRA generally are permitted to
be rolled over into a qualified plan, section 403(b) annuity,
or governmental section 457 plan. The direct rollover and
withholding rules are extended to distributions from a
governmental section 457 plan, and such plans are required to
provide the written notification regarding eligible rollover
distributions.\105\ The rollover notice (with respect to all
plans) is required to include a description of the provisions
under which distributions from the plan to which the
distribution is rolled over may be subject to restrictions and
tax consequences different than those applicable to
distributions from the distributing plan. Qualified plans,
section 403(b) annuities, and section 457 plans would not be
required to accept rollovers.
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\104\ Hardship distributions from governmental section 457 plans
would be considered eligible rollover distributions.
\105\ The elective withholding rules applicable to distributions
from qualified plans and section 403(b) annuities that are not eligible
rollover distributions are also extended to distributions from
governmental section 457 plans. Thus, periodic distributions from
governmental section 457 plans that are not eligible rollover
distributions are subject to withholding as if the distribution were
wages and nonperiodic distributions from such plans that are not
eligible rollover distributions are subject to withholding at a 10-
percent rate. In either case, the individual may elect not to have
withholding apply.
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Some special rules apply in certain cases. A distribution
from a qualified plan is not eligible for capital gains or
averaging treatment if there was a rollover to the plan that
would not have been permitted under present law. Thus, in order
to preserve capital gains and averaging treatment for a
qualified plan distribution that is rolled over, the rollover
would have to be made to a ``conduit IRA'' as under present
law, and then rolled back into a qualified plan. Amounts
distributed from a section 457 plan are subject to the early
withdrawal tax to the extent the distribution consists of
amounts attributable to rollovers from another type of plan.
Section 457 plans are required to separately account for such
amounts.
Rollover of after-tax contributions
The House bill provides that employee after-tax
contributions may be rolled over into another qualified plan or
a traditional IRA. In the case of a rollover from a qualified
plan to another qualified plan, the rollover is permitted to be
accomplished only through a direct rollover. In addition, a
qualified plan is not permitted to accept rollovers of after-
tax contributions unless the plan provides separate accounting
for such contributions (and earnings thereon). After-tax
contributions (including nondeductible contributions to an IRA)
are not permitted to be rolled over from an IRA into a
qualified plan, tax-sheltered annuity, or section 457 plan.
In the case of a distribution from a traditional IRA that
is rolled over into an eligible rollover plan that is not an
IRA, the distribution is attributed first to amounts other than
after-tax contributions.
Expansion of spousal rollovers
The House bill provides that surviving spouses may roll
over distributions to a qualified plan, section 403(b) annuity,
or governmental section 457 plan in which the surviving spouse
participates.
Treasury regulations
The Secretary is directed to prescribe rules necessary to
carry out the House bill. Such rules may include, for example,
reporting requirements and mechanisms to address mistakes
relating to rollovers. It is anticipated that the IRS will
develop forms to assist individuals who roll over after-tax
contributions to an IRA in keeping track of such contributions.
Such forms could, for example, expand Form 8606--Nondeductible
IRAs, to include information regarding after-tax contributions.
Effective date.--The House bill is effective for
distributions made after December 31, 2001. It is intended that
the Secretary will revise the safe harbor rollover notice that
plans may use to satisfy the rollover requirements. No penalty
is imposed on a plan for a failure to provide the information
required under the House bill with respect to any distribution
made before the date that is 90 days after the date the
Secretary issues a new safe harbor rollover notice, if the plan
administrator makes a reasonable attempt to comply with such
notice requirement. For example, the House bill requires that
the rollover notice include a description of the provisions
under which distributions from the eligible retirement plan
receiving the distribution may be subject to restrictions and
tax consequences which are different from those applicable to
distributions from the plan making the distribution. A plan is
treated as making a reasonable good faith effort to comply with
this requirement if the notice states that distributions from
the plan to which the rollover is made may be subject to
different restrictions and tax consequences than those that
apply to distributions from the plan from which the rollover is
made.
senate Amendment
The Senate amendment is the same as the House bill, with
the following modification. The Senate amendment does not
include a provision for relief from the imposition of a penalty
for failure to provide the information required under the
Senate amendment.
Conference Agreement
The conference agreement follows the House bill, with the
following modification. Hardship distributions from
governmental section 457 plans are not considered eligible
rollover distributions.
(b) Waiver of 60-day rule (sec. 404 of the House bill, sec.
644 of the Senate amendment, and secs. 402 and 408
of the Code)
Present Law
Under present law, amounts received from an IRA or
qualified plan may be rolled over tax free if the rollover is
made within 60 days of the date of the distribution. The
Secretary does not have the authority to waive the 60-day
requirement, except during military service in a combat zone or
by reason of a Presidentially declared disaster. The Secretary
has issued regulations postponing the 60-day rule in such
cases.
House Bill
The House bill provides that the Secretary may waive the
60-day rollover period if the failure to waive such requirement
would be against equity or good conscience, including cases of
casualty, disaster, or other events beyond the reasonable
control of the individual subject to such requirement. For
example, the Secretary may issue guidance that includes
objective standards for a waiver of the 60-day rollover period,
such as waiving the rule due to military service in a combat
zone or during a Presidentially declared disaster (both of
which are provided for under present law), or for a period
during which the participant has received payment in the form
of a check, but has not cashed the check, or for errors
committed by a financial institution.
Effective date.--The House bill applies to distributions
made after December 31, 2001.
Senate Amendment
The Senate amendment is the same as the House bill.
Conference Agreement
The conference agreement provides that the Secretary may
waive the 60-day rollover period if the failure to waive such
requirement would be against equity or good conscience,
including cases of casualty, disaster, or other events beyond
the reasonable control of the individual subject to such
requirement. For example, the Secretary may issue guidance that
includes objective standards for a waiver of the 60-day
rollover period, such as waiving the rule due to military
service in a combat zone or during a Presidentially declared
disaster (both of which are provided for under present law), or
for a period during which the participant has received payment
in the form of a check, but has not cashed the check, or for
errors committed by a financial institution, or in cases of
inability to complete a rollover due to death, disability,
hospitalization, incarceration, restrictions imposed by a
foreign country, or postal error.
Effective date.--The conference agreement applies to
distributions made after December 31, 2001.
(c) Treatment of forms of distribution (sec. 405 of the
House bill, sec. 645 of the Senate amendment, and
sec. 411(d)(6) of the Code)
Present Law
An amendment of a qualified retirement plan may not
decrease the accrued benefit of a plan participant. An
amendment is treated as reducing an accrued benefit if, with
respect to benefits accrued before the amendment is adopted,
the amendment has the effect of either (1) eliminating or
reducing an early retirement benefit or a retirement-type
subsidy, or (2) except as provided by Treasury regulations,
eliminating an optional form of benefit (sec. 411(d)(6)).\106\
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\106\ A similar provision is contained in Title I of ERISA.
---------------------------------------------------------------------------
Under regulations recently issued by the Secretary,\107\
this prohibition against the elimination of an optional form of
benefit does not apply in the case of (1) a defined
contribution plan that offers a lump sum at the same time as
the form being eliminated if the participant receives at least
90 days' advance notice of the elimination, or (2) a voluntary
transfer between defined contribution plans, subject to the
requirements that a transfer from a money purchase pension
plan, an ESOP, or a section 401(k) plan must be to a plan of
the same type and that the transfer be made in connection with
certain corporate mergers, acquisitions, or similar
transactions or changes in employment status.
---------------------------------------------------------------------------
\107\ Treas. Reg. sec. 1.411(d)-4, Q&A-2(e) and Q&A-(3)(b).
---------------------------------------------------------------------------
House Bill
A defined contribution plan to which benefits are
transferred will not be treated as reducing a participant's or
beneficiary's accrued benefit even though it does not provide
all of the forms of distribution previously available under the
transferor plan if (1) the plan receives from another defined
contribution plan a direct transfer of the participant's or
beneficiary's benefit accrued under the transferor plan, or the
plan results from a merger or other transaction that has the
effect of a direct transfer (including consolidations of
benefits attributable to different employers within a multiple
employer plan), (2) the terms of both the transferor plan and
the transferee plan authorize the transfer, (3) the transfer
occurs pursuant to a voluntary election by the participant or
beneficiary that is made after the participant or beneficiary
received a notice describing the consequences of making the
election, and (4) the transferee plan allows the participant or
beneficiary to receive distribution of his or her benefit under
the transferee plan in the form of a single sum distribution.
The House bill does not modify the rules relating to survivor
annuities under section 417. Thus, as under present law, a plan
that is a transferee of a plan subject to the joint and
survivor rules is also subject to those rules.
Except to the extent provided by the Secretary of the
Treasury in regulations, a defined contribution plan is not
treated as reducing a participant's accrued benefit if (1) a
plan amendment eliminates a form of distribution previously
available under the plan, (2) a single sum distribution is
available to the participant at the same time or times as the
form of distribution eliminated by the amendment, and (3) the
single sum distribution is based on the same or greater portion
of the participant's accrued benefit as the form of
distribution eliminated by the amendment.
Furthermore, the House bill directs the Secretary of the
Treasury to provide by regulations that the prohibitions
against eliminating or reducing an early retirement benefit, a
retirement-type subsidy, or an optional form of benefit do not
apply to plan amendments that eliminate or reduce early
retirement benefits, retirement-type subsidies, and optional
forms of benefit that create significant burdens and
complexities for a plan and its participants, but only if such
an amendment does not adversely affect the rights of any
participant in more than a de minimis manner.
It is intended that the factors to be considered in
determining whether an amendment has more than a de minimis
adverse effect on any participant will include (1) all of the
participant's early retirement benefits, retirement-type
subsidies, and optional forms of benefits that are reduced or
eliminated by the amendment, (2) the extent to which early
retirement benefits, retirement-type subsidies, and optional
forms of benefit in effect with respect to a participant after
the amendment effective date provide rights that are comparable
to the rights that are reduced or eliminated by the plan
amendment, (3) the number of years before the participant
attains normal retirement age under the plan (or early
retirement age, as applicable), (4) the size of the
participant's benefit that is affected by the plan amendment,
in relation to the amount of the participant's compensation,
and (5) the number of years before the plan amendment is
effective.
This provision of the House bill does not affect the
rules relating to involuntary cash outs (sec. 411(a)(11)) or
survivor annuity requirements (sec. 417). Accordingly, if a
participant is entitled to protections of the joint and
survivor rules, those protections may not be eliminated. The
intent of the provision authorizing regulations is solely to
permit the elimination of early retirement benefits,
retirement-type subsidies, or optional forms of benefit that
have no more than a de minimis effect on any participant but
create disproportionate burdens and complexities for a plan and
its participants.
For example, assume the following. Employer A acquires
employer B and merges B's defined benefit plan into A's defined
benefit plan. The defined benefit plan maintained by B before
the merger provides an early retirement subsidy for individuals
age 55 with a specified number of years of service. E1 and E2
are were employees of B and who transfer to A in connection
with the merger. E1 is 25 years old and has compensation of
$40,000. The present value of E1's early retirement subsidy
under B's plan is $75. E2 is 50 years old and also has
compensation of $40,000. The present value of E2's early
retirement subsidy under B's plan is $10,000.
Assume that A's plan has an early retirement subsidy for
individuals who have attained age 50 with a specified number of
years of service, but the subsidy is not the same as under B's
plan. Under A's plan, the present value of E2's early
retirement subsidy is $9,850. Maintenance of both subsidies
after the plan merger would create burdens for the plan and
complexities for the plan and its participants.
Treasury regulations could permit E1's early retirement
subsidy under B's plan to be eliminated entirely (i.e., even if
A's plan did not have an early retirement subsidy). Taking into
account all relevant factors, including the value of the
benefit, E1's compensation, and the number of years until E1
would be eligible to receive the subsidy, the subsidy is de
minimis. Treasury regulations could permit E2's early
retirement subsidy under B's plan to be eliminated as to be
replaced by the subsidy under A's plan, because the difference
in the subsidies is de minimis. However, A's subsidy could not
be entirely eliminated.
The Secretary is directed to issue, not later than
December 31, 2003, final regulations under section 411(d)(6),
including regulations required under the House bill.
Effective date.--The House bill is effective for years
beginning after December 31, 2001, except that the direction to
the Secretary is effective on the date of enactment.
senate amendment
A defined contribution plan to which benefits are
transferred is not treated as reducing a participant's or
beneficiary's accrued benefit even though it does not provide
all of the forms of distribution previously available under the
transferor plan if (1) the plan receives from another defined
contribution plan a direct transfer of the participant's or
beneficiary's benefit accrued under the transferor plan, or the
plan results from a merger or other transaction that has the
effect of a direct transfer (including consolidations of
benefits attributable to different employers within a multiple
employer plan), (2) the terms of both the transferor plan and
the transferee plan authorize the transfer, (3) the transfer
occurs pursuant to a voluntary election by the participant or
beneficiary that is made after the participant or beneficiary
received a notice describing the consequences of making the
election, and (4) the transferee plan allows the participant or
beneficiary to receive distribution of his or her benefit under
the transferee plan in the form of a single sum distribution.
Furthermore, the Senate amendment directs the Secretary
of the Treasury to provide by regulations that the prohibitions
against eliminating or reducing an early retirement benefit, a
retirement-type subsidy, or an optional form of benefit do not
apply to plan amendments that eliminate or reduce early
retirement benefits, retirement-type subsidies, and optional
forms of benefit that create significant burdens and
complexities for a plan and its participants, but only if such
an amendment does not adversely affect the rights of any
participant in more than a de minimis manner.
It is intended that the factors to be considered in
determining whether an amendment has more than a de minimis
adverse effect on any participant will include (1) all of the
participant's early retirement benefits, retirement-type
subsidies, and optional forms of benefits that are reduced or
eliminated by the amendment, (2) the extent to which early
retirement benefits, retirement-type subsidies, and optional
forms of benefit in effect with respect to a participant after
the amendment effective date provide rights that are comparable
to the rights that are reduced or eliminated by the plan
amendment, (3) the number of years before the participant
attains normal retirement age under the plan (or early
retirement age, as applicable), (4) the size of the
participant's benefit that is affected by the plan amendment,
in relation to the amount of the participant's compensation,
and (5) the number of years before the plan amendment is
effective.
The Secretary is directed to issue, not later than
December 31, 2002, final regulations under section 411(d)(6),
including regulations required under the Senate amendment.
Effective date.--The provision is effective for years
beginning after December 31, 2001, except that the direction to
the Secretary is effective on the date of enactment.
conference agreement
The conference agreement follows the House bill.
(d) Rationalization of restrictions on distributions (sec.
406 of the House bill, sec. 646 of the Senate
amendment, and secs. 401(k), 403(b), and 457 of the
Code)
Present Law
Elective deferrals under a qualified cash or deferred
arrangement (``section 401(k) plan''), tax-sheltered annuity
(``section 403(b) annuity''), or an eligible deferred
compensation plan of a tax-exempt organization or State or
local government (``section 457 plan''), may not be
distributable prior to the occurrence of one or more specified
events. These permissible distributable events include
``separation from service.''
A separation from service occurs only upon a
participant's death, retirement, resignation or discharge, and
not when the employee continues on the same job for a different
employer as a result of the liquidation, merger, consolidation
or other similar corporate transaction. A severance from
employment occurs when a participant ceases to be employed by
the employer that maintains the plan. Under a so-called ``same
desk rule,'' a participant's severance from employment does not
necessarily result in a separation from service.\108\
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\108\ Rev. Rul. 79-336, 1979-2 C.B. 187.
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In addition to separation from service and other events,
a section 401(k) plan that is maintained by a corporation may
permit distributions to certain employees who experience a
severance from employment with the corporation that maintains
the plan but do not experience a separation from service
because the employees continue on the same job for a different
employer as a result of a corporate transaction. If the
corporation disposes of substantially all of the assets used by
the corporation in a trade or business, a distributable event
occurs with respect to the accounts of the employees who
continue employment with the corporation that acquires the
assets. If the corporation disposes of its interest in a
subsidiary, a distributable event occurs with respect to the
accounts of the employees who continue employment with the
subsidiary. Under a recent IRS ruling, a person is generally
deemed to have separated from service if that person is
transferred to another employer in connection with a sale of
less than substantially all the assets of a trade or
business.\109\
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\109\ Rev. Rul. 2000-27, 2000-21 I.R.B. 1016.
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house bill
The House bill modifies the distribution restrictions
applicable to section 401(k) plans, section 403(b) annuities,
and section 457 plans to provide that distribution may occur
upon severance from employment rather than separation from
service. In addition, the provisions for distribution from a
section 401(k) plan based upon a corporation's disposition of
its assets or a subsidiary are repealed; this special rule is
no longer necessary under the House bill.
Effective date.--The House bill is effective for
distributions after December 31, 2001, regardless of when the
severance of employment occurred.
senate amendment
The Senate amendment is the same as the House bill.
conference agreement
The conference agreement follows the House bill and the
Senate amendment.
The conferees intend that a plan may provide that certain
specified types of severance from employment do not constitute
distributable events. For example, a plan could provide that a
severance from employment is not a distributable event if it
would not have constituted a ``separation from service'' under
the law in effect prior to a specified date. Also, if a plan
describes distributable events by reference to section
401(k)(2), the plan may be amended to restrict distributable
events to fewer than all events that constitute a severance
from employment. Thus, for example, if a plan sponsor had
employees who experienced a severance from employment in the
past that the ``same desk rule'' prevented from being treated
as a distributable event, the plan sponsor would have the
option of providing in the plan that such severance from
employment would, or would not, be treated as a distributable
event under the plan.
The conferees intend that, as under current law, if there
is a transfer of plan assets and liabilities relating to any
portion of an employee's benefit under a plan of the employee's
former employer to a plan being maintained or created by the
employee's new employer (other than a rollover or elective
transfer), then that employee has not experienced a severance
from employment with the employer maintaining the plan that
covers the employee.
(e) Purchase of service credit under governmental pension
plans (sec. 407 of the House bill, sec. 647 of the
Senate amendment, and secs. 403(b) and 457 of the
Code)
present law
A qualified retirement plan maintained by a State or
local government employer may provide that a participant may
make after-tax employee contributions in order to purchase
permissive service credit, subject to certain limits (sec.
415). Permissive service credit means credit for a period of
service recognized by the governmental plan only if the
employee voluntarily contributes to the plan an amount (as
determined by the plan) that does not exceed the amount
necessary to fund the benefit attributable to the period of
service and that is in addition to the regular employee
contributions, if any, under the plan.
In the case of any repayment of contributions and
earnings to a governmental plan with respect to an amount
previously refunded upon a forfeiture of service credit under
the plan (or another plan maintained by a State or local
government employer within the same State), any such repayment
is not taken into account for purposes of the section 415
limits on contributions and benefits. Also, service credit
obtained as a result of such a repayment is not considered
permissive service credit for purposes of the section 415
limits.
A participant may not use a rollover or direct transfer
of benefits from a tax-sheltered annuity (``section 403(b)
annuity'') or an eligible deferred compensation plan of a tax-
exempt organization or a State or local government (``section
457 plan'') to purchase permissive service credits or repay
contributions and earnings with respect to a forfeiture of
service credit.
house bill
A participant in a State or local governmental plan is
not required to include in gross income a direct trustee-to-
trustee transfer to a governmental defined benefit plan from a
section 403(b) annuity or a section 457 plan if the transferred
amount is used (1) to purchase permissive service credits under
the plan, or (2) to repay contributions and earnings with
respect to an amount previously refunded under a forfeiture of
service credit under the plan (or another plan maintained by a
State or local government employer within the same State).
Effective date.--The House bill is effective for
transfers after December 31, 2001.
senate amendment
The Senate amendment is the same as the House bill.
conference agreement
The conference agreement follows the House bill and the
Senate amendment.
(f) Employers may disregard rollovers for purposes of cash-
out rules (sec. 408 of the House bill, sec. 648 of
the Senate amendment, and sec. 411(a)(11) of the
Code)
present law
If a qualified retirement plan participant ceases to be
employed by the employer that maintains the plan, the plan may
distribute the participant's nonforfeitable accrued benefit
without the consent of the participant and, if applicable, the
participant's spouse, if the present value of the benefit does
not exceed $5,000. If such an involuntary distribution occurs
and the participant subsequently returns to employment covered
by the plan, then service taken into account in computing
benefits payable under the plan after the return need not
include service with respect to which a benefit was
involuntarily distributed unless the employee repays the
benefit.\110\
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\110\ A similar provision is contained in Title I of ERISA.
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Generally, a participant may roll over an involuntary
distribution from a qualified plan to an IRA or to another
qualified plan.\111\
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\111\ Other provisions expand the kinds of plans to which benefits
may be rolled over.
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house bill
For purposes of the cash-out rule, a plan is permitted to
provide that the present value of a participant's
nonforfeitable accrued benefit is determined without regard to
the portion of such benefit that is attributable to rollover
contributions (and any earnings allocable thereto).
Effective date.--The House bill is effective for
distributions after December 31, 2001.
senate amendment
The Senate amendment is the same as the House bill.
conference agreement
The conference agreement follows the House bill and the
Senate amendment.
(g) Minimum distribution and inclusion requirements for
section 457 plans (sec. 409 of the House bill, sec.
649 of the Senate amendment, and sec. 457 of the
Code)
present law
A ``section 457 plan'' is an eligible deferred
compensation plan of a State or local government or tax-exempt
employer that meets certain requirements. For example, amounts
deferred under a section 457 plan cannot exceed certain limits.
Amounts deferred under a section 457 plan are generally
includible in income when paid or made available. Amounts
deferred under a plan of deferred compensation of a State or
local government or tax-exempt employer that does not meet the
requirements of section 457 are includible in income when the
amounts are not subject to a substantial risk of forfeiture,
regardless of whether the amounts have been paid or made
available.\112\
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\112\ This rule of inclusion does not apply to amounts deferred
under a tax-qualified retirement plan or similar plans.
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Section 457 plans are subject to the minimum distribution
rules applicable to tax-qualified pension plans. In addition,
such plans are subject to additional minimum distribution rules
(sec. 457(d)(2)(B)).
house bill
The House bill provides that amounts deferred under a
section 457 plan of a State or local government are includible
in income when paid. The House bill also repeals the special
minimum distribution rules applicable to section 457 plans.
Thus, such plans are subject to the minimum distribution rules
applicable to qualified plans.
Effective date.--The House bill is effective for
distributions after December 31, 2001.
senate amendment
The Senate amendment is the same as the House bill, with
the following modification.
The Senate amendment also modifies the transition rule
adopted in the 1986 Act relating to deferred compensation plans
of tax-exempt employers. Under the Senate amendment, the
transition rule applies to agreements providing cost-of-living
adjustments to amounts that otherwise satisfy the requirements
of the transition rule. The grandfather does not apply to the
extent that the annual amount provided under such an agreement
exceeds the annual grandfathered amount multiplied by the
cumulative increase in the Consumer Price Index (as published
by the Department of Labor).
Effective date.--The Senate amendment is generally
effective for distributions after December 31, 2001. The
provision relating to plans of tax-exempt organizations is
effective for taxable years ending after the date of enactment
for cost-of-living increases after September 1993.
conference agreement
The conference agreement follows the House bill.
4. Strengthening Pension Security and Enforcement
(a) Phase in repeal of 160 percent of current liability
funding limit; deduction for contributions to fund
termination liability (secs. 501-502 of the House
bill, secs. 651-652 of the Senate amendment, and
secs. 404(a)(1), 412(c)(7), and 4972(c) of the
Code)
Present Law
Under present law, defined benefit pension plans are
subject to minimum funding requirements designed to ensure that
pension plans have sufficient assets to pay benefits. A defined
benefit pension plan is funded using one of a number of
acceptable actuarial cost methods.
No contribution is required under the minimum funding
rules in excess of the full funding limit. The full funding
limit is generally defined as the excess, if any, of (1) the
lesser of (a) the accrued liability under the plan (including
normal cost) or (b) 160 percent of the plan's current
liability, over (2) the value of the plan's assets (sec.
412(c)(7)).\113\ In general, current liability is all
liabilities to plan participants and beneficiaries accrued to
date, whereas the accrued liability full funding limit is based
on projected benefits. The current liability full funding limit
is scheduled to increase as follows: 165 percent for plan years
beginning in 2003 and 2004, and 170 percent for plan years
beginning in 2005 and thereafter.\114\ In no event is a plan's
full funding limit less than 90 percent of the plan's current
liability over the value of the plan's assets.
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\113\ The minimum funding requirements, including the full funding
limit, are also contained in title I of ERISA.
\114\ As originally enacted in the Pension Protection Act of 1997,
the current liability full funding limit was 150 percent of current
liability. The Taxpayer Relief Act of 1997 increased the current
liability full funding limit to 155 percent in 1999 and 2000, 160
percent in 2001 and 2002, and adopted the scheduled increases described
in the text.
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An employer sponsoring a defined benefit pension plan
generally may deduct amounts contributed to satisfy the minimum
funding standard for the plan year. Contributions in excess of
the full funding limit generally are not deductible. Under a
special rule, an employer that sponsors a defined benefit
pension plan (other than a multiemployer plan) which has more
than 100 participants for the plan year may deduct amounts
contributed of up to 100 percent of the plan's unfunded current
liability.
house bill
Current liability full funding limit
The House bill gradually increases and then repeals the
current liability full funding limit. Under the bill, the
current liability full funding limit is 165 percent of current
liability for plan years beginning in 2002, and 170 percent for
plan years beginning in 2003. The current liability full
funding limit is repealed for plan years beginning in 2004 and
thereafter. Thus, in 2004 and thereafter, the full funding
limit is the excess, if any, of (1) the accrued liability under
the plan (including normal cost), over (2) the value of the
plan's assets.
Deduction for contributions to fund termination liability
The special rule allowing a deduction for unfunded
current liability generally is extended to all defined benefit
pension plans, i.e., the House bill applies to multiemployer
plans and plans with 100 or fewer participants. The special
rule does not apply to plans not covered by the PBGC
termination insurance program.\115\
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\115\ The PBGC termination insurance program does not cover plans
of professional service employers that have fewer than 25 participants.
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The House bill also modifies the rule by providing that
the deduction is for up to 100 percent of unfunded termination
liability, determined as if the plan terminated at the end of
the plan year. In the case of a plan with less than 100
participants for the plan year, termination liability does not
include the liability attributable to benefit increases for
highly compensated employees resulting from a plan amendment
which was made or became effective, whichever is later, within
the last two years.
General Accounting Office study
In connection with the Committee's desire to strengthen
pension security, the Committee directs the General Accounting
Office to conduct a study examining the extent to which certain
present-law rules create obstacles or disincentives for
taxpayers experiencing financial hardships to make current and
future contributions to underfunded defined benefit pension
plans. The Committee is concerned that, as a result of not
obtaining a current or carryback deduction for pension
contributions, taxpayers experiencing financial hardships will
be subject to higher after-tax costs of maintaining pension
funding levels. In the study, the General Accounting Office is
to consider whether pension funding would be enhanced if
section 172(f), which since 1998 has permitted only listed
items to be carried back, were modified to list deductions for
payments to defined benefit pension plans as an item for which
10-year specified loss carrybacks may be available. This study
is to be submitted to the Committee on Ways and Means of the
House of Representatives and the Committee on Finance of the
Senate not later than one year after the date of enactment.
Effective date.--The House bill is effective for plan
years beginning after December 31, 2001.
senate amendment
Current liability full funding limit
The Senate amendment gradually increases and then repeals
the current liability full funding limit. Under the Senate
amendment, the current liability full funding limit is 160
percent of current liability for plan years beginning in 2002,
165 percent for plan years beginning in 2003, and 170 percent
for plan years beginning in 2004. The current liability full
funding limit is repealed for plan years beginning in 2005 and
thereafter. Thus, in 2005 and thereafter, the full funding
limit is the excess, if any, of (1) the accrued liability under
the plan (including normal cost), over (2) the value of the
plan's assets.
Deduction for contributions to fund termination liability
The special rule allowing a deduction for unfunded
current liability generally is extended to all defined benefit
pension plans, i.e., the Senate amendment applies to
multiemployer plans and plans with 100 or fewer participants.
The special rule does not apply to plans not covered by the
PBGC termination insurance program.\116\
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\116\ The PBGC termination insurance program does not cover plans
of professional service employers that have fewer than 25 participants.
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The Senate amendment also modifies the rule by providing
that the deduction is for up to 100 percent of unfunded
termination liability, determined as if the plan terminated at
the end of the plan year. In the case of a plan with less than
100 participants for the plan year, termination liability does
not include the liability attributable to benefit increases for
highly compensated employees resulting from a plan amendment
which was made or became effective, whichever is later, within
the last two years.
Effective date.--The Senate amendment is effective for
plan years beginning after December 31, 2001.
conference agreement
The conference agreement follows the Senate amendment,
with modifications.
The conference agreement gradually increases and then
repeals the current liability full funding limit. Under the
conference agreement, the current liability full funding limit
is 165 percent of current liability for plan years beginning in
2002, and 170 percent for plan years beginning in 2003. The
current liability full funding limit is repealed for plan years
beginning in 2004 and thereafter. Thus, in 2004 and thereafter,
the full funding limit is the excess, if any, of (1) the
accrued liability under the plan (including normal cost), over
(2) the value of the plan's assets.
With respect to the special rule allowing a deduction for
unfunded current liability, the modification of the rule to
provide that the deduction is for up to 100 percent of unfunded
termination liability is applicable only for a plan that
terminates within the plan year.
(b) Excise tax relief for sound pension funding (sec. 503
of the House bill, sec. 653 of the Senate
amendment, and sec. 4972 of the Code)
present law
Under present law, defined benefit pension plans are
subject to minimum funding requirements designed to ensure that
pension plans have sufficient assets to pay benefits. A defined
benefit pension plan is funded using one of a number of
acceptable actuarial cost methods.
No contribution is required under the minimum funding
rules in excess of the full funding limit. The full funding
limit is generally defined as the excess, if any, of (1) the
lesser of (a) the accrued liability under the plan (including
normal cost) or (b) 160 percent of the plan's current
liability, over (2) the value of the plan's assets (sec.
412(c)(7)). In general, current liability is all liabilities to
plan participants and beneficiaries accrued to date, whereas
the accrued liability full funding limit is based on projected
benefits. The current liability full funding limit is scheduled
to increase as follows: 165 percent for plan years beginning in
2003 and 2004, and 170 percent for plan years beginning in 2005
and thereafter.\117\ In no event is a plan's full funding limit
less than 90 percent of the plan's current liability over the
value of the plan's assets.
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\117\ As originally enacted in the Pension Protection Act of 1997,
the current liability full funding limit was 150 percent of current
liability. The Taxpayer Relief Act of 1997 increased the current
liability full funding limit to 155 percent in 1999 and 2000, 160
percent in 2001 and 2002, and adopted the scheduled increases described
in the text. Another provision would gradually increase and then repeal
the current liability full funding limit.
---------------------------------------------------------------------------
An employer sponsoring a defined benefit pension plan
generally may deduct amounts contributed to satisfy the minimum
funding standard for the plan year. Contributions in excess of
the full funding limit generally are not deductible. Under a
special rule, an employer that sponsors a defined benefit
pension plan (other than a multiemployer plan) which has more
than 100 participants for the plan year may deduct amounts
contributed of up to 100 percent of the plan's unfunded current
liability.
Present law also provides that contributions to defined
contribution plans are deductible, subject to certain
limitations.
Subject to certain exceptions, an employer that makes
nondeductible contributions to a plan is subject to an excise
tax equal to 10 percent of the amount of the nondeductible
contributions for the year. The 10-percent excise tax does not
apply to contributions to certain terminating defined benefit
plans. The 10-percent excise tax also does not apply to
contributions of up to six percent of compensation to a defined
contribution plan for employer matching and employee elective
deferrals.
House Bill
In determining the amount of nondeductible contributions,
the employer is permitted to elect not to take into account
contributions to a defined benefit pension plan except to the
extent they exceed the accrued liability full funding limit.
Thus, if an employer elects, contributions in excess of the
current liability full funding limit are not subject to the
excise tax on nondeductible contributions. An employer making
such an election for a year is not permitted to take advantage
of the present-law exceptions for certain terminating plans and
certain contributions to defined contribution plans. The House
bill applies to terminated plans as well as ongoing plans.
Effective date.--The House bill is effective for years
beginning after December 31, 2001.
Senate Amendment
The Senate amendment is the same as the House bill.
Conference Agreement
The conference agreement follows the House bill and the
Senate amendment.
(c) Notice of significant reduction in plan benefit
accruals (sec. 504 of the House bill, sec. 659 of
the Senate amendment, and new sec. 4980f of the
Code)
Present Law
Section 204(h) of Title I of ERISA provides that a
defined benefit pension plan or a money purchase pension plan
may not be amended so as to provide for a significant reduction
in the rate of future benefit accrual, unless, after adoption
of the plan amendment and not less than 15 days before the
effective date of the plan amendment, the plan administrator
provides a written notice (``section 204(h) notice''), setting
forth the plan amendment (or a summary of the amendment written
in a manner calculated to be understood by the average plan
participant) and its effective date. The plan administrator
must provide the section 204(h) notice to each plan
participant, each alternate payee under an applicable qualified
domestic relations order (``QDRO''), and each employee
organization representing participants in the plan. The
applicable Treasury regulations \118\ provide, however, that a
plan administrator need not provide the section 204(h) notice
to any participant or alternate payee whose rate of future
benefit accrual is reasonably expected not to be reduced by the
amendment, nor to an employee organization that does not
represent a participant to whom the section 204(h) notice must
be provided. In addition, the regulations provide that the rate
of future benefit accrual is determined without regard to
optional forms of benefit, early retirement benefits,
retirement-type subsidiaries, ancillary benefits, and certain
other rights and features.
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\118\ Treas. Reg. sec. 1.411(d)-6.
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A covered amendment generally will not become effective
with respect to any participants and alternate payees whose
rate of future benefit accrual is reasonably expected to be
reduced by the amendment but who do not receive a section
204(h) notice. An amendment will become effective with respect
to all participants and alternate payees to whom the section
204(h) notice was required to be provided if the plan
administrator (1) has made a good faith effort to comply with
the section 204(h) notice requirements, (2) has provided a
section 204(h) notice to each employee organization that
represents any participant to whom a section 204(h) notice was
required to be provided, (3) has failed to provide a section
204(h) notice to no more than a de minimis percentage of
participants and alternate payees to whom a section 204(h)
notice was required to be provided, and (4) promptly upon
discovering the oversight, provides a section 204(h) notice to
each omitted participant and alternate payee.
The Internal Revenue Code does not require any notice
concerning a plan amendment that provides for a significant
reduction in the rate of future benefit accrual.
House Bill
The House bill adds to the Internal Revenue Code a
requirement that the plan administrator of a defined benefit
pension plan or a money purchase pension plan furnish a written
notice concerning a plan amendment that provides for a
significant reduction in the rate of future benefit accrual,
including any elimination or reduction of an early retirement
benefit or retirement-type subsidy. The plan administrator is
required to provide in this notice, in a manner calculated to
be understood by the average plan participant, sufficient
information (as defined in Treasury regulations) to allow
participants to understand the effect of the amendment.
The notice requirement does not apply to governmental
plans or church plans with respect to which an election to have
the qualified plan participation, vesting, and funding rules
apply has not been made (sec. 410(d)). The House bill
authorizes the Secretary of the Treasury to provide a
simplified notice requirement or an exemption from the notice
requirement for planswith less than 100 participants and to
allow any notice required under the House bill to be provided by using
new technologies. The House bill also authorizes the Secretary to
provide a simplified notice requirement or an exemption from the notice
requirement if participants are given the option to choose between
benefits under the new plan formula and the old plan formula. In such
cases, the House bill will have no effect on the fiduciary rules
applicable to pension plans that may require appropriate disclosure to
participants, even if no disclosure is required under the House bill.
The plan administrator is required to provide this notice
to each affected participant, each affected alternate payee,
and each employee organization representing affected
participants. For purposes of the House bill, an affected
participant or alternate payee is a participant or alternate
payee whose rate of future benefit accrual may reasonably be
expected to be significantly reduced by the plan amendment.
Except to the extent provided by Treasury regulations,
the plan administrator is required to provide the notice within
a reasonable time before the effective date of the plan
amendment. The House bill permits a plan administrator to
provide any notice required under the House bill to a person
designated in writing by the individual to whom it would
otherwise be provided.
The House bill imposes on a plan administrator that fails
to comply with the notice requirement an excise tax equal to
$100 per day per omitted participant and alternate payee. No
excise tax is imposed during any period during which any person
subject to liability for the tax did not know that the failure
existed and exercised reasonable diligence to meet the notice
requirement. In addition, no excise tax is imposed on any
failure if any person subject to liability for the tax
exercised reasonable diligence to meet the notice requirement
and such person provides the required notice during the 30-day
period beginning on the first date such person knew, or
exercising reasonable diligence would have known, that the
failure existed. Also, if the person subject to liability for
the excise tax exercised reasonable diligence to meet the
notice requirement, the total excise tax imposed during a
taxable year of the employer will not exceed $500,000.
Furthermore, in the case of a failure due to reasonable cause
and not to willful neglect, the Secretary of the Treasury is
authorized to waive the excise tax to the extent that the
payment of the tax would be excessive relative to the failure
involved.
It is intended under the House bill that the Secretary
issue the necessary regulations with respect to disclosure
within 90 days of enactment. It is also intended that such
guidance may be relatively detailed because of the need to
provide for alternative disclosures rather than a single
disclosure methodology that may not fit all situations, and the
need to consider the complex actuarial calculations and
assumptions involved in providing necessary disclosures.
In addition, the House bill directs the Secretary of the
Treasury to prepare a report on the effects of conversions of
traditional defined benefit plans to cash balance or hybrid
formula plans. Such study is to examine the effect of such
conversions on longer service participants, including the
incidence and effects of ``wear away'' provisions under which
participants earn no additional benefits for a period of time
after the conversion. The Secretary is directed to submit such
report, together with recommendations thereon, to the Committee
on Ways and Means and the Committee on Education and the
Workforce of the House of Representatives and the Committee on
Finance and the Committee on Health, Education, Labor, and
Pensions of the Senate as soon as practicable, but not later
than 60 days after the date of enactment.
Effective date.--The House bill is effective for plan
amendments taking effect on or after the date of enactment. The
period for providing any notice required under the House bill
will not end before the last day of the three-month period
following the date of enactment. Prior to the issuance of
Treasury regulations, a plan is treated as meeting the
requirements of the House bill if the plan makes a good faith
effort to comply with such requirements. The notice requirement
under the House bill does not apply to any plan amendment
taking effect on or after the date of enactment if, before
April 25, 2001, notice is provided to participants and
beneficiaries adversely affected by the plan amendment (or
their representatives) that is reasonably expected to notify
them of the nature and effective date of the plan amendment.
Senate Amendment
The Senate amendment adds to the Internal Revenue Code a
requirement that the plan administrator of a defined benefit
pension plan furnish a written notice concerning a plan
amendment that provides for a significant reduction in the rate
of future benefit accrual, including any elimination or
reduction of an early retirement benefit or retirement-type
subsidy.\119\ The notice is required to set forth: (1) a
summary of the plan amendment and the effective date of the
amendment; (2) a statement that the amendment is expected to
significantly reduce the rate of future benefit accrual; (3) a
description of the classes of employees reasonably expected to
be affected by the reduction in the rate of future benefit
accrual; (4) examples illustrating the plan changes for these
classes of employees; (5) in the event of an amendment that
results in the significant restructuring of the plan benefit
formula, as determined under regulations prescribed by the
Secretary (a ``significant restructuring amendment''), a notice
that the plan administrator will provide, generally no later
than 15 days prior to the effective date of the amendment, a
``benefit estimation tool kit'' (described below) that will
enable employees who have completed at least one year of
participation to personalize the illustrative examples; and (6)
notice of each affected participant's right to request, and of
the procedures for requesting, an annual benefit statement as
provided under present law. The plan administrator is required
to provide the notice not less than 45 days before the
effective date of the plan amendment.
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\119\ The provision also modifies the present-law notice
requirement contained in section 204(h) of Title I of ERISA to provide
that an applicable pension plan may not be amended to provide for a
significant reduction in the rate of future benefit accrual in the
event of a failure by the plan administrator to exercise due diligence
in meeting a notice requirement similar to the notice requirement that
the provision adds to the Internal Revenue Code. In addition, the
provision expands the current ERISA notice requirement regarding
significant reductions in normal retirement benefit accrual rates to
early retirement benefits and retirement-type subsidies.
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The notice requirement does not apply to governmental
plans or church plans with respect to which an election to have
the qualified plan participation, vesting, and funding rules
apply has not been made (sec. 410(d)).
The plan administrator is required to provide this
generalized notice to each affected participant and each
affected alternate payee. For purposes of the Senate amendment,
an affected participant or alternate payee is a participant or
alternate payee to whom the significant reduction in the rate
of future benefit accrual is reasonably expected to apply.
As noted above, the Senate amendment requires the plan
administrator to provide a benefit estimation tool kit, no
later than 15 days prior to the amendment effective date, to a
participant for whom the amendment may reasonably be expected
to produce a significant reduction in the rate of future
benefit accrual if the amendment is a significant restructuring
amendment. The plan administrator is not required to provide
this benefit estimation tool kit to any participant who has
less than one year of participation in the plan.
The benefit estimation tool kit is designed to enable
participants to estimate benefits under the old and new plan
provisions. The Senate amendment permits the tool kit to be in
the form of software (for use at home, at a workplace kiosk, or
on a company intranet), worksheets, or calculation
instructions, or other formats to be determined by the
Secretary of the Treasury. The tool kit is required to include
any necessary actuarial assumptions and formulas and to permit
the participant to estimate both a single life annuity at
appropriate ages and, when available, a lump sum distribution.
The tool kit is required to disclose the interest rate used to
compute a lump sum distribution and whether the value of early
retirement benefits is included in the lump sum distribution.
The Senate amendment requires the benefit estimation tool
kit to accommodate employee-provided variables with respect to
age, years of service, retirement age, covered compensation,
and interest rate (when variable rates apply). The tool kit is
required to permit employees to recalculate estimated benefits
by changing the values of these variables. The Senate amendment
does not require the tool kit to accommodate employee variables
with respect to qualified domestic relations orders, factors
that result in unusual patterns of credited service (such as
extended time away from the job), special benefit formulas for
unusual situations, offsets from other plans, and forms of
annuity distributions.
In the case of a significant restructuring amendment that
occurs in connection with a business disposition or acquisition
transaction and within one year following the date of the
transaction, the Senate amendment requires the plan
administrator to provide the benefit estimation tool kit prior
to the date that is 12 months after the date on which the
generalized notice of the amendment is given to the affected
participants.
The Senate amendment permits a plan administrator to
provide any notice required under the Senate amendment to a
person designated in writing by the individual to whom it would
otherwise be provided. In addition, the Senate amendment
authorizes the Secretary of the Treasury to allow any notice
required under the Senate amendment to be provided by using new
technologies, provided that at least one option for providing
notice is not dependent upon new technologies.
The Senate amendment imposes on a plan administrator that
fails to comply with the notice requirement an excise tax equal
to $100 per day per omitted participant and alternate payee. No
excise tax is imposed during any period during which any person
subject to liability for the tax did not know that the failure
existed and exercised reasonable diligence to meet the notice
requirement. In addition, no excise tax is imposed on any
failure if any person subject to liability for the tax
exercised reasonable diligence to meet the notice requirement
and such person provides the required notice during the 30-day
period beginning on the first date such person knew, or
exercising reasonable diligence would have known, that the
failure existed. Also, if the person subject to liability for
the excise tax exercised reasonable diligence to meet the
notice requirement, the total excise tax imposed during a
taxable year of the employer will not exceed $500,000.
Furthermore, in the case of a failure due to reasonable cause
and not to willful neglect, the Secretary of the Treasury is
authorized to waive the excise tax to the extent that the
payment of the tax is excessive relative to the failure
involved.
The Senate amendment directs the Secretary of the
Treasury to issue, not later than one year after the date of
enactment, regulations with respect to early retirement
benefits or retirement-type subsidies, the determination of a
significant restructuring amendment, and the examples that are
required under the generalized notice and the benefit
estimation tool kit.
In addition, the Senate amendment directs the Secretary
of the Treasury to prepare a report on the effects of
significant restructurings of plan benefit formulas of
traditional defined benefit plans. Such study is to examine the
effect of such restructurings on longer service participants,
including the incidence and effects of ``wear away'' provisions
under which participants earn no additional benefits for a
period of time after the restructuring. The Secretary is
directed to submit such report, together with recommendations
thereon, to the Committee on Ways and Means and the Committee
on Education and the Workforce of the House of Representatives
and the Committee on Finance and the Committee on Health,
Education, Labor, and Pensions of the Senate as soon as
practicable, but not later than one year after the date of
enactment.
Effective date.--The Senate amendment is effective for
plan amendments taking effect on or after the date of
enactment. The period for providing any notice required under
the Senate amendment will not end before the last day of the
three-month period following the date of enactment. Prior to
the issuance of Treasury regulations, a plan is treated as
meeting the requirements of the Senate amendment if the plan
makes a good faith effort to comply with such requirements.
Conference Agreement
The conference agreement follows the House bill, with the
following modifications. The conference agreement also modifies
the present-law notice requirement contained in section 204(h)
of Title I of ERISA to provide that an applicable pension plan
may not be amended to provide for a significant reduction in
the rate of future benefit accrual in the event of an egregious
failure by the plan administrator to comply with a notice
requirement similar to the notice requirement that the
conference agreement adds to the Internal Revenue Code. In
addition, the conference agreement expands the current ERISA
notice requirement regarding significant reductions in normal
retirement benefit accrual rates to early retirement benefits
and retirement-type subsidies.
(d) Modifications to section 415 limits for multiemployer
plans (sec. 505 of the House bill, sec. 654 of the
Senate amendment, and sec. 415 of the Code)
Present Law
Under present law, limits apply to contributions and
benefits under qualified plans (sec. 415). The limits on
contributions and benefits under qualified plans are based on
the type of plan.
Under a defined benefit plan, the maximum annual benefit
payable at retirement is generally the lesser of (1) 100
percent of average compensation for the highest three years, or
(2) $140,000 (for 2001). The dollar limit is adjusted for cost-
of-living increases in $5,000 increments. The dollar limit is
reduced in the case of retirement before the social security
retirement age and increases in the case of retirement after
the social security retirement age.
A special rule applies to governmental defined benefit
plans. In the case of such plans, the defined benefit dollar
limit is reduced in the case of retirement before age 62 and
increased in the case of retirement after age 65. In addition,
there is a floor on early retirement benefits. Pursuant to this
floor, the minimum benefit payable at age 55 is $75,000.
In the case of a defined contribution plan, the limit on
annual is additions if the lesser of (1) 25 percent of
compensation \120\ or (2) $35,000 (for 2001).
---------------------------------------------------------------------------
\120\ Another provision of the House bill increases this limit to
100 percent of compensation.
---------------------------------------------------------------------------
In applying the limits on contributions and benefits,
plans of the same employer are aggregated. That is, all defined
benefit plans of the same employer are treated as a single
plan, and all defined contribution plans of the same employer
are treated as a single plan. Under Treasury regulations,
multiemployer plans are not aggregated with other multiemployer
plans. However, if an employer maintains both a plan that is
not a multiemployer plan and a multiemployer plan, the plan
that is not a multiemployer plan is aggregated with the
multiemployer plan to the extent that benefits provided under
the multiemployer plan are provided with respect to a common
participant.\121\
---------------------------------------------------------------------------
\121\ Treas. Reg. sec. 1.415-8(e).
---------------------------------------------------------------------------
House Bill
Under the House bill, the 100 percent of compensation
defined benefit plan limit does not apply to multiemployer
plans. With respect to aggregation of multiemployer plans with
other plans, the House bill provides that multiemployer plans
are not aggregated with single-employer defined benefit plans
maintained by an employer contributing to the multiemployer
plan for purposes of applying the 100 percent of compensation
limit to such single-employer plan.
Effective date.--The House bill is effective for years
beginning after December 31, 2001.
Senate Amendment
The Senate amendment is the same as the House bill with
respect to the waiver of the 100 percent of compensation limit.
With respect to aggregation of multiemployer plans with
other plans, multiemployer plans are not aggregated with any
other plan maintained by the same employer, except for purposes
of applying the dollar limitation on defined plans and the
limits on annual additions to a plan that is not a
multiemployer plan.
Conference Agreement
The conference agreement follows the House bill.
(e) Investment of employee contributions in 401(k) plans
(sec. 506 of the House bill, sec. 655 of the Senate
amendment, and sec. 1524(b) of the Taxpayer Relief
Act of 1997)
Present Law
The Employee Retirement Income Security Act of 1974, as
amended (``ERISA'') prohibits certain employee benefit plans
from acquiring securities or real property of the employer who
sponsors the plan if, after the acquisition, the fair market
value of such securities and property exceeds 10 percent of the
fair market value of plan assets. The 10-percent limitation
does not apply to any ``eligible individual account plans''
that specifically authorize such investments. Generally,
eligible individual account plans are defined contribution
plans, including plans containing a cash or deferred
arrangement (``401(k) plans'').
The term ``eligible individual account plan'' does not
include the portion of a plan that consists of elective
deferrals (and earnings on the elective deferrals) made under
section 401(k) if elective deferrals equal to more than one
percent of any employee's eligible compensation are required to
be invested in employer securities and employer real property.
Eligible compensation is compensation that is eligible to be
deferred under the plan. The portion of the plan that consists
of elective deferrals (and earnings thereon) is still treated
as an individual account plan, and the 10-percent limitation
does not apply, as long as elective deferrals (and earnings
thereon) are not required to be invested in employer securities
or employer real property.
The rule excluding elective deferrals (and earnings
thereon) from the definition of individual account plan does
not apply if individual account plans are a small part of the
employer's retirement plans. In particular, that rule does not
apply to an individual account plan for a plan year if the
value of the assets of all individual account plans maintained
by the employer do not exceed 10 percent of the value of the
assets of all pension plans maintained by the employer
(determined as of the last day of the preceding plan year).
Multiemployer plans are not taken into account in determining
whether the value of the assets of all individual account plans
maintained by the employer exceed 10 percent of the value of
the assets of all pension plans maintained by the employer. The
rule excluding elective deferrals (and earnings thereon)from
the definition of individual account plan does not apply to an employee
stock ownership plan as defined in section 4975(e)(7) of the Internal
Revenue Code.
The rule excluding elective deferrals (and earnings
thereon) from the definition of individual account plan applies
to elective deferrals for plan years beginning after December
31, 1998 (and earnings thereon). It does not apply with respect
to earnings on elective deferrals for plan years beginning
before January 1, 1999.
House Bill
The House bill modifies the effective date of the rule
excluding certain elective deferrals (and earnings thereon)
from the definition of individual account plan by providing
that the rule does not apply to any elective deferral used to
acquire an interest in the income or gain from employer
securities or employer real property acquired (1) before
January 1, 1999, or (2) after such date pursuant to a written
contract which was binding on such date and at all times
thereafter.
Effective date.--The House bill is effective as if
included in the section of the Taxpayer Relief Act of 1997 that
contained the rule excluding certain elective deferrals (and
earnings thereon).
Senate Amendment
The Senate amendment is the same as the House bill.
Conference Agreement
The conference agreement follows the House bill and the
Senate amendment.
(f) Periodic pension benefit statements (sec. 507 of the
House bill and sec. 105(a) of ERISA)
Present Law
Title I of ERISA provides that a pension plan
administrator must furnish a benefit statement to any
participant or beneficiary who makes a written request for such
a statement. This statement must indicate, on the basis of the
latest available information, (1) the participant's or
beneficiary's total accrued benefit, and (2) the participant's
or beneficiary's vested accrued benefit or the earliest date on
which the accrued benefit will become vested. A participant or
beneficiary is not entitled to receive more than one benefit
statement during any 12-month period. The plan administrator
must furnish the benefit statement no later than 60 days after
receipt of the request or, if later, 120 days after the close
of the immediately preceding plan year.
In addition, the plan administrator must furnish a
benefit statement to each participant whose employment
terminates or who has a one-year break in service. For purposes
of this benefit statement requirement, a ``one-year break in
service'' is a calendar year, plan year, or other 12-month
period designated by the plan during which the participant does
not complete more than 500 hours of service for the employer. A
participant is not entitled to receive more than one benefit
statement with respect to consecutive breaks in service. The
plan administrator must provide a benefit statement required
upon termination of employment or a break in service no later
than 180 days after the end of the plan year in which the
termination of employment or break in service occurs.
House Bill
A plan administrator of a defined contribution plan
generally is required to furnish a benefit statement to each
participant at least once annually and to a beneficiary upon
written request.
In addition to providing a benefit statement to a
participant or beneficiary upon written request, the plan
administrator of a defined benefit plan generally is required
either (1) to furnish a benefit statement at least once every
three years to each participant who has a vested accrued
benefit and who is employed by the employer at the time the
plan administrator furnishes the benefit statements to
participants, or (2) to annually furnish written, electronic,
telephonic, or other appropriate notice to each participant of
the availability of and the manner in which the participant may
obtain the benefit statement.
The plan administrator is required to write the benefit
statement in a manner calculated to be understood by the
average plan participant and is permitted to furnish the
statement in written, electronic, telephonic, or other
appropriate form.
The Secretary of Labor is authorized to provide that
years in which no employee or former employee benefits under a
plan need not be taken into account in determining the
applicable three-year period.
In addition, the Secretary of Labor is directed to
develop a model benefit statement, written in a manner
calculated to be understood by the average plan participant,
that may be used by plan administrators in complying with the
requirements of section 105 of ERISA. The use of the model
statement is optional. It is intended that the model statement
include items such as the amount of nonforfeitable accrued
benefits as of the statement date that are payable at normal
retirement age under the plan, the amount of accrued benefits
that are forfeitable but that may become nonforfeitable under
the terms of the plan, information on how to contact the Social
Security Administration to obtain a participant's personal
earnings and benefit estimate statement, and other information
that may be important to understanding benefits earned under
the plan. Statements provided by electronic forms of
communications shall be provided consistent with Department of
Labor and Department of Treasury regulations.
Effective date.--The provision is effective for plan
years beginning after December 31, 2002.
Senate Amendment
No provision.
Conference Agreement
The conference agreement does not include the House bill.
(g) Prohibited allocations of stock in an S corporation
ESOP (sec. 508 of the House bill, sec. 656 of the
Senate amendment, and secs. 409 and 4979a of the
Code)
Present Law
The Small Business Job Protection Act of 1996 allowed
qualified retirement plan trusts described in section 401(a) to
own stock in an S corporation. That Act treated the plan's
share of the S corporation's income (and gain on the
disposition of the stock) as includible in full in the trust's
unrelated business taxable income (``UBTI'').
The Tax Relief Act of 1997 repealed the provision
treating items of income or loss of an S corporation as UBTI in
the case of an employee stock ownership plan (``ESOP''). Thus,
the income of an S corporation allocable to an ESOP is not
subject to current taxation.
Present law provides a deferral of income on the sales of
certain employer securities to an ESOP (sec. 1042). A 50-
percent excise tax is imposed on certain prohibited allocations
of securities acquired by an ESOP in a transaction to which
section 1042 applies. In addition, such allocations are
currently includible in the gross income of the individual
receiving the prohibited allocation.
House Bill
In general
Under the House bill, if there is a nonallocation year
with respect to an ESOP maintained by an S corporation: (1) the
amount allocated in a prohibited allocation to an individual
who is a disqualified person is treated as distributed to such
individual (i.e., the value of the prohibited allocation is
includible in the gross income of the individual receiving the
prohibited allocation); (2) an excise tax is imposed on the S
corporation equal to 50 percent of the amount involved in a
prohibited allocation; and (3) an excise tax is imposed on the
S corporation with respect to any synthetic equity owned by a
disqualified person.\122\
---------------------------------------------------------------------------
\122\ The plan is not disqualified merely because an excise tax is
imposed under the provision.
---------------------------------------------------------------------------
It is intended that the House bill will limit the
establishment of ESOPs by S corporations to those that provide
broad-based employee coverage and that benefit rank-and-file
employees as well as highly compensated employees and
historical owners.
Definition of nonallocation year
A nonallocation year means any plan year of an ESOP
holding shares in an S corporation if, at any time during the
plan year, disqualified persons own at least 50 percent of the
number of outstanding shares of the S corporation.
A person is a disqualified person if the person is either
(1) a member of a ``deemed 20-percent shareholder group'' or
(2) a ``deemed 10-percent shareholder.'' A person is a member
of a ``deemed 20-percent shareholder group'' if the aggregate
number of deemed-owned shares of the person and his or her
family members is at least 20 percent of the number of deemed-
owned shares of stock in the S corporation.\123\ A person is a
deemed 10-percent shareholder if the person is not a member of
a deemed 20-percent shareholder group and the number of the
person's deemed-owned shares is at least 10 percent of the
number of deemed-owned shares of stock of the corporation.
---------------------------------------------------------------------------
\123\ A family member of a member of a ``deemed 20-percent
shareholder group'' with deemed owned shares is also treated as a
disqualified person.
---------------------------------------------------------------------------
In general, ``deemed-owned shares'' means: (1) stock
allocated to the account of an individual under the ESOP, and
(2) an individual's share of unallocated stock held by the
ESOP. An individual's share of unallocated stock held by an
ESOP is determined in the same manner as the most recent
allocation of stock under the terms of the plan.
For purposes of determining whether there is a
nonallocation year, ownership of stock generally is attributed
under the rules of section 318,\124\ except that: (1) the
family attribution rules are modified to include certain other
family members, as described below, (2) option attribution does
not apply (but instead special rules relating to synthetic
equity described below apply), and (3) ``deemed-owned shares''
held by the ESOP are treated as held by the individual with
respect to whom they are deemed owned.
---------------------------------------------------------------------------
\124\ These attribution rules also apply to stock treated as owned
by reason of the ownership of synthetic equity.
---------------------------------------------------------------------------
Under the House bill, family members of an individual
include (1) the spouse \125\ of the individual, (2) an ancestor
or lineal descendant of the individual or his or her spouse,
(3) a sibling of the individual (or the individual's spouse)
and any lineal descendant of the brother or sister, and (4) the
spouse of any person described in (2) or (3).
---------------------------------------------------------------------------
\125\ As under section 318, an individual's spouse is not treated
as a member of the individual's family if the spouses are legally
separated.
---------------------------------------------------------------------------
The House bill contains special rules applicable to
synthetic equity interests. Except to the extent provided in
regulations, the stock on which a synthetic equity interest is
based are treated as outstanding stock of the S corporation and
as deemed-owned shares of the person holding the synthetic
equity interest if such treatment will result in the treatment
of any person as a disqualified person or the treatment of any
year as a nonallocation year. Thus, for example, disqualified
persons for a year include those individuals who are
disqualified persons under thegeneral rule (i.e., treating only
those shares held by the ESOP as deemed-owned shares) and those
individuals who are disqualified individuals if synthetic equity
interests are treated as deemed-owned shares.
``Synthetic equity'' means any stock option, warrant,
restricted stock, deferred issuance stock right, or similar
interest that gives the holder the right to acquire or receive
stock of the S corporation in the future. Except to the extent
provided in regulations, synthetic equity also includes a stock
appreciation right, phantom stock unit, or similar right to a
future cash payment based on the value of such stock or
appreciation in such value.\126\
---------------------------------------------------------------------------
\126\ The provisions relating to synthetic equity do not modify the
rules relating to S corporations, e.g., the circumstances in which
options or similar interests are treated as creating a second class of
stock.
---------------------------------------------------------------------------
Ownership of synthetic equity is attributed in the same
manner as stock is attributed under the House bill (as
described above). In addition, ownership of synthetic equity is
attributed under the rules of section 318(a)(2) and (3) in the
same manner as stock.
Definition of prohibited allocation
An ESOP of an S corporation is required to provide that
no portion of the assets of the plan attributable to (or
allocable in lieu of) S corporation stock may, during a
nonallocation year, accrue (or be allocated directly or
indirectly under any qualified plan of the S corporation) for
the benefit of a disqualified person. A ``prohibited
allocation'' refers to violations of this provision. A
prohibited allocation occurs, for example, if income on S
corporation stock held by an ESOP is allocated to the account
of an individual who is a disqualified person.
Application of excise tax
In the case of a prohibited allocation, the S corporation
is liable for an excise tax equal to 50 percent of the amount
of the allocation. For example, if S corporation stock is
allocated in a prohibited allocation, the excise tax is equal
to 50 percent of the fair market value of such stock.
A special rule applies in the case of the first
nonallocation year, regardless of whether there is a prohibited
allocation. In that year, the excise tax also applies to the
fair market value of the deemed-owned shares of any
disqualified person held by the ESOP, even though those shares
are not allocated to the disqualified person in that year.
As mentioned above, the S corporation also is liable for
an excise tax with respect to any synthetic equity interest
owned by any disqualified person in a nonallocation year. The
excise tax is 50 percent of the value of the shares on which
synthetic equity is based.
Treasury regulations
The Treasury Department is given the authority to
prescribe such regulations as may be necessary to carry out the
purposes of the House bill.
Effective date.--The House bill generally is effective
with respect to plan years beginning after December 31, 2004.
In the case of an ESOP established after March 14, 2001, or an
ESOP established on or before such date if the employer
maintaining the plan was not an S corporation on such date, the
House bill is effective with respect to plan years ending after
March 14, 2001.
Senate Amendment
The Senate amendment is the same as the House bill, with
a modification of the effective date.
Effective date.--The Senate amendment generally is
effective with respect to plan years beginning after December
31, 2002. In the case of an ESOP established after July 11,
2000, or an ESOP established on or before such date if the
employer maintaining the plan was not an S corporation on such
date, the Senate amendment is effective with respect to plan
years ending after July 11, 2000.
Conference Agreement
The conference agreement follows the House bill. The
conference agreement authorizes the Secretary to determine, by
regulation or other guidance of general applicability, that a
nonallocation year occurs in any case in which the principal
purpose of the ownership structure of an S corporation
constitutes, in substance, an avoidance or evasion of the
prohibited allocation rules. For example, this might apply if
more than 10 independent businesses are combined in an S
corporation owned by an ESOP in order to take advantage of the
income tax treatment of S corporations owned by an ESOP.
(h) Automatic rollovers of certain mandatory distributions
(sec. 657 of the Senate amendment and secs.
401(a)(31) and 402(f)(1) of the Code and sec.
404(c) of ERISA)
Present Law
If a qualified retirement plan participant ceases to be
employed by the employer that maintains the plan, the plan may
distribute the participant's nonforfeitable accrued benefit
without the consent of the participant and, if applicable, the
participant's spouse, if the present value of the benefit does
not exceed $5,000. If such an involuntary distribution occurs
and the participant subsequently returns to employment covered
by the plan, then service taken into account in computing
benefits payable under the plan after the return need not
include service with respect to which a benefit was
involuntarily distributed unless the employee repays the
benefit.
Generally, a participant may roll over an involuntary
distribution from a qualified plan to an IRA or to another
qualified plan. Before making a distribution that is eligible
for rollover, a plan administrator must provide the participant
with a written explanation of the ability to have the
distribution rolled over directly to an IRA or another
qualified plan and the related tax consequences.
House Bill
No provision.
Senate Amendment
The Senate amendment makes a direct rollover the default
option for involuntary distributions that exceed $1,000 and
that are eligible rollover distributions from qualified
retirement plans. The distribution must be rolled over
automatically to a designated IRA, unless the participant
affirmatively elects to have the distribution transferred to a
different IRA or a qualified plan or to receive it directly.
The written explanation provided by the plan
administrator is required to explain that an automatic direct
rollover will be made unless the participant elects otherwise.
The plan administrator is also required to notify the
participant in writing (as part of the general written
explanation or separately) that the distribution may be
transferred without cost to another IRA.
The Senate amendment amends the fiduciary rules of ERISA
so that, in the case of an automatic direct rollover, the
participant is treated as exercising control over the assets in
the IRA upon the earlier of (1) the rollover of any portion of
the assets to another IRA, or (2) one year after the automatic
rollover.
The Senate amendment directs the Secretary of Labor to
issue safe harbors under which the designation of an
institution and investment of funds in accordance with the
Senate amendment are deemed to satisfy the requirements of
section 404(a) of ERISA. In addition, the Senate amendment
authorizes and directs the Secretary of the Treasury and the
Secretary of Labor to give consideration to providing special
relief with respect to the use of low-cost individual
retirement plans for purposes of the provision and for other
uses that promote the preservation of tax-qualified retirement
assets for retirement income purposes.
Effective date.--The Senate amendment applies to
distributions that occur after the Department of Labor has
adopted final regulations implementing the Senate amendment.
Conference Agreement
The conference agreement follows the Senate amendment,
with modifications. The conference agreement directs the
Secretary of Labor to adopt final regulations implementing the
conference agreement not later than three years after the date
of enactment.
(i) Clarification of treatment of contributions to a
multiemployer plan (sec. 658 of the bill)
Present Law
Employer contributions to one or more qualified
retirement plans are deductible subject to certain limits. In
general, contributions are deductible for the taxable year of
the employer in which the contributions are made. Under a
special rule, an employer may be deemed to have made a
contribution on the last day of the preceding taxable year if
the contribution is on account of the preceding taxable year
and is made not later than the time prescribed by law for
filing the employer's income tax return for that taxable year
(including extensions).\127\
---------------------------------------------------------------------------
\127\ Section 404(a)(6).
---------------------------------------------------------------------------
A change in method of accounting includes a change in the
overall plan of accounting for gross income or deductions or a
change in the treatment of any material item used in such
overall plan. A material item is any item that involves the
proper time for the inclusion of the item in income or taking
of a deduction.\128\ A change in method of accounting does not
include correction of mathematical or posting errors, or errors
in the computation of tax liability. Also, a change in method
of accounting does not include adjustment of any item of income
or deduction that does not involve the proper time for the
inclusion of the item of income or the taking of a deduction. A
change in method of accounting also does not include a change
in treatment resulting from a change in underlying facts.
---------------------------------------------------------------------------
\128\ Treas. Reg. sec. 1.446-1(e)(2)(ii)(a).
---------------------------------------------------------------------------
House Bill
No provision.
Senate Amendment
The Senate amendment clarifies that a determination of
whether contributions to multiemployer pension plans are on
account of a prior year under section 404(a)(6) is not a method
of accounting. Thus, any taxpayer that begins to deduct
contributions to multiemployer plans as provided in section
404(a)(6) has not changed its method of accounting and is not
subject to an adjustment under section 481. The Senate
amendment is intended to respect, not disturb, the effect of
the statute of limitations. The Senate amendment is not
intended to permit, as of the end of the taxable year,
aggregate deductions for contributions to a qualified plan in
excess of the amounts actually contributed or deemed
contributed to the plan by the taxpayer. The Secretary of the
Treasury is authorized to promulgate regulations to clarify
that, in the aggregate, no taxpayer will be permitted
deductions in excess of amounts actually contributed to
multiemployer plans, taking into account the provisions of
section 404(a)(6).
No inference is intended regarding whether the
determination of whether a contribution to a multiemployer
pension plan on account of a prior year under section 404(a)(6)
is a method of accounting prior to the effective date of the
provision.
Effective date.--The Senate amendment is effective after
the date of enactment.
Conference Agreement
The conference agreement follows the Senate amendment.
5. Reducing regulatory burdens
(a) Modification of timing of plan valuations (sec. 601 of
the House bill, sec. 661 of the Senate amendment,
and sec. 412 of the Code)
Present Law
Under present law, plan valuations are generally required
annually for plans subject to the minimum funding rules. Under
proposed Treasury regulations, except as provided by the
Commissioner, the valuation must be as of a date within the
plan year to which the valuation refers or within the month
prior to the beginning of that year.\129\
---------------------------------------------------------------------------
\129\ Prop. Treas. Reg. sec. 1.412(c)(9)-1(b)(1).
---------------------------------------------------------------------------
House Bill
The House bill incorporates into the statute the proposed
regulation regarding the date of valuations. The House bill
also provides, as an exception to this general rule, that the
valuation date with respect to a plan year may be any date
within the immediately preceding plan year if, as of such date,
plan assets are not less than 125 percent of the plan's current
liability. Information determined as of such date is required
to be adjusted actuarially, in accordance with Treasury
regulations, to reflect significant differences in plan
participants. An election to use a prior plan year valuation
date, once made, may only be revoked with the consent of the
Secretary.
Effective date.--The House bill is effective for plan
years beginning after December 31, 2001.
Senate Amendment
The Senate amendment is the same as the House bill.
Conference Agreement
The conference agreement incorporates into the statute
the proposed regulation regarding the date of valuations. The
conference agreement also provides, as an exception to this
general rule, that the valuation date with respect to a plan
year may be any date within the immediately preceding plan year
if, as of such date, plan assets are not less than 100 percent
of the plan's current liability. Information determined as of
such date is required to be adjusted actuarially, in accordance
with Treasury regulations, to reflect significant differences
in plan participants. A change in funding method to take
advantage of the exception to the general rule may not be made
unless, as of such date, plan assets are not less than 125
percent of the plan's current liability. The Secretary is
directed to automatically approve changes in funding method to
use a prior year valuation date if the change is within the
first three years that the plan is eligible to make the change.
(b) ESOP dividends may be reinvested without loss of
dividend deduction (sec. 602 of the House bill,
sec. 662 of the Senate amendment, and sec. 404 of
the Code)
Present Law
An employer is entitled to deduct certain dividends paid
in cash during the employer's taxable year with respect to
stock of the employer that is held by an employee stock
ownership plan (``ESOP''). The deduction is allowed with
respect to dividends that, in accordance with plan provisions,
are (1) paid in cash directly to the plan participants or their
beneficiaries, (2) paid to the plan and subsequently
distributed to the participants or beneficiaries in cash no
later than 90 days after the close of the plan year in which
the dividends are paid to the plan, or (3) used to make
payments on loans (including payments of interest as well as
principal) that were used to acquire the employer securities
(whether or not allocated to participants) with respect to
which the dividend is paid.
The Secretary may disallow the deduction for any ESOP
dividend if he determines that the dividend constitutes, in
substance, an evasion of taxation (sec. 404(k)(5)).
House Bill
In addition to the deductions permitted under present law
for dividends paid with respect to employer securities that are
held by an ESOP, an employer is entitled to deduct dividends
that, at the election of plan participants or their
beneficiaries, are (1) payable in cash directly to plan
participants or beneficiaries, (2) paid to the plan and
subsequently distributed to the participants or beneficiaries
in cash no later than 90 days after the close of the plan year
in which the dividends are paid to the plan, or (3) paid to the
plan and reinvested in qualifying employer securities.
The House bill permits the Secretary to disallow the
deduction for any ESOP dividend if the Secretary determines
that the dividend constitutes, in substance, the avoidance or
evasion of taxation.
Effective date.--The House bill is effective for taxable
years beginning after December 31, 2001.
Senate Amendment
In addition to the deductions permitted under present law
for dividends paid with respect to employer securities that are
held by an ESOP, an employer is entitled to deduct the
applicable percentage of dividends that, at the election of
plan participants or their beneficiaries, are (1) payable in
cash directly to plan participants or beneficiaries, (2) paid
to the plan and subsequently distributed to the participants or
beneficiaries in cash no later than 90 days after the close of
the plan year in which the dividends are paid to the plan, or
(3) paid to the plan and reinvested in qualifying employer
securities. The applicable percentage is 25 percent for 2002
through 2004, 50 percent for 2005 through 2007, 75 percent for
2008 through 2010 and 100 percent for 2011 and thereafter.
Conference Agreement
The conference agreement follows the House bill. The
provision of the conference agreement that authorizes the
Secretary to disallow the deduction for any ESOP dividend if
the Secretary determines that the dividend constitutes, in
substance, the avoidance or evasion of taxation includes
authority to disallow a deduction of unreasonable dividends.
For purposes of the section 404(k)(2)(A)(iii) reinvested
dividends, a dividend paid on common stock that is primarily
and regularly traded on an established securities market would
be reasonable. In addition, for this purpose in the case of
employers with no common stock (determined on a controlled
group basis) that is primarily and regularly traded on an
established securities market, the reasonableness of a dividend
is determined by comparing the dividend rate on stock held by
the ESOP with the dividend rate for common stock of comparable
corporations whose stock is primarily and regularly traded on
an established securities market. Whether a corporation is
comparable is determined by comparing relevant corporate
characteristics such as industry, corporate size, earnings,
debt-equity structure and dividend history.
(c) Repeal transition rule relating to certain highly
compensated employees (sec. 603 of the House bill,
sec. 663 of the Senate amendment, and sec.
1114(c)(4) of the Tax Reform Act of 1986)
Present Law
Under present law, for purposes of the rules relating to
qualified plans, a highly compensated employee is generally
defined as an employee \130\ who (1) was a five-percent owner
of the employer at any time during the year or the preceding
year or (2) either (a) had compensation for the preceding year
in excess of $85,000 (for 2001) or (b) at the election of the
employer, had compensation in excess of $85,000 for the
preceding year and was in the top 20 percent of employees by
compensation for such year.
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\130\ An employee includes a self-employed individual.
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Under a rule enacted in the Tax Reform Act of 1986, a
special definition of highly compensated employee applies for
purposes of the nondiscrimination rules relating to qualified
cash or deferred arrangements (``section 401(k) plans'') and
matching contributions. This special definition applies to an
employer incorporated on December 15, 1924, that meets certain
specific requirements.
House Bill
The House bill repeals the special definition of highly
compensated employee under the Tax Reform Act of 1986. Thus,
the present-law definition applies.
Effective date.--The House bill is effective for plan
years beginning after December 31, 2001.
Senate Amendment
The Senate amendment is the same as the House bill.
Conference Agreement
The conference agreement follows the House bill and the
Senate amendment.
(d) Employees of tax-exempt entities (sec. 604 of the House
bill and sec. 664 of the Senate amendment)
Present Law
The Tax Reform Act of 1986 provided that nongovernmental
tax-exempt employers were not permitted to maintain a qualified
cash or deferred arrangement (``section 401(k) plan''). This
prohibition was repealed, effective for years beginning after
December 31, 1996, by the Small Business Job Protection Act of
1996.
Treasury regulations provide that, in applying the
nondiscrimination rules to a section 401(k) plan (or a section
401(m) plan that is provided under the same general arrangement
as the section 401(k) plan), the employer may treat as
excludable those employees of a tax-exempt entity who could not
participate in the arrangement due to the prohibition on
maintenance of a section 401(k) plan by such entities. Such
employees may be disregarded only if more than 95 percent of
the employees who could participate in the section 401(k) plan
benefit under the plan for the plan year.\131\
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\131\ Treas. Reg. sec. 1.410(b)-6(g).
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Tax-exempt charitable organizations may maintain a tax-
sheltered annuity (a ``section 403(b) annuity'') that allows
employees to make salary reduction contributions.
House Bill
The Treasury Department is directed to revise its
regulations under section 410(b) to provide that employees of a
tax-exempt charitable organization who are eligible to make
salary reduction contributions under a section 403(b) annuity
may be treated as excludable employees for purposes of testing
a section 401(k) plan, or a section 401(m) plan that is
provided under the same general arrangement as the section
401(k) plan of the employer if (1) no employee of such tax-
exempt entity is eligible to participate in the section 401(k)
or 401(m) plan and (2) at least 95 percent of the employees who
are not employees of the charitable employer are eligible to
participate in such section 401(k) plan or section 401(m) plan.
The revised regulations are to be effective for years
beginning after December 31, 1996.
Effective date.--The House bill is effective on the date
of enactment.
Senate Amendment
The Senate amendment is the same as the House bill.
Conference Agreement
The conference agreement follows the House bill and the
Senate amendment.
(e) Treatment of employer-provided retirement advice (sec.
605 of the House bill, sec. 665 of the Senate
amendment, and sec. 132 of the Code)
Present Law
Under present law, certain employer-provided fringe
benefits are excludable from gross income (sec. 132) and wages
for employment tax purposes. These excludable fringe benefits
include working condition fringe benefits and de minimis
fringes. In general, a working condition fringe benefit is any
property or services provided by an employer to an employee to
the extent that, if the employee paid for such property or
services, such payment would be allowable as a deduction as a
business expense. A de minimis fringe benefit is any property
or services provided by the employer the value of which, after
taking into account the frequency with which similar fringes
are provided, is so small as to make accounting for it
unreasonable or administratively impracticable.
In addition, if certain requirements are satisfied, up to
$5,250 annually of employer-provided educational assistance is
excludable from gross income (sec. 127) and wages. This
exclusion expires with respect to courses beginning after
December 31, 2001.\132\ Education not excludable under section
127 may be excludable as a working condition fringe.
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\132\ The exclusion does not apply with respect to graduate-level
courses.
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There is no specific exclusion under present law for
employer-provided retirement planning services. However, such
services may be excludable as employer-provided educational
assistance or a fringe benefit.
House Bill
Qualified retirement planning services provided to an
employee and his or her spouse by an employer maintaining a
qualified plan are excludable from income and wages. The
exclusion does not apply with respect to highly compensated
employees unless the services are available on substantially
the same terms to each member of the group of employees
normally provided education and information regarding the
employer's qualified plan. ``Qualified retirement planning
services'' are retirement planning advice and information. The
exclusion is not limited to information regarding the qualified
plan, and, thus, for example, applies to advice and information
regarding retirement income planning for an individual and his
or her spouse and how the employer's plan fits into the
individual's overall retirement income plan. On the other hand,
the exclusion does not apply to services that may be related to
retirement planning, such as tax preparation, accounting, legal
or brokerage services.
It is intended that the House bill will clarify the
treatment of retirement advice provided in a nondiscriminatory
manner. It is intended that the Secretary, in determining the
application of the exclusion to highly compensated employees,
may permit employers to take into consideration employee
circumstances other than compensation and position in providing
advice to classifications of employees. Thus, for example, the
Secretary may permit employers to limit certain advice to
individuals nearing retirement age under the plan.
Effective date.--The House bill is effective with respect
to years beginning after December 31, 2001.
Senate Amendment
The Senate amendment is the same as the House bill.
Conference Agreement
The conference agreement follows the House bill and the
Senate amendment.
(f) Reporting simplification (sec. 606 of the House bill
and sec. 666 of the Senate amendment)
Present Law
A plan administrator of a pension, annuity, stock bonus,
profit-sharing or other funded plan of deferred compensation
generally must file with the Secretary of the Treasury an
annual return for each plan year containing certain information
with respect to the qualification, financial condition, and
operation of the plan. Title I of ERISA also may require the
plan administrator to file annual reports concerning the plan
with the Department of Labor and the Pension Benefit Guaranty
Corporation (``PBGC''). The plan administrator must use the
Form 5500 series as the format for the required annual
return.\133\ The Form 5500 series annual return/report, which
consists of a primary form and various schedules, includes the
information required to be filed with all three agencies. The
plan administrator satisfies the reporting requirement with
respect to each agency by filing the Form 5500 series annual
return/report with the Department of Labor, which forwards the
form to the Internal Revenue Service and the PBGC.
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\133\ Treas. Reg. sec. 301.6058-1(a).
---------------------------------------------------------------------------
The Form 5500 series consists of two different forms:
Form 5500 and Form 5500-EZ. Form 5500 is the more comprehensive
of the forms and requires the most detailed financial
information. A plan administrator generally may file Form 5500-
EZ, which consists of only one page, if (1) the only
participants in the plan are the sole owner of a business that
maintains the plan (and such owner's spouse), or partners in a
partnership that maintains the plan (and such partners'
spouses), (2) the plan is not aggregated with another plan in
order to satisfy the minimum coverage requirements of section
410(b), (3) the employer is not a member of a related group of
employers, and (4) the employer does not receive the services
of leased employees. If the plan satisfies the eligibility
requirements for Form 5500-EZ and the total value of the
planassets as of the end of the plan year and all prior plan years
beginning on or after January 1, 1994, does not exceed $100,000, the
plan administrator is not required to file a return.
With respect to a plan that does not satisfy the
eligibility requirements for Form 5500-EZ, the characteristics
and the size of the plan determine the amount of detailed
financial information that the plan administrator must provide
on Form 5500. If the plan has more than 100 participants at the
beginning of the plan year, the plan administrator generally
must provide more information.
House Bill
The Secretary of the Treasury is directed to modify the
annual return filing requirements with respect to plans that
satisfy the eligibility requirements for Form 5500-EZ to
provide that if the total value of the plan assets of such a
plan as of the end of the plan year and all prior plan years
beginning on or after January 1, 1994, does not exceed
$250,000, the plan administrator is not required to file a
return. In addition, the House bill directs the Secretary of
the Treasury and the Secretary of Labor to provide simplified
reporting requirements for certain plans with fewer than 25
employees.
Effective date.--The House bill is effective on January
1, 2002.
Senate Amendment
The Senate amendment is the same as the House bill, with
the following modification. The Senate amendment does not
include the direction to the Secretary of the Treasury and the
Secretary of Labor to provide simplified reporting requirements
for certain plans with fewer than 25 employees.
Conference Agreement
The conference agreement does not include the House bill
or the Senate amendment.
(g) Improvement to Employee Plans Compliance Resolution
System (sec. 607 of the House bill and sec. 667 of
the Senate amendment)
Present Law
A retirement plan that is intended to be a tax-qualified
plan provides retirement benefits on a tax-favored basis if the
plan satisfies all of the requirements of section 401(a).
Similarly, an annuity that is intended to be a tax-sheltered
annuity provides retirement benefits on a tax-favored basis if
the program satisfies all of the requirements of section
403(b). Failure to satisfy all of the applicable requirements
of section 401(a) or section 403(b) may disqualify a plan or
annuity for the intended tax-favored treatment.
The Internal Revenue Service (``IRS'') has established
the Employee Plans Compliance Resolution System (``EPCRS''),
which is a comprehensive system of correction programs for
sponsors of retirement plans and annuities that are intended,
but have failed, to satisfy the requirements of section 401(a),
section 403(a), or section 403(b), as applicable.\134\ EPCRS
permits employers to correct compliance failures and continue
to provide their employees with retirement benefits on a tax-
favored basis.
---------------------------------------------------------------------------
\134\ Rev. Proc. 2001-17, 2001-7 I.R.B. 589.
---------------------------------------------------------------------------
The IRS has designed EPCRS to (1) encourage operational
and formal compliance, (2) promote voluntary and timely
correction of compliance failures, (3) provide sanctions for
compliance failures identified on audit that are reasonable in
light of the nature, extent, and severity of the violation, (4)
provide consistent and uniform administration of the correction
programs, and (5) permit employers to rely on the availability
of EPCRS in taking corrective actions to maintain the tax-
favored status of their retirement plans and annuities.
The basic elements of the programs that comprise EPCRS
are self-correction, voluntary correction with IRS approval,
and correction on audit. The Self-Correction Program (``SCP'')
generally permits a plan sponsor that has established
compliance practices to correct certain insignificant failures
at any time (including during an audit), and certain
significant failures within a two-year period, without payment
of any fee or sanction. The Voluntary Correction Program
(``VCP'') program permits an employer, at any time before an
audit, to pay a limited fee and receive IRS approval of a
correction. For a failure that is discovered on audit and
corrected, the Audit Closing Agreement Program (``Audit CAP'')
provides for a sanction that bears a reasonable relationship to
the nature, extent, and severity of the failure and that takes
into account the extent to which correction occurred before
audit.
The IRS has expressed its intent that EPCRS will be
updated and improved periodically in light of experience and
comments from those who use it.
House Bill
The Secretary of the Treasury is directed to continue to
update and improve EPCRS, giving special attention to (1)
increasing the awareness and knowledge of small employers
concerning the availability and use of EPCRS, (2) taking into
account special concerns and circumstances that small employers
face with respect to compliance and correction of compliance
failures, (3) extending the duration of the self-correction
period under SCP for significant compliance failures, (4)
expanding the availability to correct insignificant compliance
failures under SCP during audit, and (5) assuring that any tax,
penalty, or sanction that is imposed by reason of a compliance
failure is not excessive and bears a reasonable relationship to
the nature, extent, and severity of the failure.
Effective date.--The House bill is effective on the date
of enactment.
Senate Amendment
The Senate amendment is the same as the House bill.
conference agreement
The conference agreement does not include the House bill
or the Senate amendment.
(h) Repeal of the multiple use test (sec. 608 of the House
bill, sec. 668 of the Senate amendment, and sec.
401(m) of the Code)
Present Law
Elective deferrals under a qualified cash or deferred
arrangement (``section 401(k) plan'') are subject to a special
annual nondiscrimination test (``ADP test''). The ADP test
compares the actual deferral percentages (``ADPs'') of the
highly compensated employee group and the nonhighly compensated
employee group. The ADP for each group generally is the average
of the deferral percentages separately calculated for the
employees in the group who are eligible to make elective
deferrals for all or a portion of the relevant plan year. Each
eligible employee's deferral percentage generally is the
employee's elective deferrals for the year divided by the
employee's compensation for the year.
The plan generally satisfies the ADP test if the ADP of
the highly compensated employee group for the current plan year
is either (1) not more than 125 percent of the ADP of the
nonhighly compensated employee group for the prior plan year,
or (2) not more than 200 percent of the ADP of the nonhighly
compensated employee group for the prior plan year and not more
than two percentage points greater than the ADP of the
nonhighly compensated employee group for the prior plan year.
Employer matching contributions and after-tax employee
contributions under a defined contribution plan also are
subject to a special annual nondiscrimination test (``ACP
test''). The ACP test compares the actual deferral percentages
(``ACPs'') of the highly compensated employee group and the
nonhighly compensated employee group. The ACP for each group
generally is the average of the contribution percentages
separately calculated for the employees in the group who are
eligible to make after-tax employee contributions or who are
eligible for an allocation of matching contributions for all or
a portion of the relevant plan year. Each eligible employee's
contribution percentage generally is the employee's aggregate
after-tax employee contributions and matching contributions for
the year divided by the employee's compensation for the year.
The plan generally satisfies the ACP test if the ACP of
the highly compensated employee group for the current plan year
is either (1) not more than 125 percent of the ACP of the
nonhighly compensated employee group for the prior plan year,
or (2) not more than 200 percent of the ACP of the nonhighly
compensated employee group for the prior plan year and not more
than two percentage points greater than the ACP of the
nonhighly compensated employee group for the prior plan year.
For any year in which (1) at least one highly compensated
employee is eligible to participate in an employer's plan or
plans that are subject to both the ADP test and the ACP test,
(2) the plan subject to the ADP test satisfies the ADP test but
the ADP of the highly compensated employee group exceeds 125
percent of the ADP of the nonhighly compensated employee group,
and (3) the plan subject to the ACP test satisfies the ACP test
but the ACP of the highly compensated employee group exceeds
125 percent of the ACP of the nonhighly compensated employee
group, an additional special nondiscrimination test (``multiple
use test'') applies to the elective deferrals, employer
matching contributions, and after-tax employee contributions.
The plan or plans generally satisfy the multiple use test if
the sum of the ADP and the ACP of the highly compensated
employee group does not exceed the greater of (1) the sum of
(A) 1.25 times the greater of the ADP or the ACP of the
nonhighly compensated employee group, and (B) two percentage
points plus (but not more than two times) the lesser of the ADP
or the ACP of the nonhighly compensated employee group, or (2)
the sum of (A) 1.25 times the lesser of the ADP or the ACP of
the nonhighly compensated employee group, and (B) two
percentage points plus (but not more than two times) the
greater of the ADP or the ACP of the nonhighly compensated
employee group.
house bill
The House bill repeals the multiple use test.
Effective date.--The House bill is effective for years
beginning after December 31, 2001.
senate amendment
The Senate amendment is the same as the House bill.
conference agreement
The conference agreement follows the House bill and the
Senate amendment.
(i) Flexibility in nondiscrimination, coverage, and line of
business rules (sec. 609 of the House bill, sec.
669 of the Senate amendment, and secs. 401(a)(4),
410(b), and 414(r) of the Code)
Present Law
A plan is not a qualified retirement plan if the
contributions or benefits provided under the plan discriminate
in favor of highly compensated employees (sec. 401(a)(4)). The
applicable Treasury regulations set forth the exclusive rules
for determining whether a plan satisfies the nondiscrimination
requirement. These regulations state that the form of the plan
and the effect of the plan in operation determine whether the
plan is nondiscriminatory and that intent is irrelevant.
Similarly, a plan is not a qualified retirement plan if
the plan does not benefit a minimum number of employees (sec.
410(b)). A plan satisfies this minimum coverage requirement if
and only if it satisfies one of the tests specified in the
applicable Treasury regulations. If an employer is treated as
operating separate lines of business, the employer may apply
the minimum coverage requirements to a plan separately with
respect to the employees in each separate line of business
(sec. 414(r)). Under a so-called ``gateway'' requirement,
however, the plan must benefit a classification of employees
that does not discriminate in favor of highly compensated
employees in order for the employer to apply the minimum
coverage requirements separately forthe employees in each
separate line of business. A plan satisfies this gateway requirement
only if it satisfies one of the tests specified in the applicable
Treasury regulations.
house bill
The Secretary of the Treasury is directed to modify, on
or before December 31, 2003, the existing regulations issued
under section 414(r) in order to expand (to the extent that the
Secretary may determine to be appropriate) the ability of a
plan to demonstrate compliance with the line of business
requirements based upon the facts and circumstances surrounding
the design and operation of the plan, even though the plan is
unable to satisfy the mechanical tests currently used to
determine compliance.
The Secretary of the Treasury is directed to provide by
regulation applicable to years beginning after December 31,
2003, that a plan is deemed to satisfy the nondiscrimination
requirements of section 401(a)(4) if the plan satisfies the
pre-1994 facts and circumstances test, satisfies the conditions
prescribed by the Secretary to appropriately limit the
availability of such test, and is submitted to the Secretary
for a determination of whether it satisfies such test (to the
extent provided by the Secretary).
Similarly, a plan complies with the minimum coverage
requirement of section 410(b) if the plan satisfies the pre-
1989 coverage rules, is submitted to the Secretary for a
determination of whether it satisfies the pre-1989 coverage
rules (to the extent provided by the Secretary), and satisfies
conditions prescribed by the Secretary by regulation that
appropriately limit the availability of the pre-1989 coverage
rules.
Effective date.--The provision of the House bill relating
to the line of business requirements under section 414(r) is
effective on the date of enactment. The provision relating to
the nondiscrimination requirements under section 401(a)(4) is
effective on the date of enactment, except that any condition
of availability prescribed by the Secretary is not effective
before the first year beginning not less than 120 days after
the date on which such condition is prescribed. The provision
relating to the minimum coverage requirements under section
410(b) is effective for years beginning after December 31,
2003, except that any condition of availability prescribed by
the Secretary by regulation does not apply before the first
year beginning not less than 120 days after the date on which
such condition is prescribed.
senate amendment
The Senate amendment is the same as the House bill, with
the following modification. The Senate amendment provides that
the regulations required with respect to the nondiscrimination
requirements of section 401(a)(4) are to be applicable to plan
years beginning after December 31, 2001, and that the
regulations required with respect to the line of business
requirements of section 414(r) are to be issued by December 31,
2001.
conference agreement
The conference agreement does not include the House bill
or the Senate amendment.
(j) Extension to all governmental plans of moratorium on
application of certain nondiscrimination rules
applicable to state and local government plans
(sec. 610 of the House bill, sec. 670 of the Senate
amendment, sec. 1505 of the Taxpayer Relief Act of
1997, and secs. 401(a) and 401(k) of the Code)
present law
A qualified retirement plan maintained by a State or
local government is exempt from the rules concerning
nondiscrimination (sec. 401(a)(4)) and minimum participation
(sec. 401(a)(26)). All other governmental plans are not exempt
from the nondiscrimination and minimum participation rules.
house bill
The House bill exempts all governmental plans (as defined
in sec. 414(d)) from the nondiscrimination and minimum
participation rules.
Effective date.--The House bill is effective for plan
years beginning after December 31, 2001.
senate amendment
The Senate amendment is the same as the House bill.
conference agreement
The conference agreement does not include the House bill
or the Senate amendment.
(k) Notice and consent period regarding distributions (sec.
611 of the House bill and sec. 417 of the Code)
present law
Notice and consent requirements apply to certain
distributions from qualified retirement plans. These
requirements relate to the content and timing of information
that a plan must provide to a participant prior to a
distribution, and to whether the plan must obtain the
participant's consent to the distribution. The nature and
extent of the notice and consent requirements applicable to a
distribution depend upon the value of the participant's vested
accrued benefit and whether the joint and survivor annuity
requirements (sec. 417) apply to the participant.\135\
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\135\ Similar provisions are contained in Title I of ERISA.
---------------------------------------------------------------------------
If the present value of the participant's vested accrued
benefit exceeds $5,000, the plan may not distribute the
participant's benefit without the written consent of the
participant. The participant's consent to a distribution is not
valid unless the participant has received from the plan a
notice that contains a written explanation of (1) the material
features and the relative values of the optional forms of
benefit available under the plan, (2) the participant's right,
if any, to have the distribution directly transferred to
another retirement plan or IRA, and (3) the rules concerning
the taxation of a distribution. If the joint and survivor
annuity requirements apply to the participant, this notice also
must contain a written explanation of (1) the terms and
conditions of the qualified joint and survivor annuity
(``QJSA''), (2) the participant's right to make, and the effect
of, an election to waive the QJSA, (3) the rights of the
participant's spouse with respect to a participant's waiver of
the QJSA, and (4) the right to make, and the effect of, a
revocation of a waiver of the QJSA. The plan generally must
provide this notice to the participant no less than 30 and no
more than 90 days before the date distribution commences.
If the participant's vested accrued benefit does not
exceed $5,000, the terms of the plan may provide for
distribution without the participant's consent. The plan
generally is required, however, to provide to the participant a
notice that contains a written explanation of (1) the
participant's right, if any, to have the distribution directly
transferred to another retirement plan or IRA, and (2) the
rules concerning the taxation of a distribution. The plan
generally must provide this notice to the participant no less
than 30 and no more than 90 days before the date distribution
commences.
house bill
A qualified retirement plan is required to provide the
applicable distribution notice no less than 30 days and no more
than 180 days before the date distribution commences. The
Secretary of the Treasury is directed to modify the applicable
regulations to reflect the extension of the notice period to
180 days and to provide that the description of a participant's
right, if any, to defer receipt of a distribution shall also
describe the consequences of failing to defer such receipt.
Effective date.--The House bill is effective for years
beginning after December 31, 2001.
senate amendment
No provision.
conference agreement
The conference agreement does not include the House bill.
(l) Annual report dissemination (sec. 612 of the House bill
and sec. 104(b)(3) of ERISA)
present law
Title I of ERISA generally requires the plan
administrator of each employee pension benefit plan and each
employee welfare benefit plan to file an annual report
concerning the plan with the Secretary of Labor within seven
months after the end of the plan year. Within nine months after
the end of the plan year, the plan administrator generally must
furnish to each participant and to each beneficiary receiving
benefits under the plan a summary of the annual report filed
with the Secretary of Labor for the plan year.
house bill
The requirement that a plan administrator furnish a
summary annual report is satisfied if the report is made
reasonably available through electronic means or other new
technology. The interpretation of the House bill is to be
consistent with the regulations of the Department of Labor and
the Department of the Treasury.
Effective date.--The House bill is effective for reports
for years beginning after December 31, 2000.
senate amendment
No provision.
conference agreement
The conference agreement does not include the House bill.
(m) Modifications to the SAVER Act (sec. 613 of the House
bill and sec. 517 of ERISA)
present law
The Savings Are Vital to Everyone's Retirement
(``SAVER'') Act initiated a public-private partnership to
educate American workers about retirement savings and directed
the Department of Labor to maintain an ongoing program of
public information and outreach. The Act also convened a
National Summit on Retirement Savings held June 4-5, 1998, and
to be held again in 2001 and 2005, co-hosted by the President
and the bipartisan Congressional leadership. The National
Summit brings together experts in the fields of employee
benefits and retirement savings, key leaders of government, and
interested parties from the private sector and general public.
The delegates are selected by the Congressional leadership and
the President. The National Summit is a public-private
partnership, receiving substantial funding from private sector
contributions. The goals of the National Summits are to: (1)
advance the public's knowledge and understanding of retirement
savings and facilitate the development of a broad-based, public
education program; (2) identify the barriers which hinder
workers from setting aside adequate savings for retirement and
impede employers, especially small employers, from assisting
their workers in accumulating retirement savings; and (3)
develop specific recommendations for legislative, executive,
and private sector actions to promote retirement income savings
among American workers.
house bill
The House bill clarifies that future National Summits on
Retirement Savings are to be held in the month of September in
2001 and 2005, and adds an additional National Summit in 2009.
To facilitate the administration of future National Summits,
the Department of Labor is given authority to enter into
cooperative agreements (pursuant to the Federal Grant and
Cooperative Agreement Act of 1977) with its 1999 summit
partner, the American Savings Education Council.
Six new statutory delegates are added to future National
Summits: the Chairman and Ranking Member of the House Ways and
Means Committee, the Senate Finance Committee, and the
Subcommittee on Employer-Employee Relations of the House
Committee on Education and the Workforce. Further, the
President, in consultation with the Congressional leadership,
may appoint up to three percent of the delegates (not to exceed
10) from a list of nominees provided by the private sector
partner in Summit administration. The provision also clarifies
that new delegates are to be appointed for each future National
Summit (as was the intent of the original legislation) and sets
deadlines for their appointment.
The provision also sets deadlines for the Department of
Labor to publish the Summit agenda, gives the Department of
Labor limited reception and representation authority, and
mandates that the Department of Labor consult with the
Congressional leadership in drafting the post-Summit report.
Effective date.--The provision is effective on the date
of enactment.
senate amendment
No provision.
conference agreement
The conference agreement does not include the House bill.
6. Other ERISA provisions
(a) Extension of PBGC missing participants program (sec.
701 of the House bill, sec. 681 of the Senate
amendment, and secs. 206(f) and 4050 of ERISA)
present law
The plan administrator of a defined benefit pension plan
that is subject to Title IV of ERISA, is maintained by a single
employer, and terminates under a standard termination is
required to distribute the assets of the plan. With respect to
a participant whom the plan administrator of a single employer
plan cannot locate after a diligent search, the plan
administrator satisfies the distribution requirement only by
purchasing irrevocable commitments from an insurer to provide
all benefit liabilities under the plan or transferring the
participant's designated benefit to the Pension Benefit
Guaranty Corporation (``PBGC''), which holds the benefit of the
missing participant as trustee until the PBGC locates the
missing participant and distributes the benefit.
The PBGC missing participant program is not available to
multiemployer plans or defined contribution plans and other
plans not covered by Title IV of ERISA.
house bill
The PBGC is directed to prescribe for terminating
multiemployer plans rules similar to the present-law missing
participant rules applicable to terminating single-employer
plans that are subject to Title IV of ERISA.
In addition, plan administrators of certain types of
plans not subject to the PBGC termination insurance program
under present law are permitted, but not required, to elect to
transfer missing participants' benefits to the PBGC upon plan
termination. Specifically, the House bill extends the missing
participants program to defined contribution plans, defined
benefit plans that have no more than 25 active participants and
are maintained by professional service employers, and the
portion of defined benefit plans that provide benefits based
upon the separate accounts of participants and therefore are
treated as defined contribution plans under ERISA.
Effective date.--The House bill is effective for
distributions from terminating plans that occur after the PBGC
has adopted final regulations implementing the House bill.
senate amendment
The Senate amendment is the same as the House bill.
conference agreement
The conference agreement does not include the House bill
or the Senate amendment.
(b) Reduce PBGC premiums for small and new plans (secs.
702-703 of the House bill, secs. 682-683 of the
Senate amendment, and sec. 4006 of ERISA)
present law
Under present law, the Pension Benefit Guaranty
Corporation (``PBGC'') provides insurance protection for
participants and beneficiaries under certain defined benefit
pension plans by guaranteeing certain basic benefits under the
plan in the event the plan is terminated with insufficient
assets to pay benefits promised under the plan. The guaranteed
benefits are funded in part by premium payments from employers
who sponsor defined benefit plans. The amount of the required
annual PBGC premium for a single-employer plan is generally a
flat rate premium of $19 per participant and an additional
variable-rate premium based on a charge of $9 per $1,000 of
unfunded vested benefits. Unfunded vested benefits under a plan
generally means (1) the unfunded current liability for vested
benefits under the plan, over (2) the value of the plan's
assets, reduced by any credit balance in the funding standard
account. No variable-rate premium is imposed for a year if
contributions to the plan were at least equal to the full
funding limit.
The PBGC guarantee is phased in ratably in the case of
plans that have been in effect for less than five years, and
with respect to benefit increases from a plan amendment that
was in effect for less than five years before termination of
the plan.
house bill
Reduced flat-rate premiums for new plans of small employers
Under the House bill, for the first five plan years of a
new single-employer plan of a small employer, the flat-rate
PBGC premium is $5 per plan participant.
A small employer is a contributing sponsor that, on the
first day of the plan year, has 100 or fewer employees. For
this purpose, all employees of the members of the controlled
group of the contributing sponsor are taken into account. In
the case of a plan to which more than one unrelated
contributing sponsor contributes, employees of all contributing
sponsors (and their controlled group members) are taken into
account in determining whether the plan is a plan of a small
employer.
A new plan means a defined benefit plan maintained by a
contributing sponsor if, during the 36-month period ending on
the date of adoption of the plan, such contributing sponsor (or
controlled group member or a predecessor of either) has not
established or maintained a plan subject to PBGC coverage with
respect to which benefits were accrued for substantially the
same employees as are in the new plan.
Reduced variable-rate PBGC premium for new plans
The House bill provides that the variable-rate premium is
phased in for new defined benefit plans over a six-year period
starting with the plan's first plan year. The amount of the
variable-rate premium is a percentage of the variable premium
otherwise due, as follows: zero percent of the otherwise
applicable variable-rate premium in the first plan year; 20
percent in the second plan year; 40 percent in the third plan
year; 60 percent in the fourth plan year; 80 percent in the
fifth plan year; and 100 percent in the sixth plan year (and
thereafter).
A new defined benefit plan is defined as described above
under the flat-rate premium provision of the House bill
relating to new small employer plans.
Reduced variable-rate PBGC premium for small plans
In the case of a plan of a small employer, the variable-
rate premium is no more than $5 multiplied by the number of
plan participants in the plan at the end of the preceding plan
year. For purposes of the House bill, a small employer is a
contributing sponsor that, on the first day of the plan year,
has 25 or fewer employees. For this purpose, all employees of
the members of the controlled group of the contributing sponsor
are taken into account. In the case of a plan to which more
than one unrelated contributing sponsor contributes, employees
of all contributing sponsors (and their controlled group
members) are taken into account in determining whether the plan
is a plan of a small employer.
Effective date.--The reduction of the flat-rate premium
for new plans of small employers and the reduction of the
variable-rate premium for new plans is effective with respect
to plansestablished after December 31, 2001. The reduction of
the variable-rate premium for small plans is effective with respect to
plan years beginning after December 31, 2001.
senate amendment
The Senate amendment is the same as the House bill.
conference agreement
The conference agreement does not include the House bill
or the Senate amendment.
(c) Authorization for PBGC to pay interest on premium
overpayment refunds (sec. 704 of the House bill,
sec. 684 of the Senate amendment, and sec. 4007(b)
of ERISA)
present law
The PBGC charges interest on underpayments of premiums,
but is not authorized to pay interest on overpayments.
House bill
The House bill allows the PBGC to pay interest on
overpayments made by premium payors. Interest paid on
overpayments is calculated at the same rate and in the same
manner as interest is charged on premium underpayments.
Effective date.--The House bill is effective with respect
to interest accruing for periods beginning not earlier than the
date of enactment.
senate amendment
The Senate amendment is the same as the House bill.
Conference Agreement
The conference agreement does not include the House bill
or the Senate amendment.
(d) Rules for substantial owner benefits in terminated
plans (sec. 705 of the House bill, sec. 685 of the
Senate amendment, and secs. 4021, 4022, 4043 and
4044 of ERISA)
present law
Under present law, the Pension Benefit Guaranty
Corporation (``PBGC'') provides participants and beneficiaries
in a defined benefit pension plan with certain minimal
guarantees as to the receipt of benefits under the plan in case
of plan termination. The employer sponsoring the defined
benefit pension plan is required to pay premiums to the PBGC to
provide insurance for the guaranteed benefits. In general, the
PBGC will guarantee all basic benefits which are payable in
periodic installments for the life (or lives) of the
participant and his or her beneficiaries and are non-
forfeitable at the time of plan termination. The amount of the
guaranteed benefit is subject to certain limitations. One
limitation is that the plan (or an amendment to the plan which
increases benefits) must be in effect for 60 months before
termination for the PBGC to guarantee the full amount of basic
benefits for a plan participant, other than a substantial
owner. In the case of a substantial owner, the guaranteed basic
benefit is phased in over 30 years beginning with participation
in the plan. A substantial owner is one who owns, directly or
indirectly, more than 10 percent of the voting stock of a
corporation or all the stock of a corporation. Special rules
restricting the amount of benefit guaranteed and the allocation
of assets also apply to substantial owners.
house bill
The House bill provides that the 60-month phase-in of
guaranteed benefits applies to a substantial owner with less
than 50 percent ownership interest. For a substantial owner
with a 50 percent or more ownership interest (``majority
owner''), the phase-in occurs over a 10-year period and depends
on the number of years the plan has been in effect. The
majority owner's guaranteed benefit is limited so that it could
not be more than the amount phased in over 60 months for other
participants. The rules regarding allocation of assets applies
to substantial owners, other than majority owners, in the same
manner as other participants.
Effective date.--The House bill is effective for plan
terminations with respect to which notices of intent to
terminate are provided, or for which proceedings for
termination are instituted by the PBGC, after December 31,
2001.
senate amendment
The Senate amendment is the same as the House bill.
conference agreement
The conference agreement does not include the House bill
or the Senate amendment.
(e) Civil penalties for breach of fiduciary responsibility
(sec. 706 of the House bill and sec. 502 of ERISA)
present law
Present law requires the Secretary of Labor to assess a
civil penalty against (1) a fiduciary who breaches a fiduciary
responsibility under, or commits a violation of, part 4 of
Title I of ERISA, or (2) any other person who knowingly
participates in such a breach or violation. The penalty is
equal to 20 percent of the ``applicable recovery amount'' that
is paid pursuant to a settlement agreement with the Secretary
of Labor or that a court orders to be paid in a judicial
proceeding brought by the Secretary of Labor to enforce ERISA's
fiduciary responsibility provisions. The Secretary of Labor may
waive or reduce the penalty only if the Secretary finds in
writing that either (1) the fiduciary or other person acted
reasonably and in good faith, or (2) it is reasonable to expect
that the fiduciary or other person cannot restore all the
losses without severe financial hardship unless the waiver or
reduction is granted.
house bill
The House bill makes the assessment of the penalty
discretionary with the Secretary of Labor, rather than
mandatory. This change will allow the Secretary to refrain from
imposing the penalty in certain cases as well as to assess a
penalty of less than 20 percent of the applicable recovery
amount. The requirement of a settlement agreement is also
eliminated. The applicable recovery amount is any amount
recovered by a plan or by a participant or beneficiary more
than 30 days after the fiduciary's or other person's receipt of
a written notice of the violation from the Department of Labor
(``DOL''). Payments made after the 30-day grace period, whether
they are made pursuant to a settlement agreement, or simply to
discourage the DOL from bringing a legal action, are subject to
the penalty, as are amounts recovered pursuant to a court
order. ERISA section 502(l) is also amended to clarify that the
term ``applicable recovery amount'' includes payments by third
parties that are made on behalf of the relevant fiduciary or
other persons liable for the amount that is recovered,
including those who did not actually pay. These changes prevent
avoidance of the penalty by having an unrelated third party pay
the recovery amount.
Effective date.--The House bill applies to any breach of
fiduciary responsibility or other violation of part 4 of Title
I of ERISA occurring on or after the date of enactment. The
change with respect to ``applicable recovery amount'' includes
a transition rule whereby a breach or other violation occurring
before the date of enactment which continues past the 180th day
from enactment (and which may have been discontinued during
that period) is treated as having occurred after the date of
enactment (to avoid having to make a complex determination
regarding how much of the applicable recovery amount for such
continuing violations should be attributed to the post-
enactment part of the violation).
senate amendment
No provision.
conference agreement
The conference agreement does not include the House bill.
(f) Benefit suspension notice (sec. 707 of the House bill
and sec. 203 of ERISA)
present law
Under present law (ERISA sec. 203(a)(3)(B)), a plan will
not fail to satisfy the vesting requirements with respect to a
participant by reason of suspending payment of the
participant's benefits while such participant is employed.
Under the applicable Department of Labor (``DOL'') regulations,
such a suspension is only permissible if the plan notifies the
participant during the first calendar month or payroll period
in which the plan withholds benefit payments. Such notice must
provide certain information and must also include a copy of the
plan's provisions relating to the suspension of payments.
In the case of a plan that does not pay benefits to
active participants upon attainment of normal retirement age,
the employer must monitor plan participants to determine when
any participant who is still employed attains normal retirement
age. In order to suspend payment of such a participant's
benefits, generally a plan must, as noted above, promptly
provide the participant with a suspension notice.
house bill
The House bill directs the Secretary of Labor to revise
the regulations relating to the benefit suspension notice to
generally permit the information currently required to be set
forth in a suspension notice to be included in the summary plan
description. The House bill also directs the Secretary of Labor
to eliminate the requirement that the notice include a copy of
relevant plan provisions. However, individuals reentering the
workforce to resume work with a former employer after they have
begun to receive benefits will still receive the notification
of the suspension of benefits (and a copy of the plan's
provisions relating to suspension of payments). In addition, if
a reduced rate of future benefit accruals will apply to a
returning employee (as of his or her first date of
participation in the plan after returning to work) who has
begun to receive benefits, the notice must include a statement
that the rate of future benefit accruals will be reduced.
Effective date.--The House bill applies to plan years
beginning after December 31, 2001.
senate amendment
No provision.
conference agreement
The conference agreement does not include the House bill.
(g) Studies (sec. 708 of the House bill)
present law
No provision.
house bill
Study on small employer group plans
The House bill directs the Secretary of Labor, in
consultation with the Secretary of the Treasury, to conduct a
study to determine (1) the most appropriate form(s) of pension
plans that would be simple to create and easy to maintain by
multiple small employers, while providing ready portability of
benefits for all participants and beneficiaries, (2) how such
arrangements could be established by employer or employee
associations, (3) how such arrangements could provide for
employees to contribute independent of employer sponsorship,
and (4) appropriate methods and strategies for making such
pension plan coverage more widely available to American
workers.
The Secretary of Labor is to consider the adequacy and
availability of existing pension plans and the extent to which
existing models may be modified to be more accessible to
bothemployees and employers. The Secretary of Labor is to issue a
report within 18 months, including recommendations for one or more
model plans or arrangements as described above which may serve as the
basis for appropriate administrative or legislative action.
Study on pension coverage
The House bill also directs the Secretary of Labor to
report to the Committee on Education and the Workforce of the
House of Representatives and the Committee on Health,
Education, Labor and Pensions of the Senate regarding the
effect of the bill on pension coverage, including: the extent
of pension plan coverage for low and middle-income workers, the
levels of pension plan benefits generally, the quality of
pension plan coverage generally, worker's access to and
participation in pension plans, and retirement security. This
report is required to be submitted no later than five years
after the date of enactment.
Effective date.--The House bill is effective on the date
of enactment.
senate amendment
No provision.
conference agreement
The conference agreement does not include the House bill.
7. Miscellaneous provisions
(a) Tax treatment of electing Alaska Native Settlement
Trusts (section 691 of the Senate amendment and new
sections 646 and 6039H of the Code, modifying Code
sections including 1(e), 301, 641, 651, 661, and
6034A))
Present Law
An Alaska Native Corporation (``ANC'') may establish a
Settlement Trust (``Trust'') under section 39 of the Alaska
Native Claims Settlement Act (``ANCSA'') \136\ and transfer
money or other property to such Trust for the benefit of
beneficiaries who constitute all or a class of the shareholders
of the ANC, to promote the health, education and welfare of the
beneficiaries and preserve the heritage and culture of Alaska
Natives.
---------------------------------------------------------------------------
\136\ 43 U.S.C. 1601 et seq. A settlement Trust is subject to
certain limitations under ANCSA, including that it may not operate a
business. 43 U.S.C. 1629e(b).
---------------------------------------------------------------------------
With certain exceptions, once an ANC has made a
conveyance to a Trust, the assets conveyed shall not be subject
to attachment, distraint, or sale or execution of judgment,
except with respect to the lawful debts and obligations of the
Trust.
The Internal Revenue Service (``IRS'') has indicated that
contributions to a Trust constitute distributions to the
beneficiary-shareholders at the time of the contribution and
are treated as dividends to the extent of earnings and profits
as provided under section 301 of the Code.\137\ Also, a Trust
and its beneficiaries are generally taxed subject to applicable
trust rules.\138\
---------------------------------------------------------------------------
\137\ See, e.g., PLR 9824014; PLR 9433021; PLR 9329026 and PLR
9326019.
\138\ See Subchapter J of the Code (secs. 641 et. seq.); Treas.
Reg. Sec. 301.7701-4.
---------------------------------------------------------------------------
Under general rules regarding the classification of
entities, an entity that is taxed as a trust may not engage in
business activity and must meet certain other
requirements.\139\ Under certain circumstances, a trust can be
treated as a ``grantor'' trust rather than being taxed as a
trust; and its income can be taxed directly to the person or
persons considered the owner of the trust.\140\
---------------------------------------------------------------------------
\139\ Treas. Reg. Sec. 301.7701-4.
\140\ Sec. 671 et. seq.
---------------------------------------------------------------------------
house bill
No provision.
senate amendment
The Senate amendment allows an election under which
special rules will apply in determining the income tax
treatment of an electing Trust and of its beneficiaries. An
electing Trust will pay tax on its income at the lowest rate
specified for ordinary income of an individual (or
corresponding lower capital gains rate). The provision also
specifies the treatment of distributions by an electing Trust
to beneficiaries, the reporting requirements associated with
such an election, and the consequences of disqualification for
these benefits due to the allowance of certain impermissible
dispositions of Trust interests, or of ANC stock.
Under the provision, a trust that is a Trust established
by an Alaska Native Corporation under section 39 of ANCSA may
make an election for its first taxable year ending after the
date of enactment of the provision to be subject to the rules
of the provision rather than otherwise applicable income tax
rules. If the election is in effect, no amount will be included
in the gross income of a beneficiary of such Trust by reason of
a contribution to the Trust.\141\ In addition, ordinary income
of the electing Trust, whether accumulated or distributed, will
be taxed only to the Trust (and not to beneficiaries) at the
lowest individual tax rate for ordinary income. Capital gains
of the electing Trust will similarly be taxed to the Trust at
the capital gains rate applicable to individuals subject to
such lowest rate. These rates will apply, rather than the
higher rates generally applicable to trusts or to higher tax
bracket beneficiaries. The election is made on a one-time basis
only. The benefits of the election will terminate, however, and
other special rules will apply, if the electing Trust or the
sponsoring ANC fail to satisfy the restrictions on
transferability of Trust beneficial interests or of ANC stock.
---------------------------------------------------------------------------
\141\ If the ANC transfers appreciated property to the Trust,
section 311(b) of the Code will apply to the ANC, as under present law,
so that the ANC will recognize gain as if it had sold the property for
fair market value. The Trust takes the property with a fair market
value basis, pursuant to section 301(d) of the Code.
---------------------------------------------------------------------------
The treatment to beneficiaries of amounts distributed by
an electing Trust depends upon the amount of the distribution.
Solely for purposes of determining what amount has been
distributed and thus which treatment applies under these rules,
the amount of any distribution of property is the fair market
value of the property at the time of the distribution.\142\
---------------------------------------------------------------------------
\142\ Section 661 of the Code, which provides a deduction to the
trust for certain distributions, does not apply to an electing Trust
under the provision unless the election is terminated by
disqualification. Similarly, the inclusion provisions of section 662 of
the Code, relating to amounts to be included in income of
beneficiaries, also do not apply to a qualified electing Trust.
---------------------------------------------------------------------------
Amounts distributed by an electing Trust during any
taxable year are excludable from the gross income of the
recipient beneficiary to the extent of (1) the taxable income
of the Trust for the taxable year and all prior taxable years
for which an election was in effect (decreased by any income
tax paid by the Trust with respect to the income) plus (2) any
amounts excluded from gross income of the Trust under section
103 for those periods.\143\
---------------------------------------------------------------------------
\143\ In the case of any such excludable distribution that involves
a distribution of property other than cash, the basis of such property
in the hands of the recipient beneficiary will generally be the
adjusted basis of the property in the hands of the Trust, unless the
Trust makes an election to pay tax, in which case the basis in the
hands of the beneficiary would be the fair market value of the
property. See Code sections 643(e) and 643(e)(3).
---------------------------------------------------------------------------
If distributions to beneficiaries exceed the excludable
amounts described above, then such excess distributions are
reported and taxed to beneficiaries as if distributed by the
ANC in the year of the distribution by the electing Trust to
the extent the ANC then has current or accumulated earnings and
profits, and are treated as dividends to beneficiaries.\144\
Additional distributions in excess of the current or
accumulated earnings and profits of the ANC are treated by the
beneficiaries as distributions by the Trust in excess of the
distributable net income of the Trust for such year.\145\
---------------------------------------------------------------------------
\144\ The treatment of such amounts distributed by an electing
Trust as a dividend applies even if all or any part of the
contributions by an ANC to a Trust would not have been dividends at the
time of the contribution under present law; for example, because the
ANC had no current or accumulated earnings and profits, or because the
contribution was made from Alaska Native Fund amounts that may not have
been taxable. See 43 U.S.C. 1605.
\145\ Such distributions would not be taxable to the beneficiaries.
In the case of any such nontaxable distribution that involves a
distribution of property other than cash, the basis of such property in
the hands of the recipient beneficiary will generally be the adjusted
basis of the property in the hands of the Trust, unless the Trust makes
an election to pay tax, in which case the basis in the hands of the
beneficiary will be the fair market value of the property. See Code
sections 643(e) and 643(e)(3).
---------------------------------------------------------------------------
The fiduciary of an electing Trust must report to the
IRS, with the Trust tax return, the amount of distributions to
each beneficiary, and the tax treatment to the beneficiary of
such distributions under the provision (either as exempt from
tax to the beneficiary, or as a distribution deemed made by the
ANC). The electing Trust must also furnish such information to
the ANC. In the case of distributions that are treated as if
made by the ANC, the ANC must then report such amounts to the
beneficiaries and must indicate whether they are dividends or
not, in accordance with the earnings and profits of the ANC.
The reporting thus required by an electing Trust will be in
lieu of, and will satisfy, the reporting requirements of
section 6034A (and such other reporting requirements as the
Secretary of the Treasury may deem appropriate).
The earnings and profits of an ANC will not be reduced by
the amount of its contributions to an electing Trust at the
time of the contributions. However, the ANC earnings and
profits will be reduced as and when distributions are
thereafter made by the electing Trust that are taxed to
beneficiaries under the provision as dividends from the ANC to
the Trust beneficiaries.
If in any taxable year the beneficial interests in the
electing Trust may be disposed of to a person in a manner that
would not be permitted under ANCSA if the interests were
Settlement Common Stock (generally, to a person other than an
Alaska Native),\146\ then the special provisions applicable to
electing Trusts, including the favorable ordinary income tax
rate and corresponding lower capital gains tax rate, cease to
apply as of the beginning of such taxable year. The
distributable net income of the Trust is increased up to the
amount of current and accumulated earnings and profits of the
ANC as of the end of that year, but such increase shall not
exceed the fair market value of the assets of the Trust as of
the date the beneficial interests of the Trust became
disposable.\147\ Thereafter, the Trust and its beneficiaries
are generally subject to the rules of subchapter J and to the
generally applicable trust income tax rates. Thus, the increase
in distributable net income will result in the Trust being
taxed at regular trust rates to the extent the recomputed
distributable net income is not distributed to beneficiaries;
and beneficiaries will be taxed to the extent there are
distributions. Normal reporting rules applicable to trusts and
their beneficiaries will apply. The basis of any property
distributed to beneficiaries will also be determined under
normal trust rules. The same rules apply if any stock of the
ANC may be disposed of to a person in a manner that would not
be permitted under ANCSA if the stock were Settlement Common
Stock and the ANC makes a transfer to the Trust.
---------------------------------------------------------------------------
\146\ Under ANSCA, Settlement Common Stock is subject to
restrictions on transferability, generally limiting transfers. However,
if changes are made to permit transfers of stock that would not be
permitted for Settlement Common Stock, then the Settlement Common Stock
is cancelled and Replacement Common Stock is issued. See 43 U.S.C.
1602(p), 1606(h) and 1629c.
\147\ To the extent the earnings and profits of the ANC increase
distributable net income of the Trust under this provision, the ANC
will have a corresponding adjustment reducing its earnings and profits.
---------------------------------------------------------------------------
The provision contains a special loss disallowance rule
that reduces any loss that would otherwise be recognized by a
shareholder upon the disposition of a share of stock of a
sponsoring ANC by a ``per share loss adjustment factor''. This
factor reflects the aggregate of all contributions to an
electing Trust sponsored by such ANC made on or after the first
day the trust is treated as an electing Trust, expressed on a
per share basis and determined as of the day of each such
contribution.
The special loss disallowance rule is intended to prevent
the allowance of noneconomic losses if the ANC stock owned by
beneficiaries ever becomes transferable in any type of
transaction that could cause the recognition of taxable gain or
loss, (including a redemption by the ANC) where the basis of
the stock in the hands of the beneficiary (or in the hands of
any transferee of a beneficiary) fails to reflect the allocable
reduction in corporate value attributable to amounts
transferred by the ANC into the Trust.
Effective date.--The provision is effective for taxable
years of Trusts, their beneficiaries, and sponsoring Alaska
Native Corporations ending after the date of enactment, and to
contributions made to electing Trusts during such year and
thereafter.
Conference Agreement
The conference agreement follows the Senate amendment.
The conferees wish to state certain technical
clarifications of the description of the Senate amendment,
which also apply under the conference agreement.
Under the Senate amendment and the conference agreement,
a Trust that makes the election remains subject to the
generally applicable requirements for classification and
taxation as a trust, in order to obtain the benefits of the
provision.
Under the Senate amendment and the conference agreement,
the per share loss adjustment factor for stock of an ANC is the
aggregate of all contributions to all electing Trusts sponsored
by such ANC made on or after the first day each such Trust is
treated as an electing Trust expressed on a per share basis and
determined as of the day of each such contribution.
Under the Senate amendment and the conference agreement,
the restrictions on transfer of stock or beneficial interests
under the provision are those that would apply to Settlement
Common Stock under section 7(h) of ANSCA \148\ (whether or not
the interest or stock in question is in fact Settlement Common
Stock). To the extent section 7(h) of ANSCA permits certain
transfers of Settlement Common stock on death or in other
special circumstances, those are also permitted under the
provision. Also, the mere transferability of ANC stock in
manner that would not be permitted for Settlement Common Stock
(but without such transferability of any Trust interests) will
not destroy the beneficial treatment of an existing electing
Trust unless and until the ANC thereafter makes a transfer to
the Trust.
---------------------------------------------------------------------------
\148\ 43 U.S.C. 1606(h).
---------------------------------------------------------------------------
Under the Senate amendment and the conference agreement,
the surrender of an interest in an ANC or an electing Trust in
order to accomplish the whole or partial redemption of the
interest of a shareholder or beneficiary in such ANC or Trust,
or to accomplish the whole or partial liquidation of such ANC
or Trust, is deemed to be a transfer permitted by section 7(h)
of ANSCA for purposes of the provision.
The conferees also wish to clarify the effect of the
general sunset rule of the legislation on this provision. The
general sunset is effective for taxable years beginning after
December 31, 2010. For such taxable years, the tax consequences
of any election previously made under this provision, and any
right to make a future election, shall be terminated. Thus, for
taxable years beginning after December 31, 2010, any electing
Trust then in existence, its beneficiaries, and the sponsoring
ANC shall be taxed under the provisions of law in effect
immediately prior to the enactment of this provision.
8. Provisions relating to plan amendments (sec. 801 of the House bill)
Present Law
Plan amendments to reflect amendments to the law
generally must be made by the time prescribed by law for filing
the income tax return of the employer for the employer's
taxable year in which the change in law occurs.
House Bill
The House bill permits certain plan amendments made
pursuant to the changes made by the bill (or regulations issued
under the provisions of the House bill) to be retroactively
effective. If the plan amendment meets the requirements of the
bill, then the plan is treated as being operated in accordance
with its terms and the amendment does not violate the
prohibition of reductions of accrued benefits. In order for
this treatment to apply, the plan amendment must be made on or
before the last day of the first plan year beginning on or
after January 1, 2004 (January 1, 2006, in the case of a
governmental plan). If the amendment is required to be made to
retain qualified status as a result of the changes in the bill
(or regulations) the amendment must be made retroactively
effective as of the date on which the change became effective
with respect to the plan and the plan must be operated in
compliance until the amendment is made. Amendments that are not
required to retain qualified status but that are made pursuant
to the changes made by the bill (or applicable regulations) may
be made retroactive as of the first day the plan was operated
in accordance with the amendment.
A plan amendment is not considered to be pursuant to the
bill (or applicable regulations) if it has an effective date
before the effective date of the provision of the House bill
(or regulations) to which it relates. Similarly, the House bill
does not provide relief from section 411(d)(6) for periods
prior to the effective date of the relevant provision of the
House bill (or regulations) or the plan amendment.
The Secretary is authorized to provide exceptions to the
relief from the prohibition on reductions in accrued benefits.
It is intended that the Secretary will not permit inappropriate
reductions in contributions or benefits that are not directly
related to the provisions of the House bill. For example, it is
intended that a plan that incorporates the section 415 limits
by reference could be retroactively amended to impose the
section 415 limits in effect before the bill. On the other
hand, suppose a plan that incorporates the section 401(a)(17)
limit on compensation by reference provides for an employer
contribution of three percent of compensation. It is expected
that the Secretary will provide that the plan could not be
amended retroactively to reduce the contribution percentage for
those participants not affected by the section 401(a)(17)
limit, even though the reduction will result in the same dollar
level of contributions for some participants because of the
increase in compensation taken into account under the plan. As
another example, suppose that under present law a plan is top-
heavy and therefore a minimum benefit is required under the
plan, and that under the provisions of the House bill, the plan
would not be considered to be top heavy. It is expected that
the Secretary will generally permit plans to be retroactively
amended to reflect the new top-heavy provisions of the House
bill.
Effective date.--The House bill is effective on the date
of enactment.
Senate Amendment
No provision.
Conference Agreement
The conference agreement does not include the House bill.
VII. ALTERNATIVE MINIMUM TAX
A. Individual Alternative Minimum Tax Relief (Sec. 3(c) of H.R. 6, Sec.
701 of the Senate amendment and Sec. 55 of the Code)
Present Law
Present law imposes an alternative minimum tax (``AMT'')
on individuals to the extent that the tentative minimum tax
exceeds the regular tax. An individual's tentative minimum tax
generally is an amount equal to the sum of (1) 26 percent of
the first $175,000 ($87,500 in the case of a married individual
filing a separate return) of alternative minimum taxable income
(``AMTI'') in excess of an exemption amount and (2) 28 percent
of the remaining AMTI. AMTI is the individual's taxable income
adjusted to take account of specified preferences and
adjustments.
The AMT exemption amounts are: (1) $45,000 in the case of
married individuals filing a joint return and surviving
spouses; (2) $33,750 in the case of other unmarried
individuals; and (3) $22,500 in the case of married individuals
filing a separate return, estates and trusts. The exemption
amounts are phased out by an amount equal to 25 percent of the
amount by which the individual's AMTI exceeds (1) $150,000 in
the case of married individuals filing a joint return and
surviving spouses, (2) $112,500 in the case of other unmarried
individuals, and (3) $75,000 in the case of married individuals
filing separate returns or an estate or a trust. The exemption
amounts, the threshold phase-out amounts, and rate brackets are
not indexed for inflation.
House Bill
No provision.
However, H.R. 6, as passed by the House, increases the
AMT exemption amount for married couples filing a joint return
and surviving spouses by $1,000 in 2005, by an additional $500
in 2006, and by an additional $500 every even-numbered year
thereafter. The exemption amount for married individuals filing
a separate return is one-half the exemption amount for a
married couple filing a joint return.
Effective date.--The provision applies to taxable years
beginning after December 31, 2004.
Senate Amendment
The Senate amendment increases the AMT exemption amount
for married couples filing a joint return and surviving spouses
by $4,000. The AMT exemption amounts for other individuals
(i.e., unmarried individuals and married individuals filing a
separate return) are increased by $2,000.
Effective date.--The provision applies to taxable years
beginning after December 31, 2000, and before January 1, 2007.
Conference Agreement
The conference agreement increases the AMT exemption
amount for married couples filing a joint return and surviving
spouses by $4,000. The AMT exemption amounts for other
individuals (i.e., unmarried individuals and married
individuals filing a separate return) are increased by $2,000.
Effective date.--The provision applies to taxable years
beginning after December 31, 2000, and beginning before January
1, 2005.
VIII. OTHER PROVISIONS
A. Modification to Corporate Estimated Tax Requirements (Secs. 801 and
815 of the Senate Amendment)
Present Law
In general, corporations are required to make quarterly
estimated tax payments of their income tax liability (section
6655). For a corporation whose taxable year is a calendar year,
these estimated tax payments must be made by April 15, June 15,
September 15, and December 15.
House Bill
No provision.
Senate Amendment
With respect to corporate estimated tax payments due on
September 17, 2001,\149\ 30 percent is required to be paid by
September 17, 2001, and 70 percent is required to be paid by
October 1, 2001. With respect to corporate estimated tax
payments due on September 15, 2004, 80 percent is required to
be paid by September 15, 2004, and 20 percent is required to be
paid by October 1, 2004.
---------------------------------------------------------------------------
\149\ September 15, 2001 will be a Saturday. Under present law,
payments required to be made on a Saturday must be made no later than
the next banking day.
---------------------------------------------------------------------------
With respect to corporate estimated tax payments due in
July, August, or September 2011, the payment must be 170
percent of the amount otherwise required to be paid under the
corporate estimated tax rules.
Effective date.--The provision is effective on the date
of enactment.
Conference Agreement
The conference agreement follows the Senate amendment
with respect to corporate estimated tax payments due on
September 15, 2004. With respect to corporate estimated tax
payments due on September 17, 2001, 100 percent is not due
until October 1, 2001. The conference agreement does not
include the provision affecting corporate estimated tax
payments due in 2011.
B. Authority To Postpone Certain Tax-Related Deadlines by Reason of
Presidentially Declared Disaster (Sec. 802 of the Senate Amendment and
Sec. 7508A of the Code)
Present Law
The Secretary of the Treasury may specify that certain
deadlines are postponed for a period of up to 90 days in the
case of a taxpayer determined to be affected by a
Presidentially declared disaster.\150\ The deadlines that may
be postponed are the same as are postponed by reason of service
in a combat zone. If the Secretary extends the period of time
for filing income tax returns and for paying income tax, the
Secretary must abate related interest for that same period of
time.\151\
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\150\ Section 7508A.
\151\ Section 6404(h).
---------------------------------------------------------------------------
House Bill
No provision.
Senate Amendment
The Senate amendment directs the Secretary to create in
the IRS a Permanent Disaster Response Team, which, in
coordination with the Federal Emergency Management Agency, is
to assist taxpayers in clarifying and resolving tax matters
associated with a Presidentially declared disaster. One of the
duties of the Disaster Response Team is to postpone certain
tax-related deadlines for up to 120 days in appropriate cases
for taxpayers determined to be affected by a Presidentially
declared disaster.
It is anticipated that the Disaster Response Team would
be staffed by IRS employees with relevant knowledge and
experience. It is anticipated that the Disaster Response Team
would staff a toll-free number dedicated to responding to
taxpayers affected by a Presidentially declared disaster and
provide relevant information via the IRS website.
Effective date.--The provision is effective on the date
of enactment.
Conference Agreement
The conference agreement expands the period of time with
respect to which the Secretary may postpone certain deadlines
from 90 days to 120 days. The conference agreement does not
include the provision of the Senate amendment that provides for
a Permanent Disaster Response Team.
C. Income Tax Treatment of Certain Restitution Payments to Holocaust
Victims (Sec. 803 of the Senate amendment)
present law
Under the Code, gross income means ``income from whatever
source derived'' except for certain items specifically exempt
or excluded by statute (sec. 61). There is no explicit
statutory exception from gross income provided for amounts
received by Holocaust victims or their heirs.
house bill
No provision.
senate amendment
The Senate amendment provides that excludable restitution
payments made to an eligible individual (or the individual's
heirs or estate) are: (1) excluded from gross income; and (2)
not taken into account for any provision of the Code which
takes into account excludable gross income in computing
adjusted gross income (e.g., taxation of Social Security
benefits).
The basis of any property received by an eligible
individual (or the individual's heirs or estate) that is
excluded under this provision is the fair market value of such
property at the time of receipt by the eligible individual (or
the individual's heirs or estate).
The Senate amendment provides that any excludible
restitution payment is disregarded in determining eligibility
for, and the amount of benefits and services to be provided
under, any Federal or federally assisted program which provides
benefit or service based, in whole or in part, on need. Under
the Senate amendment, no officer, agency, or instrumentality of
any government may attempt to recover the value of excessive
benefits or services provided under such a program before
January 1, 2000, by reason of failure to take account of
excludable restitution payments received before that date.
Similarly, the Senate amendment requires a good faith effort to
notify any eligible individual who may have been denied such
benefits or services of their potential eligibility for such
benefits or services. The Senate amendment also provides
coordination between this bill and Public Law 103-286, which
also disregarded certain restitution payments in determining
eligibility for, and the amount of certain needs-based benefits
and services.
Eligible restitution payments are any payment or
distribution made to an eligible individual (or the
individual's heirs or estate) which: (1) is payable by reason
of the individual's status as an eligible individual (including
any amount payable by any foreign country, the United States,
or any foreign or domestic entity or fund established by any
such country or entity, any amount payable as a result of a
final resolution of legal action, and any amount payable under
a law providing for payments or restitution of property); (2)
constitutes the direct or indirect return of, or compensation
or reparation for, assets stolen or hidden, or otherwise lost
to, the individual before, during, or immediately after World
War II by reason of the individual's status as an eligible
individual (including any proceeds of insurance under policies
issued on eligible individuals by European insurance companies
immediately before and during World War II); or (3) interest
payable as part of any payment or distribution described in (1)
or (2), above. An eligible individual is a person who was
persecuted for racial or religious reasons by Nazi Germany, or
any other Axis regime, or any other Nazi-controlled or Nazi-
allied country.
Effective date.--The provision is effective for any
amounts received on or after January 1, 2000. No inference is
intended with respect to the income tax treatment of any amount
received before January 1, 2000.
conference agreement
The conference agreement follows the Senate amendment,
with three changes. First, the definition of eligible
individuals is expanded to also include individuals persecuted
on the basis of physical or mental disability or sexual
orientation. Second, interest earned by enumerated escrow or
settlement funds are also excluded from tax. Third, the
provision disregarding excludible restitution in determining
eligibility for and the benefit calculation of certain Federal
or Federally assisted programs is deleted.
D. Treatment of Survivor Annuity Payments with Respect to Public Safety
Officers (Sec. 804 of the Senate amendment)
present law
The Taxpayer Relief Act of 1997 provided that an amount
paid as a survivor annuity on account of the death of a public
safety officer who is killed in the line of duty is excludable
from income to the extent the survivor annuity is attributable
to the officer's service as a law enforcement officer. The
survivor annuity must be provided under a governmental plan to
the surviving spouse (or former spouse) of the public safety
officer or to a child of the officer.
The provision does not apply with respect to the death of
a public safety officer if it is determined by the appropriate
supervising authority that (1) the death was caused by the
intentional misconduct of the officer or by the officer's
intention to bring about the death, (2) the officer was
voluntarily intoxicated at the time of death, (3) the officer
was performing his or her duties in a grossly negligent manner
at the time of death, or (4) the actions of the individual to
whom payment is to be made were a substantial contributing
factor to the death of the officer.
For purposes of the exclusion, ``public safety officer''
is defined as in section 1204 of the Omnibus Crime Control and
Safe Streets Act of 1968 (as amended). Under that Act, a public
safety officer is an: (1) individual serving a public agency
(with or without compensation) as a law enforcement officer,
firefighter, rescue squad member, or ambulance crew member; (2)
employee of the Federal Emergency Management Agency (FEMA)
performing hazardous duties with respect to a Federally
declared disaster area; and (3) employee of a State, local, or
tribal emergency agency who is performing hazardous duties in
cooperation with FEMA in a Federally declared disaster area.
The provision applies to amounts received in taxable
years beginning after December 31, 1996, with respect to
individuals dying after that date.
house bill
No provision. However, H.R. 1727, the ``Fallen Hero
Survivor Benefit Fairness Act of 2001,'' as passed by the
House, extends the present-law treatment of survivor annuities
with respect to public safety officers killed in the line of
duty with respect to individuals dying on or before December
31, 1996.
Effective date.--The provision is effective with respect
to payments received after December 31, 2001.
senate amendment
The Senate amendment provision is the same as H.R. 1727.
Effective date.--The provision is effective with respect
to payments received after December 31, 2000.
conference agreement
The conference agreement does not include the provisions
of H.R. 1727 or the Senate amendment provision.
E. Circuit Breaker (Sec. 805 of the Senate Amendment)
present law
The Congressional Budget Act of 1974 contains numerous
rules enforcing the scope of items permitted to be considered
under the budget reconciliation process.
house bill
No provision.
senate amendment
The Senate amendment provides that, in any fiscal year
beginning with fiscal year 2004, if the level of debt held by
the public at the end of that fiscal year (as projected by the
Office of Management and Budget sequestration update report on
August 20th preceding the beginning of that fiscal year) would
exceed the level of debt held by the public for that fiscal
year set forth in the concurrent resolution on the budget for
fiscal year 2002, any Member of Congress may move to proceed to
a bill that would make changes in law to reduce discretionary
spending and direct pending (except for changes in Social
Security, Medicare and COLA's) and increase revenues in a
manner that would reduce the debt held by the public for the
fiscal year to a level not exceeding the level provided in that
concurrent resolution for that fiscal year.
A bill considered pursuant to this provision would be
considered as provided in section 310(e) of the Congressional
Budget Act.
The Senate amendment provides that it shall not be in
order in the Senate to consider any bill, joint resolution,
motion, amendment, or conference report pursuant to the
provision that contains any provisions other than those
enumerated in sections 310(a)(1) and 310(a)(2) of the
Congressional Budget Act. This point of order may be waived or
suspended in the Senate only by the affirmative vote of three-
fifths of the Members. An affirmative vote of three-fifths of
the Members shall be required in the Senate to sustain an
appeal of the ruling of the Chair on a point of order raised
pursuant to the provision.
Effective date.--The provision is effective on the date
of enactment.
conference agreement
The conference agreement does not include the Senate
amendment provision.
F. Acceleration of Health Insurance Deduction for Self-Employed
Individuals (Secs. 806 and 807 of the Senate Amendment and Sec. 162(l)
of the Code)
present law
Under present law, the individual income tax treatment of
health insurance expenses depends on the individual's
circumstances. Self-employed individuals may deduct a portion
of health insurance expenses for the individual and his or her
spouse and dependents. The deductible percentage of health
insurance expenses of a self-employed individual is 60 percent
in 2001, 70 percent in 2002, and 100 percent in 2003 and
thereafter. The deduction for health insurance expenses of
self-employed individuals is not available for any month in
which the individual is eligible to participate in a subsidized
health plan maintained by the employer of the individual or the
individual's spouse. The self-employed health deduction also
applies to qualified long-term care insurance premiums treated
as medical care for purposes of the itemized deduction for
medical expenses, described below.
Employees can exclude from income 100 percent of
employer-provided health insurance.
Individuals who itemize deductions may deduct their
health insurance expenses only to the extent that the total
medical expenses of the individual exceed 7.5 percent of
adjusted gross income (sec. 213). Subject to certain dollar
limitations, premiums for qualified long-term care insurance
are treated as medical expenses for purposes of the itemized
deduction for medical expenses (sec. 213). The amount of
qualified long-term care insurance premiums that may be taken
into account for 2001 is as follows: $230 in the case of an
individual 40 years old or less; $430 in the case of an
individual who is over 40 but not more than 50; $860 in the
case of an individual who is more than 50 but not more than 60;
$2,290 in the case of an individual who is more than 60 but not
more than 70; and $2,860 in the case of an individual who is
more than 70. These dollar limits are indexed for inflation.
house bill
No provision.
Senate Amendment
The Senate amendment increases the deduction for health
insurance expenses (and qualified long-term care insurance
expenses) of self-employed individuals to 100 percent beginning
in 2002. The Senate amendment also provides that the deduction
is not available for any month in which the self-employed
individual participates in (rather than is eligible for) a
subsidized health plan maintained by ay employer of the
individual or his or her spouse.
Effective date.--The provision is effective for taxable
years beginning after December 31, 2001.
conference agreement
The conference agreement does not include the Senate
amendment provision.
G. Enhanced Deduction for Charitable Contribution of Literary, Musical,
and Artistic Compositions (Sec. 808 of the Senate Amendment and Sec.
170 of the Code)
present law
In the case of a charitable contribution of inventory or
other ordinary-income or short-term capital gain property, the
amount of the deduction is limited to the taxpayer's basis in
the property. In the case of a charitable contribution of
tangible personal property, the deduction is limited to the
taxpayer's basis in such property if the use by the recipient
charitable organization is unrelated to the organization's tax-
exempt purpose. In cases involving contributions to a private
foundation (other than certain private operating foundations),
the amount of the deduction is limited to the taxpayer's basis
in the property.
Under present law, charitable contributions of literary,
musical, and artistic compositions are considered ordinary
income property and a taxpayer's deduction of such property is
limited to the taxpayer's basis (typically, cost) in the
property. To be eligible for the deduction, the contribution
must be of an undivided portion of the donor's entire interest
in the property. For purposes of the charitable income tax
deduction, the copyright and the work in which the copyright is
embodied are not treated as separate property interests.
Accordingly, if a donor owns a work of art and the copyright to
the work of art, a gift of the artwork without the copyright or
the copyright without the artwork will constitute a gift of a
``partial interest'' and will not qualify for the income tax
charitable deduction.
house bill
No provision.
senate amendment
The Senate amendment provides that a deduction for
qualified artistic charitable contributions is the fair market
value of the property contributed at the time of the
contribution. The Senate amendment defines a qualified artistic
charitable contribution to mean a charitable contribution of
any literary, musical, artistic, or scholarly composition, or
similar property, or the copyright thereon (or both). The
tangible property and the copyright on such property are
treated as separate interests in the property for purposes of
the ``partial interest'' rule. Contributions of letters,
memoranda, or similar property that are written, prepared, or
produced by or for an individual in his or her capacity as an
officer or employee of any person (including a government
agency or instrumentality) do not qualify for fair market value
deduction unless the contributed property is entirely personal.
Under the Senate amendment, the increase in the deduction
that results from the provision cannot exceed the amount of
adjusted gross income of the donor for the taxable year from
the sale or use of property created by the donor that is of the
same type as the donated property, and from teaching,
lecturing, performing, or similar activities with respect to
such property. The fair market value deduction cannot be
carried over and deducted in other taxable years.
A contribution is required to meet several requirements
in order to qualify for the fair market value deduction. First,
the contributed property must have been created by the personal
efforts of the donor at least 18 months prior to the date of
contribution. Second, the donor must obtain a qualified
appraisal of the contributed property, a copy of which must be
attached to the donor's income tax return for the taxable year
in which such contribution is made. Third, the contribution
must be made to a public charity or to certain limited types of
private foundations. Finally, the use of donated property by
the recipient organization must be related to the
organization's charitable purpose or function, and the donor
must receive a written statement from the organization
verifying such use.
Effective date.--The deduction for qualified artistic
charitable contributions applies to contributions made after
the date of enactment.
conference agreement
The conference agreement does not include the Senate
amendment provision.
H. Estate Tax Recapture From Cash Rents of Specially-Valued Property
(Sec. 809 of the Senate Amendment)
present law
Under the special-use valuation rules of section 2032A,
the executor may elect to value certain ``qualified real
property'' used in farming or another qualifying trade or
business at its current use rather than its highest and best
use. If, after the special-use valuation election is made, the
heir who acquired the real property ceases to use it in its
qualified use within 10 years (15 years for individuals dying
before 1982) of the decedent's death, an additional estate tax
is imposed in order to ``recapture'' the benefit of the
special-use valuation. Section 2032A is effective for estates
of decedents dying after December 31, 1976.
Under prior law, some courts had held that cash rental of
property for which special-use valuation was claimed was not a
qualified use under the rules, because the heirs no longer bore
the financial risk of working the property, thus triggering the
additional estate tax.\152\
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\152\ See Martin v. Commissioner, 783 F.2d 81 (7th Cir. 1986) (cash
lease to unrelated party not qualified use); Williamson v.
Commissioner, 93 T.C. 242 (1989), aff'd. 974 F.2d 1525 (9th Cir. 1992)
(cash lease to family member not a qualified use); Fisher v.
Commissioner, T.C. Memo. 1993-139 (cash lease to family member not a
qualified use); cf. Minter v. U.S., 19 F.3d 426 (8th Cir. 1994) (cash
lease to family's farming corporation is qualified use); Estate of
Gavin v. U.S., 103 F.3d 802 (8th Cir. 1997) (heir's option to pay cash
rent or 50 percent crop share is qualified use).
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With respect to a decedent's surviving spouse, a special
rule provides that the surviving spouse will not be treated as
failing to use the property in a qualified use solely because
the spouse rents the property to a member of the spouse's
family on a net cash basis. Members of an individual's family
include (1) the individual's spouse, (2) the individual's
ancestors, (3) lineal descendants of the individual, of the
individual's spouse, or of the individual's parents, and (4)
the spouses of any such lineal descendants.
Section 504(c) of the Tax Reform Act of 1997 expanded the
class of heirs eligible to lease property for which special-use
valuation was claimed without causing the qualified use of such
property to cease for purposes of imposition of the additional
estate tax. Section 2032A(c)(7)(E) provides that the net cash
lease of property (for which special-use valuation was claimed)
by a lineal descendant of the decedent to a member of such
lineal descendant's family does not cause the qualified use of
the property to cease for purposes of imposition of the
additional estate tax. The amendment made under the Tax Reform
Act of 1997 applies to leases entered into after December 31,
1976.
In Technical Advice Memorandum 9843001, the IRS
determined that the retroactive effective date in the changes
made by the Tax Reform Act of 1997 did not constitute a waiver
of the period of limitations otherwise applicable on a
taxpayer's claim. Accordingly, the IRS determined that a
taxpayer's claim for refund of recapture tax paid on account of
the cessation of a qualified use was barred under the generally
applicable statute of limitations on refund claims.
house bill
No provision.
Senate Amendment
The Senate amendment provides that, if on the date of
enactment or at any time within one year after the date of
enactment, a claim for refund or credit of any overpayment of
tax resulting from the application of net cash lease provisions
for spouses and lineal descendants (Sec. 2032A(c)(7)(E)) is
barred by operation of law or rule of law, then the refund or
credit of such overpayment shall, nonetheless, be allowed if a
claim therefore is filed before the date that is one year after
the date of enactment.
Effective date.--This provision is effective for refund
claims filed prior to the date that is one year after the date
of enactment.
conference agreement
The conference agreement follows the Senate amendment.
I. Extension of Research and Experimentation Tax Credit and New Vaccine
Research Credit (Secs. 810 and 811 of the Senate Amendment and Sec. 41
and New Sec. 45G of the Code)
present law
Section 41 provides for a research tax credit equal to 20
percent of the amount by which a taxpayer's qualified research
expenditures for a taxable year exceeded its base amount for
that year. The research tax credit generally applies to amounts
paid or incurred before July 1, 2004.
Except for certain university basic research payments
made by corporations, the research tax credit applies only to
the extent that the taxpayer's qualified research expenditures
for the current taxable year exceed its base amount. The base
amount for the current year generally is computed by
multiplying the taxpayer's ``fixed-base percentage'' by the
average amount of the taxpayer's gross receipts for the four
preceding years. If a taxpayer both incurred qualified research
expenditures and had gross receipts during each of at least
three years from 1984 through 1988, then its ``fixed-base
percentage'' is the ratio that its total qualified research
expenditures for the 1984-1988 period bears to its total gross
receipts for that period (subject to a maximum ratio of 0.16).
All other taxpayers (so-called ``start-up firms'') are assigned
a fixed-base percentage of 3.0 percent.
Taxpayers are allowed to elect an alternative incremental
research credit regime. If a taxpayer elects to be subject to
this alternative regime, the taxpayer is assigned a three-
tiered fixed-base percentage (that is lower than the fixed-base
percentage otherwise applicable under present law) and the
credit rate likewise is reduced. Under the alternative credit
regime, a credit rate of 2.65 percent applies to the extent
that a taxpayer's current-year research expenses exceed a base
amount computed by using a fixed-base percentage of 1.0 percent
(i.e., the base amount equals 1.0 percent of the taxpayer's
average gross receipts for the four preceding years) but do not
exceed a base amount computed by using a fixed-base percentage
of 1.5 percent. A credit rate of 3.2 percent applies to the
extent that a taxpayer's current-year research expenses exceed
a base amount computed by using a fixed-base percentage of 1.5
percent but do not exceed a base amount computed by using a
fixed-base percentage of 2.0 percent. A credit rate of 3.75
percent applies to the extent that a taxpayer's current-year
research expenses exceed a base amount computed by using a
fixed-base percentage of 2.0 percent. An election to be subject
to this alternative incremental credit regime may be made for
any taxable year beginning after June 30, 1996, and such an
election applies to that taxable year and all subsequent years
(in the event that the credit subsequently is extended by
Congress) unless revoked with the consent of the Secretary of
the Treasury.
House Bill
No provision.
senate amendment
The Senate amendment would make the research credit
permanent.
The Senate amendment also would increase the credit rates
under the alternative incremental credit from 2.65 percent to
3.0 percent, from 3.2 percent to 4.0 percent, and from 3.75
percent to 5.0 percent.
In addition, the Senate amendment would provide a new
research credit with respect to certain qualified vaccine and
microbiocide research. The amendment would provide a credit
equal to 30 percent of qualifying vaccine research expenses
undertaken to develop vaccines and microbicides for malaria,
tuberculosis, HIV, or any infectious disease (of a single
etiology) which, according to the World Health Organization,
causes over one million human deaths annually.\153\ Qualifying
expenses would include 100 percent of in-house research
expenses and 100 percent of contract research expenses. In-
house research expenses and contract research expenses would be
defined as in present-law sec. 41. Qualifying vaccine research
expenses would not include expenses for research incurred
outside the United States, other than in the case of expenses
for human clinical testing. No credit may be claimed for pre-
clinical expenses unless a research plan has been filed with
the Secretary of the Treasury.
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\153\ The credit for vaccine research expenses would be coordinated
with the credit for research under present-law sec. 41 and any
deduction otherwise allowed with respect to qualifying vaccine research
expenses would be reduced by the amount of the credit claimed for
vaccine research expenses.
---------------------------------------------------------------------------
Effective date.--The provision generally would be
effective on the date of enactment. The increase in credit
rates under the alternative incremental credit and the new
credit for qualifying vaccine research expenses would be
effective for taxable years ending after the date of enactment.
conference agreement
The conference agreement does not include the Senate
amendment.
J. Acceleration of Round II Empowerment Zone Wage Credit (Sec. 812 of
the Senate Amendment and Sec. 1396 of the Code)
present law
The Omnibus Budget Reconciliation Act of 1993 (``OBRA
1993'') authorized the designation of nine empowerment zones
(``Round I empowerment zones'') to provide tax incentives for
businesses to locate within targeted areas designated by the
Secretaries of Housing and Urban Development and Agriculture.
The Taxpayer Relief Act of 1997 (``1997 Act'') authorized the
designation of two additional Round I urban empowerment zones.
Among other incentives, Round I empowerment zones qualify for a
20-percent wage credit for the first $15,000 of wages paid to a
zone resident who works in the empowerment zone.
The 1997 Act also authorized the designation of 20
additional empowerment zones (``Round II empowerment zones''),
of which 15 are located in urban areas and five are located in
rural areas. The 1997 Act did not authorize a wage credit for
businesses located in the Round II empowerment zones. The
Community Renewal Tax Relief Act of 2000, however, extended the
20-percent wage credit to Round II empowerment zones for wages
paid or incurred after December 31, 2001.\154\
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\154\ H.R. 5662, sec. 113 (2000) (enacted by Pub. L. No. 106-554);
sec. 1396(b). Among other changes, the Community Renewal Tax Relief Act
of 2000 extended all empowerment zone designations through December 31,
2009, and provided that the wage credit rate remains at 20 percent for
all empowerment zones (rather than being phased down) through December
31, 2009.
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house bill
No provision.
senate amendment
The Senate amendment accelerates the availability of the
wage credit for Round II empowerment zones to the earlier of
July 1, 2001, or the date of enactment of the bill.
Effective date.--For wages paid or incurred after the
earlier of July 1, 2001 or date of enactment.
conference agreement
The conference agreement does not contain the Senate
amendment.
K. Treatment of Certain Hospital Support Organizations in Determining
Acquisition Indebtedness (Sec. 813 of the Senate Amendment and Sec. 514
of the Code)
present law
In general, income of a tax-exempt organization that is
produced by debt-financed property is treated as unrelated
business income in proportion to the acquisition indebtedness
on the income-producing property. Acquisition indebtedness
generally means the amount of unpaid indebtedness incurred by
an organization to acquire or improve the property and
indebtedness that would not have been incurred but for the
acquisition or improvement of the property. However, under an
exception, acquisition indebtedness does not include
indebtedness incurred by certain qualified organizations to
acquire or improve real property. Qualified organizations
include pension trusts, educational institutions, and title-
holding companies.
house bill
No provision.
senate amendment
The Senate amendment expands the exception to the
definition of acquisition indebtedness in the case of a
qualified hospital support organization. The exception applies
to eligible indebtedness (or the qualified refinancing thereof)
of the qualified hospital support organization.
A qualified hospital support organization is a supporting
organization (under Code section 509(a)(3)) of a hospital that
is an academic health center (under Code section 119(d)(4)(B)).
The assets of the supporting organization must also meet
certain requirements. First, more than half of the value of its
assets at any time since its organization (1) must have been
acquired, directly or indirectly, by gift or devise, and (2)
must consist of real property. In addition, the fair market
value of the organization's real estate acquired by gift or
devise must exceed 10 percent of the fair market value of all
investment assets held by the organization immediately prior to
the time that the eligible indebtedness is incurred. These
requirements must be met each time eligible indebtedness is
incurred or a qualified refinancing thereof occurs.
Eligible indebtedness means indebtedness secured by real
property acquired by gift or devise, the proceeds of which are
used exclusively to acquire a leasehold interest in or to
improve the property. A qualified refinancing of eligible
indebtedness occurs if the refinancing does not exceed the
amount of refinanced eligible indebtedness immediately before
the refinancing.
Effective date.--The Senate amendment applies to
indebtedness incurred after December 31, 2003.
conference agreement
The conference agreement does not include the Senate
amendment provision.
L. Modify Rules Governing Tax-Exempt Bonds for Certain Private Water
Facilities (Sec. 814 of the Senate Amendment and Sec. 142 of the Code)
present law
Interest on State or local government bonds is tax-exempt
when the proceeds of the bonds are used to finance activities
carried out by or paid for by those governmental units.
Interest on bonds issued by State or local governments acting
as conduit borrowers for private businesses is taxable unless a
specific exception is included in the Code. One such exemption
allows tax-exempt bonds to be issued to finance privately owned
and operated facilities for the furnishing of water. Such
facilities must be operated in a manner similar to municipal
water facilities in that service must be offered to the general
public, and rates must be regulated. Tax-exempt private
activity bonds for water facilities may be issued to finance
arsenic and other pollutant treatment facilities.
Issuance of private activity tax-exempt bonds for water
facilities is subject to aggregate annual State volume
limitations that apply to most private activity bonds.
Similarly, like most other private activity bonds, interest on
these bonds is a preference item for purposes of the
alternative minimum tax.
house bill
No provision.
senate amendment
The Senate amendment provides that private activity bonds
for facilities to remediate arsenic levels in water (as opposed
to such bonds to finance private water treatment facilities
generally) are not subject to the State volume limits and the
interest on the bonds is not a preference item for the
alternative minimum tax. A bond is treated as for arsenic
remediation if at least 95 percent of the proceeds are used for
facilities to comply with the 10 parts per billion standard
recommended by the National Academy of Sciences. The provision
does not affect governmental bonds for municipal water
facilities.
Effective date.--The provision is effective for bonds
issued after the date of enactment.
conference agreement
The conference agreement does not include the Senate
amendment provision.
M. Combined Employment Tax Reporting (Sec. 816 of the Senate Amendment
and Sec. 6103(d)(5) of the Code)
present law
The Internal Revenue Code prohibits disclosure of tax
returns and return information, except to the extent
specifically authorized by the Internal Revenue Code (sec.
6103). Unauthorized disclosure is a felony punishable by a fine
not exceeding $5,000 or imprisonment of not more than five
years, or both (sec. 7213). An action for civil damages also
may be brought for unauthorized disclosure (sec. 7431). No tax
information may be furnished by the Internal Revenue Service
(``IRS'') to another agency unless the other agency establishes
procedures satisfactory to the IRS for safeguarding the tax
information it receives (sec. 6103(p)).
The Taxpayer Relief Act of 1997 authorized a
demonstration project to assess the feasibility and
desirability of expanding combined reporting. The demonstration
project was: (1) limited to State of Montana, (2) limited to
employment taxes, (3) limited to taxpayer identity (name,
address, taxpayer identifying number) and the signature of the
taxpayer and (4) limited to a period of five years. After
August 5, 2002, the demonstration project will expire.
To implement that demonstration project, the Taxpayer
Relief Act of 1997 amended the Code to authorize the IRS to
disclose the name, address, taxpayer identifying number, and
signature of the taxpayer, which is common to both the State
and Federal portions of the combined form. The Code permits the
IRS to disclose these common data items to the State and not
have it subject to the redisclosure restrictions, safeguards,
or criminal penalty provisions.\155\ Essentially, the State is
allowed to use this information as if the State directly
received this information from the taxpayer.
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\155\ Sec. 6103(d)(5). The following restrictions and requirements
do not apply: (1) the prohibition on disclosure of returns or return
information by State officers and employees (sec. 6103(a)(2); (2) the
Federal penalties for unauthorized disclosure and inspection of returns
and return information (secs. 7213 and 7213A) and (3) the requirement
that the State establish safeguards regarding the information obtained
from the IRS (sec. 6103(p)(4)).
---------------------------------------------------------------------------
house bill
No provision.
senate amendment
The Senate amendment makes the IRS disclosure authority
permanent and expands the authorized recipients to include any
State agency, body, or commission, for the purpose of carrying
out a combined Federal and State employment tax reporting
program approved by the Secretary. The statutory waiver of the
redisclosure restrictions, safeguards, and criminal penalty
provisions continues to apply. Further, the items authorized
for disclosure continue to be limited to the name, address,
taxpayer identification number, and signature of the taxpayer.
Effective date.--The Senate amendment is effective on the
date of enactment.
conference agreement
The conference agreement does not contain the Senate
amendment.
N. Reporting Requirements of State and Local Political Organizations
(Secs. 901-904 of the Senate Amendment and Secs. 527 and 6012 of the
Code)
present law
In general
Under present law, section 527 provides a limited tax-
exempt status to ``political organizations,'' meaning a party,
committee, association, fund, account, or other organization
(whether or not incorporated) organized and operated primarily
for the purpose of directly or indirectly accepting
contributions or making expenditures (or both) for an ``exempt
function.'' These organizations are generally exempt from
Federal income tax on contributions they receive, but are
subject to tax on their net investment income and certain other
income at the highest corporate income tax rate (``political
organization taxable income''). Donors are exempt from gift tax
on their contributions to such organizations. For purposes of
section 527, the term ``exempt function'' means: the function
of influencing or attempting to influence the selection,
nomination, election, or appointment of any individual to any
Federal, State, or local public office or office in a political
organization, or the election of Presidential or Vice-
Presidential electors, whether or not such individual or
electors are selected, nominated, elected, or appointed. Thus,
by definition, the purpose of a section 527 organization is to
accept contributions or make expenditures for political
campaign (and similar) activities.
Notice of section 527 organization
An organization is not treated as a section 527
organization unless it has given notice to the Secretary of the
Treasury, electronically and in writing, that it is a section
527 organization. The notice is not required (1) of any person
required to report as a political committee under the Federal
Election Campaign Act of 1971, (2) by organizations that
reasonably anticipate that their annual gross receipts will
always be less than $25,000, and (3) organizations described in
section 501(c). All other organizations, including State and
local candidate committees, are required to file the notice.
The notice is required to be transmitted no later than 24
hours after the date on which the organization is organized.
The notice is required to include the following information:
(1) the name and address of the organization and its electronic
mailing address, (2) the purpose of the organization, (3) the
names and addresses of the organization's officers, highly
compensated employees, contact person, custodian of records,
and members of the organization's Board of Directors, (4) the
name and address of, and relationship to, any related entities,
and (5) such other information as the Secretary may require.
The notice of status as a section 527 organization is
required to be disclosed to the public by the IRS and by the
organization. In addition, the Secretary of the Treasury is
required to make publicly available on the Internet and at the
offices of the IRS a list of all political organizations that
file a notice with the Secretary under section 527 and the
name, address, electronic mailing address, custodian of
records, and contact person for such organization. The IRS is
required to make this information available within 5 business
days after the Secretary of the Treasury receives a notice from
a section 527 organization.
An organization that fails to file the notice is not
treated as a section 527 organization and its exempt function
income is taken into account in determining taxable income.
Disclosure by political organizations of expenditures and contributors
A political organization that accepts a contribution or
makes an expenditure for an exempt function during any calendar
year is required to file with the Secretary of the Treasury
certain reports. The following reports are required: either (1)
in the case of a calendar year in which a regularly scheduled
election is held, quarterly reports, a pre-election report, and
a post-general election report and, in the case of any other
calendar year, a report covering January 1 to June 30 and July
1 to December 31, or (2) monthly reports for the calendar year,
except that, in lieu of the reports due for November and
December of any year in which a regularly scheduled general
election is held, a pre-general election report, a post-general
election report, and a year end report are to be filed.
The reports are required to include the following
information: (1) the amount of each expenditure made to a
person if the aggregate amount of expenditures to such person
during the calendar year equals or exceeds $500 and the name
and address of the person (in the case of an individual,
including the occupation and name of the employer of the
individual); and (2) the name and address (in the case of an
individual, including the occupation and name of employer of
such individual) of all contributors that contributed an
aggregate amount of $200 or more to the organization during the
calendar year and the amount of the contribution.
The disclosure requirements do not apply (1) to any
person required to report as a political committee under the
Federal Election Campaign Act of 1971, (2) to any State or
local committee of a political party or political committee of
a State or local candidate, (3) to any organization that
reasonably anticipates that it will not have gross receipts of
$25,000 or more for any taxable year, (4) to any organization
described in section 501(c), or (5) with respect to any
expenditure that is an independent expenditure (as defined in
section 301 of the Federal Election Campaign Act of 1971).
For purposes of the disclosure requirements, the term
``election'' means (1) a general, special, primary, or runoff
election for a Federal office, (2) a convention or caucus of a
political party that has authority to nominate a candidate for
Federal office, (3) a primary election held for the selection
of delegates to a national nominating convention of a political
party, or (4) a primary election held for the expression of a
preference for the nomination of individuals for election to
the office of President.
The IRS is required to make available to the public any
report filed by a political organization. In addition, the
organization is required to make any such report available to
the public. A penalty is imposed for failure to file a report
or provide required information in the report.
Return requirements for section 527 organizations
Under present law, a section 527 organization that has
political organization taxable income is required annually to
file Form 1120-POL (Return of Organization Exempt from Income
Tax). Section 527 organizations that do not have political
organization taxable incomebut have gross receipts of $25,000
or more during the taxable year also are required to file an income tax
return. The gross receipts requirement does not apply to political
organizations that are subject to section 527 solely by reason of
section 527(f)(1) (which makes certain charities subject to section 527
based on the charity's political activities). The annual return must be
made available to the public by the organization and by the IRS.
house bill
No provision.
senate amendment
The Senate amendment provides that a political
organization that is a political committee of a State or local
candidate is exempt from the requirement to provide notice to
the Secretary of its formation and purpose.
In addition, the Senate amendment exempts certain
political organizations from the requirement provided by
section 527(j)(2) to file regular reports with the Secretary
detailing contribution and expenditure information. To be
exempt from such reporting requirements under the amendment:
(1) the organization must not be an organization already exempt
from the reporting requirement under present law (as provided
by section 527(j)(5)); (2) the organization must not engage in
any exempt function activities other than activities for the
purpose of influencing or attempting to influence the
selection, nomination, election, or appointment of any
individual to any State or local public office or office in a
State or local political organization; and (3) no candidate for
Federal office or individual holding Federal office can control
or materially participate in the direction of the organization,
solicit any contributions to the organization, or direct, in
whole or in part, any expenditure made by the organization.
Further, during the calendar year, the organization must be
required to report under State or local law, and must in fact
report, information regarding each separate expenditure and
contribution (including information regarding the person who
makes such contribution or receives such expenditure) that
otherwise would be required. The agency with which such
information is filed must make the filed information public and
available for public inspection. If the minimum amount of a
contribution or expenditure that triggers disclosure under
State or local law is more than $100 than the minimum amount
for disclosure required by the Code, the requirements for
exemption from reporting will not be met.
Under the Senate amendment, political organizations
described in the preceding paragraph are exempt from the
requirement to file an income tax return if such organization
does not have political organization taxable income, is not
subject to section 527 solely by reason of section 527(f)(1)
(as described above), and has gross receipts of less than
$100,000 for the taxable year.
The Senate amendment further provides that the Secretary
in consultation with the Federal Election Commission shall
publicize the effects of these changes and the interaction of
the requirements to file a notification or report under section
527 and reports under the Federal Election Campaign Act of
1971.
Finally, the Senate amendment gives the Secretary the
authority to waive all or any portion of the penalties imposed
on an organization for failure to notify the Secretary of the
organization's establishment or the failure to file a report.
Such waiver is subject to a showing by the organization that
the failure was due to reasonable cause and not to willful
neglect.
Effective date.--The exemptions from the notification,
reporting, and return requirements are effective as of July 1,
2000. The authority to the Secretary to waive penalties is
effective for any tax assessed or penalty imposed after June
30, 2000.
conference agreement
The conference agreement does not include the Senate
amendment provision.
IX. COMPLIANCE WITH CONGRESSIONAL BUDGET ACT
(Secs. 111, 211, 311, 451, 581, 695, 711, and 821 of the Senate
Amendment)
present law
Reconciliation is a procedure under the Congressional
Budget Act of 1974 (the ``Budget Act'') by which Congress
implements spending and tax policies contained in a budget
resolution. The Budget Act contains numerous rules enforcing
the scope of items permitted to be considered under the budget
reconciliation process. One such rule, the so-called ``Byrd
rule,'' was incorporated into the Budget Act in 1990. The Byrd
rule, named after its principal sponsor, Senator Robert C.
Byrd, is contained in section 313 of the Budget Act. The Byrd
rule generally permits members to raise a point of order
against extraneous provisions (those which are unrelated to the
goals of the reconciliation process) from either a
reconciliation bill or a conference report on such bill.
Under the Byrd rule, a provision is considered to be
extraneous if it falls under one or more of the following six
definitions:
(1) It does not produce a change in outlays or
revenues;
(2) It produces an outlay increase or revenue
decrease when the instructed committee is not in
compliance with its instructions;
(3) It is outside of the jurisdiction of the
committee that submitted the title or provision for
inclusion in the reconciliation measure;
(4) It produces a change in outlays or revenues
which is merely incidental to the nonbudgetary
components of the provision;
(5) It would increase the deficit for a fiscal year
beyond those covered by the reconciliation measure; and
(6) It recommends changes in Social Security.
house bill
No provision.
senate amendment
Sunset of provisions
To ensure compliance with the Budget Act, the Senate
amendment provides that all provisions of, and amendments made
by, the bill that are in effect on September 30, 2011, shall
cease to apply as of the close of September 30, 2011.
conference agreement
The conference agreement follows the Senate amendment,
except that all provisions of, and amendments made by, the bill
generally do not apply for taxable, plan or limitation years
beginning after December 31, 2010. With respect to the estate,
gift, and generation-skipping provisions of the bill, the
provisions do not apply to estates of decedents dying, gifts
made, or generation skipping transfers, after December 31,
2010. The Code and the Employee Retirement Income Security Act
of 1974 are applied to such years, estates, gifts and transfers
after December 31, 2010, as if the provisions of and amendments
made by the bill had never been enacted.
X. TAX COMPLEXITY ANALYSIS
The following tax complexity analysis is provided
pursuant to section 4022(b) of the Internal Revenue Service
Reform and Restructuring Act of 1998, which requires the staff
of the Joint Committee on Taxation (in consultation with the
Internal Revenue Service (``IRS'') and the Treasury Department)
to provide a complexity analysis of tax legislation reported by
the House Committee on Ways and Means, the Senate Committee on
Finance, or a Conference Report containing tax provisions. The
complexity analysis is required to report on the complexity and
administrative issues raised by provisions that directly or
indirectly amend the Internal Revenue Code and that have
widespread applicability to individuals or small businesses.
For each such provision identified by the staff of the Joint
Committee on Taxation, a summary description of the provision
is provided along with an estimate of the number and type of
affected taxpayers, and a discussion regarding the relevant
complexity and administrative issues.
Following the analysis of the staff of the Joint
Committee on Taxation are the comments of the IRS and the
Treasury Department regarding each of the provisions included
in the complexity analysis, including a discussion of the
likely effect on IRS forms and any expected impact on the IRS.
1. Reduction in income tax rates for individuals (sec. 101 of the
conference agreement)
Summary description of provision
The bill creates a new 10-percent regular income tax
bracket for a portion of the taxable income that is currently
taxed at 15 percent. The bill reduces the other regular income
tax rates. By 2006, the present-law individual income tax rates
of 28 percent, 31 percent, 36 percent, and 39.6 percent are
lowered to 25 percent, 28 percent, 33 percent, and 35 percent,
respectively. The bill also provides for acceleration of the 10
percent income tax rate bracket benefit for 2001, principally
through advance payment of the credit in the form of checks
issued to taxpayers by the Department of the Treasury.
Number of affected taxpayers
It is estimated that the provision will affect
approximately 100 million individual tax returns.
Discussion
It is not anticipated that individuals will need to keep
additional records due to this provision. It should not result
in an increase in disputes with the IRS, nor will regulatory
guidance be necessary to implement this provision. It may,
however, increase the number of questions that taxpayers ask
the IRS, such as when taxpayers will receive their checks. This
increased volume of questions could have an adverse impact on
other elements of IRS' operations, such as the levels of
taxpayer service. In addition, the provision should not
increase the tax preparation costs for most individuals.
The IRS will need to add to the individual income tax
forms package a new worksheet so that taxpayers can reconcile
the amount of the check they receive from the Department of the
Treasury with the credit they are allowed as an acceleration of
the 10 percent income tax rate bracket benefit for 2001. This
worksheet should be relatively simple and many taxpayers will
not need to fill it out completely because they will have
received the full amount by check.
The Secretary of the Treasury is expected to make
appropriate revisions to the wage withholding tables to reflect
the proposed rate reduction for calendar year 2001 as
expeditiously as possible. To implement the effects of the rate
cuts for 2001, employers would be required to use a new
(second) set of withholding rate tables to determine the
correct withholding amounts for each employee. Switching to the
new withholding rate tables during the year can be expected to
result in a one-time additional burden for employers (or
additional costs for employers that rely on a bookkeeping or
payroll service).
2. Standard deduction tax relief (sec. 301 of the conference agreement)
Summary description of provision
The bill increases the basic standard deduction for
married taxpayers filing a joint return to twice the basic
standard deduction for an unmarried individual. The increase is
phased-in over five years beginning in 2005 and would be fully
phased-in for 2009 and thereafter.
Number of affected taxpayers
It is estimated that the provision will affect
approximately 23 million individual returns.
Discussion
It is not anticipated that individuals will need to keep
additional records due to this provision. The higher basic
standard deduction should not result in an increase in disputes
with the IRS, nor will regulatory guidance be necessary to
implement this provision. In addition, the provision should not
increase individuals' tax preparation costs.
Some taxpayers who currently itemize deductions may
respond to the provision by claiming the increased standard
deduction in lieu of itemizing. According to estimates by the
staff of the Joint Committee on Taxation, approximately three
million individual tax returns will realize greater tax savings
from the increased standard deduction than from itemizing their
deductions. In addition to the tax savings, such taxpayers will
no longer have to file Schedule A to Form 1040 and a
significant number of which will no longer need to engage in
the record keeping inherent in itemizing below-the-line
deductions. Moreover, by claiming the standard deduction, such
taxpayers may qualify to use simpler versions of the Form 1040
(i.e., Form 1040EZ or Form 1040A) that are not available to
individuals who itemize their deductions. These forms simplify
the return preparation process by eliminating from the Form
1040 those items that do not apply to particular taxpayers.
This reduction in complexity and record keeping also may
result in a decline in the number of individuals using a tax
preparation service or a decline in the cost of using such a
service. Furthermore, if the provision results in a taxpayer
qualifying to use one of the simplerversions of the Form 1040,
the taxpayer may be eligible to file a paperless Federal tax return by
telephone. The provision also should reduce the number of disputes
between taxpayers and the IRS regarding substantiation of itemized
deductions.
3. Expansion of the 15-percent rate bracket (sec. 302 of the conference
agreement)
Summary description of provision
The provision increases the size of the 15-percent
regular income tax rate bracket for married individuals filing
a joint return to twice the size of the corresponding rate
bracket for unmarried individuals. This increase is phased-in
over four years beginning in 2005. It is fully effective
beginning in 2008.
Number of affected taxpayers
It is estimated that the provision will affect
approximately 20 million individual tax returns.
Discussion
It is not anticipated that individuals will need to keep
additional records due to this provision. The increased size of
the 15-percent regular income tax rate bracket for married
individuals filing joint returns should not result in an
increase in disputes with the IRS, nor will regulatory guidance
be necessary to implement this provision.
4. Increase the child tax credit (sec. 201 of the conference agreement)
Summary description of provision
The provision increases the child tax credit from $500 to
$1,000, phased in over an ten-year period beginning in 2001,
extends refundability of the credit, allows the credit to the
extent of the full regular tax and alternative minimum tax, and
repeals the provision that reduces the refundable child credit
by the individual's alternative minimum tax.
Number of affected taxpayers
It is estimated that the provisions will affect
approximately 25 million individual tax returns.
Discussion
Individuals should not have to keep additional records
due to this provision, nor will additional regulatory guidance
be necessary to implement this provision. More taxpayers will
have to perform the additional calculations necessary to
determine eligibility for the refundable child credit but this
should not lead to an increase in disputes with the IRS. For
taxpayer's with less than two children, however, the provision
can be expected to increase tax preparation costs and the
number of individuals using a tax preparation service. (See,
also, the discussion of the interactive effect of the child
credit and the individual alternative minimum tax, below.)
5. The effect of the alternative minimum tax rules
The provisions relating to the rate reductions, increased
standard deduction, the expanded 15-percent rate bracket, and
the increased child tax credit are affected by the alternative
minimum tax rules. Although the bill provides relief from the
alternative minimum tax, additional individuals will need to
make the necessary calculations to determine the applicability
of the alternative minimum tax rules. It is estimated that for
the year 2010, 18 million additional individual income tax
returns that will benefit from the rate reductions, increased
standard deduction, expanded 15-percent rate bracket, and
increased child tax credit would be affected by the alternative
minimum tax. For these taxpayers, it could be expected that the
interaction of the provisions with the alternative minimum tax
rules would result in an increase in tax preparation costs and
in the number of individuals using a tax preparation service.
The bill also provides that the alternative minimum tax
exemption amount for married individuals filing a joint return
is increased. This should reduce complexity for affected
taxpayers. It is estimated that, for the year 2006, the
provision increasing the alternative minimum tax exemption
amount will apply to seven million individual income tax
returns. Some of these taxpayers will no longer be affected by
the alternative minimum tax.
Department of the Treasury,
Internal Revenue Service,
Washington, DC, May 25, 2001.
Ms. Lindy L. Paull,
Chief of Staff, Joint Committee on Taxation, Washington, DC.
Dear Ms. Paull: Enclosed are the combined comments of the
Internal Revenue Service and the Treasury Department on the
provisions of the conference agreement on the ``Economic Growth
and Tax Relief Reconciliation Act.'' Our comments are based on
the description of these provisions contained in a brief
summary of the conference agreement prepared by the staff of
the Joint Committee on Taxation.
Due to the short turnaround time, our comments are
necessarily provisional.
Sincerely,
Charles O. Rossotti.
Enclosure.
Complexity Analysis of Economic Growth and Tax Relief Reconciliation
Act of 2001
New 10-Percent Rate Bracket and Reduction in Other Rate Brackets
Provision
Create a new 10-percent regular income tax bracket
($6,000/$10,000/$12,000 of taxable income in 2001-2007 and
$7,000/$10,000/$14,000 of taxable income in 2008 and
thereafter; index in 2009); advance payments would be made to
taxpayers in 2001.
Reduce the present-law regular income tax rates of 28,
31, 36, and 39.6 percent to 25, 28, 33, and 35 percent,
respectively. The reduction is phased in over 6 years beginning
July 1, 2001.
IRS and Treasury Comments
The new tax bracket and the reduced tax rates would be
incorporated into the tax table and the tax rate schedules
shown in the instructions for Forms 1040, 1040A, 1040EZ,
1040NR, 1040NR-EZ, and 1041, and on Forms W-4V and 8814 for
2001 and later years. Other forms (e.g., Form 8752 and Schedule
D (Form 1040)) would also be affected. No new forms would be
required.
The new tax bracket and the reduced tax rates would also
be incorporated into the tax rate schedules shown on Form 1040-
ES for 2002 and later years. Subsequent to enactment, the IRS
would have to advise taxpayers who make estimated tax payments
for 2001 how they can adjust their estimated tax payments for
2001 to reflect the reduced rates.
Programming changes would be required to reflect the new
tax bracket and rates for tax years 2001 through 2006.
Currently, the IRS tax computation programs are updated
annually to incorporate mandated inflation adjustments.
Programming changes necessitated by the provision would be
included during that process for 2002 and later years.
Supplemental programming changes would be required to
accommodate the new 10-percent tax bracket for 2001.
New withholding rate tables and schedules will be
published soon after enactment to update the current Circular E
for use by employers during the remainder of calendar year
2001.
The advance payment of the credit for 2001 would require
a notice to explain the advance payment amount; programming
changes to compute the advance payment amount; and resources to
answer taxpayer questions about the payment.
The new credit for 2001 would require a new form to
report to taxpayers the amount of the advance payment made to
them; one new line to be added to Forms 1040, 1040A, and 1040EZ
for taxpayers to compute the amount, if any, of their allowable
credit; programming changes to compute the amount of the
credit; and script and other changes to enable TeleFile to
compute the amount of the credit.
The alternative minimum tax (AMT) is projected to apply
to an increasing number of taxpayers over time. The provision
would increase the number of taxpayers, particularly in the
later years of the budget period (2006-2011), whose liability
is affected by the AMT, and would also cause additional
taxpayers to perform AMT calculations to determine whether
their liability is affected by the AMT.
Child Tax Credit
Provision
Increase the amount of the child tax credit to $600
(2001-2004), $700 (2005-2008), $800 (2009), and $1,000 (2010).
Make the child tax credit refundable to the extent of 10
percent of the taxpayer's earned income in excess of $10,000
for 2001-2004 (15 percent for 2005 and later). The $10,000
figure would be indexed beginning in 2002.
Change the tax liability limitation for the child tax
credit, including the order in which the credit is claimed,
beginning in 2002. The child tax credit, but not the other
personal nonrefundable credits, would be allowed against the
sum of the regular tax and the alternative minimum tax. Under a
new ordering rule, the foreign tax credit and the other
nonrefundable personal credits would be taken into account
before the child tax credit.
IRS and Treasury Comments
No new forms would be required as a result of any of the
above-mentioned child tax credit provisions.
The increase in the amount of the child tax credit would
be incorporated in the instructions for Forms 1040, 1040A, and
1040NR for 2001 and later years. This increase also affects the
amount of the refundable child tax credit for residents of
Puerto Rico and would be reflected in the instructions for
Forms 1040-PR and 1040-SS for 2001 and later years.
The change in the tax liability limitation for 2002 and
later years would:
1. Eliminate two questions from the instructions for
Forms 1040 and 1040A.
2. Eliminate the need to refer taxpayers with three or
more qualifying children and certain other personal
nonrefundable credits to Publication 972 to compute their child
tax credit. Such taxpayers will no longer be required to
complete an additional 10-line worksheet (the ``Line 11
Worksheet'') in Publication 972.
3. Add three lines to the child tax credit worksheet in
the Form 1040 instructions and one line to that worksheet in
the Form 1040A instructions.
4. Change the ordering of the credits on Forms 1040,
1040A, and 1040NR.
Nine million additional taxpayers would be required to
file Form 8812 to benefit from the provision that would make
the child tax credit refundable to the extent of 15 percent of
earned income in excess of $10,000. Form 8812 would be expanded
from nine lines to 13 lines, beginning in 2001. (A similar
change will be necessary on Forms 1040-PR and 1040-SS for
residents of Puerto Rico.)
The increase in the amount of the credit would be
incorporated on Form 1040-ES for 2004, 2007, 2010, and 2011.
Supplemental programming changes would be required to
accommodate the changes to the computation of the child tax
credit for 2001.
As a result of this change, the number of taxpayers
affected by the AMT would decrease.
Standard Deduction for Married Taxpayers Filing Jointly
Provision
Increase the basic standard deduction for a married
couple filing a joint return to twice the basic standard
deduction for an unmarried individual filing a single return,
phased in over 5 years beginning in 2006.
IRS and Treasury comments
The increase in the basic standard deduction for married
taxpayers would be incorporated in the instructions for Forms
1040, 1040A, 1040EZ, and on Forms1040, 1040A, 1040EZ, and 1040-
ES beginning in 2006. No new forms would be required.
Programming changes would be required to reflect the
increased standard deduction for married taxpayers. Currently,
IRS tax computation programs are updated annally to incorporate
mandated inflation adjustments. Programming changes
necessitated by this provision would be included during that
process.
Compared with current law, the larger standard deduction
would reduce the number of taxpayers who itemize deductions.
As a result of this provision, the number of taxpayers
affected by the AMT would increase.
15-Percent Rate Bracket For Married Taxpayers Filing Jointly
Provision
Increase the width of the 15-percent regular income tax
rate bracket for a married couple filing a joint return to
twice the width of the corresponding rate bracket for an
unmarried individual filing a single return, phased in over 5
years beginning in 2006.
IRS and Treasury comments
The increase in the width of the 15-percent rate bracket
for married taxpayers would be incorporated in the tax tables
and the tax rate schedules shown in the instructions for Forms
1040, 1040A, 1040EZ, 1040NR, 1040NR-EZ, and on Form 1040-ES for
each year during the phase-in period (2006-2010). No new forms
would be required.
Programming changes would be required to reflect the
expanded 15-percent rate bracket. Currently, the IRS tax
computation programs are updated annually to incorporate
mandated inflation adjustments. Programming changes
necessitated by the provision would be included during that
process.
As a result of this provision, the number of taxpayers
affected by the AMT would increase.
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William Thomas,
Dick Armey,
Managers on the Part of the House.
Chuck Grassley,
Orrin Hatch,
Frank H. Murkowski,
Don Nickles,
Phil Gramm,
Max Baucus,
John Breaux,
Managers on the Part of the Senate.