Public Law 87–792

by adding at the end of paragraph (5) of subsection (a)

68A Stat. 135.

26 USC 401.

the following new sentence: “For purposes of this paragraph and paragraph (10), the total compensation of an individual who is an employee within the meaning of subsection (c)(1) means such

Post, p. 811.

Post, p. 811.

individual’s earned income (as defined in subsection (c)(2)), and the basic or regular rate of compensation of such an individual shall be determined, under regulations prescribed by the Secretary or his delegate, with respect to that portion of his earned income which bears the same ratio to his earned income as the basic or regular compensation of the employees under the plan bears to the total compensation of such employees.”;

by adding at the end of subsection (a) the following new paragraphs:

“(7)“(7)

A trust shall not constitute a qualified trust under this section unless the plan of which such trust is a part provides that, upon its termination or upon complete discontinuance of contributions under the plan, the rights of all employees to benefits accrued to the date of such termination or discontinuance, to the extent then funded, or the amounts credited to the employees’ accounts are nonforfeitable. This paragraph shall not apply to benefits or contributions which, under provisions of the plan adopted pursuant to regulations prescribed by the Secretary or his delegate to preclude the discrimination prohibited by paragraph (4), may not be used for designated employees in the event of early termination of the plan.

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“(8)“(8)

A trust forming part of a pension plan shall not constitute a qualified trust under this section unless the plan provides that forfeitures must not be applied to increase the benefits any employee would otherwise receive under the plan.

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“(9)“(9)

In the case of a plan which provides contributions or benefits for employees some or all of whom are employees within the meaning oi subsection (c)(1), a trust forming part of such plan shall not constitute a qualified trust under this section unless, under the plan, the entire interest of each employee—

“(A)“(A)

either will be distributed to him not later than his taxable year in which he attains the age of 70% years, or, in the case of an employee other than an owner-employee (as defined in subsection (c)(3)), in which he retires, whichever is the later, or

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“(B)“(B)

will be distributed, commencing not later than such taxable year, (i) in accordance with regulations prescribed by the Secretary or his delegate, over the life of such employee or over the lives of such employee and his spouse, or (ii) in accordance with such regulations, over a period not extending beyond the life expectancy of such employee or the life expectancy of such employee and his spouse.

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A trust shall not be disqualified under this paragraph by reason of distributions under a designation, prior to the date of the enactment of this paragraph, by any employee under the plan of which such trust is a part, of a method of distribution which does riot meet the terms of the preceding sentence.

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“(10)“(10)

In the case of a plan which provides contributions or benefits for employees some or all of whom are owner-employees

Post, p. 812.

(as defined in subsection (c)(3))—

“(A)“(A)

paragraph (3) and the first and second sentences of paragraph (5) shall not apply, but—

“(i)“(i)

such plan shall not be considered discriminatory within the meaning of paragraph (4) merely because the contributions or benefits of or on behalf of employees under the plan bear a uniform relationship to the total compensation, or the basic or regular rate of compensation, of such employees, and

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“(ii)“(ii)

such plan shall not be considered discriminatory within the meaning of paragraph (4) solely because under the plan contributions described in subsection (e)(3)(A)

Post, p. 818.

26 USC 404.

Post, p. 820.

which are in excess of the amounts which may be deducted under section 404 (determined without regard to section 404(a)(10)) for the taxable year may be made on behalf of any owner-employee; and

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“(B)“(B)

a trust forming a part of such plan shall constitute a qualified trust under this section only if the requirements in subsection (d) are also met.”; and

Post, p. 812.

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by redesignating subsection (c) as subsection (h) and inserting after subsection (b) the following new subsections:

“(c)“(c)

Definitions and Rules Relating to Self-Employed Individuals and Owner-Employees.—

For purposes of this section—

“(1)“(1)

Employee.—

The term ‘employee’ includes, for any taxable year, an individual who has earned income (as defined in paragraph (2)) for the taxable year. To the extent provided in regulations prescribed by the Secretary or his delegate, such term also includes, for any taxable year—

“(A)“(A)

an individual who would be an employee within the meaning of the preceding sentence but for the fact that the trade or business carried on by such individual did not have net profits for the taxable year, and

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“(B)“(B)

an individual who has been an employee within the meaning of the preceding sentence for any prior taxable year.

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“(2)“(2)

Earned income.—

“(A)“(A)

In general.—

The term ‘earned income’ means the net earnings from self-employment (as defined in section 1402(a)) to the extent that such net earnings constitute

26 USC 1402.

26 USC 911.

earned income (as defined in section 911(b) but determined with the application of subparagraph (B)), but such net earnings shall be determined—

“(i)“(i)

without regard to paragraphs (4) and (5) of section 1402(c),

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“(ii)“(ii)

in the case of any individual who is treated as an employee under sections 3121(d)(3)(A), (C), or (D),

26 USC 3121.

without regard to paragraph (2) of section 1402(c), and

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“(iii)“(iii)

without regard to items which are not included in gross income for purposes of this chapter, and the deductions properly allocable to or chargeable against such items.

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For purposes of this subparagraph, sections 911(b) and 1402, as in effect for a taxable year ending on December 31, 1962, and subparagraph (B), as in effect for a taxable year beginning on January 1, 1963, shall be treated as having been in effect for all taxable years ending before such date.

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“(B)“(B)

Earned income when both personal services and captial are material income-producing factors.—

In applying section 911 (b) for purposes of subparagraph (A), in the

26 USC 911.

case of an individual who is an employee within the meaning of paragraph (1) and who is engaged in a trade or business in which both personal services and capital are material income-producing factors and with respect to which the individual actually renders personal services on a full-time, or substantially full-time, basis, so much of his share of the net profits of such trade or business as does not exceed $2,500 shall be considered as earned income. In the case of any such individual who is engaged in more than one trade or business with respect to which he actually renders substantial personal services, if with respect to all such trades or businesses he actually renders personal services on a full-time, or substantially full-time, basis, there shall be considered as earned income with respect to the trades or businesses in which both personal services and capital are material income-producing factors—

“(i)“(i)

so much of his share of the net profits of such trades or businesses as does not exceed $2,500, reduced by

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“(ii)“(ii)

his share of the net profits of any trade or business in which only personal services is a material income-producing factor.

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The preceding sentences shall not be construed to reduce the share of net profits of any trade or business which under the second sentence of section 911(b) would be considered as earned income of any such individual.

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“(3)“(3)

Owner-employee.—

The term ‘owner-employee’ means an employee who—

“(A)“(A)

owns the entire interest in an unincorporated trade or business, or

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“(B)“(B)

in the case of a partnership, is a partner who owns more than 10 percent of either the capital interest or the profits interest in such partnership.

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To the extent provided in regulations prescribed by the Secretary or his delegate, such term also means an individual who has been an owner-employee within the meaning of the preceding sentence.

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“(4)“(4)

Employer.—

An individual who owns the entire interest in an unincorporated trade or business shall be treated as his own employer. A partnership shall be treated as the employer of each partner who is an employee within the meaning of paragraph (1).

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“(5)“(5)

Contributions on behalf of owner-employees.—

The term ‘contribution on behalf of an owner-employee’ includes, except as the context otherwise requires, a contribution under a plan—

“(A)“(A)

by the employer for an owner-employee, and

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“(B)“(B)

by an owner-employee as an employee.

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“(d)“(d)

Additional Requirements for Qualification of Trusts and Plans Benefiting Owner-Employees.—

A trust forming part of a pension or profit-sharing plan which provides contributions or benefits for employees some or all of whom are owner-employees shall constitute a qualified trust under this section only if, in addition to meeting

26 USC 401.

the requirements of subsection (a), the following requirements of this subsection are met by the trust and by the plan of which such trust is a part:

“(1)“(1)

In the case of a trust which is created on or after the date of the enactment of this subsection, or which was created before such date but is not exempt from tax under section 501(a) as an

26 USC 501.

organization described in subsection (a) on the day before such date, the trustee is a bank, but a person (including the employer) other than a bank may be granted, under the trust instrument, the power to control the investment of the trust funds either by directing investments (including reinvestments, disposals, and exchanges) or by disapproving proposed investments (including reinvestments, disposals, and exchanges). This paragraph shall not apply to a trust created or organized outside the United States before the date of the enactment of this subsection if, under section

26 USC 402.

402(c), it is treated as exempt from tax under section 501(a) on the day before such date; or, to the extent provided under regulations prescribed by the Secretary or his delegate, to a trust which uses annuity, endowment, or life insurance contracts of a life insurance company exclusively to fund the benefits prescribed by the trust, if the life insurance company supplies annually such information about trust transactions affecting owner-employees as the Secretary or his delegate shall by forms or regulations prescribe. For purposes of this paragraph, the term ‘bank’ means a bank as defined in section 581, a corporation which under the

26 USC 581.

laws of the State of its incorporation is subject to supervision and examination by the commissioner of banking or other officer of such State in charge of the administration of the banking laws of such State, and, in the case of a trust created or organized outside the United States, a bank or trust company, wherever incorporated, exercising fiduciary powers and subject to supervision and examination by governmental authority.

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“(2)“(2)

Under the plan—

“(A)“(A)

the employees’ rights to or derived from the contributions under the plan are nonforfeitable at the time the contributions are paid to or under the plan; and

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“(B)“(B)

in the case of a profit-sharing plan, there is a definite formula for determining the contributions to be made by the employer on behalf of employees (other than owner-employees).

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Subparagraph (A) shall not apply to contributions which, under provisions of the plan adopted pursuant to regulations prescribed by the Secretary or his delegate to preclude the discrimination prohibited by subsection (a)(4), may not be used to provide

26 USC 401.

benefits for designated employees in the event of early termination of the plan.

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“(3)“(3)

The plan benefits each employee having a period of employment of 3 years or more. For purposes of the preceding sentence, the term ‘employee’ does not include any employee whose customary employment is for not more than 20 hours in any one week or is for not more than 5 months in any calendar year.

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“(4)“(4)

Under the plan—

“(A)“(A)

contributions or benefits are not provided for any owner-employee unless such owner-employee has consented to being included under the plan; and

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“(B)“(B)

no benefits may be paid to any owner-employee, except in the case of his becoming disabled (within the meaning of section 213(g)(3)), prior to his attaining the age

72 Stat. 1614.

26 USC 213.

of 59½ years.

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“(5)“(5)

The plan does not permit—

“(A)“(A)

contributions to be made by the employer on behalf of any owner-employee in excess of the amounts which may be

68A Stat. 138; Post, p. 820.

26 USC 404.

deducted under section 404 (determined without regard to section 404(a)(10)) for the taxable year;

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“(B)“(B)

in the case of a plan which provides contributions or benefits only for owner-employees, contributions to be made on behalf of any owner-employee in excess of the amounts which may be deducted under section 404 (determined without regard to section 404(a)(10)) for the taxable year; and

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“(C)“(C)

if a distribution under the plan is made to any employee and if any portion of such distribution is an amount

Post, p. 823.

described in section 72(m)(5)(A)(i), contributions to be made on behalf of such employee for the 5 taxable years succeeding the taxable year in which such distribution is made.

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Subparagraphs (A) and (B) shall not apply to any contribution which is not considered to be an excess contribution (as defined in

Post, p. 815.

Post, p. 817.

subsection (e)(1)) by reason of the application of subsection (e)(3).

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“(6)“(6)

Except as provided in this paragraph, the plan meets the requirements of subsection (a)(4) without taking into account for any purpose contributions or benefits under chapter 2 (relating to tax on self-employment income), chapter 21 (relating to Federal Insurance Contributions Act), title II of the Social Security Act, as amended, or any other Federal or State law. If—

“(A)“(A)

of the contributions deductible under section 404 (determined without regard to section 404 (a)(10)), not more than one-third is deductible by reason of contributions by the employer on behalf of owner-employees, and

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“(B)“(B)

taxes paid by the owner-employees under chapter 2 (relating to tax on self-employment income), and the taxes which would be payable under such chapter 2 by the owner-employees

26 USC 1402.

but for paragraphs (4) and (5) of section 1402(c), are taken into account as contributions by the employer on behalf of such owner-employees,

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26 USC 3111.

then taxes paid under section 3111 (relating to tax on employers) with respect to an employee may, for purposes of subsection (a)(4), be taken into account as contributions by the employer for such employee under the plan.

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“(7)“(7)

Under the plan, if an owner-employee dies before his entire interest has been distributed to him, or if distribution has been

Ante, p. 810.

commenced in accordance with subsection (a)(9)(B) to his surviving spouse and such surviving spouse dies before his entire interest has been distributed to such surviving spouse, his entire interest (or the remaining part of such interest if distribution thereof has commenced) will, within 5 years after his death (or the death of his surviving spouse), be distributed, or applied to the purchase of an immediate annuity for his beneficiary or beneficiaries (or the beneficiary or beneficiaries of his surviving spouse) which will be payable for the life of such beneficiary or beneficiaries (or for a term certain not extending beyond the life expectancy of such beneficiary or beneficiaries) and which will be immediately distributed to such beneficiary or beneficiaries. The preceding sentence shall not apply if distribution of the interest of an owner-employee has commenced and such distribution is for a term certain over a period permitted under subsection (a)(9)(B)(ii).

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“(8)“(8)

Under the plan—

“(A)“(A)

any contribution which is an excess contribution, together with the income attributable to such excess

Post, p. 817.

contribution, is (unless subsection (e)(2)(E) applies) to be repaid to the owner-employee on whose behalf such excess contribution is made;

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“(B)“(B)

if for any taxable year the plan does not, by reason of subsection (e)(2)(A), meet (for purposes of section 404)

Post, p. 816.

the requirements of this subsection with respect to an owner-employee, the income for the taxable year attributable to the interest of such owner-employee under the plan is to be paid to such owner-employee; and

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“(C)“(C)

the entire interest of an owner-employee is to be repaid to him when required by the provisions of subsection (e)(2)(E).

Post, p. 817.

#

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“(9)“(9)

(A)(A)

If the plan provides contributions or benefits for an owner-employee who controls, or for two or more owner-employees who together control, the trade or business with respect to which the plan is established, and who also control as an owner-employee or as owner-employees one or more other trades or businesses, such plan and the plans established with respect to such other trades or businesses, when coalesced, constitute a single plan which meets the requirements of subsection (a)(including paragraph (10) thereof) and of this subsection with respect to

68A Stat. 134; Ante, p. 810.

26 USC 401.

the employees of all such trades or businesses (including the trade or business with respect to which the plan intended to qualify under this section is established).

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“(B)“(B)

For purposes of subparagraph (A), an owner-employee, or two or more owner-employees, shall be considered to control a trade or business if such owner-employee, or such two or more owner-employees together—

“(i)“(i)

own the entire interest in an unincorporated trade or business, or

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“(ii)“(ii)

in the case of a partnership, own more than 50 percent of either the capital interest or the profits interest in such partnership.

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For purposes of the preceding sentence, an owner-employee, or two or more owner-employees, shall be treated as owning any interest in a partnership which is owned, directly or indirectly, by a partnership which such owner-employee, or such two or more owner-employees, are considered to control within the meaning of the preceding sentence.

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“(10)“(10)

The plan does riot provide contributions or benefits for any owner-employee who controls (within the meaning of paragraph (9)(B)), or for two or more owner-employees who together control, as an owner-employee or as owner-employees, any other trade or business, unless the employees of each trade or business which such owner-employee or such owner-employees control are included under a plan which meets the requirements of subsection (a)(including paragraph (10) thereof) and of this subsection, and provides contributions and benefits for employees which are not less favorable than contributions and benefits provided for owner-employees under the plan.

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“(11)“(11)

Under the plan, contributions on behalf of any owner-employee may be made only with respect to the earned income of such owner-employee which is derived from the trade or business with respect to which such plan is established.

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“(e)“(e)

Excess Contributions on Behalf of Owner-Employees.—

“(1)“(1)

Excess contribution defined.—

For purposes of this section, the term ‘excess contribution’ means, except as provided in paragraph (3)—

“(A)“(A)

if, in the taxable year, contributions are made under the plan only on behalf of owner-employees, the amount of any contribution made on behalf of any owner-employee which (without regard to this subsection) is not deductible under section 404 (determined without regard to section 404

68A Stat. 138; Post, p. 820.

26 USC 404.

(a)(10)) for the taxable year; or

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“(B)“(B)

if, in the taxable year, contributions are made under the plan on behalf or employees other than owner-employees—

“(i)“(i)

the amount of any contribution made by the employer on behalf of any owner-employee which (without regard to this subsection) is not deductible under section 404 (determined without regard to section 404(a)(10)) for the taxable year;

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“(ii)“(ii)

the amount of any contribution made by any owner-employee (as an employee) at a rate which exceeds the rate of contributions permitted to be made by employees other than owner-employees;

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“(iii)“(iii)

the amount of any contribution made by any owner-employee (as an employee) which exceeds the lesser of $2,500 or 10 percent of the earned income for such taxable year derived by such owner-employee from the trade or business with respect to which the plan is established; and

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“(iv)“(iv)

in the case of any individual on whose behalf contributions are made under more than one plan as an owner-employee, the amount of any contribution made by such owner-employee (as an employee) under all such plans which exceeds $2,500; and

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“(C)“(C)

the amount of any contribution made on behalf of an owner-employee in any taxable year for which, under

Infra.

paragraph (2)(A) or (E), the plan does not (for purposes of section 404) meet the requirements of subsection (d) with respect to such owner-employee.

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For purposes of this subsection, the amount of any contribution which is allocable (determined in accordance with regulations prescribed by the Secretary or his delegate) to the purchase of life, accident, health, or other insurance shall not be taken into account.

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“(2)“(2)

Effect of excess contribution.—

“(A)“(A)

In general.—

If an excess contribution (other than an excess contribution to which subparagraph (E) applies) is made on behalf of an owner-employee in any taxable year, the plan with respect to which such excess contribution is made shall, except as provided in subparagraphs (C) and (D), be considered, for purposes of section 404, as not meeting the requirements of subsection (d) with respect to such owner-employee for the taxable year and for all succeeding taxable years.

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“(B)“(B)

Inclusion of amounts in gross income of owner-employees.—

For any taxable year for which any plan does not meet the requirements of subsection (d) with respect to an owner-employee by reason of subparagraph (A), the gross income or such owner-employee shall, for purposes of this chapter, include the amount of net income for such taxable year attributable to the interest of such owner-employee under such plan.

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“(C)“(C)

Repayment within prescribed period.—

Subparagraph (A) shall not apply to an excess contribution with respect to any taxable year, if, on or before the close of the 6month period beginning on the day on which the Secretary or his delegate sends notice (by certified or registered mail) to the person to whom such excess contribution was paid of the amount of such excess contribution, the amount of such excess contribution, and the net income attributable thereto, is repaid to the owner-employee on whose behalf such excess contribution was made. If the excess contribution is an excess contribution as defined in paragraph (1)(A) or (Bl (i), or is an excess contribution as defined in paragraph (1)(C) with respect to which a deduction has been claimed under section 404, the notice required by the preceding sentence shall

26 USC 404.

not be mailed prior to the time that the amount of the tax under this chapter of such owner-employee for the taxable year in which such excess contribution was made has been finally determined.

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“(D)“(D)

Repayment after prescribed period.—

If an excess contribution, together with the net income attributable thereto, is not repaid within the 6month period referred to in subparagraph (C), subparagraph (A) shall not apply to an excess contribution with respect to any taxable year beginning with the taxable year in which the person to whom such excess contribution was paid repays the amount of such excess contribution to the owner-employee on whose behalf such excess contribution was made, and pays to such owner-employee the amount of net income attributable to the interest of such owner-employee which, under subparagraph (B), has been included in the gross income of such owner-employee for any prior taxable year.

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“(E)“(E)

Special rule if excess contribution was willfully made.—

If an excess contribution made on behalf of an owner-employee is determined to have been willfully made, then—

“(i)“(i)

subparagraphs (A), (B), (C),and (D) shall not apply with respect to such excess contribution;

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“(ii)“(ii)

there shall be distributed to the owner-employee on whose behalf such excess contribution was willfully made his entire interest in all plans with respect to which he is an owner-employee; and

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“(iii)“(iii)

no plan shall, for purposes of section 404, be considered as meeting the requirements of subsection (d) with respect to such owner-employee for the taxable year in which it is determined that such excess contribution was willfully made and for the 5 taxable years following such taxable year.

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“(F)“(F)

Statute of limitations.—

In any case in which subparagraph (A) applies, the period for assessing any deficiency arising by reason of—

“(i)“(i)

the disallowance of any deduction under section 404 on account of a plan not meeting the requirements of subsection (d) with respect to the owner-employee on whose behalf an excess contribution was made, or

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“(ii)“(ii)

the inclusion, under subparagraph (B), in gross income of such owner-employee of income attributable to the interest of such owner-employee under a plan,

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for the taxable year in which such excess contribution was made or for any succeeding taxable year shall not expire prior to one year after the close of the 6month period referred to in subparagraph (C).

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“(3)“(3)

Contributions for premiums on annuity, etc., contracts.—

A contribution by the employer on behalf of an owner-employee shall not be considered to be an excess contribution within the meaning of paragraph (1), if—

Ante, p. 815.

“(A)“(A)

under the plan such contribution is required to be applied (directly or through a trustee) to pay premiums or other consideration for one or more annuity, endowment, or life insurance contracts on the life of such owner-employee issued under the plan,

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“(B)“(B)

the amount of such contribution exceeds the amount deductible under section 404 (determined without regard to section 404(a)(10)) with respect to contributions made by the employer on behalf of such owner-employee under the plan, and

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“(C)“(C)

the amount of such contribution does not exceed the average of the amounts which were deductible under section 404 (determined without regard to section 404(a)(10)) with respect to contributions made by the employer on behalf of such owner-employee under the plan (or which would have been deductible under such section if such section had been in effect) for the first 3 taxable years (i) preceding the year in which the last such annuity, endowment, or life insurance contract was issued under the plan and (ii) in which such owner-employee derived earned income from the trade or business with respect to which the plan is established, or for so many of such taxable years as such owner-employee was engaged in such trade or business and derived earned income therefrom.

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In the case of any individual on whose behalf contributions described in subparagraph (A) are made under more than one plan as an owner-employee during any taxable year, the preceding sentence shall not apply if the amount of such contributions under all such plans for such taxable year exceeds $2,500. Any contribution which is not considered to be an excess contribution by reason of the application of this paragraph shall, for purposes of subparagraphs (B)(ii), (iii), and (iv) of paragraph

Ante, p. 816.

(1), be taken into account as a contribution made by such owner-employee as an employee to the extent that the amount of such contribution is not deductible under section 404 (determined without regard to section 404(a)(10)) for the taxable year, but only for the purpose of applying such subparagraphs to other contributions made by such owner-employee as an employee.

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‘(f) Certain Custodial Accounts.—

“(1)“(1)

Treatment as qualified trust.—

For purposes of this title, a custodial account shall be treated as a qualified trust under this section, if—

“(A)“(A)

such custodial account would, except for the fact that it is not a trust, constitute a qualified trust under this section;

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“(B)“(B)

the custodian is a bank (as defined in subsection (d)(1));

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“(C)“(C)

the investment of the funds in such account (including all earnings) is to be made—

“(i)“(i)

solely in regulated investment company stock with respect to which an employee is the beneficial owner, or

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“(ii)“(ii)

solely in annuity, endowment, or life insurance contracts issued by an insurance company;

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“(D)“(D)

the shareholder of record of any such stock described in subparagraph (C)(i) is the custodian or its nominee; and

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“(E)“(E)

the contracts described in subparagraph (C)(ii) are held by the custodian until distributed under the plan.

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For purposes of this title, in the case of a custodial account treated as a qualified trust under this section by reason of the preceding sentence, the custodian of such account shall be treated as the trustee thereof.

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“(2)“(2)

Definition.—

For purposes of paragraph (1), the term ‘regulated investment company’ means a domestic corporation which—

“(A)“(A)

is a regulated investment company within the meaning of section 851(a), and

26 USC 851.

#

“(B)“(B)

issues only redeemable stock.

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“(g)“(g)

Annuity Defined.—

For purposes of this section and sections 402, 403, and 404, the term ‘annuity’ includes a face-amount certificate,

26 USC 402, 403, 404.

as defined in section 2(a)(15) of the Investment Company Act of 1940 (15 U.S.C., sec. 80a–2); but does not include any contract or certificate

54 Stat. 790.

issued after December 31, 1962, which is transferable, if any person other than the trustee of a trust described in section 401(a) which is exempt from tax under section 501(a) is the owner of such contract

26 USC 401, 501.

or certificate.”

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Inclusion of Self-Employed Individuals.—

Section 404(a) of the Internal Revenue Code of 1954 (relating to the deductibility of contributions to pension, annuity, profit-sharing, or stock bonus plans or plans of deferred compensation) is amended—

Limitations on Deductible Contributions on Behalf of Self-Employed Individuals.—

Section 404 of the Internal Revenue

26 USC 404.

Code of 1954 (relating to the deductibility of contributions to pension, annuity, profit-sharing, or stock bonus plans or plans of deferred compensation) is amended by adding after subsection (d) the following new subsections:

“(e)“(e)

Special Limitations for Self-Employed Individuals.—

“(1)“(1)

In general.—

In the case of a plan included in subsection (a)(1), (2), or (3), which provides contributions or benefits for employees some or all of whom are employees within the meaning of section 401(c)(1), the amounts deductible under subsection (a)(determined without regard to paragraph (10) thereof) in any taxable year with respect to contributions on behalf of any employee within the meaning of section 401(c)(1) shall, subject to the provisions of paragraph (2), not exceed $2,500, or 10 percent of the earned income derived by such employee from the trade or business with respect to which the plan is established, whichever is the lesser.

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“(2)“(2)

Contributions made under more than one plan.—

“(A)“(A)

Overall limitation.—

In any taxable year in which amounts are deductible with respect to contributions under two or more plans on behalf of an individual who is an employee within the meaning of section 401(c)(1) with respect to such plans, the aggregate amount deductible for such taxable year under all such plans with respect to contributions on behalf of such employee (determined without regard to subsection (a)(10)) shall not exceed $2,500, or 10 percent of the earned income derived by such employee from the trades or businesses with respect to which the plans are established, whichever is the lesser.

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“(B)“(B)

Allocation of amounts deductible.—

In any case in which the amounts deductible under subsection (a)(with the application of the limitations of this subsection) with respect to contributions made on behalf of an employee within the meaning of section 401(c)(1) under two or more plans

Ante, p. 811.

are, by reason of subparagraph (A), less than the amounts deductible under such subsection determined without regard to such subparagraph, the amount deductible under subsection (a)(determined without regard to paragraph (10) thereof) with respect to such contributions under each such plan shall be determined in accordance with regulations prescribed by the Secretary or his delegate.

#

#

“(3)“(3)

Contributions allocable to insurance protection.—

For purposes of this subsection, contributions which are allocable (determined under regulations prescribed by the Secretary or his delegate) to the purchase of life, accident, health, or other insurance shall not be taken into account.

#

#

“(f)“(f)

Certain Loan Repayments Considered as Contributions.—

For purposes of this section, any amount paid, directly or indirectly, by an owner-employee (within the meaning of section 401(c)(3)) in repayment of any loan which under section 72(m)(4)(B) was treated as an amount received under a contract purchased by a trust described in section 401(a) which is exempt from tax under section 501(a) or purchased as a part of a plan described in

Ante, p. 812.

Post, p. 823.

section 403(a) shall be

26 USC 401, 501, 403.

treated as a contribution to which this section applies on behalf of such owner-employee to such trust or to or under such plan.”

#

Employees’ Annuities.—

Section 72(d)(2) of the Internal Revenue Code of 1954 (relating to employees’ annuities) is amended

26 USC 72.

to read as follows:

“(2)“(2)

Special rules for application of paragraph (1).—

For purposes of paragraph (1)—

“(A)“(A)

if the employee died before any amount was received as an annuity under the contract, the words ‘receivable by the employee’ shall be read as ‘receivable by a beneficiary of the employee’; and

#

“(B)“(B)

any contribution made with respect to the contract while the employee is an employee within the meaning of section 401(c)(1) which is not allowed as a deduction under section 404 shall be treated as consideration for the contract contributed by the employee.”

26 USC 404.

#

#

Special Rules Relating to Self-Employed Individuals and Owner-Employees.—

Section 72 of the Internal Revenue Code of 1954 (relating to annuities, etc.) is amended by redesignating subsection

26 USC 72.

(m) as subsection (o) and by inserting after subsection (1) the following new subsections:

“(m)“(m)

Special Rules Applicable to Employee Annuities and Distributions Under Employee Plans.—

“(1)“(1)

Certain amounts received before annuity starting date.—

Any amounts received under an annuity, endowment, or life insurance contract before the annuity starting date which are not received as an annuity (within the meaning of subsection (e)(2)) shall be included in the recipient’s gross income for the taxable year in which received to the extent that—

“(A)“(A)

such amounts, plus all amounts theretofore received under the contract and includible in gross income under this paragraph, do not exceed

#

“(B)“(B)

the aggregate premiums or other consideration paid for the contract while the employee was an owner-employee which were allowed as deductions under section 404 for the taxable year and all prior taxable years.

#

Any such amounts so received which are not includible in gross income under this paragraph shall be subject to the provisions of subsection (e).

#

“(2)“(2)

Computation op consideration paid by the employee.—

In computing—

“(A)“(A)

the aggregate amount of premiums or other consideration paid for the contract for purposes of subsection (c)(1)(A)(relating to the investment in the contract),

#

“(B)“(B)

the consideration for the contract contributed by the employee for purposes of subsection (d)(1)(relating to employee’s contributions recoverable in 3 years), and

#

“(C)“(C)

the aggregate premiums or other consideration paid for purposes of subsection (e)(1)(B)(relating to certain amounts not received as an annuity),

#

any amount allowed as a deduction with respect to the contract under section 404 which was paid while the employee was an employee within the meaning of section 401 (c)(1) shall be treated as consideration contributed by

Ante, p. 811.

the employer, and there shall not be taken into account any portion of the premiums or other consideration for the contract paid while the employee was an owner-employee which is properly allocable (as determined under regulations prescribed by the Secretary or his delegate) to the cost of life, accident, health, or other insurance.

#

“(3)“(3)

Life insurance contracts.—

“(A)“(A)

This paragraph shall apply to any life insurance contract—

“(i)“(i)

purchased as a part of a plan described in section 403(a), or

#

“(ii)“(ii)

purchased by a trust described in section 401(a) which is exempt from tax under section 501(a) if the proceeds of such contract are payable directly or indirectly to a participant in such trust or to a beneficiary of such participant.

#

#

“(B)“(B)

Any contribution to a plan described in subparagraph (A)(i) or a trust described in subparagraph (A)(ii) which is allowed as a deduction under section 404, and any income of a trust described in subparagraph (A)(ii), which is determined in accordance with regulations prescribed by the Secretary or his delegate to have been applied to purchase the life insurance protection under a contract described in subparagraph (A), is includible in the gross income of the participant for the taxable year when so applied.

#

“(C)“(C)

In the case of the death of an individual insured under a contract described in subparagraph (A), an amount equal to the cash surrender value of the contract immediately before the death of the insured shall be treated as a payment under such plan or a distribution by such trust, and the excess of the amount payable by reason of the death of the insured over such cash surrender value shall not be includible in gross income under this section and shall be treated as provided in

26 USC 101.

section 101.

#

#

“(4)“(4)

Amounts constructively received.—

“(A)“(A)

Assignments or pledges.—

If during any taxable year an owner-employee assigns (or agrees to assign) or pledges (or agrees to pledge) any portion of his interest in a trust described in section 401(a) which is exempt from tax under section 501(a) or any portion of the value of a contract purchased as part of a plan described in section 403(a), such

26 USC 401, 501, 403.

portion shall be treated as having been received by such owner-employee as a distribution from such trust or as an amount received under the contract.

#

“(B)“(B)

Loans on contracts.—

If during any taxable year, an owner-employee receives, directly or indirectly, any amount from any insurance company as a loan under a contract purchased by a trust described in section 401(a) which is exempt from tax under section 501(a) or purchased as part of a plan described in section 403(a), and issued by such insurance company, such amount shall be treated as an amount received under the contract.

#

#

“(5)“(5)

Penalties applicable to certain amounts received by owner-employees.—

“(A)“(A)

This paragraph shall apply—

“(i)“(i)

to amounts (other than any amount received by an individual in his capacity as a policyholder of an annuity, endowment, or life insurance contract which is in the nature of a dividend or similar distribution) which are received from a qualified trust described in section 401(a) or under a plan described in section 403(a) and which are received by an individual, who is, or has been, an owner-employee, before such individual attains the age of 59% years, for any reason other than the individual’s becoming disabled (within the meaning of section 213(g)(3)), but only to the extent that such amounts

72 Stat. 1614.

26 USC 213.

are attributable to contributions paid on behalf of such individual (whether or not paid by him) while he was an owner-employee,

#

“(ii)“(ii)

to amounts which are received from a qualified trust described in section 401(a) or under a plan described in section 403(a) at any time by an individual who is, or has been, an owner-employee, or by the successor of such individual, but only to the extent that such amounts are determined, under regulations prescribed by the Secretary or his delegate, to exceed the benefits provided for such individual under the plan formula, and

#

“(iii)“(iii)

to amounts which are received, by an individual who is, or has been, an owner-employee, by reason of the distribution under the provisions of section 401(e)(2)(E) of his entire interest in all qualified trusts described in section 401(a) and in all plans described

Ante, p. 817

in section 403(a).

#

#

“(B)“(B)

(i)(i)

If the aggregate of the amounts to which this paragraph applies received by any person in his taxable year equals or exceeds $2,500, the increase in his tax for the taxable year in which such amounts are received and attributable to such amounts shall not be less than 110 percent of the aggregate increase in taxes, for the taxable year and the 4 immediately preceding taxable years, which would have resulted if such amounts had been included in such person’s gross income ratably over such taxable years.

#

“(ii)“(ii)

If deductions have been allowed under section 404 for contributions paid on behalf of the individual while he is an owner-employee for a number of prior taxable years less than 4, clause (i) shall be applied by taking into account a number of taxable years immediately preceding the taxable year in which the amount was so received equal to such lesser number.

#

#

“(C)“(C)

If subparagraph (B) does not apply to a person for the taxable year, the increase in tax of such person for the taxable year attributable to the amounts to which this paragraph applies shall be 110 percent of such increase (computed without regard to this subparagraph).

#

“(D)“(D)

Subparagraph (A)(ii) of this paragraph shall not apply to any amount to which section 402(a)(2) or 403(a)(2) applies.

#

“(E)“(E)

For special rules for computation of taxable income for taxable years to which this paragraph applies, see subsection (n)(3).

#

#

“(6)“(6)

Owner-employee defined.—

For purposes of this subsection, the term.‘owner-employee’ has the meaning assigned to it by section 401(c)(3).

#

#

“(n)“(n)

Treatment of Certain Distributions With Respect to Contributions by Self-Employed Individuals.—

“(1)“(1)

Application of subsection.—

“(A)“(A)

Distributions by employees’ trust.—

Subject to the provisions of subparagraph (C), this subsection shall apply to amounts distributed to a distributee, in the case of an

26 USC 401.

26 USC 501.

employees’ trust described in section 401(a) which is exempt from tax under section 501(a), if the total distributions payable to the distributee with respect to an employee are paid to the distributee within one taxable year of the distributee—

“(i)“(i)

on account of the employee’s death,

#

“(ii)“(ii)

after the employee has attained the age of 59 years, or

#

“(iii)“(iii)

after the employee has become disabled (within the meaning of section 213(g)(3)).

#

#

“(B)“(B)

Annuity plans.—

Subject to the provisions of subparagraph (C), this subsection shall apply to amounts paid to a payee, in the case of an annuity plan described in section 403(a), if the total amounts payable to the payee with respect to an employee are paid to the payee within one taxable year of the payee—

“(i)“(i)

on account of the employee’s death,

#

“(ii)“(ii)

after the employee has attained the age of 59% years, or

#

“(iii)“(iii)

after the employee has become disabled (within the meaning of section 213(g)(3)).

#

#

“(C)“(C)

Limitations and exceptions.—

This subsection shall apply—

“(i)“(i)

only with respect to so much of any distribution or payment to which (without regard to this subparagraph) subparagraph (A) or (B) applies as is attributable to contributions made on behalf of an employee while he was an employee within the meaning of section 401(c)(1), and

#

“(ii)“(ii)

if the recipient is the employee on whose behalf such contributions were made, only if contributions which were allowed as a deduction under section 404 have been made on behalf of such employee while he was an employee within the meaning of section 401(c)(1) for 5 or more taxable years prior to the taxable year in which the total distributions payable or total amounts payable, as the case may be, are paid.

#

This subsection shall not apply to amounts described in clauses (ii) and (iii) of subparagraph (A) of subsection (m)(5)(but, in the case of amounts described in clause (ii) of

Ante, p. 823.

such subparagraph, only to the extent that subsection (m)(5) applies to such amounts).

#

#

“(2)“(2)

Limitation of tax.—

In any case to which this subsection applies, the tax attributable to the amounts to which this subsection applies for the taxable year in which such amounts are received snail not exceed whichever of the following is the greater:

“(A)“(A)

5 times the increase in tax which would result from the inclusion in gross income of the recipient of 20 percent of so much of the amount so received as is includible in gross income, or

#

“(B)“(B)

5 times the increase in tax which would result if the taxable income of the recipient for such taxable year equaled 20 percent of the amount of the taxable income of the recipient for such taxable year determined under paragraph (3)(A).

#

#

“(3)“(3)

Determination of taxable income.—

Notwithstanding section 63 (relating to definition of taxable income), for purposes

26 USC 63.

only of computing the tax under this chapter attributable to amounts to which this subsection or subsection (m)(5) applies and which are includible in gross income—

“(A)“(A)

the taxable income of the recipient for the taxable year of receipt shall be treated as being not less than the amount by which (i) the aggregate of such amounts so includible in gross income exceeds (ii) the amount of the deductions allowed for such taxable year under section 151 (relating to

26 USC 151.

deductions for personal exemptions); and

#

“(B)“(B)

in making ratable inclusion computations under paragraph (5)(B) of subsection (m), the taxable income of the recipient for each taxable year involved in such ratable inclusion shall be treated as being not less than the amount required by such paragraph (5)(B) to be treated as includible in gross income for such taxable year.

#

In any case in w’hich the preceding sentence results in an increase in taxable income for any taxable year, the resulting increase in the taxes imposed by section 1 or 3 tor such taxable year shall not

26 USC 1, 3.

be reduced by any credit under part IV of subchapter A (other than section 31 thereof) which, but for this sentence, would be

26 USC 31.

allowable.”

#

#

Capital Gains Treatment of Certain Employees’ Trust Distributions.—

Section 402(a)(2) of the Internal Revenue Code of 1954 (relating to capital gains treatment for certain distributions) is amended by adding at the end thereof the following new sentence: “This paragraph shall not apply to distributions paid to any distributee to the extent such distributions are attributable to contributions made on behalf of the employee while he was an employee within the meaning of section 401(c)(1).”

Ante, p. 811.

Capital Gains Treatment of Certain Employees’ Annuity Payments.—

Section 403(a) of the Internal Revenue Code of 1954

26 USC 403.

(relating to taxability of a beneficiary under a qualified annuity plan) is amended—

Qualified Bond Purchase Plans.—

Part I of subchapter D of chapter 1 of the Internal Revenue Code of 1954 (relating to deferred compensation, etc.) is amended by adding at the end thereof the following new section:

“SEC. 405. QUALIFIED BOND PURCHASE PLANS.

“(a)“(a)

Requirements for Qualification.—

A plan of an employer for the purchase for and distribution to his employees or their beneficiaries of United States bonds described in subsection (b) shall constitute a qualified bond purchase plan under this section if—

“(1)“(1)

the plan meets the requirements of section 401 (a)(3), (4), (5), (6), (7), and (8) and, if applicable, the requirements of section 401(a)(9) and (10) and of section 401 (d)(other than paragraphs (1), (5)(B), and (8)); and

#

“(2)“(2)

contributions under the plan are used solely to purchase for employees or their beneficiaries United States bonds described in subsection (b).

#

#

“(b)“(b)

Bonds to Which Applicable.—

“(1)“(1)

Characteristics of bonds.—

This section shall apply only to a bond issued under the Second Liberty Bond Act, as amended, which by its terms, or by regulations prescribed by the Secretary under such Act—

“(A)“(A)

provides for payment of interest, or investment yield, only upon redemption;

#

“(B)“(B)

may be purchased only in the name of an individual;

#

“(C)“(C)

ceases to bear interest, or provide investment yield, not later than 5 years after the death of the individual in whose name it is purchased;

#

“(D)“(D)

may be redeemed before the death of the individual in whose name it is purchased only if such individual—

“(i)“(i)

has attained the age of 59 years, or

#

“(ii)“(ii)

has become disabled (within the meaning of section 213(g)(3)); and

#

#

“(E)“(E)

is nontransferable.

#

#

“(2)“(2)

Must be purchased in name of employee.—

This section shall apply to a bond described in paragraph (1) only if it is purchased in the name of the employee.

#

#

“(c)“(c)

Deduction for Contributions to Bond Purchase Plans.—

Contributions paid by an employer to or under a qualified bond purchase plan shall be allowed as a deduction in an amount determined

26 USC 404, 401, 501.

under section 404 in the same manner and to the same extent as if such contributions were made to a trust described in section 401(a) which is exempt from tax under section 501(a).

#

“(d)“(d)

Taxability of Beneficiary of Qualified Bond Purchase Plan.—

“(1)“(1)

Gross income not to include bonds at time of distribution.—

For purposes of this chapter, in the case of a distributee of a bond described in subsection (b) under a qualified bond purchase plan, or from a trust described in section 401(a) which is

26 USC 401, 501.

exempt from tax under section 501(a), gross income does not include any amount attributable to the receipt of such bond. Upon redemption of such bond, the proceeds shall be subject to taxation under this chapter, but the provisions of section 72 (relating

26 USC 72.

26 USC 1232.

to annuities, etc.) and section 1232 (relating to bonds and other evidences of indebtedness) shall not apply.

#

“(2)“(2)

Basis.—

The basis of any bond received by a distributee under a qualified bond purchase plan—

“(A)“(A)

if such bond is distributed to an employee, or with respect to an employee, who at the time of purchase of the

Ante, p. 811.

bond, was an employee other than an employee within the meaning of section 401(c)(1), shall be the amount of the contributions by the employee which were used to purchase the bond, and

#

“(B)“(B)

if such bond is distributed to an employee, or with respect to an employee, who, at the time of purchase of the bond, was an employee within the meaning or section 401(c)(1), shall be the amount of the contributions used to purchase the bond which were made on behalf of such employee and were not allowed as a deduction under subsection (c).

#

The basis of any bond described in subsection (b) received by a distributee from a trust described in section 401(a) which is exempt from tax under section 501(a) shall be determined under regulations prescribed by the Secretary or his delegate.

#

#

“(e)“(e)

Capital Gains Treatment Not To Apply to Bonds Distributed by Trusts.—

Section 402(a)(2) shall not apply to any bond

26 USC 402.

described in subsection (b) distributed to any distributee and, for purposes of applying such section, any such bond distributed to any distributee and any such bond to the credit of any employee shall not be taken into account. .

#

“(f)“(f)

Employee Defined.—

For purposes of this section, the term ‘employee’ includes an individual who is an employee within the meaning of section 401(c)(1), and the employer of such individual shall be the person treated as his employer under section 401 (c)(4).

Ante, p. 812.

#

“(g)“(g)

Proof of Purchase.—

At the time of purchase of any bond to which this section applies, proof of such purchase shall be furnished in such form as will enable the purchaser, and the employee in whose name such bond is purchased, to comply with the provisions of this section.

#

“(h)“(h)

Regulations.—

The Secretary or his delegate shall prescribe such regulations as may be necessary to carry out the provisions of this section.”

#

#

Clerical Amendment.—

The table of sections for such part is amended by adding at the end thereof the following new item:

Retirement Income Credit.—

Section 37 (c)(1) of the Internal Revenue Code of 1954 (relating to definition of retirement income) is amended—

Adjusted Gross Income.—

Section 62 of the Internal Revenue Code of 1954 (relating to the definition of adjusted gross income) is amended by inserting after paragraph (6) the following new paragraph:

“(7)“(7)

Pension, profit-sharing, annuity, and bond purchase plans of self-employed individuals.—

In the case of an individual who is an employee within the meaning of section 401

26 USC 404.

Ante, p. 826.

(c)(1), the deductions allowed by section 404 and section 405(c) to the extent attributable to contributions made on behalf of such individual.”

#

Death Benefits.—

Section 101(b) of the Internal Revenue Code of 1954 (relating to employees’ death benefits) is amended—

26 USC 101.

Amounts Received Through Accident or Health Insurance.—

Section 104(a) of the Internal Revenue Code of 1954 (relating

26 USC 104.

to compensation for injuries or sickness) is amended by adding at the end thereof the following new sentence:

“For purposes of paragraph (3), in the case of an individual who is, or has been, an employee within the meaning of section 401 (c)(1)(relating to self-employed individuals), contributions made on behalf of such individual while he was such an employee to a trust described in section 401(a) which is exempt from tax under section 501(a), or

26 USC 401, 501.

under a plan described in section 403(a), shall, to the extent allowed as deductions under section 404, be treated as contributions by the

26 USC 404.

employer which were not includible in the gross income of the employee.”

Amounts Received Under Accident and Health Plans.—

Section 105 of the Internal Revenue Code of 1954 (relating to amounts

26 USC 105.

received under accident and health plans) is amended by adding at the end thereof the following new subsection:

“(g)“(g)

Self-Employed Individual Not Considered an Employee.—

For purposes of this section, the term ‘employee’ does not include an individual who is an employee within the meaning of section 401 (c)(1)(relating to self-employed individuals).”

#

Net Operating Loss Deduction.—

Section 172(d)(4) of the

26 USC 172.

Internal Revenue Code of 1954 (relating to nonbusiness deductions of taxpayers other than corporations) is amended—

Certain Life Insurance Reserves.—

Section 805(d)(1) of the Internal Revenue Code of 1954 (relating to pension plan reserves) is

26 USC 805.

amended—

Unincorporated Businesses Electing To Be Taxed as Corporations.—

Section 1361(d) of the Internal Revenue Code of 1954 (relating to unincorporated business enterprises electing to be

26 USC 1361.

taxed as domestic corporations) is amended by inserting before the period at the end thereof the following: “other than an employee within the meaning of section 401(c)(1)(relating to self-employed

Ante, p. 826.

individuals), or for purposes of section 405 (relating to qualified bond purchase plans) other than an employee described in section 405(f)”.

Estate Tax Exemption of Employees’ Annuities.—

Section 2039 of the Internal Revenue Code of 1954 (relating to exemption from the gross estate of annuities under certain trusts and plans) is amended—

Gift Tax Exemption of Employees’ Annuities.—

Section 2517 of the Internal Revenue Code of 1954 (relating to exclusion from gift tax in case of certain annuities under qualified plans) is amended—

Federal Unemployment Tax Act.—

Section 3306(b)(5) of the Internal Revenue Code of 1954 (relating to definition of wages) is amended by striking out subparagraph (B) and inserting in lieu thereof the following new subparagraphs:

“(B)“(B)

under or to an annuity plan which, at the time of such payment, is a plan described in section 403(a), or

#

“(C)“(C)

under or to a bond purchase plan which, at the time of such payment, is a qualified bond purchase plan described in

Ante, p. 826.

section 405(a);”.

#

Withholding of Income Tax.—

Section 3401(a)(12) of the Internal Revenue Code of 1954 (relating to definition of wages) is amended by striking out subparagraph (B) and inserting in lieu thereof the following new subparagraphs:

“(B)“(B)

under or to an annuity plan which, at the time of such payment, is a plan described in section 403(a); or

#

“(C)“(C)

under or to a bond purchase plan which, at the time of such payment, is a qualified bond purchase plan described in section 405(a).”

#

Information Requirements.—