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[Congressional Record: August 1, 1996 (House)]
[Page H9568]
From the Congressional Record Online via GPO Access [wais.access.gpo.gov]
Subtitle D--Pension Simplification
CHAPTER 1--SIMPLIFIED DISTRIBUTION RULES
SEC. 1401. REPEAL OF 5-YEAR INCOME AVERAGING FOR LUMP-SUM
DISTRIBUTIONS.
(a) In General.--Subsection (d) of section 402 (relating to
taxability of beneficiary of employees' trust) is amended to
read as follows:
``(d) Taxability of Beneficiary of Certain Foreign Situs
Trusts.--For purposes of subsections (a), (b), and (c), a
stock bonus, pension, or profit-sharing trust which would
qualify for exemption from tax under section 501(a) except
for the fact that it is a trust created or organized outside
the United States shall be treated as if it were a trust
exempt from tax under section 501(a).''.
(b) Conforming Amendments.--
(1) Subparagraph (D) of section 402(e)(4) (relating to
other rules applicable to exempt trusts) is amended to read
as follows:
``(D) Lump-sum distribution.--For purposes of this
paragraph--
``(i) In general.--The term `lump sum distribution' means
the distribution or payment within one taxable year of the
recipient of the balance to the credit of an employee which
becomes payable to the recipient--
``(I) on account of the employee's death,
``(II) after the employee attains age 59\1/2\,
``(III) on account of the employee's separation from
service, or
``(IV) after the employee has become disabled (within the
meaning of section 72(m)(7)),
from a trust which forms a part of a plan described in
section 401(a) and which is exempt from tax under section 501
or from a plan described in section 403(a). Subclause (III)
of this clause shall be applied only with respect to an
individual who is an employee without regard to section
401(c)(1), and subclause (IV) shall be applied only with
respect to an employee within the meaning of section
401(c)(1). For purposes of this clause, a distribution to two
or more trusts shall be treated as a distribution to one
recipient. For purposes of this paragraph, the balance to the
credit of the employee does not include the accumulated
deductible employee contributions under the plan (within the
meaning of section 72(o)(5)).
``(ii) Aggregation of certain trusts and plans.--For
purposes of determining the balance to the credit of an
employee under clause (i)--
``(I) all trusts which are part of a plan shall be treated
as a single trust, all pension plans maintained by the
employer shall be treated as a single plan, all profit-
sharing plans maintained by the employer shall be treated as
a single plan, and all stock bonus plans maintained by the
employer shall be treated as a single plan, and
``(II) trusts which are not qualified trusts under section
401(a) and annuity contracts which do not satisfy the
requirements of section 404(a)(2) shall not be taken into
account.
``(iii) Community property laws.--The provisions of this
paragraph shall be applied without regard to community
property laws.
``(iv) Amounts subject to penalty.--This paragraph shall
not apply to amounts described in subparagraph (A) of section
72(m)(5) to the extent that section 72(m)(5) applies to such
amounts.
``(v) Balance to credit of employee not to include amounts
payable under qualified domestic relations order.--For
purposes of this paragraph, the balance to the credit of an
employee shall not include any amount payable to an alternate
payee under a qualified domestic relations order (within the
meaning of section 414(p)).
``(vi) Transfers to cost-of-living arrangement not treated
as distribution.--For purposes of this paragraph, the balance
to the credit of an employee under a defined contribution
plan shall not include any amount transferred from such
defined contribution plan to a qualified cost-of-living
arrangement (within the meaning of section 415(k)(2)) under a
defined benefit plan.
``(vii) Lump-sum distributions of alternate payees.--If any
distribution or payment of the balance to the credit of an
employee would be treated as a lump-sum distribution, then,
for purposes of this paragraph, the payment under a qualified
domestic relations order (within the meaning of section
414(p)) of the balance to the credit of an alternate payee
who is the spouse or former spouse of the employee shall be
treated as a lump-sum distribution. For purposes of this
clause, the balance to the credit of the alternate payee
shall not include any amount payable to the employee.''.
(2) Section 402(c) (relating to rules applicable to
rollovers from exempt trusts) is amended by striking
paragraph (10).
(3) Paragraph (1) of section 55(c) (defining regular tax)
is amended by striking ``shall not include any tax imposed by
section 402(d) and''.
(4) Paragraph (8) of section 62(a) (relating to certain
portion of lump-sum distributions from pension plans taxed
under section 402(d)) is hereby repealed.
(5) Section 401(a)(28)(B) (relating to coordination with
distribution rules) is amended by striking clause (v).
(6) Subparagraph (B)(ii) of section 401(k)(10) (relating to
distributions that must be lump-sum distributions) is amended
to read as follows:
``(ii) Lump-sum distribution.--For purposes of this
subparagraph, the term `lump-sum distribution' has the
meaning given such term by section 402(e)(4)(D) (without
regard to subclauses (I), (II), (III), and (IV) of clause (i)
thereof).''.
(7) Section 406(c) (relating to termination of status as
deemed employee not to be treated as separation from service
for purposes of limitation of tax) is hereby repealed.
(8) Section 407(c) (relating to termination of status as
deemed employee not to be treated as separation from service
for purposes of limitation of tax) is hereby repealed.
(9) Section 691(c) (relating to deduction for estate tax)
is amended by striking paragraph (5).
(10) Paragraph (1) of section 871(b) (relating to
imposition of tax) is amended by striking ``section 1, 55, or
402(d)(1)'' and inserting ``section 1 or 55''.
(11) Subsection (b) of section 877 (relating to alternative
tax) is amended by striking ``section 1, 55, or 402(d)(1)''
and inserting ``section 1 or 55''.
(12) Section 4980A(c)(4) is amended--
(A) by striking ``to which an election under section
402(d)(4)(B) applies'' and inserting ``(as defined in section
402(e)(4)(D)) with respect to which the individual elects to
have this paragraph apply'',
(B) by adding at the end the following new flush sentence:
``An individual may elect to have this paragraph apply to
only one lump-sum distribution.'', and
(C) by striking the heading and inserting:
``(4) Special one-time election.--''.
(13) Section 402(e) is amended by striking paragraph (5).
(c) Effective Dates.--
(1) In general.--The amendments made by this section shall
apply to taxable years beginning after December 31, 1999.
(2) Retention of certain transition rules.--The amendments
made by this section shall not apply to any distribution for
which the taxpayer is eligible to elect the benefits of
section 1122 (h)(3) or (h)(5) of the Tax Reform Act of 1986.
Notwithstanding the preceding sentence, individuals who elect
such benefits after December 31, 1999, shall not be eligible
for 5-year averaging under section 402(d) of the Internal
Revenue Code of 1986 (as in effect immediately before such
amendments).
SEC. 1402. REPEAL OF $5,000 EXCLUSION OF EMPLOYEES' DEATH
BENEFITS.
(a) In General.--Subsection (b) of section 101 is hereby
repealed.
(b) Conforming Amendments.--
(1) Subsection (c) of section 101 is amended by striking
``subsection (a) or (b)'' and inserting ``subsection (a)''.
(2) Sections 406(e) and 407(e) are each amended by striking
paragraph (2) and by redesignating paragraph (3) as paragraph
(2).
(3) Section 7701(a)(20) is amended by striking ``, for the
purpose of applying the provisions of section 101(b) with
respect to employees' death benefits''.
(c) Effective Date.--The amendments made by this section
shall apply with respect to decedents dying after the date of
the enactment of this Act.
[[Page H9578]]
SEC. 1403. SIMPLIFIED METHOD FOR TAXING ANNUITY DISTRIBUTIONS
UNDER CERTAIN EMPLOYER PLANS.
(a) General Rule.--Subsection (d) of section 72 (relating
to annuities; certain proceeds of endowment and life
insurance contracts) is amended to read as follows:
``(d) Special Rules for Qualified Employer Retirement
Plans.--
``(1) Simplified method of taxing annuity payments.--
``(A) In general.--In the case of any amount received as an
annuity under a qualified employer retirement plan--
``(i) subsection (b) shall not apply, and
``(ii) the investment in the contract shall be recovered as
provided in this paragraph.
``(B) Method of recovering investment in contract.--
``(i) In general.--Gross income shall not include so much
of any monthly annuity payment under a qualified employer
retirement plan as does not exceed the amount obtained by
dividing--
``(I) the investment in the contract (as of the annuity
starting date), by
``(II) the number of anticipated payments determined under
the table contained in clause (iii) (or, in the case of a
contract to which subsection (c)(3)(B) applies, the number of
monthly annuity payments under such contract).
``(ii) Certain rules made applicable.--Rules similar to the
rules of paragraphs (2) and (3) of subsection (b) shall apply
for purposes of this paragraph.
``(iii) Number of anticipated payments.--
``If the age of the primary annuitant on the annuity starting date
is: The number of anticipated payments is:
Not more than 55..........................................360
More than 55 but not more than 60.........................310
More than 60 but not more than 65.........................260
More than 65 but not more than 70.........................210
More than 70..............................................160.
``(C) Adjustment for refund feature not applicable.--For
purposes of this paragraph, investment in the contract shall
be determined under subsection (c)(1) without regard to
subsection (c)(2).
``(D) Special rule where lump sum paid in connection with
commencement of annuity payments.--If, in connection with the
commencement of annuity payments under any qualified employer
retirement plan, the taxpayer receives a lump sum payment--
``(i) such payment shall be taxable under subsection (e) as
if received before the annuity starting date, and
``(ii) the investment in the contract for purposes of this
paragraph shall be determined as if such payment had been so
received.
``(E) Exception.--This paragraph shall not apply in any
case where the primary annuitant has attained age 75 on the
annuity starting date unless there are fewer than 5 years of
guaranteed payments under the annuity.
``(F) Adjustment where annuity payments not on monthly
basis.--In any case where the annuity payments are not made
on a monthly basis, appropriate adjustments in the
application of this paragraph shall be made to take into
account the period on the basis of which such payments are
made.
``(G) Qualified employer retirement plan.--For purposes of
this paragraph, the term `qualified employer retirement plan'
means any plan or contract described in paragraph (1), (2),
or (3) of section 4974(c).
``(2) Treatment of employee contributions under defined
contribution plans.--For purposes of this section, employee
contributions (and any income allocable thereto) under a
defined contribution plan may be treated as a separate
contract.''.
(b) Effective Date.--The amendment made by this section
shall apply in cases where the annuity starting date is after
the 90th day after the date of the enactment of this Act.
SEC. 1404. REQUIRED DISTRIBUTIONS.
(a) In General.--Section 401(a)(9)(C) (defining required
beginning date) is amended to read as follows:
``(C) Required beginning date.--For purposes of this
paragraph--
``(i) In general.--The term `required beginning date' means
April 1 of the calendar year following the later of--
``(I) the calendar year in which the employee attains age
70\1/2\, or
``(II) the calendar year in which the employee retires.
``(ii) Exception.--Subclause (II) of clause (i) shall not
apply--
``(I) except as provided in section 409(d), in the case of
an employee who is a 5-percent owner (as defined in section
416) with respect to the plan year ending in the calendar
year in which the employee attains age 70\1/2\, or
``(II) for purposes of section 408 (a)(6) or (b)(3).
``(iii) Actuarial adjustment.--In the case of an employee
to whom clause (i)(II) applies who retires in a calendar year
after the calendar year in which the employee attains age
70\1/2\, the employee's accrued benefit shall be actuarially
increased to take into account the period after age 70\1/2\
in which the employee was not receiving any benefits under
the plan.
``(iv) Exception for governmental and church plans.--
Clauses (ii) and (iii) shall not apply in the case of a
governmental plan or church plan. For purposes of this
clause, the term `church plan' means a plan maintained by a
church for church employees, and the term `church' means any
church (as defined in section 3121(w)(3)(A)) or qualified
church-controlled organization (as defined in section
3121(w)(3)(B)).''.
(b) Effective Date.--The amendment made by subsection (a)
shall apply to years beginning after December 31, 1996.
[Conference report follows]
II. PENSION SIMPLIFICATION PROVISIONS
A. Simplified Distribution Rules
(Secs. 1401-1404 of the House bill and the Senate
amendment.)
Present law
In general, a distribution of benefits from a tax-favored
retirement arrangement (i.e., a qualified plan, a qualified
annuity plan, and a tax-sheltered annuity contract (sec.
403(b) annuity)) generally is includable in gross income in
the year it is paid or distributed under the rules relating
to the taxation of annuities.
Lump-sum distributions
Lump-sum distributions from qualified plans and qualified
annuity plans are eligible for special 5-year forward
averaging. In general, a lump-sum distribution is a
distribution within one taxable year of the balance to the
credit of an employee that becomes payable to the recipient
first, on account of the death of the employee, second, after
the employee attains age 59\1/2\, third, on account of the
employee's separation from service, or fourth, in the case of
self-employed individuals, on account of disability. Lump-sum
treatment is not available for distributions from a tax-
sheltered annuity.
A taxpayer is permitted to make an election with respect to
a lump-sum distribution received on or after the employee
attains age 59\1/2\ to use 5-year forward income averaging
under the tax rates in effect for the taxable year in which
the distribution is made. In general, this election allows
the taxpayer to pay a separate tax on the lump-sum
distribution that approximates the tax that would be due if
the lump-sum distribution were received in 5 equal
installments. If the election is made, the taxpayer is
entitled to deduct the amount of the lump-sum distribution
from gross income. Only one such election on or after 59\1/2\
may be made with respect to any employee.
Under the Tax Reform Act of 1986 (the ``1986 Act''),
individuals who attained age 50 by January 1, 1986, can elect
to use 10-year averaging (under the rates in effect prior to
the 1986 Act) in lieu of 50 year averaging. In addition, such
individuals may elect to retain capital gains treatment with
respect to the pre-1974 portion of a lump sum distribution.
Exclusion of $5,000 for employer-provided death benefits
Under present law, the beneficiary or estate of a deceased
employee generally can exclude up to $5,000 in benefits paid
by or on behalf of an employer by reason of the employee's
death (sec. 101(b)).
Recovery of basis
Amounts received as an annuity under a qualified plan
generally are includable in income in the year received,
except to the extent they represent the return of the
recipient's investment in the contract (i.e., basis). Under
present law, a pro-rata basis recovery rule generally
applies, so that the portion of any annuity payment that
represents nontaxable return of basis is determined by
applying an exclusion ratio equal to the employee's total
investment in the contract divided by the total expected
payments over the term of the annuity.
Under a simplified alternative method provided by the IRS,
the taxable portion of qualifying annuity payments is
determined under a simplified exclusion ratio method.
In no event can the total amount excluded from income as
nontaxable return of basis be greater than the recipient's
total investment in the contract.
Required distributions
Present law provides uniform minimum distribution rules
generally applicable to all types of tax-favored retirement
vehicles, including qualified plans and annuities, IRAs, and
tax-sheltered annuities.
Under present law, a qualified plan is required to provide
that the entire interest of each participant will be
distributed beginning no later than the participant's
required beginning date (sec. 401(a)(9)). The required
beginning date is generally April 1 of the calendar year
following the calendar year in which the plan participant or
IRA owner attains age 70\1/2\. In the case of a governmental
plan or a church plan, the required beginning date is the
later of first, such April 1, or second, the April 1 of the
year following the year in which the participant retires.
House bill
Lump-sum distributions
The House bill repeals 5-year averaging for lump-sum
distributions from qualified plans. Thus, the House bill
repeals the separate tax paid on a lump-sum distribution and
also repeals the deduction from gross income for taxpayers
who elect to pay the separate tax on a lump-sum distribution.
Effective date.--The provision is effective for taxable
years beginning after December 31, 1998. The House bill
preserves the ability of certain individuals to elect 10-year
averaging and capital gains treatment as provided under the
Tax Reform Act of 1986.
Exclusion of $5,000 for employer-provided death benefits
The House bill repeals the $5,000 exclusion for employer-
provided death benefits.
Effective date.--The provision applies with respect to
decedents dying after date of enactment.
Recovery of basis
The House bill provides that basis recovery on payments
from qualified plans generally
[[Page H9627]]
is determined under a method similar to the present-law
simplified alternative method provided by the IRS. The
portion of each annuity payment that represents a return of
basis equals to the employee's total basis as of the annuity
starting date, divided by the number of anticipated payments
under the following table:
Age Number of payments:
Not more than 55....................................................360
56-60...............................................................310
61-65...............................................................260
66-70...............................................................210
More than 70........................................................160
Effective date.--The provision is effective with respect to
annuity starting dates beginning 90 days after the date of
enactment.
Required distributions
The House bill modifies the rule that requires all
participants in qualified plans to commence distributions by
age 70\1/2\ without regard to whether the participant is
still employed by the employer and generally replaces it with
the rule in effect prior to the Tax Reform Act of 1986. Under
the House bill, distributions generally are required to begin
by April 1 of the calendar year following the later of first,
the calendar year in which the employee attains age 70\1/2\
or second, the calendar year in which the employee retires.
However, in the case of a 5-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 5-
percent owner attains age 70\1/2\.
In addition, in the case of an employee (other than a 5-
percent owner) who retires in a calendar year after attaining
age 70\1/2\, the House bill generally requires the employee's
accrued benefit to 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. Thus, under the
House bill, the employee's accrued benefit is required to
reflect the value of benefits that the employee would have
received if the employee had retired at age 70\1/2\ and had
begun receiving benefits at that time.
The actuarial adjustment rule and the rule requiring 5-
percent owners to begin distributions after attainment of age
70\1/2\ does not apply, under the House bill, in the case of
a governmental plan or church plan.
Effective date.--The provision is effective for years
beginning after December 31, 1996. If a participant is
currently receiving distributions, but does not have to under
the provision, it is intended that a plan (or annuity
contract) could (but would not be required to) permit the
participant, with his or her consent, with his or her consent
to stop receiving distributions until such distributions are
required under the provision.
Senate amendment
Lump-sum distributions
The Senate amendment is the same as the House bill.
Effective date.--The provision is effective for taxable
years beginning after December 31, 1999.
Exclusion of $5,000 for employer-provided death benefits
The Senate amendment is the same as the House bill.
Recovery of basis
The Senate amendment is the same as the House bill.
Required distributions
The Senate amendment is the same as the House bill.
Conference agreement
Lump-sum distributions
The conference agreement follows the Senate amendment.
Exclusion of $5,000 for employer-provided death benefits
The conference agreement follows the Senate amendment.
Recovery of basis
The conference agreement follows the Senate amendment.
Required distributions
The conference agreement follows the House bill and the
Senate amendment. The conferees intend that the actuarial
adjustment rule does not apply in the case of a defined
contribution plan.
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