CONTRIBUTIONS ON BEHALF OF SELF-EMPLOYED INDIVIDUALS AND SHAREHOLDER-EMPLOYEES.

SEC. 2001. CONTRIBUTIONS ON BEHALF OF SELF-EMPLOYED INDIVIDUALS AND SHAREHOLDER-EMPLOYEES. (a) Increase in Maximum Amount Deductible for Self-Employed Individuals— (1) Paragraph (1) of section 404(e) (relating to special limitations for self-employed individuals) is amended— (A) by striking out “$2,500, or 10 percent” and inserting in lieu thereof “$7,500, or 15 percent”, and (B) by striking out “subject to the provisions of paragraph (2)” and inserting in lieu thereof “subject to paragraphs (2) and (4)”. (2) Paragraph (2)(A) of section 404(e) is amended by striking out “shall not exceed $2,500, or 10 percent” and inserting in lieu thereof “shall (subject to paragraph (4)) not exceed $7,500, or 15 percent”. (3) Section 404(e) is amended by adding at the end thereof the following new paragraph: “(4) Limitations cannot be lower than $750 or 100 percent of earned income.—The limitations under paragraphs (1) and (2)(A) for any employee shall not be less than the lesser of— “(A) $750, or “(B) 100 percent of the earned income derived by such employee from the trades or businesses taken into account for purposes of paragraph (1) or (2)(A) as the case may be.”. (b) Increase in Maximum Amount Deductible for Shareholder-Employees.—Paragraph (1) of section 1379(b) (relating to taxability of shareholder-employees) is amended— (1) by striking out “10 percent” in subparagraph (A) and inserting in lieu thereof “15 percent”, and (2) by striking out “$2,500” in subparagraph (B) and inserting in lieu thereof “$7,500”. (c) Only First $100,000 of Annual Compensation To Be Taken Into Account.—Subsection (a) of section 401 (relating to requirements for qualification) is amended by inserting after paragraph (16) the following new paragraph: “(17) In the case of a plan which provides contributions or benefits for employees some or all of whom are employees within the meaning of subsection (c)(1), or are shareholder-employees within the meaning of section 1379(d), only if the annual compen-88 Stat. 953sation of each employee taken into account under the plan does not exceed the first $100,000 of such compensation.” (d) Defined Benefit Plans for Self-Employed Individuals.— (1) Subsection (a) of section 401 is amended by inserting after paragraph (17) the following new paragraph: “(18) In the case of a trust which is part of a plan providing a defined benefit for employees some or all of whom are employees within the meaning of subsection (c)(1), or are shareholder-employees within the meaning of section 1379(d), only if such plan satisfies the requirements of subsection (j).” (2) Section 401 (relating to qualified pension, profit-sharing, and stock bonus plans) is amended by redesignating subsection (j) as subsection (k) and by inserting after subsection (i) the following new subsection: “(j) Defined Benefit Plans Providing Benefits for Self-Employed Individuals and Shareholder-Employees.— “(1) In general.—A defined benefit plan satisfies the requirements of this subsection only if the basic benefit accruing under the plan for each plan year of participation by an employee within the meaning of subsection (c)(1) (or a shareholder-employee) is permissible under regulations prescribed by the Secretary or his delegate under this subsection to insure that there will be reasonable comparability (assuming level funding) between the maximum retirement benefits which may be provided with favorable tax treatment under this title for such employees under— “(A) defined contribution plans, “(B) defined benefit plans, and “(C) a combination of defined contribution plans and defined benefit plans. “(2) Guidelines for regulations.—The regulations prescribed under this subsection shall provide that a plan does not satisfy the requirements of this subsection if, under the plan, the basic benefit of any employee within the meaning of subsection (c)(1) (or a shareholder-employee) may exceed the sum of the products for each plan year of participation of— “(A) his annual compensation (not in excess of $50,000) for such year, and “(B) the applicable percentage determined under paragraph (3). “(3) Applicable percentage.— “(A) Table.—For purposes of paragraph (2), the applicable percentage for any individual for any plan year shall be based on the percentage shown on the following table opposite his age when his current period of participation in the plan began. “Age when participation began: Applicable percentage 30 or less 6.5 35 5.4 40 4.4 45 3.6 50 3.0 55 2.5 60 or over 2.0 “(B) Additional requirements.—The regulations prescribed under this subsection shall include provisions— “(i) for applicable percentages for ages between any two ages shown on the table, “(ii) for adjusting the applicable percentages in the case of plans providing benefits other than a basic benefit, 88 Stat. 954 “(iii) that any increase in the rate of accrual, and any increase in the compensation base which may be taken into account, shall, with respect only to such increase, begin a new period of participation in the plan, and “(iv) when appropriate, in the case of periods beginning after December 31, 1977, for adjustments in the applicable percentages based on changes in prevailing interest and mortality rates occurring after 1973. “(4) Certain contributions and benefits may not be taken into account.—A defined benefit plan which provides contributions or benefits for owner-employees does not satisfy the requirements of this subsection unless such plan meets the requirements of subsection (a)(4) without taking into account 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, or any other Federal or State law. “(5) Definitions.—For purposes of this subsection— “(A) Basic benefit.—The term ‘basic benefit’ means a benefit in the form of a straight life annuity commencing at the later of— “(i) age 65, or “(ii) the day 5 years after the day the participant’s current period of participation began under a plan which provides no ancillary benefits and to which employees do not contribute. “(B) Shareholder-employee.—The term ‘shareholder-employee’ has the same meaning as when used in section 1379(d). “(C) Compensation.—The term ‘compensation’ means— “(i) in the case of an employee within the meaning of subsection (c)(1), the earned income of such individual, or “(ii) in the case of a shareholder-employee, the compensation received or accrued by the individual from the electing small business corporation. “(6) Special rules.—Section 404(e) (relating to special limitations for self-employed individuals) and section 1379(b) (relating to taxability of shareholder-employee beneficiaries) do not apply to a trust to which this subsection applies.” (e) Repeal of Existing Tax Treatment of Excess Contributions.— (1) The last sentence of section 401(d)(5) is amended to read as follows: “Subparagraphs (A) and (B) do not apply to contributions described in subsection (e).” (2) Paragraph (8) of section 401(d) is repealed. (3) Subsection (e) of section 401 is amended to read as follows: “(e) Contributions for Premiums on Annuity, Etc., Contracts.—A contribution by the employer on behalf of an owner-employee is described in this subsection if— “(1) 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, “(2) the amount of such contribution exceeds the amount deductible under section 404 with respect to contributions made by the employer on behalf of such owner-employee under the plan, and “(3) the amount of such contribution does not exceed the average of the amounts which were deductible under section 404 with 88 Stat. 955 respect to contributions made by the employer on behalf of such owner-employee under the plan (or which would have been deductible if such section had been in effect) for the first three taxable years (A) preceding the year in which the last such annuity, endowment, or life insurance contract was issued under the plan, and (B) 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. In the case of any individual on whose behalf contributions described in paragraph (1) are made under more than one plan as an owner-employee during any taxable year, the preceding sentence does not apply if the amount of such contributions under all such plans for all such years exceeds $7,500. Any contribution which is described in this subsection shall, for purposes of section 4972(b), 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 for the taxable year, but only for the purpose of applying section 4972(b) to other contributions made by such owner-employee as an employee.” (4) Clause (ii) of section 401(a)(10)(A) is amended by striking out “subsection (e)(3)(A)” and inserting in lieu thereof “subsection (e)”. (5) Subparagraph (A) of section 72(m)(5)(A) is amended— (A) by inserting “and” at the end of clause (i), (B) by striking out the comma at the end of clause (ii) and the word “and” following that comma, and inserting in lieu thereof a period, and (C) by striking out clause (iii). (f) Tax on Excess Contributions.— (1) Chapter 43 (relating to qualified pension, etc., plans) is amended by inserting after section 4971 the following new section: “SEC. 4972. TAX ON EXCESS CONTRIBUTIONS FOR SELF-EMPLOYED INDIVIDUALS. “(a) Tax Imposed.—In the case of a plan which provides contributions or benefits for employees some or all of whom are employees within the meaning of section 401(c)(1), there is imposed, for each taxable year of the employer who maintains such plan, a tax in an amount equal to 6 percent of the amount of the excess contributions under the plan (determined as of the close of the taxable year). The tax imposed by this subsection shall be paid by the employer who maintains the plan. This section applies only to plans which include a trust described in section 401(a), which are described in section 403(a), or which are described in section 405(a). “(b) Excess Contributions.— “(1) In general.—For purposes of this section, the term ‘excess contributions’ means the sum of the amounts (if any) determined under paragraphs (2), (3), and (4), reduced by the sum of the correcting distributions (as defined in paragraph (5)) made in all prior taxable years beginning after December 31, 1975. For purposes of this subsection the amount of any contribution which is 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. “(2) Contributions by owner-employees.—The amount determined under this paragraph, in the case of a plan which provides contributions or benefits for employees some or all of whom are 88 Stat. 956 owner-employees (within the meaning of section 401(c)(3)), is the sum of— “(A) the excess (if any) of— “(i) the amount contributed under the plan by each owner-employee (as an employee) for the taxable year, over “(ii) the amount permitted to be contributed by each owner-employee (as an employee) for such year, and “(B) the amount determined under this paragraph for the preceding taxable year of the employer, reduced by the excess (if any) of the amount described in subparagraph (A)(ii) over the amount described in subparagraph (A)(i). “(3) Defined benefit plans.—The amount determined under this paragraph, in the case of a defined benefit plan, is the amount contributed under the plan by the employer during the taxable year or any prior taxable year beginning after December 31, 1975, if— “(A) as of the close of the taxable year, the full funding limitation of the plan (determined under section 412(c)(7)) is zero, and “(B) such amount has not been deductible for the taxable year or any prior taxable year. “(4) Defined contribution plans.—The amount determined under this paragraph, in the case of a plan other than a defined benefit plan, is the portion of the amounts contributed under the plan by the employer during the taxable year and each prior taxable year beginning after December 31, 1975, which has not been deductible for the taxable year or any prior taxable year. “(5) Correcting distribution.—For purposes of this subsection the term ‘correcting distribution’ means— “(A) in the case of a contribution made by an owner-employee as an employee, regardless of the type of plan, the amount determined under paragraph (2) distributed to the owner-employee who contributed such amount, “(B) in the case of a defined benefit plan, the amount determined under paragraph (3) which is distributed from the plan to the employer, and “(C) in the case of a defined contribution plan, the amount determined under paragraph (4) which is distributed from the plan to the employer or to the employee to the account of whom the amount described was contributed. “(c) Amount Permitted To Be Contributed by Owner-Employee.—For purposes of subsection (b)(2), the amount permitted to be contributed under a plan by an owner-employee (as an employee) for any taxable year is the smallest of the following: “(1) $2,500, “(2) 10 percent of the earned income (as defined in section 401(c)(2)) for such taxable year derived by such owner-employee from the trade or business with respect to which the plan is established, or “(3) the amount of the contribution which would be contributed by the owner-employee (as an employee) if such contribution were made at the rate of contributions permitted to be made by employees other than owner-employees. In any case in which there are no employees other than owner-employees, the amount determined under the preceding sentence shall be zero. 88 Stat. 957 “(d) Cross Reference.— “For disallowance of deduction for taxes paid under this section, see section 275.”. (2) Clerical amendment.—The table of sections for chapter 43 is amended by inserting after the item relating to section 4971 the following new item: “Sec. 4972. Tax on excess contributions for self-employed individuals.”. (g) Premature Distributions to Owner-Employees.— (1) In general.—Subparagraph (B) of section 72(m)(5) (relating to penalties applicable to certain amounts received by owner-employees) is amended to read as follows: “(B) If a person receives an amount to which this paragraph applies, his tax under this chapter for the taxable year in which such amount is received shall be increased by an amount equal to 10 percent of the portion of the amount so received which is includible in his gross income for such taxable year.” (2) Conforming amendments.— (A) Subparagraphs (C), (D), and (E) of section 72(m)(5) are repealed. (B) The second sentence of section 46(a)(3) and the second sentence of section 50A(a)(3), as each is amended by section 2005(c)(4) of this Act, are each amended by inserting after “tax preferences,” the following: “section 72(m)(5) (B) (relating to 10 percent tax on premature distributions to owner-employees),”. (C) The third sentence of section 901(a), as amended by section 2005(c)(5) of this Act, is amended by striking out “tax preferences,” and inserting in lieu thereof “tax preferences), against the tax imposed for the taxable year under section 72(m)(5)(B) (relating to 10 percent tax on premature distributions to owner-employees),”. (D) Subparagraph (A) of section 56(a)(2) and paragraph (1) of section 56(c), as each is amended by section 2005(c)(7) of this Act, are each amended by striking out “402(e)” and inserting in lieu thereof “72(m)(5)(B), 402(e)”. (E) Section 404(a)(2) is amended by striking out “(16)” and inserting in lieu thereof “(16),(17),(18)”. (F) Clause (ii) of section 404(a)(9)(B) is amended to read as follows: “(ii) without regard to the second sentence of paragraph (3); and”. (h) Withdrawal of Employee Contributions of Owner-Employees.— (1) Section 401(d)(4)(B) (relating to additional requirements for qualification of trusts and plans benefiting owner-employees) is amended by inserting “in excess of contributions made by an owner-employee as an employee” after “benefits”. (2) Paragraph (1) of section 72(m) (relating to certain amounts received before annuity starting date) is repealed. (3) Section 72(m)(5)(A)(i) is amended by striking out “(whether or not paid by him)” and inserting in lieu thereof the following: “(other than contributions made by him as an owner-employee)”. (i) Effective Dates.— (1) The amendments made by subsections (a) and (b) apply to taxable years beginning after December 31, 1973. 88 Stat. 958 (2) The amendments made by subsection (c) apply to— (A) taxable years beginning after December 31, 1975, and (B) any other taxable years beginning after December 31, 1973, for which contributions were made under the plan in excess of the amounts permitted to be made under sections 404(e) and 1379(b) as in effect on the day before the date of the enactment of this Act. (3) The amendments made by subsection (d) apply to taxable years beginning after December 31, 1975. (4) The amendments made by subsections (e) and (f) apply to contributions made in taxable years beginning after December 31, 1975. (5) The amendments made by subsection (g) apply to distributions made in taxable years beginning after December 31, 1975. (6) The amendments made by subsection (h) apply to taxable years ending after the date of enactment of this Act.