LIMITATIONS ON BENEFITS AND CONTRIBUTIONS.

SEC. 2004. LIMITATIONS ON BENEFITS AND CONTRIBUTIONS. (a) Plan Requirements.— (1) Section 401(a) (relating to requirements for qualification) is amended by inserting after paragraph (15) the following new paragraph: “(16) A trust shall not constitute a qualified trust under this section if the plan of which such trust is a part provides for benefits or contributions which exceed the limitations of section 415.” (2) Subpart B of part I of subchapter D of chapter 1 is amended by inserting after section 414 the following new section: “SEC. 415. LIMITATIONS ON BENEFITS AND CONTRIBUTION UNDER QUALIFIED PLANS. “(a) General Rule.— “(1) Trusts.—A trust which is a part of a pension, profit-sharing, or stock bonus plan shall not constitute a qualified trust under section 401(a) if— “(A) in the case of a defined benefit plan, the plan provides for the payment of benefits with respect to a participant which exceed the limitation of subsection (b), “(B) in the case of a defined contribution plan, contributions and other additions under the plan with respect to any 88 Stat. 980 participant for any taxable year exceed the limitation of subsection (c), or “(C) in any case in which an individual is a participant in both a defined benefit plan and a defined contribution plan maintained by the employer, the trust has been disqualified under subsection (g). “(2) Section applies to certain annuities and accounts.—in the case of— “(A) an employee annuity plan described in section 403(a), “(B) an annuity contract described in section 403(b), “(C) an individual retirement account described in section 408(a), “(D) an individual retirement annuity described in section 408(b), “(E) a plan described in section 405(a), or “(F) a retirement bond described in section 409, such contract, annuity plan, account, annuity, plan, or bond shall not be considered to be described in section 403(a), 403(b), 405(a), 408(a), 408(b), or 409, as the case may be, unless it satisfies the requirements of subparagraph (A) or subparagraph (B) of paragraph (1), whichever is appropriate, and has not been disqualified under subsection (g). In the case of an annuity contract described in section 403(b), the preceding sentence shall apply only to the portion of the annuity contract which exceeds the limitation of subsection (b) or the limitation of subsection (c), whichever is appropriate, and the amount of the contribution for such portion shall reduce the exclusion allowance as provided in section 403(b)(2). “(b) Limitation for Defined Benefit Plans.— “(1) In general.—Benefits with respect to a participant exceed the limitation of this subsection if, when expressed as an annual benefit (within the meaning of paragraph (2)), such annual benefit is greater than the lesser of— “(A) $75,000, or “(B) 100 percent of the participant’s average compensation for his high 3 years. “(2) Annual benefit.— “(A) In general.—For purposes of paragraph (1), the term ‘annual benefit’ means a benefit payable annually in the form of a straight life annuity (with no ancillary benefits) under a plan to which employees do not contribute and under which no rollover contributions (as defined in sections 402(a)(5), 403(a)(4), 408(d)(3), and 409(b)(3)(C)) are made. “(B) Adjustment for certain other forms of benefit.—If the benefit under the plan is payable in any form other than the form described in subparagraph (A), or if the employees contribute to the plan or make rollover contributions (as defined in sections 402(a)(5), 403(a)(4), 408(d)(3) and 409(b)(3)(C)), the determinations as to whether the limitation described in paragraph (1) has been satisfied shall be made, in accordance with regulations prescribed by the Secretary or his delegate, by adjusting such benefit so that it is equivalent to the benefit described in subparagraph (A). For purposes of this subparagraph, any ancillary benefit which is not directly related to retirement income benefits shall not be taken into account; and that portion of any joint and survivor annuity which constitutes a qualified joint and 88 Stat. 981 survivor annuity (as defined in section 401(a)(11)(H)(iii)) shall not be taken into account. “(C) Adjustment to $75,000 limit where benefit begins before age 55.—If the retirement income benefit under the plan begins before age 55, the determination as to whether the $75,000 limitation set forth in paragraph (1)(A) has been satisfied shall be made, in accordance with regulations prescribed by the Secretary or his delegate, by adjusting such benefit so that it is equivalent to such a benefit beginning at age 55. “(3) Average compensation for high 3 years.—For purposes of paragraph (1), a participant’s high 3 years shall be the period of consecutive calendar years (not more than 3) during which the participant both was an active participant in the plan and had the greatest aggregate compensation from the employer. In the case of an employee within the meaning of section 401(c)(1), the preceding sentence shall be applied by substituting for ‘compensation from the employer’ the following: ‘the participant’s earned income (within the meaning of section 401(c)(2) but determined without regard to any exclusion under section 911). “(4) Total annual benefits not in excess of $10,000.—Notwithstanding the preceding provisions of this subsection, the benefits payable with respect to a participant under any defined benefit plan shall be deemed not to exceed the limitation of this subsection if— “(A) the retirement benefits payable with respect to such participant under such plan and under all other defined benefit plans of the employer do not exceed $10,000 for the plan year, or for any prior plan year, and “(B) the employer has not at any time maintained a defined contribution plan in which the participant participated. “(5) Reduction for service less than 10 years.—In the case of an employee who has less than 10 years of service with the employer, the limitation referred to in paragraph (1), and the limitation referred to in paragraph (4), shall be the limitation determined under such paragraph (without regard to this paragraph), multiplied by a fraction, the numerator of which is the number of years (or part thereof) of service with the employer and the denominator of which is 10. “(6) Computation of benefits and contributions.—The computation of— “(A) benefits under a defined contribution plan, for purposes of section 401(a)(4), “(B) contributions made on behalf of a participant in a defined benefit plan, for purposes of section 401(a)(4), and “(C) contributions and benefits provided for a participant in a plan described in section 414(k), for purposes of this section shall not be made on a basis inconsistent with regulations prescribed by the Secretary or his delegate. “(c) Limitation for Defined Contribution Plans.— “(1) In general.—Contributions and other additions with respect to a participant exceed the limitation of this subsection if when expressed as an annual addition (within the meaning of 88 Stat. 982 paragraph (2)) to the participant’s account, such annual addition is greater than the lesser of— “(A) $25,000, or “(B) 25 percent of the participant’s compensation. “(2) Annual addition.—For purposes of paragraph (1), the term ‘annual addition’ means the sum for any year of— “(A) employer contributions, “(B) the lesser of— “(i) the amount of the employee contributions in excess of 6 percent of his compensation, or “(ii) one-half of the employee contributions, and “(C) forfeitures. For the purposes of this paragraph, employee contributions under subparagraph (B) are determined without regard to any rollover contributions (as defined in sections 402(a)(5), 403(a)(4), 408(d)(3), and 409(b)(3)(C)). “(3) Participant’s compensation.—For purposes of paragraph (1), the term ‘participant’s compensation’ means the compensation of the participant from the employer for the year. In the case of an employee within the meaning of section 401(c)(1), the preceding sentence shall be applied by substituting for ‘compensation of the participant from the employer’ the following: ‘the participant’s earned income (within the meaning of section 401(c)(2) but determined without regard to any exclusion under section 911)’. “(4) Special election for section 403(b) contracts purchased by educational institutions, hospitals, and home health service agencies.— “(A) In the case of amounts contributed for an annuity contract described in section 403(b) for the year in which occurs a participant’s separation from the service with an educational institution, a hospital, or a home health service agency, at the election of the participant there is substituted for the amount specified in paragraph (1)(B) the amount of the exclusion allowance which would be determined under section 403(b)(2) (without regard to this section) for the participant’s taxable year in which such separation occurs if the participant’s years of service were computed only by taking into account his service for the employer during the period of years (not exceeding ten) ending on the date of such separation. “(B) In the case of amounts contributed for an annuity contract described in section 403(b) for any year in the case of a participant who is an employee of an educational institution, a hospital, or a home health service agency, at the election of the participant there is substituted for the amount specified in paragraph (1)(B) the least of— “(i) 25 percent of the participant’s includible compensation (as defined in section 403(b)(3)) plus $4,000, “(ii) the amount of the exclusion allowance determined for the year under section 403(b)(2), or “(iii) $15,000. “(C) In the case of amounts contributed for an annuity contract described in section 403(b) for any year for a participant who is an employee of an educational institution, a hospital, or a home health service agency, at the election of the participant the provisions of section 403(b)(2)(A) shall not apply. 88 Stat. 983 “(D)(i) The provisions of this paragraph apply only if the participant elects its application at the time and in the manner provided under regulations prescribed by the Secretary or his delegate. Not more than one election may be made under subparagraph (A) by any participant. A participant who elects to have the provisions of subparagraph (A), (B), or (C) of this paragraph apply to him may not elect to have any other subparagraph of this paragraph apply to him. Any election made under this paragraph is irrevocable. “(ii) For purposes of this paragraph the term ‘educational institution’ means an educational institution as defined in section 151(e)(4). “(iii) For purposes of this paragraph the term ‘home health service agency’ means an organization described in subsection 501(c)(3) which is exempt from tax under section 501(a) and which has been determined by the Secretary of Health, Education, and Welfare to be a home health agency (as defined in section 1861(o) of the Social Security Act). “(d) Cost-of-Living Adjustments.— “(1) In general.—The Secretary or his delegate shall adjust annually— “(A) the $75,000 amount in subsection (b)(1)(A), “(B) the $25,000 amount in subsection (c)(1)(A), and “(C) in the case of a participant who is separated from service, the amount taken into account under subsection (b)(1)(B), for increases in the cost of living in accordance with regulations prescribed by the Secretary or his delegate. Such regulations shall provide for adjustment procedures which are similar to the procedures used to adjust primary insurance amounts under section 215(i)(2)(A) of the Social Security Act. “(2) Base periods.—The base period taken into account— “(A) for purposes of subparagraphs (A) and (B) of paragraph (1) is the calendar quarter beginning October 1, 1974, and “(B) for purposes of subparagraph (C) of paragraph (1) is the last calendar quarter of the calendar year before the calendar year in which the participant is separated from service. “(e) Limitation in Case of Defined Benefit Plan and Defined Contribution Plan for Same Employee.— “(1) In general.—In any case in which an individual is a participant in both a defined benefit plan and a defined contribution plan maintained by the same employer, the sum of the defined benefit plan fraction and the defined contribution plan fraction for any year may not exceed 1.4. “(2) Defined benefit plan fraction.—For purposes of this subsection, the defined benefit plan fraction for any year is a fraction— “(A) the numerator of which is the projected annual benefit of the participant under the plan (determined as of the close of the year), and “(B) the denominator of which is the projected annual benefit of the participant under the plan (determined as of the close of the year) if the plan provided the maximum benefit allowable under subsection (b). “(3) Defined contribution plan fraction.—For purposes of this subsection, the defined contribution plan fraction for any year is a fraction— 88 Stat. 984 “(A) the numerator of which is the sum of the annual additions to the participant’s account as of the close of the year, and “(B) the denominator of which is the sum of the maximum amount of annual additions to such account which could have been made under subsection (c) for such year and for each prior year of service with the employer. “(4) Special transition rules for defined contribution fraction.—In applying paragraph (3) with respect to years beginning before January 1, 1976— “(A) the aggregate amount taken into account under paragraph (3)(A) may not exceed the aggregate amount taken into account under paragraph (3)(B), and “(B) the amount taken into account under subsection (c)(2)(B)(i) for any year concerned is an amount equal to— “(i) the excess of the aggregate amount of employee contributions for all years beginning before January 1, 1976, during which the employee was an active participant of the plan, over 10 percent of the employee’s aggregate compensation for all such years, multiplied by “(ii) a fraction the numerator of which is 1 and the denominator of which is the number of years beginning before January 1, 1976, during which the employee was an active participant in the plan. Employee contributions made on or after October 2, 1973, shall be taken into account under subparagraph (B) of the preceding sentence only to the extent that the amount of such contributions does not exceed the maximum amount of contributions permissible under the plan as in effect on October 2, 1973. “(5) Special rules for sections 403(b) and 408.—For purposes of this subsection, any annuity contract described in section 403(b) (except in the case of a participant who has elected under subsection (c)(4)(D) to have the provisions of subsection (c)(4)(C) apply), any individual retirement account described in section 408(a), any individual retirement annuity described in section 408(b), and any retirement bond described in section 409, for the benefit of a participant shall be treated as a defined contribution plan maintained by each employer with respect to which the participant has the control required under subsection (b) or (c) of section 414 (as modified by subsection (h)). In the case of any annuity contract described in section 403(b), the amount of the contribution disqualified by reason of subsection (g) shall reduce the exclusion allowance as provided in section 403(b)(2). “(f) Combining of Plans.— “(1) In general.—For purposes of applying the limitations of subsections (b), (c), and (e)— “(A) all defined benefit plans (whether or not terminated) of an employer are to be treated as one defined benefit plan, and “(B) all defined contribution plans (whether or not terminated) of an employer are to be treated as one defined contribution plan. “(2) Annual compensation taken into account for defined benefit plans.—If the employer has more than one defined benefit plan— “(A) subsection (b)(1)(B) shall be applied separately with respect to each such plan, but 88 Stat. 985 “(B) in applying subsection (b)(1)(B) to the aggregate of such defined benefit plans for purposes of this subsection, the high 3 years of compensation taken into account shall be the period of consecutive calendar years (not more than 3) during which the individual had the greatest aggregate compensation from the employer. “(g) Aggregation of Plans.—The Secretary or his delegate, in applying the provisions of this section to benefits or contributions under more than one plan maintained by the same employer, and to any trusts, contracts, accounts, or bonds referred to in subsection (a)(2), with respect to which the participant has the control required under section 414(b) or (c), as modified by subsection (h), shall, under regulations prescribed by the Secretary or his delegate, disqualify one or more trusts, plans, contracts, accounts, or bonds, or any combination thereof until such benefits or contributions do not exceed the limitations contained in this section. In addition to taking into account such other factors as may be necessary to carry out the purposes of subsections (e) and (f), the regulations prescribed under this paragraph shall provide that no plan which has been terminated shall be disqualified until all other trusts, plans, contracts, accounts, or bonds have been disqualified. “(h) 50 Percent Control.—For purposes of applying subsections (b) and (c) of section 414 to this section, the phrase ‘more than 50 percent’ shall be substituted for the phrase ‘at least 80 percent’ each place it appears in section 1563(a)(1). “(i) Records Not Available for Past Periods.—Where for the period before January 1, 1976, or (if later) the first day of the first plan year of the plan, the records necessary for the application of this section are not available, the Secretary or his delegate may by regulations prescribe alternative methods for determining the amounts to be taken into account for such period. “(j) Regulations; Definition of Year.—The Secretary or his delegate shall prescribe such regulations as may be necessary to carry out the purposes of this section, including, but not limited to, regulations defining the term ‘year’ for purposes of any provision of this section. “(k) Special Rules.— “(1) Defined benefit plan and defined contribution plan.—For purposes of this title, the term ‘defined contribution plan’ or ‘defined benefit plan’ means a defined contribution plan (within the meaning of section 414(i)) or a defined benefit plan (within the meaning of section 414(j)), whichever applies, which is— “(A) a plan described in section 401(a) which includes a trust which is exempt from tax under section 501(a), “(B) an annuity plan described in section 403(a), “(C) a qualified bond purchase plan described in section 405(a), “(D) an annuity contract described in section 403(b), “(E) an individual retirement account described in section 408(a), “(F) an individual retirement annuity described in section 408(b), or “(G) an individual retirement bond described in section 409.”. (3) Special rule for certain plans in effect on date of enactment.—In any case in which, on the date of enactment of this Act, an individual is a participant in both a defined benefit 88 Stat. 986 plan and a defined contribution plan maintained by the same employer, and the sum of the defined benefit plan fraction and the defined contribution plan fraction for the year during which such date occurs exceeds 1.4, the sum of such fractions may continue to exceed 1.4 if— (A) the defined benefit plan fraction is not increased, by amendment of the plan or otherwise, after the date of enactment of this Act, and (B) no contributions are made under the defined contribution plan after such date. A trust which is part of a pension, profit-sharing, or stock bonus plan described in the preceding sentence shall not be treated as not constituting a qualified trust under section 401(a) of the Internal Revenue Code of 1954 on account of the provisions of section 415(e) of such Code, as long as it is described in the preceding sentence of this subsection. (b) Limit on Employer Deductions.—The second sentence of section 404(a)(3)(A) (relating to limits on deductible contributions) is amended by striking out “beneficiaries under the plan.” and inserting in lieu thereof “beneficiaries under the plan, but the amount so deductible under this sentence in any one succeeding taxable year together with the amount so deductible under the first sentence of this subparagraph shall not exceed 25 percent of the compensation otherwise paid or accrued during such taxable year to the beneficiaries under the plan.”. (c) Certain Annuity and Bond Purchase Plans.— (1) Section 404(a)(2) (relating to the general rule for deduction for employee annuities) is amended by striking out “(15)” and inserting in lieu thereof “(15), (16), and (19)” and by striking out “(a)(9) and (10)” and inserting in lieu thereof “(a)(9), (10), (17), and (18)”. (2) Section 405(a)(1) (relating to requirements for qualified bond purchase plans) is amended by striking out “and (8),” and inserting in lieu thereof “(8), (16), and (19)”. (3) Section 805(d)(1)(C) (relating to pension plan reserves) is amended by striking out “and (15)” and inserting in lieu thereof “(15), (16), and (19)”. (4) Section 403(b)(2) (relating to exclusion allowance) is amended to read as follows: “(2) Exclusion allowance.— “(A) In general.—For purposes of this subsection, the exclusion allowance for any employee for the taxable year is an amount equal to the excess, if any, of— “(i) the amount determined by multiplying 20 percent of his includible compensation by the number of years of service, over “(ii) the aggregate of the amounts contributed by the employer for annuity contracts and excludible from the gross income of the employee for any prior taxable year. “(B) Election to have allowance determined under section 415 rules.—In the case of an employee who makes an election under section 415(c)(4)(D) to have the provisions of section 415(c)(4)(C) (relating to special rule for section 408(b) contracts purchased by educational institutions, hospitals, and home health service agencies) apply, the exclusion allowance for any such employee for the taxable year is the amount which could be contributed (under section 415) by his employer under a plan described in section 408(a) if the 88 Stat. 987 annuity contract for the benefit of such employee were treated as a defined contribution plan maintained by the employer.” (d) Effective date.— (1) General rule.—The amendments made by this section shall apply to years beginning after December 31, 1975. The Secretary of the Treasury shall prescribe such regulations as may be necessary to carry out the provisions of this paragraph. (2) Transition rule for defined benefit plans.—In the case of an individual who was an active participant in a defined benefit plan before October 3, 1973, if— (A) the annual benefit (within the meaning of section 415(b)(2) of the Internal Revenue Code of 1954) payable to such participant on retirement does not exceed 100 percent of his annual rate of compensation on the earlier of (i) October 2, 1973, or (ii) the date on which he separated from the service of the employer, (B) such annual benefit is no greater than the annual benefit which would have been payable to such participant on retirement if (i) all the terms and conditions of such plan in existence on such date had remained in existence until such retirement, and (ii) his compensation taken into account for any period after October 2, 1973, had not exceeded his annual rate of compensation on such date, and (C) in the case of a participant who separated from the service of the employer prior to October 2, 1973, such annual benefit is no greater than his vested accrued benefit as of the date he separated from the service, then such annual benefit shall be treated as not exceeding the limitation of subsection (b) of section 415 of the Internal Revenue Code of 1954.