REPEAL OF 5-YEAR INCOME AVERAGING FOR LUMP-SUM DISTRIBUTIONS.

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 ifit 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 59½, “(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)). 110 STAT. 1788 “(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(rn)(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. 110 STAT. 1789 (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 oflimitation 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 (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).