AMENDMENTS RELATED TO PARTS I AND II OF SUBTITLE A OF TITLE XI OF THE REFORM ACT.

SEC. 1011. AMENDMENTS RELATED TO PARTS I AND II OF SUBTITLE A OF TITLE XI OF THE REFORM ACT. (a) Amendment Related to Section 1101 of the Reform Act.— (1) Paragraph (4) of section 219(g) of the 1986 Code (relating to special rule for married individuals filing separately) is amended to read as follows: “(4) Special rule for married individuals filing separately and living apart.— A husband and wife who— “(A) file separate returns for any taxable year, and “(B) live apart at all times during such taxable year, shall not be treated as married individuals for purposes of this subsection.” (2) (A) Except as provided in subparagraph (B), the amendment made by paragraph (1) shall apply to taxable years beginning after December 31, 1987. (B) A taxpayer may elect to have the amendment made by paragraph (1) apply to any taxable year beginning in 1987. (b) Amendments Related to Section 1102 of the Reform Act.— (1) Sections 408(d)(2)(C) and 408(o)(4)(B)(iv) of the 1986 Code are each amended by striking out “with or within which the taxable year ends” and inserting in lieu thereof “in which the taxable year begins”. (2) (A) Section 408(d)(4) of the 1986 Code (relating to excess contributions returned before due date of return) is amended by striking out “to the extent that such contribution exceeds the amount allowable as a deduction under section 219”. (B) Section 408(d)(4) of the 1986 Code is amended— (i) by striking out “excess” each place it appears, and (ii) by striking out “Excess contributions” in the heading and inserting in lieu thereof “Contributions”. (3) Sections 408(d)(5) and 4973(b) of the 1986 Code are each amended by striking out all that follows “section 219” in the last sentence thereof and inserting in lieu thereof “shall be computed without regard to section 219(g).”. (4) (A) Section 6693(b) of the 1986 Code (relating to overstatement of designated nondeductible contributions) is amended to read as follows: 102 STAT. 3457 “(b) Penalties Relating to Nondeductible Contributions.— “(1) Overstatement of designated nondeductible contributions.— Any individual who— “(A) is required to furnish information under section 408(o)(4) as to the amount of designated nondeductible contributions made for any taxable year, and “(B) overstates the amount of such contributions made for such taxable year, shall pay a penalty of $100 for each such overstatement unless it is shown that such overstatement is due to reasonable cause. “(2) Failure to file form.—Any individual who fails to file a form required to be filed by the Secretary under section 408(o)(4) shall pay a penalty of $50 for each such failure unless it is shown that such failure is due to reasonable cause.” (B) (i) The heading for section 6693 of the 1986 Code is amended by striking out “overstatement of” and inserting in lieu thereof “penalties relating to”. (ii) The item relating to section 6693 in the table of sections for subchapter B of chapter 68 is amended by striking out “overstatement of’ and inserting in lieu thereof “penalties relating to”. (c) Amendments Related to Section 1105 of the Reform Act.— (1) Section 402(g)(2)(C) of the 1986 Code (relating to taxation of distribution) is amended— (A) by striking out “(and no tax shall be imposed under section 72(t))” in clause (i), (B) by striking out “such excess deferral is made” in clause (ii) and inserting in lieu thereof “such income is distributed”, and (C) by inserting at the end thereof the following new flush sentence: “No tax shall be imposed under section 72(t) on any distribution described in the preceding sentence.” (2) Section 402(g)(2) is amended by striking out “Required distrirution” in the heading thereof and inserting in lieu thereof “Distribution”. (3) Section 402(g)(2) of the 1986 Code is amended by adding at the end thereof the following new subparagraph: “(D) Partial distributions.—If a plan distributes only a portion of any excess deferral and income allocable thereto, such portion shall be treated as having been distributed ratably from the excess deferral and the income.” (4) Section 402(g)(3) of the 1986 Code (defining elective deferral) is amended by striking out “paragraph” and inserting in (5) (A) Clause (iii) of section 402(g)(8)(A) of the 1986 Code (relating to special rule for certain organizations) is amended by inserting “(determined in the manner prescribed by the Secretary)” after “taxable years”. (B) Section 402(g)(8) of the 1986 Code is amended by adding at the end thereof the following new subparagraph: “(D) Years of service.—For purposes of this paragraph, the term ‘years of service’ has the meaning given such term by section 403(b).”. (6) (A) Section 402(g) of the 1986 Code, as added by section 1852(b)(3)(A) of the Reform Act, is redesignated as subsection (i). 102 STAT. 3458 (B) Section 402(g) of the 1986 Code, as added by section 1854(f)(2) of the Reform Act, is redesignated as subsection (j). (C) Section 1854(f)(4)(C) of the Reform Act is amended by striking out “section 402(g)” and inserting in lieu thereof “section 402(j)”. (7) (A) Section 401(a) of the 1986 Code is amended by adding at the end thereof the following new paragraph: “(30) Limitations on elective deferrals.—In the case of a trust which is part of a plan under which elective deferrals (within the meaning of section 402(g)(3)) may be made with respect to any individual during a calendar year, such trust shall not constitute a qualified trust under this subsection unless the plan provides that the amount of such deferrals under such plan and all other plans, contracts, or arrangements of an employer maintaining such plan may not exceed the amount of the limitation in effect under section 402(g)(1) for taxable years becinninc in such calendar vear.” (B) Section 403(b)(1) of the 1986 Code is amended by striking out “and” at the end of subparagraph (C), by inserting “and” at the end of subparagraph (D), and by inserting after subparagraph (D) the following new subparagraph: “(E) in the case of a contract purchased under a plan which provides a salary reduction agreement, the plan meets the requirements of section 401(a)(30),”. (C) Subparagraph (A) of section 408(k)(6) of the 1986 Code, as amended by subsection (f)(1), is amended by adding at the end thereof the following new clause: “(iv) Limitations on elective deferrals.—Clause (i) shall not apply to a simplified employee pension unless the requirements of section 401(a)(30) are met.” (D) Subparagraph (D) of section 501(c)(18) of the 1986 Code is amended by striking out “and” at the end of clause (ii), by striking out the period at the end of clause (iii) and inserting in lieu thereof “, and”, and by inserting after clause (iii) the following new clause: “(iv) the requirements of section 401(a)(30) are met.” (E) (i) Except as provided in clause (ii), the amendments made by this paragraph shall apply to plan years beginning after December 31, 1987. (ii) In the case of a plan described in section 1105(c)(2) of the Reform Act, the amendments made by this paragraph shall not apply to contributions made pursuant to an agreement described in such section for plan years beginning before the earlier of— (I) the later of January 1, 1988, or the date on which the last of such agreements terminates (determined without regard to any extension thereof after February 28, 1986), or (II) January 1, 1989. (8) Section 1105(c)(2)(A) of the Reform Act is amended by striking out “the last of such collective bargaining agreements” and inserting in lieu thereof “such agreement”. (9) Section 1105(c) of the Reform Act is amended by adding at the end thereof the following new paragraph: “(6) Reporting requirements.—The amendments made by subsection (b) shall apply to calendar years beginning after December 31, 1986.” 102 STAT. 3459 (10) Notwithstanding any other provision of law, a plan may incorporate by reference the dollar limitations under section 402(g) of the Internal Revenue Code of 1986. (11) Section 402(g)(3) of the 1986 Code is amended by inserting at the end thereof the following new sentence: “An employer contribution shall not be treated as an elective deferral described in subparagraph (C) if under the salary reduction agreement such contribution is made pursuant to a one-time irrevocable election made by the employee at the time of initial eligibility to participate in the agreement or is made pursuant to a similar arrangement specified in regulations.” (12) Subparagraph (A) of section 403(b)(12) of the 1986 Code is amended by inserting after clause (ii) the following new sentence: “For purposes of clause (i), a contribution shall be treated as not made pursuant to a salary reduction agreement if under the agreement it is made pursuant to a 1-time irrevocable election made by the employee at the time of initial eligibility to participate in the agreement or is made pursuant to a similar arrangement specified in regulations.” (d) Amendments Related to Section 1106 of the Reform Act.— (1) Section 404(1) of the 1986 Code (relating to limitation on amount of compensation which may be taken into account) is amended by adding at the end thereof the following new sentence: “For purposes of clause (i), (ii), or (iii) of subsection (a)(I)(A), and in computing the full funding limitation, any adjustment under the preceding sentence shall not be taken into account for any year before the year for which such adjustment first takes effect.”. (2) Section 415(b)(5)(D) of the 1986 Code (relating to application to changes in benefit structures) is amended by striking out “this paragraph” and inserting in lieu thereof “subparagraph (A)”. (3) Paragraph (2) of section 415(k) of the 1986 Code (relating to contributions to provide cost-of-living protection under defined benefit plans), as added by section 1106(c) of the Reform Act, is amended— (A) by striking out “to the arrangement” in subparagraph (C)(ii) and inserting in lieu thereof “to such increase , and (B) by striking out subparagraph (D) and inserting in lieu thereof: “(D) Arrangement elective; time for election.—An arrangement meets the requirements of this subparagraph only if it is elective, it is available under the same terms to all participants, and it provides that such election may at least be made in the year in which the participant— “(i) attains the earliest retirement age under the defined benefit plan (determined without regard to any requirement of separation from service), or “(ii) separates from service.” (4) Sections 401(a)(17) and 404(1) of the 1986 Code are each amended by adding at the end thereof the following new sentence: “In determining the compensation of an employee, the rules of section 414((j)(6) shall apply, except that in applying such rules, the term ‘family’ shall include only the spouse of the employee and any lineal descendants of the employee who have not attained age 19 before the close of the year.” 102 STAT. 3460 (5) Paragraph (4) of section 1106(i) of the Reform Act is amended by striking the period at the end thereof and inserting in lieu thereof “(determined as if the amendments made by this section were in effect for such year).”. (6) Section 415(b)(5)(B) of the 1986 Code is amended by inserting “and subsection (e)” after “paragraphs (1)(B) and (4)”. (7) Subparagraph (A) of section 415(c)(6) of the 1986 Code is amended— (A) by striking out “paragraph (c)(1)(A) (as adjusted for such year pursuant to subsection (d)(1))”, and inserting in lieu thereof “paragraph (1)(A)”; and (B) by striking out “paragraph (c)(1)(A) (as so adjusted)” and inserting in lieu thereof “paragraph (1)(A)”. (8) Sections 414(q)(1)(D) and 416(i)(1)(A)(i) of the 1986 Code are each amended by striking out “150 percent of the amount in effect under section 415(c)(1)(A)” and inserting in lieu thereof “50 percent of the amount in effect under section 415(b)(1)(A)”. (e) Amendments Related to Section 1107 of the Reform Act.— (1) Section 457(c)(2) of the 1986 Code is amended by striking out “and paragraphs (2) and (3) of subsection (b)”. (2) Section 457(d)(1)(A) of the 1986 Code (relating to distribution requirements) is amended to read as follows: “(A) under the plan amounts will not be made available to participants or beneficiaries earlier than— “(i) the calendar year in which the participant attains age 70(4, “(ii) when the participant is separated from service with the employer, or “(iii) when the participant is faced with an unforeseeable emergency (determined in the manner prescribed by the Secretary in regulations).” (3) Paragraph (7) of section 401(k) of the 1986 Code (defining rural electric cooperative plan) is amended to read as follows: “(7) Rural electric cooperative plan.—For purposes of this subsection— “(A) In general.— The term ‘rural electric cooperative plan’ means any pension plan— “(i) which is a defined contribution plan (as defined in section 414(i)), and “(ii) which is established and maintained by a rural electric cooperative. “(B) Rural electric cooperative defined.—For purposes of subparagraph (A), the term ‘rural electric cooperative’ means— “(i) any organization which— “(I) is exempt from tax under this subtitle or which is a State or local government or political subdivision thereof (or agency or instrumentality thereof), and “(II) is engaged primarily in providing electric service on a mutual or cooperative basis, “(ii) any organization described in paragraph (4) or (6) of section 501(c) and at least 80 percent of the members of which are organizations described in clause (i), and “(iii) an organization which is a national association of organizations described in clause (i) or (ii).” 102 STAT. 3461 (4) Section 414(o) of the 1986 Code is amended by inserting “or any requirement under section 457” after “(n)(3)”. (5) (A) Paragraph (6) of section 818(a) of the 1986 Code (defining pension plan contracts) is amended— (i) by striking out “State” in subparagraph (A), (ii) by inserting “or any organization (other than a governmental unit) exempt from tax under this subtitle,” after “foregoing,” in subparagraph (B), (iii) by striking out “or” before “agency” in subparagraph (B), and (iv) by inserting “, or organization” after “ instrumentality” the second place it appears in subparagraph (B). (B) The amendments made by this paragraph shall apply to contracts issued after December 31, 1986. (6) Section 1107(c)(3) of the Reform Act is amended— (A) by striking out “eligible” each place it appears, and (B) by inserting at the end of subparagraph ®) the following new sentence: “This subparagraph shall only apply to individuals who were covered under the plan and agreement on August 16, 1986.” (7) Paragraph (5) of section 1107(c) of the Reform Act is amended— (A) by striking out “to employees on August 1, 1986, of’, (B) by striking out “a deferred compensation plan” in subparagraph (A) and inserting in lieu thereof “to employees on August 16, 1986,”, (C) by inserting “maintaining a deferred compensation plan” after “Alabama” in subparagraph (A), and (D) by striking out “a deferred compensation plan” in subparagraph ®) and inserting in lieu thereof “to individuals eligible to participate on August 16, 1986, in a deferred compensation plan”. (8) Section 3121(v)(3)(A) of the 1986 Code is amended by striking out “457(e)(1)” and inserting in lieu thereof “457(f)(1). (9) Effective for years beginning after December 31, 1988, paragraph (9) of section 457(e) of the 1986 Code is amended by inserting “after separation from service and” before “within 60 days”. (10) Subclause (I) of section 457(d)(2)(B)(i) of the 1986 Code is amended to read as follows: “(I) the amounts payable with respect to the participant will be paid at times specified by the Secretary which are not later than the time determined under section 401(a)(9)(G) (relating to incidental death benefits),”. (f) Amendments Related to Section 1108 of the Reform Act.— (1) Subparagraph (A) of section 408(k)(6) of the 1986 Code (relating to salary reduction arrangements under simplified employee pensions) is amended to read as follows: “(A) Arrangements which qualify.— “(i) In general.—A simplified employee pension shall not fail to meet the requirements of this subsection for a year merely because, under the terms of the pension, an employee may elect to have the employer make payments— 102 STAT. 3462 “(I) as elective employer contributions to the simplified employee pension on behalf of the employee, or “(II) to the employee directly in cash. “(ii) 50 Percent of eligible employees must elect.—Clause (i) shall not apply to a simplified employee pension unless an election described in clause (i)(I) is made or is in effect with respect to not less than 50 percent of the employees of the employer eligible to participate. “(iii) Requirements relating to deferral percent-age.—Clause (i) shall not apply to a simplified employee pension for any year unless the deferral percentage for such year of each highly compensated employee eligible to participate is not more than the product of— “(I) the average of the deferral percentages for such year of all employees (other than highly compensated employees) eligible to participate, multi-plied by “(II) 1.25.” (2) Section 408(k)(6)(B) of the 1986 Code (relating to exception where more than 25 employees) is amended by inserting “who were eligible to participate (or would have been required to be eligible to participate if a pension was maintained)” after “25 employees”. (3) (A) Section 408(k)(6)(DXii) of the 1986 Code (defining deferral percentage) is amended by striking out “(within the meaning of section 414(s))” and inserting in lieu thereof “(not in excess of the first $200,000)”. (B) Subparagraph (B) of section 408(k)(7) of the 1986 Code (defining compensation) is amended to read as follows: “(B) Compensation.—Except as provided in paragraph (2)(C), the term ‘compensation’ has the meaning given such term by section 414(s).” (C) Subparagraph (O of section 408(k)(3) of the 1986 Code is amended by striking out “total” before “compensation”. (D) Section 408(k)(8) of the 1986 Code is amended by striking out “paragraph (3)(C)” and inserting in lieu thereof “paragraphs (3)(C) and (6)(D)(ii)”. (4) Section 408(k)(6) of the 1986 Code (relating to employee may elect salary reduction arrangement) is amended by redesignating subparagraph (F) as subparagraph (G) and by inserting after subparagraph (E) the following new subparagraph: “(F) Exception where pension does not meet requirements necessary to insure distribution of excess contributions.—This paragraph shall not apply with respect to any year for which the simplified employee pension does not meet such requirements as the Secretary may prescribe as are necessary to insure that excess contributions are distributed in accordance with subparagraph (C), including— “(i) reporting requirements, and “(ii) requirements which, notwithstanding paragraph (4), provide that contributions (and any income allocable thereto) may not be withdrawn from a simplified employee pension until a determination has been made 102 STAT. 3463that the requirements of subparagraph (A)(iii) have been met with respect to such contributions.” (5) Section 408(d) of the 1986 Code (relating to tax treatment of distributions) is amended by adding at the end thereof the following new paragraph: “(7) Special rules for simplified employee pensions.— “(A) Transfer or rollover of contributions prohibited until deferral test met.—Notwithstanding any other provision of this subsection or section 72(t), paragraph (1) and section 72(t)(1) shall apply to the transfer or distribution from a simplified employee pension of any contribution under a salary reduction arrangement described in subsection (k)(6) (or any income allocable thereto) before a determination as to whether the requirements of subsection (k)(6)(AXiii) are met with respect to such contribution. “(B) Certain exclusions treated as deductions.—For purposes of paragraphs (4) and (5) and section 4973, any amount excludable or excluded from gross income under section 402(h) shall be treated as an amount allowable or allowed as a deduction under section 219.” (6) Subparagraph (O of section 404(h)(1) of the 1986 Code is amended by inserting “(or during the taxable year in the case of a taxable year described in subparagraph (A)(ii))” after “taxable year” the second place it appears. (7) Section 1108(h) of the Reform Act is amended to read as follows: “(h) Effective Dates.— “(1) In general.—Except as provided in paragraph (2), the amendments made by this section shall apply to years begin ning after December 31, 1986. “(2) Integration rules.—Subparagraphs (D) and (E) of section 408(k)(3) of the Internal Revenue Code of 1954 (as in effect before the amendments made by this section) shall continue to apply for years beginning after December 31, 1986, and before January 1, 1989, except that employer contributions under an arrangement under section 408(k)(6) of the Internal Revenue Code of 1986 (as added by this section) may not be integrated under such subparagraphs.” (8) Section 2O9(e)(8) of the Social Security Act is amended to read as follows: “(8) under a simplified employee pension (as defined in section 408(k)(1) of such Code), other than any contributions described in section 408(k)(6) of such Code,”. (9) Section 3401(a)(12)(C) of the 1986 Code is amended— (A) by striking out “section 219” and inserting in lieu thereof “section 402(h) (1) and (2)”, and (B) by striking out “a deduction” and inserting in lieu thereof “an exclusion”. (10) Section 408(k)(8) of the 1986 Code is amended by inserting ”, except that in the case of years beginning after 1988, the $200,000 amount (as so adjusted) shall not exceed the amount in effect under section 401(a)(17)” after “section 415(d)”. (g) Amendments Related to Section 1111 of the Reform Act.— (1) (A) Section 401(l)(2)(B) of the 1986 Code (defining contribution percentages) is amended by inserting “by the employer” after “contributed” each place it appears. 102 STAT. 3464 (B) Clause (ii) of section 40(1)(3)(A) of the 1986 Code is amended by inserting “attributable to employer contributions” after “benefits”. (2) Section 401(1)(5)(C) of the 1986 Code (defining average annual compensation) is amended to read as follows: “(C) Average annual compensation.— The term ‘aver-age annual compensation’ means the participant’s highest average annual compensation for— “(i) any period of at least 3 consecutive years, or “(ii) if shorter, the participant’s full period of service.” (3) Section 401(1)(5)(C) of the 1986 Code (defining covered compensation) is amended— (A) by striking out “age 65” each place it appears and inserting in lieu thereof “the social security retirement age”, and (B) by adding at the end thereof the following new clause: “(iii) Social security retirement age.—For purposes of this subparagraph, the term ‘social security retirement age’ has the meaning given such term by section 415(b)(8).” (4) Section 1111(c)(3) of the Reform Act is amended by striking out “benefits pursuant to, and individuals covered by, any such agreement in”. (h) Amendments Related to Section 1112 of the Reform Act.— (1) Section 410(b)(4)(B) of the 1986 Code (relating to exclusion of employees not meeting age and service requirements) is amended— (A) by striking out “do not meet” and inserting in lieu thereof “not meeting”, and (B) by striking out “and”. (2) Section 410(b)(6) of the 1986 Code (relating to definitions and special rules) is amended by redesignating subparagraph (F) as subparagraph (G) and by adding after subparagraph (E) the following new subparagraph: “(F) Employers with only highly compensated employees.—A plan maintained by an employer which has no employees other than highly compensated employees for any year shall be treated as meeting the requirements of this subsection for such year.” (3) Section 401(a)(26) of the 1986 Code (relating to additional participation requirements) is amended by redesignating subparagraph (F) as subparagraph (H) and by adding after subparagraph (E) the following new subparagraphs: “(F) Special rule for certain dispositions or acquisitions.—Rules similar to the rules of section 410(b)(6)(C) shall apply for purposes of this paragraph. “(G) Separate lines of business.—At the election of the employer and with the consent of the Secretary, this paragraph may be applied separately with respect to each separate line of business of the employer. For purposes of this paragraph, the term ‘separate line of business’ has the meaning given such term by section 414(r) (without regard to paragraph (7) thereof).” (4) Section 402(b)(2) of the 1986 Code (relating to failure to meet requirements of section 410(b)) is amended by striking out 102 STAT. 3465subparagraphs (A) and (B) and inserting in lieu thereof the following: “(A) Highly compensated employees.—If 1 of the reasons a trust is not exempt from tax under section 501(a) is the failure of the plan of which it is a part to meet the requirements of section 401(a)(26) or 410(b), then a highly compensated employee shall, in lieu of the amount determined under paragraph (1), include in gross income for the taxable year with or within which the taxable year of the trust ends an amount equal to the vested accrued benefit of such employee (other than the employee’s investment in the contract) as of the close of such taxable year of the trust. “(B) Failure to meet coverage tests.— If a trust is not exempt from tax under section 501(a) for any taxable year solely because such trust is part of a plan which fails to meet the requirements of section 401(a)(26) or 410(b), paragraph (1) shall not apply by reason of such failure to any employee who was not a highly compensated employee during— “(i) such taxable year, or “(ii) any preceding period for which service was creditable to such employee under the plan.” (5) Subsections (m)(4)(A) and (n)(3)(A) of section 414 of the 1986 Code are each amended by striking out “and (16)” and inserting in lieu thereof “(16), (17), and (26)”. (6) Clause (iii) of section 1112(e)(3)(A) of the Reform Act is amended by striking out “a plan or merger” and inserting in lieu thereof “the plan”. (7) Section 1112(e)(2) of the Reform Act is amended by striking out “employees covered by such agreement in”. (8) Subsection (e) of section 1112 of the Reform Act is amended by striking out paragraph (3)(C) and by adding at the end of such subsection the following new paragraph: “(4) Special rule for plans which may not terminate.—To the extent provided in regulations prescribed by the Secretary of the Treasury or his delegate, if a plan is prohibited from terminating under title IV of the Employee Retirement Income Security Act of 1974 before the 1st year to which the amendment made by subsection (b) would apply, the amendment made by subsection (b) shall only apply to years after the 1st year in which the plan is able to terminate.” (9) Subparagraph (B) of section 1112(e)(3) of the Reform Act is amended to read as follows: “(B) Interest rate for determining accrued benefit of highly compensated employees for certain purposes.— In the case of a termination, transfer, or distribution of assets of a plan described in subparagraph (A)(ii) before the 1st year to which the amendment made by subsection (b) applies— “(i) Amount eligible for rollover, income averaging, or tax-free transfer.— For purposes of determining any eligible amount, the present value of the accrued benefit of any highly compensated employee shall be determined by using an interest rate not less than the highest of— 102 STAT. 3466 “(I) the applicable rate under the plan’s method in effect under the plan on August 16, 1986, “(II) the highest rate (as of the date of the termination, transfer, or distribution) determined under any of the methods applicable under the plan at any time after August 15, 1986, and before the termination, transfer, or distribution in calculating the present value of the accrued benefit of an employee who is not a highly compensated employee under the plan (or any other plan used in determining whether the plan meets the requirements of section 401 of the Internal Revenue Code of 1986), or “(III) 5 percent. “(ii) Eligible amount.— For purposes of clause (i), the term ‘eligible amount’ means any amount with respect to a highly compensated employee which— “(I) may be rolled over under section 402(a)(5) of such Code, “(II) is eligible for income averaging under section 402(e)(1) of such Code, or capital gains treatment under section 402(a)(2) or 403(a)(2) of such Code (as in effect before this Act), or “(III) may be transferred to another plan without inclusion in gross income. “(iii) Amounts subject to early withdrawal or excess distribution tax.— For purposes of sections 72(t) and 4980A of such Code, there shall not be taken into account the excess (if any) of— “(I) the amount distributed to a highly compensated employee by reason of such termination or distribution, over “(II) the amount determined by using the interest rate applicable under clause (i). “(iv) Distributions of annuity contracts.— If an annuity contract purchased after August 16, 1986, is distributed to a highly compensated employee in connection with such termination or distribution, there shall be included in gross income for the taxable year of such distribution an amount equal to the excess of— “(I) the purchase price of such contract, over “(II) the present value of the benefits payable under such contract determined by using the interest rate applicable under clause (i). Such excess shall not be taken into account for purposes of sections 72(t) and 4980A of such Code. “(v) Highly compensated employee.—For purposes of this subparagraph, the term ‘highly compensated employee’ has the meaning given such term by section 414(q) of such Code.” (10) Section 413(b) of the 1986 Code is amended by adding at the end thereof the following new paragraph: “(9) Plans covering a professional employee.—Notwithstanding subsection (a), in the case of a plan (and trust forming part thereof) which covers any professional employee, paragraph (1) shall be applied by substituting ‘section 410(a)’ for ‘section 410’, and paragraph (2) shall not apply.” 102 STAT. 3467 (11) Section 410(b)(4) of the 1986 Code is amended by adding at the end thereof the following new subparagraph: “(C) Requirements not treated as being met before entry date.—An employee shall not be treated as meeting the age and service requirements described in this paragraph until the first date on which, under the plan, any employee with the same age and service would be eligible to commence participation in the plan.” (i) Amendments Related to Section 1114 of the Reform Act.— (1) Paragraph (1) of section 414(q) of the 1986 Code (defining highly compensated employee) is amended by adding at the end thereof the following new flush sentence: “The Secretary shall adjust the $75,000 and $50,000 amounts under this paragraph at the same time and in the same manner as under section 415(d),” (2) Section 414(q)(6) of the 1986 Code is amended by adding at the end thereof the following new subparagraph: “(C) Rules to apply to other provisions.— “(i) In general.—Except as provided in regulations and in clause (ii), the rules of subparagraph (A) shall be applied in determining the compensation of (or any contributions or benefits on behalf of) any employee for purposes of any section with respect to which a highly compensated employee is defined by reference to this subsection. “(ii) Exception for determining integration levels.—Clause (i) shall not apply in determining the portion of the compensation of a participant which is under the integration level for purposes of section 401(1).”. (3) (A) Section 414((j)(8) of the 1986 Code (relating to excluded employees) is amended— (i) by inserting “and” at the end of subparagraph (D), by striking “, and” at the end of subparagraph (E) and inserting in lieu thereof a period, and by striking out subparagraph (F), and (ii) by striking out “The” in the last sentence thereof and inserting in lieu thereof “Except as provided by the Secretary, the”. (B) Section 414(q) of the 1986 Code is amended by adding at the end thereof the following new paragraph: “(11) Special rule for nonresident aliens—For purposes of this subsection and subsection (r), employees who are non-resident aliens and who receive no earned income (within the meaning of section 911(d)(2)) from the employer which constitutes income from sources within the United States (within the meaning of section 861(a)(3)) shall not be treated as employees.” (4) (A) Paragraph (8) of section 414(q) of the 1986 Code is amended by inserting “or the number of officers taken into account under paragraph (5)” after “paragraph (4)”. (B) Section 416(i)(1)(A) of the 1986 Code is amended by adding at the end thereof the following new sentence: “For purposes of determining the number of officers taken into account under clause (i), employees described in section 414((j)(8) shall be excluded,” 102 STAT. 3468 (5) Subparagraph (B) of section 408(k)(3) of the 1986 Code is amended to read as follows: “(B) Special rules.—For purposes of subparagraph (A), there shall be excluded from consideration employees described in subparagraph (A) or (C) of section 410(b)(3).” (j) Amendments Related to Section 1115 of the Reform Act.— (1) So much of section 414(s) of the 1986 Code as precedes paragraph (2) is amended to read as follows: “(s) Compensation.—For purposes of any applicable provision— “(1) In general.—Except as provided in this subsection, the term ‘compensation’ has the meaning given such term by section 415(c)(3).” (2) Section 414(s) of the 1986 Code is amended by striking out paragraph (2), by redesignating paragraphs (3) and (4) as paragraphs (2) and (3), respectively, and by adding at the end thereof the following new paragraph: (4) Applicable provision.— For purposes of this subsection, the term ‘applicable provision’ means any provision which specifically refers to this subsection,” (3) (A) Section 416(i)(1) of the 1986 Code (defining key employee) is amended by adding at the end thereof the following new subparagraph: “(D) Compensation.—For purposes of this paragraph, the term ‘compensation’ has the meaning given such term by section 414((j)(7).” (B) The amendment made by this paragraph shall apply to years beginning after December 31, 1988. (k) Amendments Related to Section 1116 of the Reform Act.— (1) (A) Subparagraph (B) of section 401(k)(2) of the 1986 Code (relating to distributions from a cash or deferred arrangement) is amended— (i) by striking out subclauses (ID, (IID, and (IV) of clause (i) and inserting in lieu thereof: “(II) an event described in paragraph (10),”, and (ii) by redesignating subclauses (V) and (VD as subclauses (HI) and (IV), respectively. (B) Section 401(k) of the 1986 Code is amended by adding at the end thereof the following new paragraph “(10) Distributions upon termination of plan or disposition of assets or subsidiary.— “(A) In general.— The following events are described in this paragraph: “(i) Termination.—The termination of the plan with-out establishment or maintenance of another defined contribution plan (other than an employee stock owner-ship plan as defined in section 4975(e)(7)). “(ii) Disposition of assets.—The disposition by a corporation of substantially all of the assets (within the meaning of section 409(d)(2)) used by such corporation in a trade or business of such corporation, but only with respect to an employee who continues employment with the corporation acquiring such assets. “(iii) Disposition of subsidiary.—The disposition by a corporation of such corporation’s interest in a subsidiary (within the meaning of section 409(d)(3)), but only with respect to an employee who continues employment with such subsidiary. 102 STAT. 3469 “(B) Distributions must be lump sum distributions.— “(i) In general.—An event shall not be treated as described in subparagraph (A) with respect to any employee unless the employee receives a lump sum distribution by reason of the event. “(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), with-out regard to clauses (i), (ii), (iii), and (iv) of subparagraph (A), subparagraph (B), or subparagraph (H) thereof. “(C) Transferor corporation must maintain plan.—An event shall not be treated as described in clause (ii) or (iii) of subparagraph (A) unless the transferor corporation continues to maintain the plan after the disposition.” (C) (i) Subparagraph (A)(i) of section 401(k)(10) of the 1986 Code (as added by subparagraph (B)) shall apply to distributions after October 16, 1987. (ii) Subparagraph (B) of section 401(k)(10) of the 1986 Code (as added by subparagraph (B)) shall apply to distributions after March 31, 1988. (2) Subparagraph (B) of section 401(k)(2) of the 1986 Code is amended— (A) by inserting “amounts held by the trust which are attributable to employer contributions made pursuant to the employee’s election” after “under which”, (B) by striking out “amounts held by the trust which are attributable to employer contributions made pursuant to the employee’s election” in clause (i), and (C) by striking out “amounts” in clause (ii). (3) (A) Clause (ii) of section 401(k)(3)(A) of the 1986 Code is amended by inserting “eligible” before “highly compensated employees” each place it appears. (B) Section 1116(b)(4) of the Reform Act is amended by striking out “any” the first place it appears and inserting in lieu thereof “an”. (4) Subparagraph (O of section 401(k)(3) of the 1986 Code, as added by section 1116(e) of the Reform Act, is redesignated as subparagraph (D). (5) Subclause (I) of section 401(k)(3)(D)(ii) of the 1986 Code, as redesignated by paragraph (4), is amended by striking out “meets” and inserting in lieu thereof “meet”. (6) Section 401(k)(4)(A) of the 1986 Code is amended by striking out “provided by such employer”. (7) Section 401(k)(8) of the 1986 Code (relating to arrangement not disqualified if excess contributions distributed) is amended by redesignating subparagraph (E) as subparagraph (F) and by inserting after subparagraph (D) the following new subparagraph: “(E) Treatment of matching contributions forfeited by reason of excess deferral or contribution.—For purposes of paragraph (2)(C), a matching contribution (within the meaning of subsection (m)) shall not be treated as forfeitable merely because such contribution is forfeitable if the contribution to which the matching contribution relates is treated as an excess contribution under subparagraph 102 STAT. 3470(B), an excess deferral under section 402(g)(2)(A), or an excess aggregate contribution under section 401(m)(6)(B).” (8) Subparagraph (B) of section 1116(f)(2) of the Reform Act is amended by adding at the end thereof the following new sentence: “If clause (i) or (ii) applies to any arrangement adopted by a governmental unit, then any cash or deferred arrangement adopted by such unit on or after the date referred to in the applicable clause shall be treated as adopted before such date.” (9) Section 401(k)(4)(B) of the 1986 Code is amended by adding at the end thereof the following new sentence: “This subparagraph shall not apply to a rural electric cooperative plan.” (10) Clause (i) of section 1116(f)(2)(B) of the Reform Act is amended by striking out “(or political subdivision thereof)” and inserting in lieu thereof “or political subdivision thereof, or any agency or instrumentality thereof,”. (l) Amendments Related to Section 1117 of the Reform Act.— (1) Paragraph (1) of section 401(m) of the 1986 Code (relating to nondiscrimination test for matching contributions and employee contributions) is amended by striking out “A plan” and inserting in lieu thereof “A defined contribution plan”. (2) Paragraph (3) of section 401(m) of the 1986 Code (relating to requirements) is amended by adding at the end thereof the following new sentence: “If matching contributions are taken into account for purposes of subsection (k)(3)(A)(ii) for any plan year, such contributions shall not be taken into account under subparagraph (A) for such year.” (3) The last sentence of section 401(m)(2)(B) of the 1986 Code is amended by striking out “such contributions” the first place it appears and inserting in lieu thereof “contributions to which this subsection applies”. (4) Section 401(m)(4)(A) of the 1986 Code (defining matching contribution) is amended by striking out “the plan” each place it appears and inserting in lieu thereof “a defined contribution plan”. (5) (A) Section 401(m)(4)(B) of the 1986 Code (defining elective deferral) is amended by striking out “section 402(g)(3)(A)” and inserting in lieu thereof “section 402(g)(3)”. (B) The amendment made by this paragraph shall take effect as if included in the amendments made by section 1120 of the Reform Act. (6) Subparagraph (C) of section 401(m)(6) of the 1986 Code is amended by striking out “excess” in the subparagraph heading and inserting in lieu thereof “excess aggregate”. (7) Section 401(m)(7)(A) of the 1986 Code (relating to additional tax of section 72(t) not applicable) is amended by striking out “paragraph (8)” and inserting in lieu thereof “paragraph (6)”. (8) Section 4979(a)(1) of the 1986 Code (relating to tax on certain excess contributions) is amended by striking out “a cash or deferred arrangement which is part of”. (9) Section 4979(c) of the 1986 Code (defining excess contributions) is amended— (A) by striking out “403(b),”, and (B) by striking out “408(k)(8)(B)” and inserting in lieu thereof “408(k)(6)(O”. (10) Section 4979(d) of the 1986 Code (defining excess aggregate contribution) is amended by adding at the end thereof the 102 STAT. 3471following new sentence: “For purposes of determining excess aggregate contributions under an annuity contract described in section 403(b), such contract shall be treated as a plan described in subsection (e)(1).” (11) Paragraph (2) of section 4979(f) of the 1986 Code (relating to inclusion in prior year) is amended to read as follows: (12) Year of inclusion.— “(A) In general.—Except as provided in subparagraph (B), any amount distributed as provided in paragraph (1) shall be treated as received and earned by the recipient in his taxable year for which such contribution was made. “(B) De minimis distributions.—If the total excess contributions and excess aggregate contributions distributed to a recipient under a plan for any plan year are less than $100, such distributions (and any income allocable thereto) shall be treated as earned and received by the recipient in his taxable year in which such distributions were made.” (12) Subsection (d) of section 1117 of the Reform Act is amended by adding at the end thereof the following new paragraph: (13) Distributions before flan amendment.— “(A) In general.—If a plan amendment is required to allow a plan to make any distribution described in section 401(m)(6) of the Internal Revenue Code of 1986, any such distribution which is made before the close of the 1st plan year for which such amendment is required to be in effect under section 1140 shall be treated as made in accordance with the provisions of the plan. “(B) Distributions pursuant to model amendment.— “(i) Secretary to prescribe amendment.—The Secretary of the Treasury or his delegate shall prescribe an amendment which allows a plan to make any distribution described in section 401(m)(6) of the Internal Revenue Code of 1986. “(ii) Adoption by plan.—If a plan adopts the amendment prescribed under clause (i) and makes a distribution in accordance with such amendment, such distribution shall be treated as made in accordance with the provisions of the plan.” (m) Amendments Related to Section 1120 of the Reform Act.— (1) (A) Section 403(b)(10) of the 1986 Code (relating to non-discrimination requirements), as added by section 1120(b) of the Reform Act, is redesignated as paragraph (12). (B) Subparagraph (D) of section 403(b)(1) of the 1986 Code is amended by striking out “paragraph (10)” and inserting in lieu thereof “paragraph (12)”. (2) Clause (i) of section 403(b)(12)(A), as redesignated by paragraph (1), is amended— (A) by inserting “(17),” after “(5),”, and (B) by inserting “, section 401(m),” after “section 401(a)” the first place it appears. (3) Section 1120(c) of the Reform Act is amended to read as follows: “(c) Effective Dates.— (1) In general—Except as provided in paragraph (2), the amendments made by this section shall apply to years beginning after December 31, 1988. 102 STAT. 3472 “(2) Collective bargaining agreements.—In the case of a plan maintained pursuant to 1 or more collective bargaining agreements between employee representatives and 1 or more employers ratified before March 1, 1986, the amendments made by this section shall not apply to plan years beginning before the earlier of— “(A) January 1, 1991, or “(B) the later of— “(i) January 1, 1989, or “(ii) the date on which the last of such collective bargaining agreements terminates (determined without regard to any extension thereof after February 28, 1986).”