[Congressional Bills 105th Congress]
[From the U.S. Government Publishing Office]
[H.R. 228 Introduced in House (IH)]







105th CONGRESS
  1st Session
                                H. R. 228

   To amend the Internal Revenue Code of 1986 to allow penalty-free 
 withdrawals from IRAs for certain purposes, to increase the amount of 
       tax deductible IRA contributions, and for other purposes.


_______________________________________________________________________


                    IN THE HOUSE OF REPRESENTATIVES

                            January 7, 1997

 Mr. McCollum introduced the following bill; which was referred to the 
                      Committee on Ways and Means

_______________________________________________________________________

                                 A BILL


 
   To amend the Internal Revenue Code of 1986 to allow penalty-free 
 withdrawals from IRAs for certain purposes, to increase the amount of 
       tax deductible IRA contributions, and for other purposes.

    Be it enacted by the Senate and House of Representatives of the 
United States of America in Congress assembled,

SECTION 1. PENALTY-FREE DISTRIBUTIONS FROM IRAS AND EXCLUSION FROM 
              INCOME OF CERTAIN IRA DISTRIBUTIONS WHICH ARE REPAID.

    (a) Penalty-Free Distributions.--
            (1) In general.--Paragraph (2) of section 72(t) of the 
        Internal Revenue Code of 1986 (relating to exceptions to 10-
        percent additional tax on early distributions from qualified 
        retirement plans) is amended by adding at the end the following 
        new subparagraph:
                    ``(E) Distributions from certain plans for first 
                home purchases, higher education expenses, and 
                qualified long term care expenses.--Distributions to an 
                individual from an individual retirement plan--
                            ``(i) which are qualified first-time 
                        homebuyer distributions,
                            ``(ii) to the extent such distributions do 
                        not exceed the qualified higher education 
                        expenses of the taxpayer for the taxable year, 
                        or
                            ``(iii) to the extent such distributions do 
                        not exceed the expenses paid by the taxpayer 
                        during the taxable year for qualified long-term 
                        care services (as defined in section 
                        7702B(c)).''
            (2) Definitions.--Section 72(t) of such Code is amended by 
        adding at the end the following new paragraphs:
            ``(7) Qualified first-time homebuyer distributions.--
                    ``(A) In general.--For purposes of paragraph 
                (2)(E)(i), the term `qualified first-time homebuyer 
                distribution' means any payment or distribution 
                received by an individual to the extent such payment or 
                distribution is used by the individual before the close 
                of the 60th day after the day on which such payment or 
                distribution is received to pay qualified acquisition 
                costs with respect to a principal residence for such 
                individual as a first-time homebuyer.
                    ``(B) Qualified acquisition costs.--For purposes of 
                this paragraph, the term `qualified acquisition costs' 
                means the costs of acquiring, constructing, or 
                reconstructing a residence. Such term includes any 
                usual or reasonable settlement, financing, or other 
                closing costs.
                    ``(C) First-time homebuyer; other definitions.--For 
                purposes of this paragraph--
                            ``(i) First-time homebuyer.--The term 
                        `first-time homebuyer' means any individual if 
                        such individual (and, if married, such 
                        individual's spouse) had no present ownership 
                        interest in a principal residence during the 3-
                        year period ending on the date of acquisition 
                        of the principal residence to which this 
                        paragraph applies.
                            ``(ii) Principal residence.--The term 
                        `principal residence' has the same meaning as 
                        when used in section 1034.
                            ``(iii) Date of acquisition.--The term 
                        `date of acquisition' means the date--
                                    ``(I) on which a binding contract 
                                to acquire the principal residence to 
                                which subparagraph (A) applies is 
                                entered into, or
                                    ``(II) on which a binding contract 
                                to construct or reconstruct such a 
                                principal residence is entered into.
                    ``(D) Special rule where delay in acquisition.--If 
                any payment or distribution fails to meet the 
                requirements of subparagraph (A) solely by reason of a 
                delay or cancellation of the purchase, construction, or 
                reconstruction of the residence, the amount of the 
                payment or distribution may be contributed to an 
                individual retirement account as provided in subsection 
                (d)(3)(A)(i) of section 408 (determined by substituting 
                `120th day' for `60th day' in such subsection), except 
                that--
                            ``(i) subsection (d)(3)(B) of such section 
                        shall not be applied to such contribution, and
                            ``(ii) such amount shall not be taken into 
                        account in applying subsection (d)(3)(B) to any 
                        other amount.
            ``(8) Qualified higher education expenses.--For purposes of 
        paragraph (2)(E)(ii)--
                    ``(A) In general.--The term `qualified higher 
                education expenses' means tuition, fees, books, 
                supplies, and equipment required for the enrollment or 
                attendance of--
                            ``(i) the taxpayer,
                            ``(ii) the taxpayer's spouse, or
                            ``(iii) the taxpayer's dependent (as 
                        defined in section 152),
                at an eligible educational institution (as defined in 
                section 135(c)(3)).
                    ``(B) Coordination with savings bond provisions.--
                The amount of qualified higher education expenses for 
                any taxable year shall be reduced by any amount 
                excludable from gross income under section 135.''
            (3) Expanded penalty-free withdrawals for unemployed.--
                    (A) In general.--Clause (i) of section 72(t)(2)(D) 
                of such Code is amended by inserting ``and'' at the end 
                of subclause (I), by striking ``, and'' at the end of 
                subclause (II) and inserting a period, and by striking 
                subclause (III).
                    (B) Conforming amendment.--The heading for 
                subparagraph (D) of section 72(t)(2) of such Code is 
                amended by striking ``for health insurance premiums''.
            (4) Conforming amendment.--Subparagraph (B) of section 
        72(t)(2) of such Code is amended by striking ``or (D)'' and 
        inserting ``, (D), or (E)''.
    (b) IRA Distributions To Pay Financially Devastating Medical 
Expenses of Certain Lineal Descendants and Ancestors.--Subparagraph (B) 
of section 72(t)(2) of such Code is amended by striking ``medical 
care'' and all that follows and inserting ``medical care determined--
                            ``(i) without regard to whether the 
                        employee itemizes deductions for such taxable 
                        year, and
                            ``(ii) in the case of an individual 
                        retirement plan, by treating such employee's 
                        dependents as including--
                                    ``(I) all children and 
                                grandchildren of the employee or such 
                                employee's spouse, and
                                    ``(II) all ancestors of the 
                                employee or such employee's spouse.''
    (c) Exclusion From Income of Certain Distributions Which Are 
Repaid.--Section 408 of the Internal Revenue Code of 1986 (relating to 
individual retirement accounts) is amended by redesignating subsection 
(q) as subsection (r) and by inserting after subsection (p) the 
following new subsection:
    ``(q) Repayable Distributions From Individual Retirement Accounts 
for First Home Purchases, Higher Education Expenses, Qualified Long 
Term Care Expenses, Qualified Unemployment Distributions, and 
Financially Devastating Medical Expenses.--
            ``(1) In general.--Notwithstanding any other provision of 
        this section, gross income shall not include any qualified 
        distribution.
            ``(2) Repayment requirement.--
                    ``(A) Addition to tax.--If the required 
                recontributions made by the taxpayer during the 
                repayment period are less than the qualified 
                distribution, the tax imposed by this chapter for the 
                last taxable year in the repayment period shall be 
                increased by the amount determined under subparagraph 
                (B).
                    ``(B) Determination of amount.--The amount 
                determined under this subparagraph shall be an amount 
                which bears the same ratio to the tax benefit amount 
                as--
                            ``(i) the excess (if any) of the qualified 
                        distribution over required recontributions made 
                        during the repayment period, bears to
                            ``(ii) the qualified distribution.
                    ``(C) Repayment period.--For purposes of this 
                subsection, the term `repayment period' means, with 
                respect to any qualified distribution, the 5-taxable 
                year period beginning after the taxable year in which 
                such distribution is received.
                    ``(D) Tax benefit amount.--For purposes of this 
                subsection, the term `tax benefit amount' means, with 
                respect to any qualified distribution, the sum of--
                            ``(i) the aggregate reduction in the tax 
                        imposed by this chapter for the taxable year in 
                        which such distribution is received by reason 
                        of the exclusion under paragraph (1), and
                            ``(ii) interest on the amount of such 
                        reduction for the repayment period computed at 
                        the Federal mid-term rate (within the meaning 
                        of section 1274(d)(1)) and compounded annually.
            ``(3) Qualified distribution.--For purposes of this 
        subsection, the term `qualified distribution' means any 
        distribution described in subparagraph (B), (D) or (E) of 
        section 72(d)(2) to an individual from an individual retirement 
        plan maintained for the benefit of such individual.
            ``(4) Recontribution of qualified distributions.--
                    ``(A) In general.--If an individual received a 
                qualified distribution, such individual shall make 
                required recontributions in the manner provided in this 
                paragraph to an individual retirement plan maintained 
                for the benefit of such individual.
                    ``(B) Method of making recontribution.--Any 
                required recontribution--
                            ``(i) shall be made during the repayment 
                        period for the qualified distribution,
                            ``(ii) shall not exceed the qualified 
                        distribution reduced by any prior 
                        recontribution under this paragraph with 
                        respect to such distribution, and
                            ``(iii) shall be made by making a payment 
                        in cash to an individual retirement plan for 
                        the benefit of such individual.
                An individual making a required recontribution under 
                this paragraph shall designate (in the manner 
                prescribed by the Secretary) such contribution as a 
                required recontribution under this paragraph and shall 
                specify the qualified distribution with respect to 
                which such recontribution is being made.
                    ``(C) Treatment as rollover contribution.--For 
                purposes of this title, any required recontribution 
                under this paragraph shall be treated as a rollover 
                contribution described in subsection (d)(3).
            ``(7) Other special rules.--
                    ``(A) Basis rules not affected.--The tax treatment 
                under this chapter of any distribution (other than a 
                qualified distribution) shall be determined as if this 
                subsection had not been enacted.
                    ``(B) Aggregation rule.--For purposes of this 
                subsection, all qualified distributions received by an 
                individual during a taxable year shall be treated as a 
                single distribution.''
    (d) Effective Date.--The amendments made by this section shall 
apply to distributions received in taxable years beginning after 
December 31, 1997.

SEC. 2. INCREASE IN AMOUNT OF DEDUCTIBLE IRA CONTRIBUTIONS AND INDEXING 
              FOR INFLATION.

    (a) Increase in Maximum Amount of Deduction.--Subparagraph (A) of 
section 219(b)(1) of the Internal Revenue Code of 1986 (relating to 
maximum amount of deduction) is amended by striking ``$2,000'' and 
inserting ``$4,500''.
    (b) Inflation Adjustments.--Subsection (f) of section 219 of such 
Code is amended by adding at the end the following new paragraph:
            ``(8) Inflation adjustments.--In the case of a taxable year 
        beginning in a calendar year after 1998, each dollar amount set 
        forth in subsections (b)(1)(A) and (g)(3)(B) shall be increased 
        by an amount equal to--
                    ``(A) such dollar amount, multiplied by
                    ``(B) the cost-of-living adjustment determined 
                under section 1(f)(3) for such calendar year by 
                substituting `calendar year 1997' for `calendar year 
                1992' in subparagraph (B) thereof.
        If any increase determined under the preceding sentence is not 
        a multiple of $100, such increase shall be rounded to the 
        nearest multiple of $100.''
    (c) Conforming Amendments.--
            (1) Subsections (a)(1) and (b)(2)(B) of section 408 of such 
        Code are each amended by striking ``$2,000'' and inserting 
        ``the dollar limitation in effect under section 219(b)(1)(A)''.
            (2) Subsection (j) of section 408 of such Code is amended 
        by striking ``the $2,000 amounts contained'' and inserting 
        ``the dollar limitations referred to''.
    (d) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 1997.

SEC. 3. ELIMINATION OF PHASE-OUT FOR INDIVIDUALS NOT ACTIVE 
              PARTICIPANTS IN DEFINED CONTRIBUTION PLANS AND INCREASE 
              OF INCOME LIMITS FOR OTHERS.

    (a) Elimination of Phase-Out for Individuals Not Active 
Participants in Defined Contribution Plan.--Paragraph (5) of section 
219(g) of the Internal Revenue Code of 1986 (relating to active 
participant) is amended by striking the period at the end of 
subparagraph (B) and inserting a comma, and by inserting after 
subparagraph (B) the following:
        ``if such plan, contract, pension, or trust is a defined 
        contribution plan (as defined in section 414(i)).''
    (b) Increase in Income Phaseout Levels.--
            (1) In general.--Subparagraph (B) of section 219(g)(3) of 
        such Code (relating to applicable dollar amount) is amended--
                    (A) by striking ``$40,000'' and inserting 
                ``$120,000'', and
                    (B) by striking ``$25,000'' and inserting 
                ``$75,000''.
            (2) Cross reference to inflation adjustment.--Paragraph (3) 
        of section 219(g) of such Code is amended by adding at the end 
        the following new subparagraph:
                    ``(C) Cross Reference.--

                                ``For inflation adjustment of dollar 
amounts set forth in subparagraph (B), see subsection (f)(8).''
    (c) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 1997.

SEC. 4. WITHHOLDING, CONTRIBUTION LIMITS, AND MATCHING CONTRIBUTION 
              NONDISCRIMINATION REQUIREMENTS FOR 401(k) PLANS.

    (a) Inapplicability of Withholding Requirement to 401(k) 
Distributions.--
            (1) In general.--Paragraph (3) of section 3405(c) of the 
        Internal Revenue Code of 1986 (relating to eligible rollover 
        distribution) is amended by striking the period at the end and 
        inserting the following: ``, except that such term shall not 
        include a distribution from a qualified cash or deferred 
        arrangement (as defined in section 401(k)).''
            (2) Effective date.--The amendment made by this subsection 
        shall apply to distributions made after December 31, 1997.
    (b) Increase in Contribution Limits for 401(k) Plans.--
            (1) In general.--Paragraph (1) of section 402(g) of such 
        Code (relating to limitation on exclusion for elective 
        deferrals) is amended by striking ``$7,000'' and inserting 
        ``$20,000''.
            (2) Conforming amendment.--Paragraph (5) of section 402(g) 
        of such Code (relating to cost-of-living adjustment) is amended 
        by striking ``$7,000'' and inserting ``$20,000'' and by 
        inserting before the period ``and the base period taken into 
        account shall be the calendar quarter beginning October 1, 
        1997''.
            (3) Effective date.--The amendments made by this subsection 
        shall apply to taxable years beginning after December 31, 1997.
    (c) Alternative Methods for Meeting Section 401(k) 
Nondiscrimination Test and Nondiscrimination Test for Matching 
Contributions.--
            (1) Section 401(k) nondiscrimination test.--Subsection (k) 
        of section 401 of such Code (relating to cash or deferred 
        arrangements) is amended by adding at the end the following new 
        paragraph:
            ``(13) Additional alternative method of meeting 
        nondiscrimination requirements.--
                    ``(A) In general.--A cash or deferred arrangement 
                shall be treated as meeting the requirements of 
                paragraph (3)(A)(ii) if--
                            ``(i) under the arrangement, the employer 
                        makes matching contributions on behalf of each 
                        employee in an amount equal to a percentage of 
                        the contributions and elective deferrals of 
                        such employee,
                            ``(ii) the same such percentage applies to 
                        all employees of the employer, and
                            ``(iii) not less than biannually, each 
                        employee eligible to participate under the 
                        arrangement is given written notice of the 
                        employee's rights and obligations under the 
                        arrangement which meets the requirements of 
                        clauses (i) and (ii) of paragraph (12)(D).
                    ``(B) Special rules regarding increase and decrease 
                in matching contributions.--
                            ``(i) Increase in rate of matching 
                        contributions.--An arrangement shall not be 
                        treated as meeting the requirement of 
                        subparagraph (A)(ii) if the rate of the 
                        employer's matching contributions increases as 
                        the rate of an employee's contributions or 
                        elective deferrals increases.
                            ``(ii) Permissible decrease as elective 
                        deferrals and contributions increase.--An 
                        arrangement shall not fail to be treated as 
                        meeting the requirement of subparagraph (A)(ii) 
                        by reason of a decrease in the rate of the 
                        employer's matching contributions as the rate 
                        of the employee's contributions or elective 
                        deferrals increases, if the same such rate of 
                        decrease applies to all employees of the 
                        employer.''
            (2) Nondiscrimination test for matching contributions.--
        Subsection (m) of section 401 of such Code is amended by 
        redesignating paragraph (12) as paragraph (13) and by inserting 
        after paragraph (11) the following new paragraph:
            ``(12) Additional alternative method for cash or deferred 
        arrangements.--A qualified cash or deferred arrangement (as 
        defined in subsection (k)) shall be treated as meeting the 
        requirements of paragraph (2) with respect to matching 
        contributions if the arrangement meets the requirements of 
        subsection (k)(13).''
            (3) Effective date.--The amendments made by this section 
        shall apply to years beginning after December 31, 1997.

SEC. 5. INHERITED IRAS AND INHERITED 401(k) AMOUNTS.

    (a) Exclusion of Inherited IRAs and Certain Inherited 401(k) 
Amounts From Gross Estate.--
            (1) In general.--Section 2039 of the Internal Revenue Code 
        of 1986 is amended by adding at the end the following new 
        subsection:
    ``(c) Exclusion of Individual Retirement Accounts and Certain 
Inherited 401(k) Amounts.--Notwithstanding any other provision of this 
section or of any other provision of law, there shall be excluded from 
the value of the gross estate any amount receivable by any beneficiary 
(other than the executor) under--
            ``(1) an individual retirement plan of the decedent, or
            ``(2) a qualified cash or deferred arrangement (as defined 
        in section 401(k)) of the decedent, if the requirements of 
        section 408(o)(2)(B)(iii) are met with respect to such 
        amount.''
            (2) Effective date.--The amendment made by paragraph (1) 
        shall apply to estates of decedents dying after December 31, 
        1997.
    (b) Beneficiary Permitted To Hold IRA Received from Decedent.--
            (1) In general.--Subparagraph (B) of section 401(a)(9) of 
        such Code (relating to required distributions) is amended by 
        adding at the end the following new clause:
                            ``(v) Exception for designated beneficiary 
                        of individual retirement plan.--Notwithstanding 
                        clauses (iii) and (iv), if any portion of the 
                        interest in an individual retirement plan is 
                        payable to (or for the benefit of) a designated 
                        beneficiary by reason of the death of another 
                        individual, the date on which distributions 
                        from such plan are required to begin under this 
                        paragraph shall be determined by applying this 
                        paragraph as if such beneficiary were the 
                        employee.''
            (2) Conforming amendment.--Paragraph (3) of section 408(d) 
        of such Code is amended by striking subparagraph (C) (relating 
        to denial of rollover treatment for inherited accounts, etc.).
            (3) Effective date.--The amendments made by this subsection 
        shall apply to amounts payable after, and acquisitions after, 
        December 31, 1997.
    (c) Contribution of Inherited 401(k) Amounts to IRA; Exclusion From 
Gross Income for Such Amounts.--
            (1) In general.--Subparagraph (B) of section 408(o)(2) of 
        such Code (relating to nondeductible limit) is amended by 
        adding at the end the following new clause:
                            ``(iii) Inherited 401(k) amounts.--If, by 
                        reason of the death of an employee, an 
                        individual receives an amount attributable to 
                        an elective deferral described in section 
                        402(g)(3)(A) of such employee--
                                    ``(I) such individual's 
                                nondeductible limit for the taxable 
                                year in which such amount is received 
                                shall be increased by the portion of 
                                such amount which is paid (not later 
                                than the 60th day after the date of 
                                such receipt) into an individual 
                                retirement plan for the benefit of such 
                                individual, and
                                    ``(II) such portion shall not be 
                                includible in the gross income of such 
                                individual.''
            (2) Conforming amendment.--Paragraph (1) of section 4973(b) 
        of such Code (relating to excess contributions) is amended by 
        striking ``408(d)(3))'' and inserting ``408(d)(3)) and other 
        than amounts excluded from gross income under section 
        408(o)(2)(B)(iii)''.
            (3) Effective date.--The amendments made by this subsection 
        shall apply to amounts received after December 31, 1997.
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