[House Report 107-84]
[From the U.S. Government Publishing Office]



107th Congress                                                   Report
 1st Session            HOUSE OF REPRESENTATIVES                 107-84
_______________________________________________________________________




 
       ECONOMIC GROWTH AND TAX RELIEF RECONCILIATION ACT OF 2001

                               __________

                           CONFERENCE REPORT

                              to accompany

                               H.R. 1836

[GRAPHIC] [TIFF OMITTED] TONGRESS.#13


     May 26 (legislative day, May 25), 2001.--Ordered to be printed

                             ----------

                   U.S. GOVERNMENT PRINTING OFFICE
 72-575                   WASHINGTON : 2001


107th Congress                                                   Report
                        HOUSE OF REPRESENTATIVES
 1st Session                                                     107-84

======================================================================



       ECONOMIC GROWTH AND TAX RELIEF RECONCILIATION ACT OF 2001

                                _______
                                

     May 26 (legislative day, May 25), 2001.--Ordered to be printed

                                _______
                                

 Mr. Thomas, from the committee of conference, submitted the following

                           CONFERENCE REPORT

                        [To accompany H.R. 1836]

    The committee of conference on the disagreeing votes of he 
two Houses on the amendment of the Senate to the bill (H.R. 
1836), to provide for reconciliation pursuant to section 104 of 
the concurrent resolution on the budget for fiscal year 2002, 
having met, after full and free conference, have agreed to 
recommend and do recommend to their respective Houses as 
follows:
    That the House recede from its disagreement to the 
amendment of the Senate and agree to the same with an amendment 
as follows:
    In lieu of the matter proposed to be inserted by the State 
amendment, insert the following:

SECTION 1. SHORT TITLE; REFERENCES; TABLE OF CONTENTS.

    (a) Short Title.--This Act may be cited as the ``Economic 
Growth and Tax Relief Reconciliation Act of 2001''.
    (b) Amendment of 1986 Code.--Except as otherwise expressly 
provided, whenever in this Act an amendment or repeal is 
expressed in terms of an amendment to, or repeal of, a section 
or other provision, the reference shall be considered to be 
made to a section or other provision of the Internal Revenue 
Code of 1986.
    (c) Table of Contents.--The table of contents of this Act 
is as follows:
Sec. 1. Short title; references; table of contents.

             TITLE I--INDIVIDUAL INCOME TAX RATE REDUCTIONS

Sec. 101. Reduction in income tax rates for individuals.
Sec. 102. Repeal of phaseout of personal exemptions.
Sec. 103. Phaseout of overall limitation on itemized deductions.

               TITLE II--TAX BENEFITS RELATING TO CHILDREN

Sec. 201. Modifications to child tax credit.
Sec. 202. Expansion of adoption credit and adoption assistance programs.
Sec. 203. Refunds disregarded in the administration of Federal programs 
          and federally assisted programs.
Sec. 204. Dependent care credit.
Sec. 205. Allowance of credit for employer expenses for child care 
          assistance.

                   TITLE III--MARRIAGE PENALTY RELIEF

Sec. 301. Elimination of marriage penalty in standard deduction.
Sec. 302. Phaseout of marriage penalty in 15-percent bracket.
Sec. 303. Marriage penalty relief for earned income credit; earned 
          income to include only amounts includible in gross income; 
          simplification of earned income credit.

                TITLE IV--AFFORDABLE EDUCATION PROVISIONS

                Subtitle A--Education Savings Incentives

Sec. 401. Modifications to education individual retirement accounts.
Sec. 402. Modifications to qualified tuition programs.

                   Subtitle B--Educational Assistance

Sec. 411. Extension of exclusion for employer-provided educational 
          assistance.
Sec. 412. Elimination of 60-month limit and increase in income 
          limitation on student loan interest deduction.
Sec. 413. Exclusion of certain amounts received under the National 
          Health Service Corps Scholarship Program and the F. Edward 
          Hebert Armed Forces Health Professions Scholarship and 
          Financial Assistance Program.

  Subtitle C--Liberalization of Tax-Exempt Financing Rules for Public 
                           School Construction

Sec. 421. Additional increase in arbitrage rebate exception for 
          governmental bonds used to finance educational facilities.
Sec. 422. Treatment of qualified public educational facility bonds as 
          exempt facility bonds.

                      Subtitle D--Other Provisions

Sec. 431. Deduction for higher education expenses.

 TITLE V--ESTATE, GIFT, AND GENERATION-SKIPPING TRANSFER TAX PROVISIONS

   Subtitle A--Repeal of Estate and Generation-Skipping Transfer Taxes

Sec. 501. Repeal of estate and generation-skipping transfer taxes.

           Subtitle B--Reductions of Estate and Gift Tax Rates

Sec. 511. Additional reductions of estate and gift tax rates.

                Subtitle C--Increase in Exemption Amounts

Sec. 521. Increase in exemption equivalent of unified credit, lifetime 
          gifts exemption, and GST exemption amounts.

                Subtitle D--Credit for State Death Taxes

Sec. 531. Reduction of credit for State death taxes.
Sec. 532. Credit for State death taxes replaced with deduction for such 
          taxes.

 Subtitle E--Carryover Basis at Death; Other Changes Taking Effect With 
                                 Repeal

Sec. 541. Termination of step-up in basis at death.
Sec. 542. Treatment of property acquired from a decedent dying after 
          December 31, 2009.

                   Subtitle F--Conservation Easements

Sec. 551. Expansion of estate tax rule for conservation easements.

      Subtitle G--Modifications of Generation-Skipping Transfer Tax

Sec. 561. Deemed allocation of GST exemption to lifetime transfers to 
          trusts; retroactive allocations.
Sec. 562. Severing of trusts.
Sec. 563. Modification of certain valuation rules.
Sec. 564. Relief provisions.

         Subtitle H--Extension of Time for Payment of Estate Tax

Sec. 571. Increase in number of allowable partners and shareholders in 
          closely held businesses.
Sec. 572. Expansion of availability of installment payment for estates 
          with interests qualifying lending and finance businesses.
Sec. 572. Clarification of availability of installment payment.

                      Subtitle I--Other Provisions

Sec. 581. Waiver of statute of limitation for taxes on certain farm 
          valuations.

   TITLE VI--PENSION AND INDIVIDUAL RETIREMENT ARRANGEMENT PROVISIONS

               Subtitle A--Individual Retirement Accounts

Sec. 601. Modification of IRA contribution limits.
Sec. 602. Deemed IRAs under employer plans.

                     Subtitle B--Expanding Coverage

Sec. 611. Increase in benefit and contribution limits.
Sec. 612. Plan loans for subchapter S owners, partners, and sole 
          proprietors.
Sec. 613. Modification of top-heavy rules.
Sec. 614. Elective deferrals not taken into account for purposes of 
          deduction limits.
Sec. 615. Repeal of coordination requirements for deferred compensation 
          plans of State and local governments and tax-exempt 
          organizations.
Sec. 616. Deduction limits.
Sec. 617. Option to treat elective deferrals as after-tax Roth 
          contributions.
Sec. 618. Nonrefundable credit to certain individuals for elective 
          deferrals and IRA contributions.
Sec. 619. Credit for pension plan startup costs of small employers.
Sec. 620. Elimination of user fee for requests to IRS regarding pension 
          plans.
Sec. 621. Treatment of nonresident aliens engaged in international 
          transportation services.

                Subtitle C--Enhancing Fairness for Women

Sec. 631. Catch-up contributions for individuals age 50 or over.
Sec. 632. Equitable treatment for contributions of employees to defined 
          contribution plans.
Sec. 633. Faster vesting of certain employer matching contributions.
Sec. 634. Modification to minimum distribution rules.
Sec. 635. Clarification of tax treatment of division of section 457 plan 
          benefits upon divorce.
Sec. 636. Provisions relating to hardship distributions.
Sec. 637. Waiver of tax on nondeductible contributions for domestic or 
          similar workers.

           Subtitle D--Increasing Portability for Participants

Sec. 641. Rollovers allowed among various types of plans.
Sec. 642. Rollovers of IRAs into workplace retirement plans.
Sec. 643. Rollovers of after-tax contributions.
Sec. 644. Hardship exception to 60-day rule.
Sec. 645. Treatment of forms of distribution.
Sec. 646. Rationalization of restrictions on distributions.
Sec. 647. Purchase of service credit in governmental defined benefit 
          plans.
Sec. 648. Employers may disregard rollovers for purposes of cash-out 
          amounts.
Sec. 649. Minimum distribution and inclusion requirements for section 
          457 plans.

       Subtitle E--Strengthening Pension Security and Enforcement

                       Part I--General Provisions

Sec. 651. Repeal of 160 percent of current liability funding limit.
Sec. 652. Maximum contribution deduction rules modified and applied to 
          all defined benefit plans.
Sec. 653. Excise tax relief for sound pension funding.
Sec. 654. Treatment of multiemployer plans under section 415.
Sec. 655. Protection of investment of employee contributions to 401(k) 
          plans.
Sec. 656. Prohibited allocations of stock in S corporation ESOP.
Sec. 657. Automatic rollovers of certain mandatory distributions.
Sec. 658. Clarification of treatment of contributions to multiemployer 
          plan.

 Part II--Treatment of Plan Amendments Reducing Future Benefit Accruals

Sec. 659. Excise tax on failure to provide notice by defined benefit 
          plans significantly reducing future benefit accruals.

                 Subtitle F--Reducing Regulatory Burdens

Sec. 661. Modification of timing of plan valuations.
Sec. 662. ESOP dividends may be reinvested without loss of dividend 
          deduction.
Sec. 663. Repeal of transition rule relating to certain highly 
          compensated employees.
Sec. 664. Employees of tax-exempt entities.
Sec. 665. Clarification of treatment of employer-provided retirement 
          advice.
Sec. 666. Repeal of the multiple use test.

                  Subtitle G--Miscellaneous Provisions

Sec. 671. Tax treatment and information requirements of Alaska Native 
          Settlement Trusts.

                   TITLE VII--ALTERNATIVE MINIMUM TAX

Sec. 701. Increase in alternative minimum tax exemption.

                      TITLE VIII--OTHER PROVISIONS

Sec. 801. Time for payment of corporate estimated taxes.
Sec. 802. Expansion of authority to postpone certain tax-related 
          deadlines by reason of Presidentially declared disaster.
Sec. 803. No Federal income tax on restitution received by victims of 
          the Nazi regime or their heirs or estates.

           TITLE IX--COMPLIANCE WITH CONGRESSIONAL BUDGET ACT

Sec. 901. Sunset of provisions of Act.

             TITLE I--INDIVIDUAL INCOME TAX RATE REDUCTIONS

SEC. 101. REDUCTION IN INCOME TAX RATES FOR INDIVIDUALS.

    (a) In General.--Section 1 (relating to tax imposed) is 
amended by adding at the end the following new subsection:
    ``(i) Rate Reductions After 2000.--
            ``(1) 10-percent rate bracket.--
                    ``(A) In general.--In the case of taxable 
                years beginning after December 31, 2000--
                            ``(i) the rate of tax under 
                        subsections (a), (b), (c), and (d) on 
                        taxable income not over the initial 
                        bracket amount shall be 10 percent, and
                            ``(ii) the 15 percent rate of tax 
                        shall apply only to taxable income over 
                        the initial bracket amount but not over 
                        the maximum dollar amount for the 15-
                        percent rate bracket.
                    ``(B) Initial bracket amount.--For purposes 
                of this paragraph, the initial bracket amount 
                is--
                            ``(i) $14,000 ($12,000 in the case 
                        of taxable years beginning before 
                        January 1, 2008) in the case of 
                        subsection (a),
                            ``(ii) $10,000 in the case of 
                        subsection (b), and
                            ``(iii) \1/2\ the amount applicable 
                        under clause (i) (after adjustment, if 
                        any, under subparagraph (C)) in the 
                        case of subsections (c) and (d).
                    ``(C) Inflation adjustment.--In prescribing 
                the tables under subsection (f) which apply 
                with respect to taxable years beginning in 
                calendar years after 2000--
                            ``(i) the Secretary shall make no 
                        adjustment to the initial bracket 
                        amount for any taxable year beginning 
                        before January 1, 2009,
                            ``(ii) the cost-of-living 
                        adjustment used in making adjustments 
                        to the initial bracket amount for any 
                        taxable year beginning after December 
                        31, 2008, shall be determined under 
                        subsection (f)(3) by substituting 
                        `2007' for `1992' in subparagraph (B) 
                        thereof, and
                            ``(iii) such adjustment shall not 
                        apply to the amount referred to in 
                        subparagraph (B)(iii).

                If any amount after adjustment under the 
                preceding sentence is not a multiple of $50, 
                such amount shall be rounded to the next lowest 
                multiple of $50.
                    ``(D) Coordination with acceleration of 10 
                percent rate bracket benefit for 2001.--This 
                paragraph shall not apply to any taxable year 
                to which section 6428 applies.
            ``(2) Reductions in rates after june 30, 2001.--In 
        the case of taxable years beginning in a calendar 
yearafter 2000, the corresponding percentage specified for such 
calendar year in the following table shall be substituted for the 
otherwise applicable tax rate in the tables under subsections (a), (b), 
(c), (d), and (e).

------------------------------------------------------------------------
                                         The corresponding percentages
                                         shall be substituted for the
   ``In the case of taxable years           following percentages:
   beginning during calendar year:   -----------------------------------
                                        28%      31%      36%     39.6%
------------------------------------------------------------------------
2001................................   27.5%    30.5%    35.5%    39.1%
2002 and 2003.......................   27.0%    30.0%    35.0%    38.6%
2004 and 2005.......................   26.0%    29.0%    34.0%    37.6%
2006 and thereafter.................   25.0%    28.0%    33.0%    35.0%
------------------------------------------------------------------------

            ``(3) Adjustment of tables.--The Secretary shall 
        adjust the tables prescribed under subsection (f) to 
        carry out this subsection.''.
    (b) Acceleration of 10 Percent Rate Bracket Benefit for 
2001.--
            (1) In general.--Subchapter B of chapter 65 
        (relating to abatements, credits, and refunds) is 
        amended by adding at the end the following new section:

``SEC. 6428. ACCELERATION OF 10 PERCENT INCOME TAX RATE BRACKET BENEFIT 
                    FOR 2001.

    ``(a) In General.--In the case of an eligible individual, 
there shall be allowed as a credit against the tax imposed by 
chapter 1 for the taxpayer's first taxable year beginning in 
2001 an amount equal to 5 percent of so much of the taxpayer's 
taxable income as does not exceed the initial bracket amount 
(as defined in section 1(i)(1)(B)).
    ``(b) Limitation Based on Amount of Tax.--The credit 
allowed by subsection (a) shall not exceed the excess (if any) 
of--
            ``(1) the sum of the regular tax liability (as 
        defined in section 26(b)) plus the tax imposed by 
        section 55, over
            ``(2) the sum of the credits allowable under part 
        IV of subchapter A of chapter 1 (other than the credits 
        allowable under subpart C thereof, relating to 
        refundable credits).
    ``(c) Eligible Individual.--For purposes of this section, 
the term `eligible individual' means any individual other 
than--
            ``(1) any estate or trust,
            ``(2) any nonresident alien individual, and
            ``(3) any individual with respect to whom a 
        deduction under section 151 is allowable to another 
        taxpayer for a taxable year beginning in the calendar 
        year in which the individual's taxable year begins.
    ``(d) Special Rules.--
            ``(1) Coordination with advance refunds of 
        credit.--
                    ``(A) In general.--The amount of credit 
                which would (but for this paragraph) be 
                allowable under this section shall be reduced 
                (but not below zero) by the aggregate refunds 
                and credits made or allowed to the taxpayer 
                under subsection (e). Any failure to so reduce 
                the credit shall be treated as arising out of a 
                mathematical or clerical error and assessed 
                according to section 6213(b)(1).
                    ``(B) Joint returns.--In the case of a 
                refund or credit made or allowed under 
                subsection (e) with respect to a joint return, 
                half of such refund or credit shall be treated 
                as having been made or allowed to each 
                individual filing such return.
            ``(2) Coordination with estimated tax.--The credit 
        under this section shall be treated for purposes of 
        section 6654(f) in the same manner as a credit under 
        subpart A of part IV of subchapter A of chapter 1.
    ``(e) Advance Refunds of Credit Based on Prior Year Data.--
            ``(1) In general.--Each individual who was an 
        eligible individual for such individual's first taxable 
        year beginning in 2000 shall be treated as having made 
        a payment against the tax imposed by chapter 1 for such 
        first taxable year in an amount equal to the advance 
        refund amount for such taxable year.
            ``(2) Advance refund amount.--For purposes of 
        paragraph (1), the advance refund amount is the amount 
        that would have been allowed as a credit under this 
        section for such first taxable year if this section 
        (other than subsection (d) and this subsection) had 
        applied to such taxable year.
            ``(3) Timing of payments.--In the case of any 
        overpayment attributable to this subsection, the 
        Secretary shall, subject to the provisions of this 
        title, refund or credit such overpayment as rapidly as 
        possible and, to the extent practicable, before October 
        1, 2001. No refund or credit shall be made or allowed 
        under this subsection after December 31, 2001.
            ``(4) No interest.--No interest shall be allowed on 
        any overpayment attributable to this subsection.''.
            (2) Clerical amendment.--The table of sections for 
        subchapter B of chapter 65 is amended by adding at the 
        end the following new item:

        ``Sec. 6428. Acceleration of 10 percent income tax rate bracket 
                  benefit for 2001.''.

    (c) Conforming Amendments.--
            (1) Subparagraph (B) of section 1(g)(7) is amended 
        by striking ``15 percent'' in clause (ii)(II) and 
        inserting ``10 percent.''.
            (2) Section 1(h) is amended--
                    (A) by striking ``28 percent'' both places 
                it appears in paragraphs (1)(A)(ii)(I) and 
                (1)(B)(i) and inserting ``25 percent'', and
                    (B) by striking paragraph (13).
            (3) Section 15 is amended by adding at the end the 
        following new subsection:
    ``(f) Rate Reductions Enacted by Economic Growth and Tax 
Relief Reconciliation Act of 2001.--This section shall not 
apply to any change in rates under subsection (i) of section 1 
(relating to rate reductions after 2000).''.
            (4) Section 531 is amended by striking ``equal to'' 
        and all that follows and inserting ``equal to the 
        product of thehighest rate of tax under section 1(c) 
and the accumulated taxable income.''.
            (5) Section 541 is amended by striking ``equal to'' 
        and all that follows and inserting ``equal to the 
        product of the highest rate of tax under section 1(c) 
        and the undistributed personal holding company 
        income.''.
            (6) Section 3402(p)(1)(B) is amended by striking 
        ``7, 15, 28, or 31 percent'' and inserting ``7 percent, 
        any percentage applicable to any of the 3 lowest income 
        brackets in the table under section 1(c),''.
            (7) Section 3402(p)(2) is amended by striking ``15 
        percent'' and inserting ``10 percent''.
            (8) Section 3402(q)(1) is amended by striking 
        ``equal to 28 percent of such payment'' and inserting 
        ``equal to the product of the third lowest rate of tax 
        applicable under section 1(c) and such payment''.
            (9) Section 3402(r)(3) is amended by striking ``31 
        percent'' and inserting ``the fourth lowest rate of tax 
        applicable under section 1(c)''.
            (10) Section 3406(a)(1) is amended by striking 
        ``equal to 31 percent of such payment'' and inserting 
        ``equal to the product of the fourth lowest rate of tax 
        applicable under section 1(c) and such payment''.
            (11) Section 13273 of the Revenue Reconciliation 
        Act of 1993 is amended by striking ``28 percent'' and 
        inserting ``the third lowest rate of tax applicable 
        under section 1(c) of the Internal Revenue Code of 
        1986''.
    (d) Effective Dates.--
            (1) In general.--Except as provided in paragraph 
        (2), the amendments made by this section shall apply to 
        taxable years beginning after December 31, 2000.
            (2) Amendments to withholding provisions.--The 
        amendments made by paragraphs (6), (7), (8), (9), (10), 
        and (11) of subsection (c) shall apply to amounts paid 
        after the 60th day after the date of the enactment of 
        this Act. References to income brackets and rates of 
        tax in such paragraphs shall be applied without regard 
        to section 1(i)(1)(D) of the Internal Revenue Code of 
        1986.

SEC. 102. REPEAL OF PHASEOUT OF PERSONAL EXEMPTIONS.

    (a) In General.--Paragraph (3) of section 151(d) (relating 
to exemption amount) is amended by adding at the end the 
following new subparagraphs:
                    ``(E) Reduction of phaseout.--
                            ``(i) In general.--In the case of 
                        taxable years beginning after December 
                        31, 2005, and before January 1, 2010, 
                        the reduction under subparagraph (A) 
                        shall be equal to the applicable 
                        fraction of the amount which would (but 
                        for this subparagraph) be the amount of 
                        such reduction.
                            ``(ii) Applicable fraction.--For 
                        purposes of clause (i), the applicable 
                        fraction shall be determined in 
                        accordance with the following table:

``For taxable years beginning                             The applicable
    in calendar year--                                     fraction is--
            2006 and 2007.....................................    \2/3\ 
            2008 and 2009.....................................    \1/3\.

                    ``(F) Termination.--This paragraph shall 
                not apply to any taxable year beginning after 
                December 31, 2009.''.
    (b) Effective Date.--The amendment made by this section 
shall apply to taxable years beginning after December 31, 2005.

SEC. 103. PHASEOUT OF OVERALL LIMITATION ON ITEMIZED DEDUCTIONS.

    (a) In General.--Section 68 is amended by adding at the end 
the following new subsections:
    ``(f) Phaseout of Limitation.--
            ``(1) In general.--In the case of taxable years 
        beginning after December 31, 2005, and before January 
        1, 2010, the reduction under subsection (a) shall be 
        equal to the applicable fraction of the amount which 
        would (but for this subsection) be the amount of such 
        reduction.
            ``(2) Applicable fraction.--For purposes of 
        paragraph (1), the applicable fraction shall be 
        determined in accordance with the following table:

``For taxable years beginning                             The applicable
    in calendar year--                                     fraction is--
            2006 and 2007.....................................    \2/3\ 
            2008 and 2009.....................................    \1/3\.

    ``(g) Termination.--This section shall not apply to any 
taxable year beginning after December 31, 2009.''.
    (b) Effective Date.--The amendment made by this section 
shall apply to taxable years beginning after December 31, 2005.

              TITLE II--TAX BENEFITS RELATING TO CHILDREN

SEC. 201. MODIFICATIONS TO CHILD TAX CREDIT.

    (a) Increase in Per Child Amount.--Subsection (a) of 
section 24 (relating to child tax credit) is amended to read as 
follows:
    ``(a) Allowance of Credit.--
            ``(1) In general.--There shall be allowed as a 
        credit against the tax imposed by this chapter for the 
        taxable year with respect to each qualifying child of 
        the taxpayer an amount equal to the per child amount.
            ``(2) Per child amount.--For purposes of paragraph 
        (1), the per child amount shall be determined as 
        follows:

``In the case of any taxable
    year beginning in--                        The per child amount is--
        2001, 2002, 2003, or 2004.............................   $  600 
        2005, 2006, 2007, or 2008.............................      700 
        2009..................................................      800 
        2010 or thereafter....................................

                                                               1,000.''.
    (b) Credit Allowed Against Alternative Minimum Tax.--
            (1) In general.--Subsection (b) of section 24 
        (relating to child tax credit) is amended by adding at 
        the end the following new paragraph:
            ``(3) Limitation based on amount of tax.--The 
        credit allowed under subsection (a) for any taxable 
        year shall not exceed the excess of--
                    ``(A) the sum of the regular tax liability 
                (as defined in section 26(b)) plus the tax 
                imposed by section 55, over
                    ``(B) the sum of the credits allowable 
                under this subpart (other than this section) 
                and section 27 for the taxable year.''.
            (2) Conforming amendments.--
                    (A) The heading for section 24(b) is 
                amended to read as follows: ``Limitations.--''.
                    (B) The heading for section 24(b)(1) is 
                amended to read as follows: ``Limitation based 
                on adjusted gross income.--''.
                    (C) Section 24(d), as amended by subsection 
                (c), is amended--
                            (i) by striking ``section 26(a)'' 
                        each place it appears and inserting 
                        ``subsection (b)(3)'', and
                            (ii) in paragraph (1)(B) by 
                        striking ``aggregate amount of credits 
                        allowed by this subpart'' and inserting 
                        ``amount of credit allowed by this 
                        section''.
                    (D) Paragraph (1) of section 26(a) is 
                amended by inserting ``(other than section 
                24)'' after ``this subpart''.
                    (E) Subsection (c) of section 23 is amended 
                by striking ``and section 1400C'' and inserting 
                ``and sections 24 and 1400C''.
                    (F) Subparagraph (C) of section 25(e)(1) is 
                amended by inserting ``, 24,'' after ``sections 
                23''.
                    (G) Section 904(h) is amended by inserting 
                ``(other than section 24)'' after ``chapter''.
                    (H) Subsection (d) of section 1400C is 
                amended by inserting ``and section 24'' after 
                ``this section''.
    (c) Refundable Child Credit.--
            (1) In general.--So much of section 24(d) (relating 
        to additional credit for families with 3 or more 
        children) as precedes paragraph (2) is amended to read 
        as follows:
    ``(d) Portion of Credit Refundable.--
            ``(1) In general.--The aggregate credits allowed to 
        a taxpayer under subpart C shall be increased by the 
        lesser of--
                    ``(A) the credit which would be allowed 
                under this section without regard to this 
                subsection and the limitation under section 
                26(a), or
                    ``(B) the amount by which the amount of 
                credit allowed by this section (determined 
                without regard to this subsection) would 
                increase if the limitation imposed by section 
                26(a) were increased by the greater of--
                            ``(i) 15 percent (10 percent in the 
                        case of taxable years beginning before 
                        January 1, 2005) of so much of the 
                        taxpayer's earned income (within the 
                        meaning of section 32) which is taken 
                        into account in computing taxable 
                        income for the taxable year as exceeds 
                        $10,000, or
                            ``(ii) in the case of a taxpayer 
                        with 3 or more qualifying children, the 
                        excess (if any) of--
                                    ``(I) the taxpayer's social 
                                security taxes for the taxable 
                                year, over
                                    ``(II) the credit allowed 
                                under section 32 for the 
                                taxable year.

        The amount of the credit allowed under this subsection 
        shall not be treated as a credit allowed under this 
        subpart and shall reduce the amount of credit otherwise 
        allowable under subsection (a) without regard to 
        section 26(a).''.
            (2) Inflation adjustment.--Subsection (d) of 
        section 24 is amended by adding at the end the 
        following new paragraph:
            ``(4) Inflation adjustment.--In the case of any 
        taxable year beginning in a calendar year after 2001, 
        the $10,000 amount contained in paragraph (1)(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 the 
                calendar year in which the taxable year begins, 
                determined by substituting `calendar year 2000' 
                for `calendar year 1992' in subparagraph (B) 
                thereof.

        Any increase determined under the preceding sentence 
        shall be rounded to the nearest multiple of $50.''
            (3) Conforming amendment.--Section 32 is amended by 
        striking subsection (n).
    (d) Elimination of Reduction of Credit to Taxpayer Subject 
to Alternative Minimum Tax Provision.--Section 24(d) is 
amended--
            (1) by striking paragraph (2), and
            (2) by redesignating paragraphs (3) and (4) as 
        paragraphs (2) and (3), respectively.
    (e) Effective Dates.--
            (1) In general.--Except as provided in paragraph 
        (2), the amendments made by this section shall apply to 
        taxable years beginning after December 31, 2000.
            (2) Subsection (b).--The amendments made by 
        subsection (b) shall apply to taxable years beginning 
        after December 31, 2001.

SEC. 202. EXPANSION OF ADOPTION CREDIT AND ADOPTION ASSISTANCE 
                    PROGRAMS.

    (a) In General.--
            (1) Adoption credit.--Section 23(a)(1) (relating to 
        allowance of credit) is amended to read as follows:
            ``(1) In general.--In the case of an individual, 
        there shall be allowed as a credit against the tax 
        imposed by this chapter--
                    ``(A) in the case of an adoption of a child 
                other than a child with special needs, the 
                amount of the qualified adoption expenses paid 
                or incurred by the taxpayer, and
                    ``(B) in the case of an adoption of a child 
                with special needs, $10,000.''.
            (2) Adoption assistance programs.--Section 137(a) 
        (relating to adoption assistance programs) is amended 
        to read as follows:
    ``(a) In General.--Gross income of an employee does not 
include amounts paid or expenses incurred by the employer for 
adoption expenses in connection with the adoption of a child by 
an employee if such amounts are furnished pursuant to an 
adoption assistance program. The amount of the exclusion shall 
be--
            ``(1) in the case of an adoption of a child other 
        than a child with special needs, the amount of the 
        qualified adoption expenses paid or incurred by the 
        taxpayer, and
            ``(2) in the case of an adoption of a child with 
        special needs, $10,000.''.
    (b) Dollar Limitations.--
            (1) Dollar amount of allowed expenses.--
                    (A) Adoption expenses.--Section 23(b)(1) 
                (relating to allowance of credit) is amended--
                            (i) by striking ``$5,000'' and 
                        inserting ``$10,000'',
                            (ii) by striking ``($6,000, in the 
                        case of a child with special needs)'', 
                        and
                            (iii) by striking ``subsection 
                        (a)'' and inserting ``subsection 
                        (a)(1)(A)''.
                    (B) Adoption assistance programs.--Section 
                137(b)(1) (relating to dollar limitations for 
                adoption assistance programs) is amended--
                            (i) by striking ``$5,000'' and 
                        inserting ``$10,000'', and
                            (ii) by striking ``($6,000, in the 
                        case of a child with special needs)'', 
                        and
                            (iii) by striking ``subsection 
                        (a)'' and inserting ``subsection 
                        (a)(1)''.
            (2) Phase-out limitation.--
                    (A) Adoption expenses.--Clause (i) of 
                section 23(b)(2)(A) (relating to income 
                limitation) is amended by striking ``$75,000'' 
                and inserting ``$150,000''.
                    (B) Adoption assistance programs.--Section 
                137(b)(2)(A) (relating to income limitation) is 
                amended by striking ``$75,000'' and inserting 
                ``$150,000''.
    (c) Year Credit Allowed.--Section 23(a)(2) (relating to 
year credit allowed) is amended by adding at the end the 
following new flush sentence:

        ``In the case of the adoption of a child with special 
        needs, the credit allowed under paragraph (1) shall be 
        allowed for the taxable year in which the adoption 
        becomes final.''.
    (d) Repeal of Terminations.--
            (1) Children without special needs.--Paragraph (2) 
        of section 23(d) (relating to definition of eligible 
        child) is amended to read as follows:
            ``(2) Eligible child.--The term `eligible child' 
        means any individual who--
                    ``(A) has not attained age 18, or
                    ``(B) is physically or mentally incapable 
                of caring for himself.''.
            (2) Adoption Assistance Programs.--Section 137 
        (relating to adoption assistance programs) is amended 
        by striking subsection (f).
    (e) Adjustment of Dollar and Income Limitations for 
Inflation.--
            (1) Adoption credit.--Section 23 (relating to 
        adoption expenses) is amended by redesignating 
        subsection (h) as subsection (i) and by inserting after 
        subsection (g) the following new subsection:
    ``(h) Adjustments for Inflation.--In the case of a taxable 
year beginning after December 31, 2002, each of the dollar 
amounts in subsection (a)(1)(B) and paragraphs (1) and 
(2)(A)(i) of subsection (b) shall be increased by an amount 
equal to--
            ``(1) such dollar amount, multiplied by
            ``(2) the cost-of-living adjustment determined 
        under section 1(f)(3) for the calendar year in which 
        the taxable year begins, determined by substituting 
        `calendar year 2001' for `calendar year 1992' in 
        subparagraph (B) thereof.''.
            (2) Adoption assistance programs.--Section 137 
        (relating to adoption assistance programs), as amended 
        by subsection (d), is amended by adding at the end the 
        following new subsection:
    ``(f) Adjustments for Inflation.--In the case of a taxable 
year beginning after December 31, 2002, each of the dollar 
amounts in subsection (a)(2) and paragraphs (1) and (2)(A) of 
subsection (b) shall be increased by an amount equal to--
            ``(1) such dollar amount, multiplied by
            ``(2) the cost-of-living adjustment determined 
        under section 1(f)(3) for the calendar year in which 
        the taxable year begins, determined by substituting 
        `calendar year 2001' for `calendar year 1992' in 
        subparagraph (B) thereof.''.
    (f) Credit Allowed Against Alternative Minimum Tax.--
            (1) In general.--Subsection (b) of section 23 is 
        amended by adding at the end the following new 
        paragraph:
            ``(4) Limitation based on amount of tax.--The 
        credit allowed under subsection (a) for any taxable 
        year shall not exceed the excess of--
                    ``(A) the sum of the regular tax liability 
                (as defined in section 26(b)) plus the tax 
                imposed by section 55, over
                    ``(B) the sum of the credits allowable 
                under this subpart (other than this section) 
                and section 27 for the taxable year.''
            (2) Conforming amendments.--
                    (A) Section 23(c), as amended by section 
                201(b), is amended--
                            (i) by striking ``section 26(a)'' 
                        and inserting ``subsection (b)(4)'', 
                        and
                            (ii) by striking ``reduced by the 
                        sum of the credits allowable under this 
                        subpart (other than this section and 
                        sections 24 and 1400C)''.
                    (B) Section 24(b)(3)(B), as added by 
                section 201(b), is amended by striking ``this 
                section'' and inserting ``this section and 
                section 23''.
                    (C) Sections 26(a)(1), 904(h), and 
                1400C(d), as amended by section 201(b), are 
                each amended by striking ``section 24'' and 
                inserting ``sections 23 and 24''.
    (g) Effective Date.--
            (1) In general.--Except as provided in paragraph 
        (2), the amendments made by this section shall apply to 
        taxable years beginning after December 31, 2001.
            (2) Subsection (a).--The amendments made by 
        subsection (a) shall apply to taxable years beginning 
        after December 31, 2002.

SEC. 203. REFUNDS DISREGARDED IN THE ADMINISTRATION OF FEDERAL PROGRAMS 
                    AND FEDERALLY ASSISTED PROGRAMS.

    Any payment considered to have been made to any individual 
by reason of section 24 of the Internal Revenue Code of 1986, 
as amended by section 201, shall not be taken into account as 
income and shall not be taken into account as resources for the 
month of receipt and the following month, for purposes of 
determining the eligibility of such individual or any other 
individual for benefits or assistance, or the amount or extent 
of benefits or assistance, under any Federal program or under 
any State or local program financed in whole or in part with 
Federal funds.

SEC. 204. DEPENDENT CARE CREDIT.

    (a) Increase in Dollar Limit.--Subsection (c) of section 21 
(relating to expenses for household and dependent care services 
necessary for gainful employment) is amended--
            (1) by striking ``$2,400'' in paragraph (1) and 
        inserting ``$3,000'', and
            (2) by striking ``$4,800'' in paragraph (2) and 
        inserting ``$6,000''.
    (b) Increase in Applicable Percentage.--Section 21(a)(2) 
(defining applicable percentage) is amended--
            (1) by striking ``30 percent'' and inserting ``35 
        percent'', and
            (2) by striking ``$10,000'' and inserting 
        ``$15,000''.
    (c) Effective Date.--The amendments made by this section 
shall apply to taxable years beginning after December 31, 2002.

SEC. 205. ALLOWANCE OF CREDIT FOR EMPLOYER EXPENSES FOR CHILD CARE 
                    ASSISTANCE.

    (a) In General.--Subpart D of part IV of subchapter A of 
chapter 1 (relating to business related credits), as amended by 
section 619, is further amended by adding at the end the 
following:

``SEC. 45F. EMPLOYER-PROVIDED CHILD CARE CREDIT.

    ``(a) In General.--For purposes of section 38, the 
employer-provided child care credit determined under this 
section for the taxable year is an amount equal to the sum of--
            ``(1) 25 percent of the qualified child care 
        expenditures, and
            ``(2) 10 percent of the qualified child care 
        resource and referral expenditures,
of the taxpayer for such taxable year.
    ``(b) Dollar Limitation.--The credit allowable under 
subsection (a) for any taxable year shall not exceed $150,000.
    ``(c) Definitions.--For purposes of this section--
            ``(1) Qualified child care expenditure.--
                    ``(A) In general.--The term `qualified 
                child care expenditure' means any amount paid 
                or incurred--
                            ``(i) to acquire, construct, 
                        rehabilitate, or expand property--
                                    ``(I) which is to be used 
                                as part of a qualified child 
                                care facility of the taxpayer,
                                    ``(II) with respect to 
                                which a deduction for 
                                depreciation (or amortization 
                                in lieu of depreciation) is 
                                allowable, and
                                    ``(III) which does not 
                                constitute part of the 
                                principal residence (within the 
                                meaning of section 121) of the 
                                taxpayer or any employee of the 
                                taxpayer,
                            ``(ii) for the operating costs of a 
                        qualified child care facility of the 
                        taxpayer, including costs related to 
                        the training of employees, to 
                        scholarship programs, and to the 
                        providing of increased compensation to 
                        employees with higher levels of child 
                        care training, or
                            ``(iii) under a contract with a 
                        qualified child care facility to 
                        provide child care services to 
                        employees of the taxpayer.
                    ``(B) Fair market value.--The term 
                `qualified child care expenditures' shall not 
                include expenses in excess of the fair market 
                value of such care.
            ``(2) Qualified child care facility.--
                    ``(A) In general.--The term `qualified 
                child care facility' means a facility--
                            ``(i) the principal use of which is 
                        to provide child care assistance, and
                            ``(ii) which meets the requirements 
                        of all applicable laws and regulations 
                        of the State or local government in 
                        which it is located, including the 
                        licensing of the facility as a child 
                        care facility.

                Clause (i) shall not apply to a facility which 
                is the principal residence (within the meaning 
                of section 121) of the operator of the 
                facility.
                    ``(B) Special rules with respect to a 
                taxpayer.--A facility shall not be treated as a 
                qualified child care facility with respect to a 
                taxpayer unless--
                            ``(i) enrollment in the facility is 
                        open to employees of the taxpayer 
                        during the taxable year,
                            ``(ii) if the facility is the 
                        principal trade or business of the 
                        taxpayer, at least 30 percent of the 
                        enrollees of such facility are 
                        dependents of employees of the 
                        taxpayer, and
                            ``(iii) the use of such facility 
                        (or the eligibility to use such 
                        facility) does not discriminate in 
                        favor of employees of the taxpayer who 
                        are highly compensated employees 
                        (within the meaning of section 414(q)).
            ``(3) Qualified child care resource and referral 
        expenditure.--
                    ``(A) In general.--The term `qualified 
                child care resource and referral expenditure' 
                means any amount paid or incurred under a 
                contract to provide child care resource and 
                referral services to an employee of the 
                taxpayer.
                    ``(B) Nondiscrimination.--The services 
                shall not be treated as qualified unless the 
                provision of such services (or the eligibility 
                to use such services) does not discriminate in 
                favor of employees of the taxpayer who are 
                highly compensated employees (within the 
                meaning of section 414(q)).
    ``(d) Recapture of Acquisition and Construction Credit.--
            ``(1) In general.--If, as of the close of any 
        taxable year, there is a recapture event with respect 
        to any qualified child care facility of the taxpayer, 
        then the tax of the taxpayer under this chapter for 
        such taxable year shall be increased by an amount equal 
        to the product of--
                    ``(A) the applicable recapture percentage, 
                and
                    ``(B) the aggregate decrease in the credits 
                allowed under section 38 for all prior taxable 
                years which would have resulted if the 
                qualified child care expenditures of the 
                taxpayer described in subsection (c)(1)(A) with 
                respect to such facility had been zero.
            ``(2) Applicable recapture percentage.--
                    ``(A) In general.--For purposes of this 
                subsection, the applicable recapture percentage 
                shall be determined from the following table:

``If the recapture event                        The applicable recapture
    occurs in:                                            percentage is:
        Years 1-3.............................................    100   
        Year 4................................................     85   
        Year 5................................................     70   
        Year 6................................................     55   
        Year 7................................................     40   
        Year 8................................................     25   
        Years 9 and 10........................................     10   
        Years 11 and thereafter...............................      0.  

                    ``(B) Years.--For purposes of subparagraph 
                (A), year 1 shall begin on the first day of the 
                taxable year in which the qualified child care 
                facility is placed in service by the taxpayer.
            ``(3) Recapture event defined.--For purposes of 
        this subsection, the term `recapture event' means--
                    ``(A) Cessation of operation.--The 
                cessation of the operation of the facility as a 
                qualified child care facility.
                    ``(B) Change in ownership.--
                            ``(i) In general.--Except as 
                        provided in clause (ii), the 
                        disposition of a taxpayer's interest in 
                        a qualified child care facility with 
                        respect to which the credit described 
                        in subsection (a) was allowable.
                            ``(ii) Agreement to assume 
                        recapture liability.--Clause (i) shall 
                        not apply if the person acquiring such 
                        interest in the facility agrees in 
                        writing to assume the recapture 
                        liability of the person disposing of 
                        such interest in effect immediately 
                        before such disposition. In the event 
                        of such an assumption, the person 
                        acquiring the interest in the facility 
                        shall be treated as the taxpayer for 
                        purposes of assessing any recapture 
                        liability (computed as if there had 
                        been no change in ownership).
            ``(4) Special rules.--
                    ``(A) Tax benefit rule.--The tax for the 
                taxable year shall be increased under paragraph 
                (1) only with respect to credits allowed by 
                reason of this section which were used to 
                reduce tax liability. In the case of credits 
                not so used to reduce tax liability, the 
                carryforwards and carrybacks under section 39 
                shall be appropriately adjusted.
                    ``(B) No credits against tax.--Any increase 
                in tax under this subsection shall not be 
                treated as a tax imposed by this chapter for 
                purposes of determining the amount of any 
                credit under subpart A, B, or D of this part.
                    ``(C) No recapture by reason of casualty 
                loss.--The increase in tax under this 
                subsection shall not apply to a cessation of 
                operation of the facility as a qualified child 
                care facility by reason of a casualty loss to 
                the extent such loss is restored by 
                reconstruction or replacement within a 
                reasonable period established by the Secretary.
    ``(e) Special Rules.--For purposes of this section--
            ``(1) Aggregation rules.--All persons which are 
        treated as a single employer under subsections (a) and 
        (b) of section 52 shall be treated as a single 
        taxpayer.
            ``(2) Pass-thru in the case of estates and 
        trusts.--Under regulations prescribed by the Secretary, 
        rules similar to the rules of subsection (d) of section 
        52 shall apply.
            ``(3) Allocation in the case of partnerships.--In 
        the case of partnerships, the credit shall be allocated 
        among partners under regulations prescribed by the 
        Secretary.
    ``(f) No Double Benefit.--
            ``(1) Reduction in basis.--For purposes of this 
        subtitle--
                    ``(A) In general.--If a credit is 
                determined under this section with respect to 
                any property by reason of expenditures 
                described in subsection (c)(1)(A), the basis of 
                such property shall be reduced by the amount of 
                the credit so determined.
                    ``(B) Certain dispositions.--If, during any 
                taxable year, there is a recapture amount 
                determined with respect to any property the 
                basis of which was reduced under subparagraph 
                (A), the basis of such property (immediately 
                before the event resulting in such recapture) 
                shall be increased by an amount equal to such 
                recapture amount. For purposes of the preceding 
                sentence, the term `recapture amount' means any 
                increase in tax (or adjustment in carrybacks or 
                carryovers) determined under subsection (d).
            ``(2) Other deductions and credits.--No deduction 
        or credit shall be allowed under any other provision of 
        this chapter with respect to the amount of the credit 
        determined under this section.''.
    (b) Conforming Amendments.--
            (1) Section 38(b), as amended by section 619, is 
        amended by striking ``plus'' at the end of paragraph 
        (13), by striking the period at the end of paragraph 
        (14) and inserting ``, plus'', and by adding at the end 
        the following:
            ``(15) the employer-provided child care credit 
        determined under section 45F.''.
            (2) The table of sections for subpart D of part IV 
        of subchapter A of chapter 1 is amended by adding at 
        the end the following:

        ``Sec. 45F. Employer-provided child care credit.''

            (3) Section 1016(a) is amended by striking ``and'' 
        at the end of paragraph (26), by striking the period at 
        the end of paragraph (27) and inserting ``, and'', and 
        by adding at the end the following:
            ``(28) in the case of a facility with respect to 
        which a credit was allowed under section 45F, to the 
        extent provided in section 45F(f)(1).''.
    (c) Effective Date.--The amendments made by this section 
shall apply to taxable years beginning after December 31, 2001.

                   TITLE III--MARRIAGE PENALTY RELIEF

SEC. 301. ELIMINATION OF MARRIAGE PENALTY IN STANDARD DEDUCTION.

    (a) In General.--Paragraph (2) of section 63(c) (relating 
to standard deduction) is amended--
            (1) by striking ``$5,000'' in subparagraph (A) and 
        inserting ``the applicable percentage of the dollar 
        amount in effect under subparagraph (C) for the taxable 
        year'';
            (2) by adding ``or'' at the end of subparagraph 
        (B);
            (3) by striking ``in the case of'' and all that 
        follows in subparagraph (C) and inserting ``in any 
        other case.''; and
            (4) by striking subparagraph (D).
    (b) Applicable Percentage.--Section 63(c) (relating to 
standard deduction) is amended by adding at the end the 
following new paragraph:
            ``(7) Applicable percentage.--For purposes of 
        paragraph (2), the applicable percentage shall be 
        determined in accordance with the following table:

``For taxable years beginning                             The applicable
    in calendar year--                                   percentage is--
            2005..............................................      174 
            2006..............................................      184 
            2007..............................................      187 
            2008..............................................      190 
            2009 and thereafter...............................   200.''.

    (c) Technical Amendments.--
            (1) Subparagraph (B) of section 1(f)(6) is amended 
        by striking ``(other than with'' and all that follows 
        through ``shall be applied'' and inserting ``(other 
        than with respect to sections 63(c)(4) and 
        151(d)(4)(A)) shall be applied''.
            (2) Paragraph (4) of section 63(c) is amended by 
        adding at the end the following flush sentence:
        ``The preceding sentence shall not apply to the amount 
        referred to in paragraph (2)(A).''.
    (d) Effective Date.--The amendments made by this section 
shall apply to taxable years beginning after December 31, 2004.

SEC. 302. PHASEOUT OF MARRIAGE PENALTY IN 15-PERCENT BRACKET.

    (a) In General.--Section 1(f) (relating to adjustments in 
tax tables so that inflation will not result in tax increases) 
is amended by adding at the end the following new paragraph:
            ``(8) Phaseout of marriage penalty in 15-percent 
        bracket.--
                    ``(A) In general.--With respect to taxable 
                years beginning after December 31, 2004, in 
                prescribing the tables under paragraph (1)--
                            ``(i) the maximum taxable income in 
                        the 15-percent rate bracket in the 
                        table contained in subsection (a) (and 
                        the minimum taxable income in the next 
                        higher taxable income bracket in such 
                        table) shall be the applicable 
                        percentage of the maximum taxable 
                        income in the 15-percent rate bracket 
                        in the table contained in subsection 
                        (c) (after any other adjustment under 
                        this subsection), and
                            ``(ii) the comparable taxable 
                        income amounts in the table contained 
                        in subsection (d) shall be \1/2\ of the 
                        amounts determined under clause (i).
                    ``(B) Applicable percentage.--For purposes 
                of subparagraph (A), the applicable percentage 
                shall be determined in accordance with the 
                following table:

``For taxable years beginning                             The applicable
    in calendar year--                                   percentage is--
            2005..............................................      180 
            2006..............................................      187 
            2007..............................................      193 
            2008 and thereafter...............................      200.

                    ``(C) Rounding.--If any amount determined 
                under subparagraph (A)(i) is not a multiple of 
                $50, such amount shall be rounded to the next 
                lowest multiple of $50.''.
    (b) Technical Amendments.--
            (1) Subparagraph (A) of section 1(f)(2) is amended 
        by inserting ``except as provided in paragraph (8),'' 
        before ``by increasing''.
            (2) The heading for subsection (f) of section 1 is 
        amended by inserting ``Phaseout of Marriage Penalty in 
        15-Percent Bracket;'' before ``Adjustments''.
    (c) Effective Date.--The amendments made by this section 
shall apply to taxable years beginning after December 31, 2004.

SEC. 303. MARRIAGE PENALTY RELIEF FOR EARNED INCOME CREDIT; EARNED 
                    INCOME TO INCLUDE ONLY AMOUNTS INCLUDIBLE IN GROSS 
                    INCOME; SIMPLIFICATION OF EARNED INCOME CREDIT.

    (a) Increased Phaseout Amount.--
            (1) In general.--Section 32(b)(2) (relating to 
        amounts) is amended--
                    (A) by striking ``Amounts.--The earned'' 
                and inserting ``Amounts.--
                    ``(A) In general.--Subject to subparagraph 
                (B), the earned'', and
                    (B) by adding at the end the following new 
                subparagraph:
                    ``(B) Joint returns.--In the case of a 
                joint return filed by an eligible individual 
                and such individual's spouse, the phaseout 
                amount determined under subparagraph (A) shall 
                be increased by--
                            ``(i) $1,000 in the case of taxable 
                        years beginning in 2002, 2003, and 
                        2004,
                            ``(ii) $2,000 in the case of 
                        taxable years beginning in 2005, 2006, 
                        and 2007, and
                            ``(iii) $3,000 in the case of 
                        taxable years beginning after 2007.''.
            (2) Inflation adjustment.--Paragraph (1)(B) of 
        section 32(j) (relating to inflation adjustments) is 
        amended to read as follows:
                    ``(B) the cost-of-living adjustment 
                determined under section 1(f)(3) for the 
                calendar year in which the taxable year begins, 
                determined--
                            ``(i) in the case of amounts in 
                        subsections (b)(2)(A) and (i)(1), by 
                        substituting `calendar year 1995' for 
                        `calendar year 1992' in subparagraph 
                        (B) thereof, and
                            ``(ii) in the case of the $3,000 
                        amount in subsection (b)(2)(B)(iii), by 
                        substituting `calendar year 2007' for 
                        `calendar year 1992' in subparagraph 
                        (B) of such section 1.''.
            (3) Rounding.--Section 32(j)(2)(A) (relating to 
        rounding) is amended by striking ``subsection (b)(2)'' 
        and inserting ``subsection (b)(2)(A) (after being 
        increased under subparagraph (B) thereof)''.
    (b) Earned Income To Include Only Amounts Includible in 
Gross Income.--Clause (i) of section 32(c)(2)(A) (defining 
earned income) is amended by inserting ``, but only if such 
amounts are includible in gross income for the taxable year'' 
after ``other employee compensation''.
    (c) Repeal of Reduction of Credit to Taxpayers Subject to 
Alternative Minimum Tax.--Section 32(h) is repealed.
    (d) Replacement of Modified Adjusted Gross Income With 
Adjusted Gross Income.--
            (1) In general.--Section 32(a)(2)(B) is amended by 
        striking ``modified''.
            (2) Conforming amendments.--
                    (A) Section 32(c) is amended by striking 
                paragraph (5).
                    (B) Section 32(f)(2)(B) is amended by 
                striking ``modified'' each place it appears.
    (e) Relationship Test.--
            (1) In general.--Clause (i) of section 32(c)(3)(B) 
        (relating to relationship test) is amended to read as 
        follows:
                            ``(i) In general.--An individual 
                        bears a relationship to the taxpayer 
                        described in this subparagraph if such 
                        individual is--
                                    ``(I) a son, daughter, 
                                stepson, or stepdaughter, or a 
                                descendant of any such 
                                individual,
                                    ``(II) a brother, sister, 
                                stepbrother, or stepsister, or 
                                a descendant of any such 
                                individual, who the taxpayer 
                                cares for as the taxpayer's own 
                                child, or
                                    ``(III) an eligible foster 
                                child of the taxpayer.''.
            (2) Eligible foster child.--
                    (A) In general.--Clause (iii) of section 
                32(c)(3)(B) is amended to read as follows:
                            ``(iii) Eligible foster child.--For 
                        purposes of clause (i), the term 
                        `eligible foster child' means an 
                        individual not described in subclause 
                        (I) or (II) of clause (i) who--
                                    ``(I) is placed with the 
                                taxpayer by an authorized 
                                placement agency, and
                                    ``(II) the taxpayer cares 
                                for as the taxpayer's own 
                                child.''.
                    (B) Conforming amendment.--Section 
                32(c)(3)(A)(ii) is amended by striking ``except 
                as provided in subparagraph (B)(iii),''.
    (f) 2 or More Claiming Qualifying Child.--Section 
32(c)(1)(C) is amended to read as follows:
                    ``(C) 2 or more claiming qualifying 
                child.--
                            ``(i) In general.--Except as 
                        provided in clause (ii), if (but for 
                        this paragraph) an individual may be 
                        claimed, and is claimed, as a 
                        qualifying child by 2 or more taxpayers 
                        for a taxable year beginning in the 
                        same calendar year, such individual 
                        shall be treated as the qualifying 
                        child of the taxpayer who is--
                                    ``(I) a parent of the 
                                individual, or
                                    ``(II) if subclause (I) 
                                does not apply, the taxpayer 
                                with the highest adjusted gross 
                                income for such taxable year.
                            ``(ii) More than 1 claiming 
                        credit.--If the parents claiming the 
                        credit with respect to any qualifying 
                        child do not file a joint return 
                        together, such child shall be treated 
                        as the qualifying child of--
                                    ``(I) the parent with whom 
                                the child resided for the 
                                longest period of time during 
                                the taxable year, or
                                    ``(II) if the child resides 
                                with both parents for the same 
                                amount of time during such 
                                taxable year, the parent with 
                                the highest adjusted gross 
                                income.''.
    (g) Expansion of Mathematical Error Authority.--Paragraph 
(2) of section 6213(g) is amended by striking ``and'' at the 
end of subparagraph (K), by striking the period at the end of 
subparagraph (L) and inserting ``, and'', and by inserting 
after subparagraph (L) the following new subparagraph:
                    ``(M) the entry on the return claiming the 
                credit under section 32 with respect to a child 
                if, according to the Federal Case Registry of 
                Child Support Orders established under section 
                453(h) of the Social Security Act, the taxpayer 
                is a noncustodial parent of such child.''
    (h) Clerical Amendment.--Subparagraph (E) of section 
32(c)(3) is amended by striking ``subparagraphs (A)(ii) and 
(B)(iii)(II)'' and inserting ``subparagraph (A)(ii)''.
    (i) Effective Dates.--
            (1) In general.--Except as provided in paragraph 
        (2), the amendments made by this section shall apply to 
        taxable years beginning after December 31, 2001.
            (2) Subsection (g).--The amendment made by 
        subsection (g) shall take effect on January 1, 2004.

               TITLE IV--AFFORDABLE EDUCATION PROVISIONS

                Subtitle A--Education Savings Incentives

SEC. 401. MODIFICATIONS TO EDUCATION INDIVIDUAL RETIREMENT ACCOUNTS.

    (a) Maximum Annual Contributions.--
            (1) In general.--Section 530(b)(1)(A)(iii) 
        (defining education individual retirement account) is 
        amended by striking ``$500'' and inserting ``$2,000''.
            (2) Conforming amendment.--Section 4973(e)(1)(A) is 
        amended by striking ``$500'' and inserting ``$2,000''.
    (b) Modification of AGI Limits To Remove Marriage 
Penalty.--Section 530(c)(1) (relating to reduction in permitted 
contributions based on adjusted gross income) is amended--
            (1) by striking ``$150,000'' in subparagraph 
        (A)(ii) and inserting ``$190,000'', and
            (2) by striking ``$10,000'' in subparagraph (B) and 
        inserting ``$30,000''.
    (c) Tax-Free Expenditures for Elementary and Secondary 
School Expenses.--
            (1) In general.--Section 530(b)(2) (defining 
        qualified higher education expenses) is amended to read 
        as follows:
            ``(2) Qualified education expenses.--
                    ``(A) In general.--The term `qualified 
                education expenses' means--
                            ``(i) qualified higher education 
                        expenses (as defined in section 
                        529(e)(3)), and
                            ``(ii) qualified elementary and 
                        secondary education expenses (as 
                        defined in paragraph (4)).
                    ``(B) Qualified state tuition programs.--
                Such term shall include any contribution to a 
                qualified State tuition program (as defined in 
                section 529(b)) on behalf of the designated 
                beneficiary (as defined in section 529(e)(1)); 
                but there shall be no increase in the 
                investment in the contract for purposes of 
                applying section 72 by reason of any portion of 
                such contribution which is not includible in 
                gross income by reason of subsection (d)(2).''.
            (2) Qualified elementary and secondary education 
        expenses.--Section 530(b) (relating to definitions and 
        special rules) is amended by adding at the end the 
        following new paragraph:
            ``(4) Qualified elementary and secondary education 
        expenses.--
                    ``(A) In general.--The term `qualified 
                elementary and secondary education expenses' 
                means--
                            ``(i) expenses for tuition, fees, 
                        academic tutoring, special needs 
                        services in the case of a special needs 
                        beneficiary, books, supplies, and other 
                        equipment which are incurred in 
                        connection with the enrollment or 
                        attendance of the designated 
                        beneficiary of the trust as an 
                        elementary or secondary school student 
                        at a public, private, or religious 
                        school,
                            ``(ii) expenses for room and board, 
                        uniforms, transportation, and 
                        supplementary items and services 
                        (including extended day programs) which 
                        are required or provided by a public, 
                        private, or religious school in 
                        connection with such enrollment or 
                        attendance, and
                            ``(iii) expenses for the purchase 
                        of any computer technology or equipment 
                        (as defined in section 170(e)(6)(F)(i)) 
                        or Internet access and related 
                        services, if such technology, 
                        equipment, or services are to be used 
                        by the beneficiary and the 
                        beneficiary's family during any of the 
                        years the beneficiary is in school.

                Clause (iii) shall not include expenses for 
                computer software designed for sports, games, 
                or hobbies unless the software is predominantly 
                educational in nature.
                    ``(B) School.--The term `school' means any 
                school which provides elementary education or 
                secondary education (kindergarten through grade 
                12), as determined under State law.''.
            (3) Conforming amendments.--Section 530 is 
        amended--
                    (A) by striking ``higher'' each place it 
                appears in subsections (b)(1) and (d)(2), and
                    (B) by striking ``higher'' in the heading 
                for subsection (d)(2).
    (d) Waiver of Age Limitations for Children With Special 
Needs.--Section 530(b)(1) (defining education individual 
retirement account) is amended by adding at the end the 
following flush sentence:

        ``The age limitations in subparagraphs (A)(ii) and (E), 
        and paragraphs (5) and (6) of subsection (d), shall not 
        apply to any designated beneficiary with special needs 
        (as determined under regulations prescribed by the 
        Secretary).''.
    (e) Entities Permitted To Contribute to Accounts.--Section 
530(c)(1) (relating to reduction in permitted contributions 
based on adjusted gross income) is amended by striking ``The 
maximum amount which a contributor'' and inserting ``In the 
case of a contributor who is an individual, the maximum amount 
the contributor''.
    (f) Time When Contributions Deemed Made.--
            (1) In general.--Section 530(b) (relating to 
        definitions and special rules), as amended by 
        subsection (c)(2), is amended by adding at the end the 
        following new paragraph:
            ``(5) Time when contributions deemed made.--An 
        individual shall be deemed to have made a contribution 
        to an education individual retirement account on the 
        last day of the preceding taxable year if the 
        contribution is made on account of such taxable year 
        and is made not later than the time prescribed by law 
        for filing the return for such taxable year (not 
        including extensions thereof).''.
            (2) Extension of time to return excess 
        contributions.--Subparagraph (C) of section 530(d)(4) 
        (relating to additional tax for distributions not used 
        for educational expenses) is amended--
                    (A) by striking clause (i) and inserting 
                the following new clause:
                            ``(i) such distribution is made 
                        before the first day of the sixth month 
                        of the taxable year following the 
                        taxable year, and'', and
                    (B) by striking ``due date of return'' in 
                the heading and inserting ``certain date''.
    (g) Coordination With Hope and Lifetime Learning Credits 
and Qualified Tuition Programs.--
            (1) In general.--Section 530(d)(2)(C) is amended to 
        read as follows:
                    ``(C) Coordination with hope and lifetime 
                learning credits and qualified tuition 
                programs.--For purposes of subparagraph (A)--
                            ``(i) Credit coordination.--The 
                        total amount of qualified higher 
                        education expenses with respect to an 
                        individual for the taxable year shall 
                        be reduced--
                                    ``(I) as provided in 
                                section 25A(g)(2), and
                                    ``(II) by the amount of 
                                such expenses which were taken 
                                into account in determining the 
                                credit allowed to the taxpayer 
                                or any other person under 
                                section 25A.
                            ``(ii) Coordination with qualified 
                        tuition programs.--If, with respect to 
                        an individual for any taxable year--
                                    ``(I) the aggregate 
                                distributions during such year 
                                to which subparagraph (A) and 
                                section 529(c)(3)(B) apply, 
                                exceed
                                    ``(II) the total amount of 
                                qualified education expenses 
                                (after the application of 
                                clause (i)) for such year,

                        the taxpayer shall allocate such 
                        expenses among such distributions for 
                        purposes of determining the amount of 
                        the exclusion under subparagraph (A) 
                        and section 529(c)(3)(B).''.
            (2) Conforming amendments.--
                    (A) Subsection (e) of section 25A is 
                amended to read as follows:
    ``(e) Election Not To Have Section Apply.--A taxpayer may 
elect not to have this section apply with respect to the 
qualified tuition and related expenses of an individual for any 
taxable year.''.
                    (B) Section 135(d)(2)(A) is amended by 
                striking ``allowable'' and inserting 
                ``allowed''.
                    (C) Section 530(d)(2)(D) is amended--
                            (i) by striking ``or credit'' and 
                        inserting ``, credit, or exclusion'', 
                        and
                            (ii) by striking ``credit or 
                        deduction'' in the heading and 
                        inserting ``deduction, credit, or 
                        exclusion''.
                    (D) Section 4973(e)(1) is amended by adding 
                ``and'' at the end of subparagraph (A), by 
                striking subparagraph (B), and by redesignating 
                subparagraph (C) as subparagraph (B).
    (h) Effective Date.--The amendments made by this section 
shall apply to taxable years beginning after December 31, 2001.

SEC. 402. MODIFICATIONS TO QUALIFIED TUITION PROGRAMS.

    (a) Eligible Educational Institutions Permitted To Maintain 
Qualified Tuition Programs.--
            (1) In general.--Section 529(b)(1) (defining 
        qualified State tuition program) is amended--
                    (A) by inserting ``or by 1 or more eligible 
                educational institutions'' after ``maintained 
                by a State or agency or instrumentality thereof 
                '' in the matter preceding subparagraph (A), 
                and
                    (B) by adding at the end the following new 
                flush sentence:
        ``Except to the extent provided in regulations, a 
        program established and maintained by 1 or more 
        eligible educational institutions shall not be treated 
        as a qualified tuition program unless such program 
        provides that amounts are held in a qualified trust and 
        such program has received a ruling or determination 
        that such program meets the applicable requirements for 
        a qualified tuition program. For purposes of the 
        preceding sentence, the term `qualified trust' means a 
        trust which is created or organized in the United 
        States for the exclusive benefit of designated 
        beneficiaries and with respect to which the 
        requirements of paragraphs (2) and (5) of section 
        408(a) are met.''.
            (2) Private qualified tuition programs limited to 
        benefit plans.--Clause (ii) of section 529(b)(1)(A) is 
        amended by inserting ``in the case of a program 
        established and maintained by a State or agency or 
        instrumentality thereof,'' before ``may make''.
            (3) Additional tax on nonqualified withdrawals.--
        Section 529 is amended--
                    (A) by striking paragraph (3) of subsection 
                (b) and by redesignating paragraphs (4), (5), 
                (6), and (7) of such subsection as paragraphs 
                (3), (4), (5), and (6), respectively, and
                    (B) by adding at the end of subsection (c) 
                the following new paragraph:
            ``(6) Additional tax.--The tax imposed by section 
        530(d)(4) shall apply to any payment or distribution 
        from a qualified tuition program in the same manner as 
        such tax applies to a payment or distribution from an 
        education individual retirement account. This paragraph 
        shall not apply to any payment or distribution in any 
        taxable year beginning before January 1, 2004, which is 
        includible in gross income but used for qualified 
        higher education expenses of the designated 
        beneficiary.''.
            (4) Conforming amendments.--
                    (A) Sections 72(e)(9), 135(c)(2)(C), 
                135(d)(1)(D), 529, 530(b)(2)(B), 4973(e), and 
                6693(a)(2)(C) are amended by striking 
                ``qualified State tuition'' each place it 
                appears and inserting ``qualified tuition''.
                    (B) The headings for sections 72(e)(9) and 
                135(c)(2)(C) are amended by striking 
                ``qualified state tuition'' each place it 
                appears and inserting ``qualified tuition''.
                    (C) The headings for sections 529(b) and 
                530(b)(2)(B) are amended by striking 
                ``Qualified state tuition'' each place it 
                appears and inserting ``Qualified tuition''.
                    (D) The heading for section 529 is amended 
                by striking ``STATE''.
                    (E) The item relating to section 529 in the 
                table of sections for part VIII of subchapter F 
                of chapter 1 is amended by striking ``State''.
    (b) Exclusion From Gross Income of Education Distributions 
From Qualified Tuition Programs.--
            (1) In general.--Section 529(c)(3)(B) (relating to 
        distributions) is amended to read as follows:
                    ``(B) Distributions for qualified higher 
                education expenses.--For purposes of this 
                paragraph--
                            ``(i) In-kind distributions.--No 
                        amount shall be includible in gross 
                        income under subparagraph (A) by reason 
                        of a distribution which consists of 
                        providing a benefit to the distributee 
                        which, if paid for by the distributee, 
                        would constitute payment of a qualified 
                        higher education expense.
                            ``(ii) Cash distributions.--In the 
                        case of distributions not described in 
                        clause (i), if--
                                    ``(I) such distributions do 
                                not exceed the qualified higher 
                                education expenses (reduced by 
                                expenses described in clause 
                                (i)), no amount shall be 
                                includible in gross income, and
                                    ``(II) in any other case, 
                                the amount otherwise includible 
                                in gross income shall be 
                                reduced by an amount which 
                                bears the same ratio to such 
                                amount as such expenses bear to 
                                such distributions.
                            ``(iii) Exception for institutional 
                        programs.--In the case of any taxable 
                        year beginning before January 1, 2004, 
                        clauses (i) and (ii) shall not apply 
                        with respect to any distribution during 
                        such taxable year under a qualified 
                        tuition program established and 
                        maintained by 1 or more eligible 
                        educational institutions.
                            ``(iv) Treatment as 
                        distributions.--Any benefit furnished 
                        to a designated beneficiary under a 
                        qualified tuition program shall be 
                        treated as a distribution to the 
                        beneficiary for purposes of this 
                        paragraph.
                            ``(v) Coordination with hope and 
                        lifetime learning credits.--The total 
                        amount of qualified higher education 
                        expenses with respect to an individual 
                        for the taxable year shall be reduced--
                                    ``(I) as provided in 
                                section 25A(g)(2), and
                                    ``(II) by the amount of 
                                such expenses which were taken 
                                into account in determining the 
                                credit allowed to the taxpayer 
                                or any other person under 
                                section 25A.
                            ``(vi) Coordination with education 
                        individual retirement accounts.--If, 
                        with respect to an individual for any 
                        taxable year--
                                    ``(I) the aggregate 
                                distributions to which clauses 
                                (i) and (ii) and section 
                                530(d)(2)(A) apply, exceed
                                    ``(II) the total amount of 
                                qualified higher education 
                                expenses otherwise taken into 
                                account under clauses (i) and 
                                (ii) (after the application of 
                                clause (v)) for such year,

                        the taxpayer shall allocate such 
                        expenses among such distributions for 
                        purposes of determining the amount of 
                        the exclusion under clauses (i) and 
                        (ii) and section 530(d)(2)(A).''.
            (2) Conforming amendments.--
                    (A) Section 135(d)(2)(B) is amended by 
                striking ``the exclusion under section 
                530(d)(2)'' and inserting ``the exclusions 
                under sections 529(c)(3)(B) and 530(d)(2)''.
                    (B) Section 221(e)(2)(A) is amended by 
                inserting ``529,'' after ``135,''.
    (c) Rollover to Different Program for Benefit of Same 
Designated Beneficiary.--Section 529(c)(3)(C) (relating to 
change in beneficiaries) is amended--
            (1) by striking ``transferred to the credit'' in 
        clause (i) and inserting ``transferred--
                                    ``(I) to another qualified 
                                tuition program for the benefit 
                                of the designated beneficiary, 
                                or
                                    ``(II) to the credit'',
            (2) by adding at the end the following new clause:
                            ``(iii) Limitation on certain 
                        rollovers.--Clause (i)(I) shall not 
                        apply to any transfer if such transfer 
                        occurs within 12 months from the date 
                        of a previous transfer to any qualified 
                        tuition program for the benefit of the 
                        designated beneficiary.'', and
            (3) by inserting ``or programs'' after 
        ``beneficiaries'' in the heading.
    (d) Member of Family Includes First Cousin.--Section 
529(e)(2) (defining member of family) is amended by striking 
``and'' at the end of subparagraph (B), by striking the period 
at the end of subparagraph (C) and by inserting ``; and'', and 
by adding at the end the following new subparagraph:
                    ``(D) any first cousin of such 
                beneficiary.''.
    (e) Adjustment of Limitation on Room and Board 
Distributions.--Section 529(e)(3)(B)(ii) is amended to read as 
follows:
                            ``(ii) Limitation.--The amount 
                        treated as qualified higher education 
                        expenses by reason of clause (i) shall 
                        not exceed--
                                    ``(I) the allowance 
                                (applicable to the student) for 
                                room and board included in the 
                                cost of attendance (as defined 
                                in section 472 of the Higher 
                                Education Act of 1965 (20 
                                U.S.C. 1087ll), as in effect on 
                                the date of the enactment of 
                                the Economic Growth and Tax 
                                Relief Reconciliation Act of 
                                2001) as determined by the 
                                eligible educational 
                                institution for such period, or
                                    ``(II) if greater, the 
                                actual invoice amount the 
                                student residing in housing 
                                owned or operated by the 
                                eligible educational 
                                institution is charged by such 
                                institution for room and board 
                                costs for such period.''.
    (f) Special Needs Services.--Subparagraph (A) of section 
529(e)(3) (defining qualified higher education expenses) is 
amended to read as follows:
                    ``(A) In general.--The term `qualified 
                higher education expenses' means--
                            ``(i) tuition, fees, books, 
                        supplies, and equipment required for 
                        the enrollment or attendance of a 
                        designated beneficiary at an eligible 
                        educational institution; and
                            ``(ii) expenses for special needs 
                        services in the case of a special needs 
                        beneficiary which are incurred in 
                        connection with such enrollment or 
                        attendance.''.
    (g) Technical Amendments.--Section 529(c)(3)(D) is 
amended--
            (1) by inserting ``except to the extent provided by 
        the Secretary,'' before ``all distributions'' in clause 
        (ii), and
            (2) by inserting ``except to the extent provided by 
        the Secretary,'' before ``the value'' in clause (iii).
    (h) Effective Date.--The amendments made by this section 
shall apply to taxable years beginning after December 31, 2001.

                   Subtitle B--Educational Assistance

SEC. 411. EXTENSION OF EXCLUSION FOR EMPLOYER-PROVIDED EDUCATIONAL 
                    ASSISTANCE.

    (a) In General.--Section 127 (relating to exclusion for 
educational assistance programs) is amended by striking 
subsection (d) and by redesignating subsection (e) as 
subsection (d).
    (b) Repeal of Limitation on Graduate Education.--The last 
sentence of section 127(c)(1) is amended by striking ``, and 
such term also does not include any payment for, or the 
provision of any benefits with respect to, any graduate level 
course of a kind normally taken by an individual pursuing a 
program leading to a law, business, medical, or other advanced 
academic or professional degree''.
    (c) Conforming Amendment.--Section 51A(b)(5)(B)(iii) is 
amended by striking ``or would be so excludable but for section 
127(d)''.
    (d) Effective Date.--The amendments made by this section 
shall apply with respect to expenses relating to courses 
beginning after December 31, 2001.

SEC. 412. ELIMINATION OF 60-MONTH LIMIT AND INCREASE IN INCOME 
                    LIMITATION ON STUDENT LOAN INTEREST DEDUCTION.

    (a) Elimination of 60-Month Limit.--
            (1) In general.--Section 221 (relating to interest 
        on education loans), as amended by section 
        402(b)(2)(B), is amended by striking subsection (d) and 
        by redesignating subsections (e), (f), and (g) as 
        subsections (d), (e), and (f), respectively.
            (2) Conforming amendment.--Section 6050S(e) is 
        amended by striking ``section 221(e)(1)'' and inserting 
        ``section 221(d)(1)''.
            (3) Effective date.--The amendments made by this 
        subsection shall apply with respect to any loan 
        interest paid after December 31, 2001, in taxable years 
        ending after such date.
    (b) Increase in Income Limitation.--
            (1) In general.--Section 221(b)(2)(B) (relating to 
        amount of reduction) is amended by striking clauses (i) 
        and (ii) and inserting the following:
                            ``(i) the excess of--
                                    ``(I) the taxpayer's 
                                modified adjusted gross income 
                                for such taxable year, over
                                    ``(II) $50,000 ($100,000 in 
                                the case of a joint return), 
                                bears to
                            ``(ii) $15,000 ($30,000 in the case 
                        of a joint return).''.
            (2) Conforming amendment.--Section 221(g)(1) is 
        amended by striking ``$40,000 and $60,000 amounts'' and 
        inserting ``$50,000 and $100,000 amounts''.
            (3) Effective date.--The amendments made by this 
        subsection shall apply to taxable years ending after 
        December 31, 2001.

SEC. 413. EXCLUSION OF CERTAIN AMOUNTS RECEIVED UNDER THE NATIONAL 
                    HEALTH SERVICE CORPS SCHOLARSHIP PROGRAM AND THE F. 
                    EDWARD HEBERT ARMED FORCES HEALTH PROFESSIONS 
                    SCHOLARSHIP AND FINANCIAL ASSISTANCE PROGRAM.

    (a) In General.--Section 117(c) (relating to the exclusion 
from gross income amounts received as a qualified scholarship) 
is amended--
            (1) by striking ``Subsections (a)'' and inserting 
        the following:
            ``(1) In general.--Except as provided in paragraph 
        (2), subsections (a)'', and
            (2) by adding at the end the following new 
        paragraph:
            ``(2) Exceptions.--Paragraph (1) shall not apply to 
        any amount received by an individual under--
                    ``(A) the National Health Service Corps 
                Scholarship Program under section 338A(g)(1)(A) 
                of the Public Health Service Act, or
                    ``(B) the Armed Forces Health Professions 
                Scholarship and Financial Assistance program 
                under subchapter I of chapter 105 of title 10, 
                United States Code.''.
    (b) Effective Date.--The amendments made by subsection (a) 
shall apply to amounts received in taxable years beginning 
after December 31, 2001.

  Subtitle C--Liberalization of Tax-Exempt Financing Rules for Public 
                          School Construction

SEC. 421. ADDITIONAL INCREASE IN ARBITRAGE REBATE EXCEPTION FOR 
                    GOVERNMENTAL BONDS USED TO FINANCE EDUCATIONAL 
                    FACILITIES.

    (a) In General.--Section 148(f)(4)(D)(vii) (relating to 
increase in exception for bonds financing public school capital 
expenditures) is amended by striking ``$5,000,000'' the second 
place it appears and inserting ``$10,000,000''.
    (b) Effective Date.--The amendment made by subsection (a) 
shall apply to obligations issued in calendar years beginning 
after December 31, 2001.

SEC. 422. TREATMENT OF QUALIFIED PUBLIC EDUCATIONAL FACILITY BONDS AS 
                    EXEMPT FACILITY BONDS.

    (a) Treatment as Exempt Facility Bond.--Subsection (a) of 
section 142 (relating to exempt facility bond) is amended by 
striking ``or'' at the end of paragraph (11), by striking the 
period at the end of paragraph (12) and inserting ``, or'', and 
by adding at the end the following new paragraph:
            ``(13) qualified public educational facilities.''.
    (b) Qualified Public Educational Facilities.--Section 142 
(relating to exempt facility bond) is amended by adding at the 
end the following new subsection:
    ``(k) Qualified Public Educational Facilities.--
            ``(1) In general.--For purposes of subsection 
        (a)(13), the term `qualified public educational 
        facility' means any school facility which is--
                    ``(A) part of a public elementary school or 
                a public secondary school, and
                    ``(B) owned by a private, for-profit 
                corporation pursuant to a public-private 
                partnership agreement with a State or local 
                educational agency described in paragraph (2).
            ``(2) Public-private partnership agreement 
        described.--A public-private partnership agreement is 
        described in this paragraph if it is an agreement--
                    ``(A) under which the corporation agrees--
                            ``(i) to do 1 or more of the 
                        following: construct, rehabilitate, 
                        refurbish, or equip a school facility, 
                        and
                            ``(ii) at the end of the term of 
                        the agreement, to transfer the school 
                        facility to such agency for no 
                        additional consideration, and
                    ``(B) the term of which does not exceed the 
                term of the issue to be used to provide the 
                school facility.
            ``(3) School facility.--For purposes of this 
        subsection, the term `school facility' means--
                    ``(A) any school building,
                    ``(B) any functionally related and 
                subordinate facility and land with respect to 
                such building, including any stadium or other 
                facility primarily used for school events, and
                    ``(C) any property, to which section 168 
                applies (or would apply but for section 179), 
                for use in a facility described in subparagraph 
                (A) or (B).
            ``(4) Public schools.--For purposes of this 
        subsection, the terms `elementary school' and 
        `secondary school' have the meanings given such terms 
        by section 14101 of the Elementary and Secondary 
        Education Act of 1965 (20 U.S.C. 8801), as in effect on 
        the date of the enactment of this subsection.
            ``(5) Annual aggregate face amount of tax-exempt 
        financing.--
                    ``(A) In general.--An issue shall not be 
                treated as an issue described in subsection 
                (a)(13) if the aggregate face amount of bonds 
                issued by the State pursuant thereto (when 
                added to the aggregate face amount of bonds 
                previously so issued during the calendar year) 
                exceeds an amount equal to the greater of--
                            ``(i) $10 multiplied by the State 
                        population, or
                            ``(ii) $5,000,000.
                    ``(B) Allocation rules.--
                            ``(i) In general.--Except as 
                        otherwise provided in this 
                        subparagraph, the State may allocate 
                        the amount described in subparagraph 
                        (A) for any calendar year in such 
                        manner as the State determines 
                        appropriate.
                            ``(ii) Rules for carryforward of 
                        unused limitation.--A State may elect 
                        to carry forward an unused limitation 
                        for any calendar year for 3 calendar 
                        years following the calendar year in 
                        which the unused limitation arose under 
                        rules similar to the rules of section 
                        146(f), except that the only purpose 
                        for which the carryforward may be 
                        elected is the issuance of exempt 
                        facility bonds described in subsection 
                        (a)(13).''.
    (c) Exemption From General State Volume Caps.--Paragraph 
(3) of section 146(g) (relating to exception for certain bonds) 
is amended--
            (1) by striking ``or (12)'' and inserting ``(12), 
        or (13)'', and
            (2) by striking ``and environmental enhancements of 
        hydroelectric generating facilities'' and inserting 
        ``environmental enhancements of hydroelectric 
        generating facilities, and qualified public educational 
        facilities''.
    (d) Exemption From Limitation on Use for Land 
Acquisition.--Section 147(h) (relating to certain rules not to 
apply to mortgage revenue bonds, qualified student loan bonds, 
and qualified 501(c)(3) bonds) is amended by adding at the end 
the following new paragraph:
            ``(3) Exempt facility bonds for qualified public-
        private schools.--Subsection (c) shall not apply to any 
        exempt facility bond issued as part of an issue 
        described in section 142(a)(13) (relating to qualified 
        public educational facilities).''.
    (e) Conforming Amendment.--The heading for section 147(h) 
is amended by striking ``Mortgage Revenue Bonds, Qualified 
Student Loan Bonds, and Qualified 501(c)(3) Bonds'' and 
inserting ``Certain Bonds''.
    (f) Effective Date.--The amendments made by this section 
shall apply to bonds issued after December 31, 2001.

                      Subtitle D--Other Provisions

SEC. 431. DEDUCTION FOR HIGHER EDUCATION EXPENSES.

    (a) Deduction Allowed.--Part VII of subchapter B of chapter 
1 (relating to additional itemized deductions for individuals) 
is amended by redesignating section 222 as section 223 and by 
inserting after section 221 the following:

``SEC. 222. QUALIFIED TUITION AND RELATED EXPENSES.

    ``(a) Allowance of Deduction.--In the case of an 
individual, there shall be allowed as a deduction an amount 
equal to the qualified tuition and related expenses paid by the 
taxpayer during the taxable year.
    ``(b) Dollar limitations.--
            ``(1) In general.--The amount allowed as a 
        deduction under subsection (a) with respect to the 
        taxpayer for any taxable year shall not exceed the 
        applicable dollar limit.
            ``(2) Applicable dollar limit.--
                    ``(A) 2002 and 2003.--In the case of a 
                taxable year beginning in 2002 or 2003, the 
                applicable dollar limit shall be equal to--
                            ``(i) in the case of a taxpayer 
                        whose adjusted gross income for the 
                        taxable year does not exceed $65,000 
                        ($130,000 in the case of a joint 
                        return), $3,000, and--
                            ``(ii) in the case of any other 
                        taxpayer, zero.
                    ``(B) 2004 and 2005.--In the case of a 
                taxable year beginning in 2004 or 2005, the 
                applicable dollar amount shall be equal to--
                            ``(i) in the case of a taxpayer 
                        whose adjusted gross income for the 
                        taxable year does not exceed $65,000 
                        ($130,000 in the case of a joint 
                        return), $4,000,
                            ``(ii) in the case of a taxpayer 
                        not described in clause (i) whose 
                        adjusted gross income for the taxable 
                        year does not exceed $80,000 ($160,000 
                        in the case of a joint return), $2,000, 
                        and
                            ``(iii) in the case of any other 
                        taxpayer, zero.
                    ``(C) Adjusted gross income.--For purposes 
                of this paragraph, adjusted gross income shall 
                be determined--
                            ``(i) without regard to this 
                        section and sections 911, 931, and 933, 
                        and
                            ``(ii) after application of 
                        sections 86, 135, 137, 219, 221, and 
                        469.
    ``(c) No Double Benefit.--
            ``(1) In general.--No deduction shall be allowed 
        under subsection (a) for any expense for which a 
        deduction is allowed to the taxpayer under any other 
        provision of this chapter.
            ``(2) Coordination with other education 
        incentives.--
                    ``(A) Denial of deduction if credit 
                elected.--No deduction shall be allowed under 
                subsection (a) for a taxable year with respect 
                to the qualified tuition and related expenses 
                with respect to an individual if the taxpayer 
                or any other person elects to have section 25A 
                apply with respect to such individual for such 
                year.
                    ``(B) Coordination with exclusions.--The 
                total amount of qualified tuition and related 
                expenses shall be reduced by the amount of such 
                expenses taken into account in determining any 
                amount excluded under section 135, 529(c)(1), 
                or 530(d)(2). For purposes of the preceding 
                sentence, the amount taken into account in 
                determining the amount excluded under section 
                529(c)(1) shall not include that portion of the 
                distribution which represents a return of any 
                contributions to the plan.
            ``(3) Dependents.--No deduction shall be allowed 
        under subsection (a) to any individual with respect to 
        whom a deduction under section 151 is allowable to 
        another taxpayer for a taxable year beginning in the 
        calendar year in which such individual's taxable year 
        begins.
    ``(d) Definitions and Special Rules.--For purposes of this 
section--
            ``(1) Qualified tuition and related expenses.--The 
        term `qualified tuition and related expenses' has the 
        meaning given such term by section 25A(f). Such 
        expenses shall be reduced in the same manner as under 
        section 25A(g)(2).
            ``(2) Identification requirement.--No deduction 
        shall be allowed under subsection (a) to a taxpayer 
        with respect to the qualified tuition and related 
        expenses of an individual unless the taxpayer includes 
        the name and taxpayer identification number of the 
        individual on the return of tax for the taxable year.
            ``(3) Limitation on taxable year of deduction.--
                    ``(A) In general.--A deduction shall be 
                allowed under subsection (a) for qualified 
                tuition and related expenses for any taxable 
                year only to the extent such expenses are in 
                connection with enrollment at an institution of 
                higher education during the taxable year.
                    ``(B) Certain prepayments allowed.--
                Subparagraph (A) shall not apply to qualified 
                tuition and related expenses paid during a 
                taxable year if such expenses are in connection 
                with an academic term beginning during such 
                taxable year or during the first 3 months of 
                the next taxable year.
            ``(4) No deduction for married individuals filing 
        separate returns.--If the taxpayer is a married 
        individual (within the meaning of section 7703), this 
        section shall apply only if the taxpayer and the 
        taxpayer's spouse file a joint return for the taxable 
        year.
            ``(5) Nonresident aliens.--If the taxpayer is a 
        nonresident alien individual for any portion of the 
        taxable year, this section shall apply only if such 
        individual is treated as a resident alien of the United 
        States for purposes of this chapter by reason of an 
        election under subsection (g) or (h) of section 6013.
            ``(6) Regulations.--The Secretary may prescribe 
        such regulations as may be necessary or appropriate to 
        carry out this section, including regulations requiring 
        recordkeeping and information reporting.
    ``(e) Termination.--This section shall not apply to taxable 
years beginning after December 31, 2005.''.
    (b) Deduction Allowed in Computing Adjusted Gross Income.--
Section 62(a) is amended by inserting after paragraph (17) the 
following:
            ``(18) Higher education expenses.--The deduction 
        allowed by section 222.''.
    (c) Conforming Amendments.--
            (1) Sections 86(b)(2), 135(c)(4), 137(b)(3), and 
        219(g)(3) are each amended by inserting ``222,'' after 
        ``221,''.
            (2) Section 221(b)(2)(C) is amended by inserting 
        ``222,'' before ``911''.
            (3) Section 469(i)(3)(F) is amended by striking 
        ``and 221'' and inserting ``, 221, and 222''.
            (4) The table of sections for part VII of 
        subchapter B of chapter 1 is amended by striking the 
        item relating to section 222 and inserting the 
        following:

        ``Sec. 222. Qualified tuition and related expenses.
        ``Sec. 223. Cross reference.''.

    (d) Effective Date.--The amendments made by this section 
shall apply to payments made in taxable years beginning after 
December 31, 2001.

 TITLE V--ESTATE, GIFT, AND GENERATION-SKIPPING TRANSFER TAX PROVISIONS

  Subtitle A--Repeal of Estate and Generation-Skipping Transfer Taxes

SEC. 501. REPEAL OF ESTATE AND GENERATION-SKIPPING TRANSFER TAXES.

    (a) Estate Tax Repeal.--Subchapter C of chapter 11 of 
subtitle B (relating to miscellaneous) is amended by adding at 
the end the following new section:

``SEC. 2210. TERMINATION.

    ``(a) In General.--Except as provided in subsection (b), 
this chapter shall not apply to the estates of decedents dying 
after December 31, 2009.
    ``(b) Certain Distributions From Qualified Domestic 
Trusts.--In applying section 2056A with respect to the 
surviving spouse of a decedent dying before January 1, 2010--
            ``(1) section 2056A(b)(1)(A) shall not apply to 
        distributions made after December 31, 2020, and
            ``(2) section 2056A(b)(1)(B) shall not apply after 
        December 31, 2009.''.
    (b) Generation-Skipping Transfer Tax Repeal.--Subchapter G 
of chapter 13 of subtitle B (relating to administration) is 
amended by adding at the end the following new section:

``SEC. 2664. TERMINATION.

    ``This chapter shall not apply to generation-skipping 
transfers after December 31, 2009.''.
    (c) Conforming Amendments.--
            (1) The table of sections for subchapter C of 
        chapter 11 is amended by adding at the end the 
        following new item:

        ``Sec. 2210. Termination.''.

            (2) The table of sections for subchapter G of 
        chapter 13 is amended by adding at the end the 
        following new item:

        ``Sec. 2664. Termination.''.

    (d) Effective Date.--The amendments made by this section 
shall apply to the estates of decedents dying, and generation-
skipping transfers, after December 31, 2009.

          Subtitle B--Reductions of Estate and Gift Tax Rates

SEC. 511. ADDITIONAL REDUCTIONS OF ESTATE AND GIFT TAX RATES.

    (a) Maximum Rate of Tax Reduced to 50 Percent.--The table 
contained in section 2001(c)(1) is amended by striking the two 
highest brackets and inserting the following:

  ``Over $2,500,000.$1,025,800, plus 50% of the excess over ............
                    $2,500,000.''.

    (b) Repeal of Phaseout of Graduated Rates.--Subsection (c) 
of section 2001 is amended by striking paragraph (2).
    (c) Additional Reductions of Maximum Rate of Tax.--
Subsection (c) of section 2001, as amended by subsection (b), 
is amended by adding at the end the following new paragraph:
            ``(2) Phasedown of maximum rate of tax.--
                    ``(A) In general.--In the case of estates 
                of decedents dying, and gifts made, in calendar 
                years after 2002 and before 2010, the tentative 
                tax under this subsection shall be determined 
                by using a table prescribed by the Secretary 
                (in lieu of using the table contained in 
                paragraph (1)) which is the same as such table; 
                except that--
                            ``(i) the maximum rate of tax for 
                        any calendar year shall be determined 
                        in the table under subparagraph (B), 
                        and
                            ``(ii) the brackets and the amounts 
                        setting forth the tax shall be adjusted 
                        to the extentnecessary to reflect the 
adjustments under subparagraph (A).
                    ``(B) Maximum rate.--

``In calendar year:                                 The maximum rate is:
        2003............................................     49 percent 
        2004............................................     48 percent 
        2005............................................     47 percent 
        2006............................................     46 percent 
        2007, 2008, and 2009............................  45 percent.''.

    (d) Maximum Gift Tax Rate Reduced to Maximum Individual 
Rate After 2009.--Subsection (a) of section 2502 (relating to 
rate of tax) is amended to read as follows:
    ``(a) Computation of Tax.--
            ``(1) In general.--The tax imposed by section 2501 
        for each calendar year shall be an amount equal to the 
        excess of--
                    ``(A) a tentative tax, computed under 
                paragraph (2), on the aggregate sum of the 
                taxable gifts for such calendar year and for 
                each of the preceding calendar periods, over
                    ``(B) a tentative tax, computed under 
                paragraph (2), on the aggregate sum of the 
                taxable gifts for each of the preceding 
                calendar periods.
            ``(2) Rate schedule.--

``If the amount with respect to which
    the tentative tax to be computed is:           The tentative tax is:
  Not over $10,000..18% of such amount..................................
  Over $10,000 but n$1,800, plus 20% of the excess over $10,000.........
  Over $20,000 but n$3,800, plus 22% of the excess over $20,000.........
  Over $40,000 but n$8,200, plus 24% of the excess over $40,000.........
  Over $60,000 but n$13,000, plus 26% of the excess over $60,000........
  Over $80,000 but n$18,200, plus 28% of the excess over $80,000........
  Over $100,000 but $23,800, plus 30% of the excess over $100,000.......
  Over $150,000 but $38,800, plus 32% of the excess over $150,000.......
  Over $250,000 but $70,800, plus 34% of the excess over $250,000.......
  Over $500,000.....$155,800, plus 35% of the excess over $500,000.''...

    (e) Treatment of Certain Transfers in Trust.--Section 2511 
(relating to transfers in general) is amended by adding at the 
end the following new subsection:
    ``(c) Treatment of Certain Transfers in Trust.--
Notwithstanding any other provision of this section and except 
as provided in regulations, a transfer in trust shall be 
treated as a taxable gift under section 2503, unless the trust 
is treated as wholly owned by the donor or the donor's spouse 
under subpart E of part I of subchapter J of chapter 1.''.
    (f) Effective Dates.--
            (1) Subsections (a) and (b).--The amendments made 
        by subsections (a) and (b) shall apply to estates of 
        decedents dying, and gifts made, after December 31, 
        2001.
            (2) Subsection (c).--The amendment made by 
        subsection (c) shall apply to estates of decedents 
        dying, and gifts made, after December 31, 2002.
            (3) Subsections (d) and (e).--The amendments made 
        by subsections (d) and (e) shall apply to gifts made 
        after December 31, 2009.

               Subtitle C--Increase in Exemption Amounts

SEC. 521. INCREASE IN EXEMPTION EQUIVALENT OF UNIFIED CREDIT, LIFETIME 
                    GIFTS EXEMPTION, AND GST EXEMPTION AMOUNTS.

    (a) In General.--Subsection (c) of section 2010 (relating 
to applicable credit amount) is amended by striking the table 
and inserting the following new table:

``In the case of estates of decedents
    dying during:                    The applicable exclusion amount is:
            2002 and 2003...............................     $1,000,000 
            2004 and 2005...............................     $1,500,000 
            2006, 2007, and 2008........................     $2,000,000 
            2009........................................  $3,500,000.''.

    (b) Lifetime Gift Exemption Increased to $1,000,000.--
            (1) For periods before estate tax repeal.--
        Paragraph (1) of section 2505(a) (relating to unified 
        credit against gift tax) is amended by inserting 
        ``(determined as if the applicable exclusion amount 
        were $1,000,000)'' after ``calendar year''.
            (2) For periods after estate tax repeal.--Paragraph 
        (1) of section 2505(a) (relating to unified credit 
        against gift tax), as amended by paragraph (1), is 
        amended to read as follows:
            ``(1) the amount of the tentative tax which would 
        be determined under the rate schedule set forth in 
        section 2502(a)(2) if the amount with respect to which 
        such tentative tax is to be computed were $1,000,000, 
        reduced by''.
    (c) GST Exemption.--
            (1) In general.--Subsection (a) of 2631 (relating 
        to GST exemption) is amended by striking ``of 
        $1,000,000'' and inserting ``amount''.
            (2) Exemption amount.--Subsection (c) of section 
        2631 is amended to read as follows:
    ``(c) GST Exemption Amount.--For purposes of subsection 
(a), the GST exemption amount for any calendar year shall be 
equal to the applicable exclusion amount under section 2010(c) 
for such calendar year.''.
    (d) Repeal of Special Benefit for Family-Owned Business 
Interests.--Section 2057 (relating to family-owned business 
interests) is amended by adding at the end the following new 
subsection:
    ``(j) Termination.--This section shall not apply to the 
estates of decedents dying after December 31, 2003.''.
    (e) Effective Dates.--
            (1) In general.--Except as provided in paragraphs 
        (2) and (3), the amendments made by this section shall 
        apply to estates of decedents dying, and gifts made, 
        after December 31, 2001.
            (2) Subsection (b)(2).--The amendments made by 
        subsection (b)(2) shall apply to gifts made after 
        December 31, 2009.
            (3) Subsections (c) and (d).--The amendments made 
        by subsections (c) and (d) shall apply to estates of 
        decedents dying, and generation-skipping transfers, 
        after December 31, 2003.

                Subtitle D--Credit for State Death Taxes

SEC. 531. REDUCTION OF CREDIT FOR STATE DEATH TAXES.

    (a) In General.--Section 2011(b) (relating to amount of 
credit) is amended--
            (1) by striking ``Credit.--The credit allowed'' and 
        inserting ``Credit.--
            ``(1) In general.--Except as provided in paragraph 
        (2), the credit allowed'',
            (2) by striking ``For purposes'' and inserting the 
        following:
            ``(3) Adjusted taxable estate.--For purposes'', and
            (3) by inserting after paragraph (1) the following 
        new paragraph:
            ``(2) Reduction of maximum credit.--
                    ``(A) In general.--In the case of estates 
                of decedents dying after December 31, 2001, the 
                credit allowed by this section shall not exceed 
                the applicable percentage of the credit 
                otherwise determined under paragraph (1).
                    ``(B) Applicable percentage.--

``In the case of estates of decedents
    dying during:                          The applicable percentage is:
            2002........................................     75 percent 
            2003........................................     50 percent 
            2004........................................  25 percent.''.

    (b) Effective Date.--The amendments made by this subsection 
shall apply to estates of decedents dying after December 31, 
2001.

SEC. 532. CREDIT FOR STATE DEATH TAXES REPLACED WITH DEDUCTION FOR SUCH 
                    TAXES.

    (a) Repeal of Credit.--Section 2011 (relating to credit for 
State death taxes) is amended by adding at the end the 
following new subsection:
    ``(g) Termination.--This section shall not apply to the 
estates of decedents dying after December 31, 2004.''.
    (b) Deduction for State Death Taxes.--Part IV of subchapter 
A of chapter 11 is amended by adding at the end the following 
new section:

``SEC. 2058. STATE DEATH TAXES.

    ``(a) Allowance of Deduction.--For purposes of the tax 
imposed by section 2001, the value of the taxable estate shall 
be determined by deducting from the value of the gross estate 
the amount of any estate, inheritance, legacy, or succession 
taxes actually paid to any State or the District of Columbia, 
in respect of any property included in the gross estate (not 
including any such taxes paid with respect to the estate of a 
person other than the decedent).
    ``(b) Period of Limitations.--The deduction allowed by this 
section shall include only such taxes as were actually paid and 
deduction therefor claimed before the later of--
            ``(1) 4 years after the filing of the return 
        required by section 6018, or
            ``(2) if--
                    ``(A) a petition for redetermination of a 
                deficiency has been filed with the Tax Court 
                within the time prescribed in section 6213(a), 
                the expiration of 60 days after the decision of 
                the Tax Court becomes final,
                    ``(B) an extension of time has been granted 
                under section 6161 or 6166 for payment of the 
                tax shown on the return, or of a deficiency, 
                the date of the expiration of the period of the 
                extension, or
                    ``(C) a claim for refund or credit of an 
                overpayment of tax imposed by this chapter has 
                been filed within the time prescribed in 
                section 6511, the latest of the expiration of--
                            ``(i) 60 days from the date of 
                        mailing by certified mail or registered 
                        mail by the Secretary to the taxpayer 
                        of a notice of the disallowance of any 
                        part of such claim,
                            ``(ii) 60 days after a decision by 
                        any court of competent jurisdiction 
                        becomes final with respect to a timely 
                        suit instituted upon such claim, or
                            ``(iii) 2 years after a notice of 
                        the waiver of disallowance is filed 
                        under section 6532(a)(3).

Notwithstanding sections 6511 and 6512, refund based on the 
deduction may be made if the claim for refund is filed within 
the period provided in the preceding sentence. Any such refund 
shall be made without interest.''.
    (c) Conforming Amendments.--
            (1) Subsection (a) of section 2012 is amended by 
        striking ``the credit for State death taxes provided by 
        section 2011 and''.
            (2) Subparagraph (A) of section 2013(c)(1) is 
        amended by striking ``2011,''.
            (3) Paragraph (2) of section 2014(b) is amended by 
        striking ``, 2011,''.
            (4) Sections 2015 and 2016 are each amended by 
        striking ``2011 or''.
            (5) Subsection (d) of section 2053 is amended to 
        read as follows:
    ``(d) Certain Foreign Death Taxes.--
            ``(1) In general.--Notwithstanding the provisions 
        of subsection (c)(1)(B), for purposes of the tax 
        imposed by section 2001, the value of the taxable 
        estate may be determined, if the executor so elects 
        before the expiration of the period of limitation for 
        assessment provided in section 6501, by deducting from 
        the value of the gross estate the amount (as determined 
        in accordance with regulations prescribed by the 
        Secretary) of any estate, succession, legacy, or 
        inheritance tax imposed by and actually paid to any 
        foreign country, in respect of any property situated 
        within such foreign country and included in the gross 
        estate of a citizen or resident of the United States, 
        upon a transfer by the decedent for public, charitable, 
        or religious uses described in section 2055. The 
        determination under this paragraph of the country 
        within which property is situated shall be made in 
        accordance with the rules applicable under subchapter B 
        (sec. 2101 and following) in determining whether 
        property is situated within or without the United 
        States. Any election under this paragraph shall be 
        exercised in accordance with regulations prescribed by 
        the Secretary.
            ``(2) Condition for allowance of deduction.--No 
        deduction shall be allowed under paragraph (1) for a 
        foreign death tax specified therein unless the decrease 
        in the tax imposed by section 2001 which results from 
        the deduction provided in paragraph (1) will inure 
        solely for the benefit of the public, charitable, or 
        religious transferees described in section 2055 or 
        section 2106(a)(2). In any case where the tax imposed 
        by section 2001 is equitably apportioned among all the 
        transferees of property included in the gross estate, 
        including those described in sections 2055 and 
        2106(a)(2) (taking into account any exemptions, 
        credits, or deductions allowed by this chapter), in 
        determining such decrease, there shall be disregarded 
        any decrease in the Federal estate tax which any 
        transferees other than those described in sections 2055 
        and 2106(a)(2) are required to pay.
            ``(3) Effect on credit for foreign death taxes of 
        deduction under this subsection.--
                    ``(A) Election.--An election under this 
                subsection shall be deemed a waiver of the 
                right to claim a credit, against the Federal 
                estate tax, under a death tax convention with 
                any foreign country for any tax or portion 
                thereof in respect of which a deduction is 
                taken under this subsection.
                    ``(B) Cross reference.--
          ``See section 2014(f) for the effect of a deduction taken 
        under this paragraph on the credit for foreign death taxes.''.

            (6) Subparagraph (A) of section 2056A(b)(10) is 
        amended--
                    (A) by striking ``2011,'', and
                    (B) by inserting ``2058,'' after ``2056,''.
            (7)(A) Subsection (a) of section 2102 is amended to 
        read as follows:
    ``(a) In General.--The tax imposed by section 2101 shall be 
credited with the amounts determined in accordance with 
sections 2012 and 2013 (relating to gift tax and tax on prior 
transfers).''.
            (B) Section 2102 is amended by striking subsection 
        (b) and by redesignating subsection (c) as subsection 
        (b).
            (C) Section 2102(b)(5) (as redesignated by 
        subparagraph (B)) and section 2107(c)(3) are each 
        amended by striking ``2011 to 2013, inclusive,'' and 
        inserting ``2012 and 2013''.
            (8) Subsection (a) of section 2106 is amended by 
        adding at the end the following new paragraph:
            ``(4) State death taxes.--The amount which bears 
        the same ratio to the State death taxes as the value of 
        the property, as determined for purposes of this 
        chapter, upon which State death taxes were paid and 
        which is included in the gross estate under section 
        2103 bears to the value of the total gross estate under 
        section 2103. For purposes of this paragraph, the term 
        `State death taxes' means the taxes described in 
        section 2011(a).''.
            (9) Section 2201 is amended--
                    (A) by striking ``as defined in section 
                2011(d)'', and
                    (B) by adding at the end the following new 
                flush sentence:

``For purposes of this section, the additional estate tax is 
the difference between the tax imposed by section 2001 or 2101 
and the amount equal to 125 percent of the maximum credit 
provided by section 2011(b), as in effect before its repeal by 
the Economic Growth and Tax Relief Reconciliation Act of 
2001.''.
            (10) Section 2604 (relating to credit for certain 
        State taxes) is amended by adding at the end the 
        following new subsection:
    ``(c) Termination.--This section shall not apply to the 
generation-skipping transfers after December 31, 2004.''.
            (11) Paragraph (2) of section 6511(i) is amended by 
        striking ``2011(c), 2014(b),'' and inserting 
        ``2014(b)''.
            (12) Subsection (c) of section 6612 is amended by 
        striking ``section 2011(c) (relating to refunds due to 
        credit for State taxes),''.
            (13) The table of sections for part II of 
        subchapter A of chapter 11 is amended by striking the 
        item relating to section 2011.
            (14) The table of sections for part IV of 
        subchapter A of chapter 11 is amended by adding at the 
        end the following new item:

        ``Sec. 2058. State death taxes.''.

            (15) The table of sections for subchapter A of 
        chapter 13 is amended by striking the item relating to 
        section 2604.
    (d) Effective Date.--The amendments made by this section 
shall apply to estates of decedents dying, and generation-
skipping transfers, after December 31, 2004.

Subtitle E--Carryover Basis at Death; Other Changes Taking Effect With 
                                 Repeal

SEC. 541. TERMINATION OF STEP-UP IN BASIS AT DEATH.

    Section 1014 (relating to basis of property acquired from a 
decedent) is amended by adding at the end the following new 
subsection:
    ``(f) Termination.--This section shall not apply with 
respect to decedents dying after December 31, 2009.''.

SEC. 542. TREATMENT OF PROPERTY ACQUIRED FROM A DECEDENT DYING AFTER 
                    DECEMBER 31, 2009.

    (a) General Rule.--Part II of subchapter O of chapter 1 
(relating to basis rules of general application) is amended by 
inserting after section 1021 the following new section:

``SEC. 1022. TREATMENT OF PROPERTY ACQUIRED FROM A DECEDENT DYING AFTER 
                    DECEMBER 31, 2009.

    ``(a) In General.--Except as otherwise provided in this 
section--
            ``(1) property acquired from a decedent dying after 
        December 31, 2009, shall be treated for purposes of 
        this subtitle as transferred by gift, and
            ``(2) the basis of the person acquiring property 
        from such a decedent shall be the lesser of--
                    ``(A) the adjusted basis of the decedent, 
                or
                    ``(B) the fair market value of the property 
                at the date of the decedent's death.
    ``(b) Basis Increase for Certain Property.--
            ``(1) In general.--In the case of property to which 
        this subsection applies, the basis of such property 
        under subsection (a) shall be increased by its basis 
        increase under this subsection.
            ``(2) Basis increase.--For purposes of this 
        subsection--
                    ``(A) In general.--The basis increase under 
                this subsection for any property is the portion 
                of the aggregate basis increase which is 
                allocated to the property pursuant to this 
                section.
                    ``(B) Aggregate basis increase.--In the 
                case of any estate, the aggregate basis 
                increase under this subsection is $1,300,000.
                    ``(C) Limit increased by unused built-in 
                losses and loss carryovers.--The limitation 
                under subparagraph (B) shall be increased by--
                            ``(i) the sum of the amount of any 
                        capital loss carryover under section 
                        1212(b), and the amount of any net 
                        operating loss carryover under section 
                        172, which would (but for the 
                        decedent's death) be carried from the 
                        decedent's last taxable year to a later 
                        taxable year of the decedent, plus
                            ``(ii) the sum of the amount of any 
                        losses that would have been allowable 
                        under section 165 if the property 
                        acquired from the decedent had been 
                        sold at fair market value immediately 
                        before the decedent's death.
            ``(3) Decedent nonresidents who are not citizens of 
        the united states.--In the case of a decedent 
        nonresident not a citizen of the United States--
                    ``(A) paragraph (2)(B) shall be applied by 
                substituting `$60,000' for `$1,300,000', and
                    ``(B) paragraph (2)(C) shall not apply.
    ``(c) Additional Basis Increase for Property Acquired by 
Surviving Spouse.--
            ``(1) In general.--In the case of property to which 
        this subsection applies and which is qualified spousal 
        property, the basis of such property under subsection 
        (a) (as increased under subsection (b)) shall be 
        increased by its spousal property basis increase.
            ``(2) Spousal property basis increase.--For 
        purposes of this subsection--
                    ``(A) In general.--The spousal property 
                basis increase for property referred to in 
                paragraph (1) is the portion of the aggregate 
                spousal property basis increase which is 
                allocated to the property pursuant to this 
                section.
                    ``(B) Aggregate spousal property basis 
                increase.--In the case of any estate, the 
                aggregate spousal property basis increase is 
                $3,000,000.
            ``(3) Qualified spousal property.--For purposes of 
        this subsection, the term `qualified spousal property' 
        means--
                    ``(A) outright transfer property, and
                    ``(B) qualified terminable interest 
                property.
            ``(4) Outright transfer property.--For purposes of 
        this subsection--
                    ``(A) In general.--The term `outright 
                transfer property' means any interest in 
                property acquired from the decedent by the 
                decedent's surviving spouse.
                    ``(B) Exception.--Subparagraph (A) shall 
                not apply where, on the lapse of time, on the 
                occurrence of an event or contingency, or on 
                the failure of an event or contingency to 
                occur, an interest passing to the surviving 
                spouse will terminate or fail--
                            ``(i)(I) if an interest in such 
                        property passes or has passed (for less 
                        than an adequate and full consideration 
                        in money or money's worth) from the 
                        decedent to any person other than such 
                        surviving spouse (or the estate of such 
                        spouse), and
                            ``(II) if by reason of such passing 
                        such person (or his heirs or assigns) 
                        may possess or enjoy any part of such 
                        property after such termination or 
                        failure of the interest so passing to 
                        the surviving spouse, or
                            ``(ii) if such interest is to be 
                        acquired for the surviving spouse, 
                        pursuant to directions of the decedent, 
                        by his executor or by the trustee of a 
                        trust.

                For purposes of this subparagraph, an interest 
                shall not be considered as an interest which 
                will terminate or fail merely because it is the 
                ownership of a bond, note, or similar 
                contractual obligation, the discharge of which 
                would not have the effect of an annuity for 
                life or for a term.
                    ``(C) Interest of spouse conditional on 
                survival for limited period.--For purposes of 
                this paragraph, an interest passing to the 
                surviving spouse shall not be considered as an 
                interest which will terminate or fail on the 
                death of such spouse if--
                            ``(i) such death will cause a 
                        termination or failure of such interest 
                        only if it occurs within a period not 
                        exceeding 6 months after the decedent's 
                        death, or only if it occurs as a result 
                        of a common disaster resulting in the 
                        death of the decedent and the surviving 
                        spouse, or only if it occurs in the 
                        case of either such event, and
                            ``(ii) such termination or failure 
                        does not in fact occur.
            ``(5) Qualified terminable interest property.--For 
        purposes of this subsection--
                    ``(A) In general.--The term `qualified 
                terminable interest property' means property--
                            ``(i) which passes from the 
                        decedent, and
                            ``(ii) in which the surviving 
                        spouse has a qualifying income interest 
                        for life.
                    ``(B) Qualifying income interest for 
                life.--The surviving spouse has a qualifying 
                income interest for life if--
                            ``(i) the surviving spouse is 
                        entitled to all the income from the 
                        property, payable annually or at more 
                        frequent intervals, or has a usufruct 
                        interest for life in the property, and
                            ``(ii) no person has a power to 
                        appoint any part of the property to any 
                        person other than the surviving spouse.

                Clause (ii) shall not apply to a power 
                exercisable only at or after the death of the 
                surviving spouse. To the extent provided in 
                regulations, an annuity shall be treated in a 
                manner similar to an income interest in 
                property (regardless of whether the property 
                from which the annuity is payable can be 
                separately identified).
                    ``(C) Property includes interest therein.--
                The term `property' includes an interest in 
                property.
                    ``(D) Specific portion treated as separate 
                property.--A specific portion of property shall 
                be treated as separate property. For purposes 
                of the preceding sentence, the term `specific 
                portion' only includes a portion determined on 
                a fractional or percentage basis.
    ``(d) Definitions and Special Rules for Application of 
Subsections (b) and (c).--
            ``(1) Property to which subsections (b) and (c) 
        apply.--
                    ``(A) In general.--The basis of property 
                acquired from a decedent may be increased under 
                subsection (b) or (c) only if the property was 
                owned by the decedent at the time of death.
                    ``(B) Rules relating to ownership.--
                            ``(i) Jointly held property.--In 
                        the case of property which was owned by 
                        the decedent and another person as 
                        joint tenants with right of 
                        survivorship or tenants by the 
                        entirety--
                                    ``(I) if the only such 
                                other person is the surviving 
                                spouse, the decedent shall be 
                                treated as the owner of only 50 
                                percent of the property,
                                    ``(II) in any case (to 
                                which subclause (I) does not 
                                apply) in which the decedent 
                                furnished consideration for the 
                                acquisition of the property, 
                                the decedent shall be treated 
                                as the owner to the extent of 
                                the portion of the property 
                                which is proportionate to such 
                                consideration, and
                                    ``(III) in any case (to 
                                which subclause (I) does not 
                                apply) in which the property 
                                has been acquired by gift, 
                                bequest, devise, or inheritance 
                                by the decedent and any other 
                                person as joint tenants with 
                                right of survivorship and their 
                                interests are not otherwise 
                                specified or fixed by law, the 
                                decedent shall be treated as 
                                the owner to the extent of the 
                                value of a fractional part to 
                                be determined by dividing the 
                                value of the property by the 
                                number of joint tenants with 
                                right of survivorship.
                            ``(ii) Revocable trusts.--The 
                        decedent shall be treated as owning 
                        property transferred by the decedent 
                        during life to a qualified revocable 
                        trust (as defined in section 
                        645(b)(1)).
                            ``(iii) Powers of appointment.--The 
                        decedent shall not be treated as owning 
                        any property by reason of holding a 
                        power of appointment with respect to 
                        such property.
                            ``(iv) Community property.--
                        Property which represents the surviving 
                        spouse's one-half share of community 
                        property held by the decedent and the 
                        surviving spouse under the community 
                        property laws of any State or 
                        possession of the United States or any 
                        foreign country shall be treated for 
                        purposes of this section as owned by, 
                        and acquired from, the decedent if at 
                        least one-half of the whole of the 
                        community interest in such property is 
                        treated as owned by, and acquired from, 
                        the decedent without regard to this 
                        clause.
                    ``(C) Property acquired by decedent by gift 
                within 3 years of death.--
                            ``(i) In general.--Subsections (b) 
                        and (c) shall not apply to property 
                        acquired by the decedent by gift or by 
                        inter vivos transfer for less than 
                        adequate and full consideration in 
                        money or money's worth during the 3-
                        year period ending on the date of the 
                        decedent's death.
                            ``(ii) Exception for certain gifts 
                        from spouse.--Clause (i) shall not 
                        apply to property acquired by the 
                        decedent from the decedent's spouse 
                        unless, during such 3-year period, such 
                        spouse acquired the property in whole 
                        or in part by gift or by inter vivos 
                        transfer for less than adequate and 
                        full consideration in money or money's 
                        worth.
                    ``(D) Stock of certain entities.--
                Subsections (b) and (c) shall not apply to--
                            ``(i) stock or securities of a 
                        foreign personal holding company,
                            ``(ii) stock of a DISC or former 
                        DISC,
                            ``(iii) stock of a foreign 
                        investment company, or
                            ``(iv) stock of a passive foreign 
                        investment company unless such company 
                        is a qualified electing fund (as 
                        defined in section 1295) with respect 
                        to the decedent.
            ``(2) Fair market value limitation.--The 
        adjustments under subsections (b) and (c) shall not 
        increase the basis of any interest in property acquired 
        from the decedent above its fair market value in the 
        hands of the decedent as of the date of the decedent's 
        death.
            ``(3) Allocation rules.--
                    ``(A) In general.--The executor shall 
                allocate the adjustments under subsections (b) 
                and (c) on the return required by section 6018.
                    ``(B) Changes in allocation.--Any 
                allocation made pursuant to subparagraph (A) 
                may be changed only as provided by the 
                Secretary.
            ``(4) Inflation adjustment of basis adjustment 
        amounts.--
                    ``(A) In general.--In the case of decedents 
                dying in a calendar year after 2010, the 
                $1,300,000, $60,000, and $3,000,000 dollar 
                amounts in subsections (b) and (c)(2)(B) shall 
                each be increased by an amount equal to the 
                product of--
                            ``(i) such dollar amount, and
                            ``(ii) the cost-of-living 
                        adjustment determined under section 
                        1(f)(3) for such calendar year, 
                        determined by substituting `2009' for 
                        `1992' in subparagraph (B) thereof.
                    ``(B) Rounding.--If any increase determined 
                under subparagraph (A) is not a multiple of--
                            ``(i) $100,000 in the case of the 
                        $1,300,000 amount,
                            ``(ii) $5,000 in the case of the 
                        $60,000 amount, and
                            ``(iii) $250,000 in the case of the 
                        $3,000,000 amount,
                such increase shall be rounded to the next 
                lowest multiple thereof.
    ``(e) Property Acquired From the Decedent.--For purposes of 
this section, the following property shall be considered to 
have been acquired from the decedent:
            ``(1) Property acquired by bequest, devise, or 
        inheritance, or by the decedent's estate from the 
        decedent.
            ``(2) Property transferred by the decedent during 
        his lifetime--
                    ``(A) to a qualified revocable trust (as 
                defined in section 645(b)(1)), or
                    ``(B) to any other trust with respect to 
                which the decedent reserved the right to make 
                any change in the enjoyment thereof through the 
                exercise of a power to alter, amend, or 
                terminate the trust.
            ``(3) Any other property passing from the decedent 
        by reason of death to the extent that such property 
        passed without consideration.
    ``(f) Coordination With Section 691.--This section shall 
not apply to property which constitutes a right to receive an 
item of income in respect of a decedent under section 691.
    ``(g) Certain Liabilities Disregarded.--
            ``(1) In general.--In determining whether gain is 
        recognized on the acquisition of property--
                    ``(A) from a decedent by a decedent's 
                estate or any beneficiary other than a tax-
                exempt beneficiary, and
                    ``(B) from the decedent's estate by any 
                beneficiary other than a tax-exempt 
                beneficiary,
        and in determining the adjusted basis of such property, 
        liabilities in excess of basis shall be disregarded.
            ``(2) Tax-exempt beneficiary.--For purposes of 
        paragraph (1), the term `tax-exempt beneficiary' 
        means--
                    ``(A) the United States, any State or 
                political subdivision thereof, any possession 
                of the United States, any Indian tribal 
                government (within the meaning of section 
                7871), or any agency or instrumentality of any 
                of the foregoing,
                    ``(B) an organization (other than a 
                cooperative described in section 521) which is 
                exempt from tax imposed by chapter 1,
                    ``(C) any foreign person or entity (within 
                the meaning of section 168(h)(2)), and
                    ``(D) to the extent provided in 
                regulations, any person to whom property is 
                transferred for the principal purpose of tax 
                avoidance.
    ``(h) Regulations.--The Secretary shall prescribe such 
regulations as may be necessary to carry out the purposes of 
this section.''.
    (b) Information Returns, Etc.--
            (1) Large transfers at death.--So much of subpart C 
        of part II of subchapter A of chapter 61 as precedes 
        section 6019 is amended to read as follows:

   ``Subpart C--Returns Relating to Transfers During Life or at Death

        ``Sec. 6018. Returns relating to large transfers at death.
        ``Sec. 6019. Gift tax returns.

``SEC. 6018. RETURNS RELATING TO LARGE TRANSFERS AT DEATH.

    ``(a) In General.--If this section applies to property 
acquired from a decedent, the executor of the estate of such 
decedent shall make a return containing the information 
specified in subsection (c) with respect to such property.
    ``(b) Property to Which Section Applies.--
            ``(1) Large transfers.--This section shall apply to 
        all property (other than cash) acquired from a decedent 
        if the fair market value of such property acquired from 
        the decedent exceeds the dollar amount applicable under 
        section 1022(b)(2)(B) (without regard to section 
        1022(b)(2)(C)).
            ``(2) Transfers of certain gifts received by 
        decedent within 3 years of death.--This section shall 
        apply to any appreciated property acquired from the 
        decedent if--
                    ``(A) subsections (b) and (c) of section 
                1022 do not apply to such property by reason of 
                section 1022(d)(1)(C), and
                    ``(B) such property was required to be 
                included on a return required to be filed under 
                section 6019.
            ``(3) Nonresidents not citizens of the united 
        states.--In the case of a decedent who is a nonresident 
        not a citizen of the United States, paragraphs (1) and 
        (2) shall be applied--
                    ``(A) by taking into account only--
                            ``(i) tangible property situated in 
                        the United States, and
                            ``(ii) other property acquired from 
                        the decedent by a United States person, 
                        and
                    ``(B) by substituting the dollar amount 
                applicable under section 1022(b)(3) for the 
                dollar amount referred to in paragraph (1).
            ``(4) Returns by trustees or beneficiaries.--If the 
        executor is unable to make a complete return as to any 
        property acquired from or passing from the decedent, 
        the executor shall include in the return a description 
        of such property and the name of every person holding a 
        legal or beneficial interest therein. Upon notice from 
        the Secretary, such person shall in like manner make a 
        return as to such property.
    ``(c) Information Required To Be Furnished.--The 
information specified in this subsection with respect to any 
property acquired from the decedent is--
            ``(1) the name and TIN of the recipient of such 
        property,
            ``(2) an accurate description of such property,
            ``(3) the adjusted basis of such property in the 
        hands of the decedent and its fair market value at the 
        time of death,
            ``(4) the decedent's holding period for such 
        property,
            ``(5) sufficient information to determine whether 
        any gain on the sale of the property would be treated 
        as ordinary income,
            ``(6) the amount of basis increase allocated to the 
        property under subsection (b) or (c) of section 1022, 
        and
            ``(7) such other information as the Secretary may 
        by regulations prescribe.
    ``(d) Property Acquired From Decedent.--For purposes of 
this section, section 1022 shall apply for purposes of 
determining the property acquired from a decedent.
    ``(e) Statements To Be Furnished to Certain Persons.--Every 
person required to make a return under subsection (a) shall 
furnish to each person whose name is required to be set forth 
in such return (other than the person required to make such 
return) a written statement showing--
            ``(1) the name, address, and phone number of the 
        person required to make such return, and
            ``(2) the information specified in subsection (c) 
        with respect to property acquired from, or passing 
        from, the decedent to the person required to receive 
        such statement.

The written statement required under the preceding sentence 
shall be furnished not later than 30 days after the date that 
the return required by subsection (a) is filed.''.
            (2) Gifts.--Section 6019 (relating to gift tax 
        returns) is amended--
                    (A) by striking ``Any individual'' and 
                inserting ``(a) In General.--Any individual'', 
                and
                    (B) by adding at the end the following new 
                subsection:
    ``(b) Statements To Be Furnished to Certain Persons.--Every 
person required to make a return under subsection (a) shall 
furnish to each person whose name is required to be set forth 
in such return (other than the person required to make such 
return) a written statement showing--
            ``(1) the name, address, and phone number of the 
        person required to make such return, and
            ``(2) the information specified in such return with 
        respect to property received by the person required to 
        receive such statement.

The written statement required under the preceding sentence 
shall be furnished not later than 30 days after the date that 
the return required by subsection (a) is filed.''.
            (3) Time for filing section 6018 returns.--
                    (A) Returns relating to large transfers at 
                death.--Subsection (a) of section 6075 is 
                amended to read as follows:
    ``(a) Returns Relating to Large Transfers at Death.--The 
return required by section 6018 with respect to a decedent 
shall be filed with the return of the tax imposed by chapter 1 
for the decedent's last taxable year or such later date 
specified in regulations prescribed by the Secretary.''.
                    (B) Conforming amendments.--Paragraph (3) 
                of section 6075(b) is amended--
                            (i) by striking ``estate tax 
                        return'' in the heading and inserting 
                        ``section 6018 return'', and
                            (ii) by striking ``(relating to 
                        estate tax returns)'' and inserting 
                        ``(relating to returns relating to 
                        large transfers at death)''.
            (4) Penalties.--Part I of subchapter B of chapter 
        68 (relating to assessable penalties) is amended by 
        adding at the end the following new section:

``SEC. 6716. FAILURE TO FILE INFORMATION WITH RESPECT TO CERTAIN 
                    TRANSFERS AT DEATH AND GIFTS.

    ``(a) Information Required To Be Furnished to the 
Secretary.--Any person required to furnish any information 
under section 6018 who fails to furnish such information on the 
date prescribed therefor (determined with regard to any 
extension of time for filing) shall pay a penalty of $10,000 
($500 in the case of information required to be furnished under 
section 6018(b)(2)) for each such failure.
    ``(b) Information Required To Be Furnished to 
Beneficiaries.--Any person required to furnish in writing to 
each person described in section 6018(e) or 6019(b) the 
information required under such section who fails to furnish 
such information shall pay a penalty of $50 for each such 
failure.
    ``(c) Reasonable Cause Exception.--No penalty shall be 
imposed under subsection (a) or (b) with respect to any failure 
if it is shown that such failure is due to reasonable cause.
    ``(d) Intentional Disregard.--If any failure under 
subsection (a) or (b) is due to intentional disregard of the 
requirements under sections 6018 and 6019(b), the penalty under 
such subsection shall be 5 percent of the fair market value (as 
of the date of death or, in the case of section 6019(b), the 
date of the gift) of the property with respect to which the 
information is required.
    ``(e) Deficiency Procedures Not To Apply.--Subchapter B of 
chapter 63 (relating to deficiency procedures for income, 
estate, gift, and certain excise taxes) shall not apply in 
respect of the assessment or collection of any penalty imposed 
by this section.''.
            (5) Clerical amendments.--
                    (A) The table of sections for part I of 
                subchapter B of chapter 68 is amended by adding 
                at the end the following new item:

        ``Sec. 6716. Failure to file information with respect to certain 
                  transfers at death and gifts.''.

                    (B) The item relating to subpart C in the 
                table of subparts for part II of subchapter A 
                of chapter 61 is amended to read as follows:

        ``Subpart C. Returns relating to transfers during life or at 
                  death.''.

    (c) Exclusion of Gain on Sale of Principal Residence Made 
Available to Heir of Decedent in Certain Cases.--Subsection (d) 
of section 121 (relating to exclusion of gain from sale of 
principal residence) is amended by adding at the end the 
following new paragraph:
            ``(9) Property acquired from a decedent.--The 
        exclusion under this section shall apply to property 
        sold by--
                    ``(A) the estate of a decedent,
                    ``(B) any individual who acquired such 
                property from the decedent (within the meaning 
                of section 1022), and
                    ``(C) a trust which, immediately before the 
                death of the decedent, was a qualified 
                revocable trust (as defined in section 
                645(b)(1)) established by the decedent,
        determined by taking into account the ownership and use 
        by the decedent.''.
    (d) Transfers of Appreciated Carryover Basis Property To 
Satisfy Pecuniary Bequest.--
            (1) In general.--Section 1040 (relating to transfer 
        of certain farm, etc., real property) is amended to 
        read as follows:

``SEC. 1040. USE OF APPRECIATED CARRYOVER BASIS PROPERTY TO SATISFY 
                    PECUNIARY BEQUEST.

    ``(a) In General.--If the executor of the estate of any 
decedent satisfies the right of any person to receive a 
pecuniary bequest with appreciated property, then gain on such 
exchange shall be recognized to the estate only to the extent 
that, on the date of such exchange, the fair market value of 
such property exceeds such value on the date of death.
    ``(b) Similar Rule for Certain Trusts.--To the extent 
provided in regulations prescribed by the Secretary, a rule 
similar to the rule provided in subsection (a) shall apply 
where--
            ``(1) by reason of the death of the decedent, a 
        person has a right to receive from a trust a specific 
        dollar amount which is the equivalent of a pecuniary 
        bequest, and
            ``(2) the trustee of a trust satisfies such right 
        with property.
    ``(c) Basis of Property Acquired in Exchange Described in 
Subsection (a) or (b).--The basis of property acquired in an 
exchange with respect to which gain realized is not recognized 
by reason of subsection (a) or (b) shall be the basis of such 
property immediately before the exchange increased by the 
amount of the gain recognized to the estate or trust on the 
exchange.''.
            (2) The item relating to section 1040 in the table 
        of sections for part III of subchapter O of chapter 1 
        is amended to read as follows:

        ``Sec. 1040. Use of appreciated carryover basis property to 
                  satisfy pecuniary bequest.''.

    (e) Amendments Related to Carryover Basis.--
            (1) Recognition of gain on transfers to 
        nonresidents.--
                    (A) Subsection (a) of section 684 is 
                amended by inserting ``or to a nonresident 
                alien'' after ``or trust''.
                    (B) Subsection (b) of section 684 is 
                amended to read as follows:
    ``(b) Exceptions.--
            ``(1) Transfers to certain trusts.--Subsection (a) 
        shall not apply to a transfer to a trust by a United 
        States person to the extent that any United States 
        person is treated as the owner of such trust under 
        section 671.
            ``(2) Lifetime transfers to nonresident aliens.--
        Subsection (a) shall not apply to a lifetime transfer 
        to a nonresident alien.''.
                    (C) The section heading for section 684 is 
                amended by inserting ``AND NONRESIDENT ALIENS'' 
                after ``ESTATES''.
                    (D) The item relating to section 684 in the 
                table of sections for subpart F of part I of 
                subchapter J of chapter 1 is amended by 
                inserting ``and nonresident aliens'' after 
                ``estates''.
            (2) Capital gain treatment for inherited art work 
        or similar property.--
                    (A) In general.--Subparagraph (C) of 
                section 1221(a)(3) (defining capital asset) is 
                amended by inserting ``(other than by reason of 
                section 1022)'' after ``is determined''.
                    (B) Coordination with section 170.--
                Paragraph (1) of section 170(e) (relating to 
                certain contributions of ordinary income and 
                capital gain property) is amended by adding at 
                the end the following: ``For purposes of this 
                paragraph, the determination of whether 
                property is a capital asset shall be made 
                without regard to the exception contained in 
                section 1221(a)(3)(C) for basis determined 
                under section 1022.''.
            (3) Definition of executor.--Section 7701(a) 
        (relating to definitions) is amended by adding at the 
        end the following:
            ``(47) Executor.--The term `executor' means the 
        executor or administrator of the decedent, or, if there 
        is no executor or administrator appointed, qualified, 
        and acting within the United States, then any person in 
        actual or constructive possession of any property of 
        the decedent.''.
            (4) Certain trusts.--Subparagraph (A) of section 
        4947(a)(2) is amended by inserting ``642(c),'' after 
        ``170(f)(2)(B),''.
            (5) Other amendments.--
                    (A) Section 1246 is amended by striking 
                subsection (e).
                    (B) Subsection (e) of section 1291 is 
                amended--
                            (i) by striking ``(e),''; and
                            (ii) by striking ``; except that'' 
                        and all that follows and inserting a 
                        period.
                    (C) Section 1296 is amended by striking 
                subsection (i).
            (6) Clerical amendment.--The table of sections for 
        part II of subchapter O of chapter 1 is amended by 
        inserting after the item relating to section 1021 the 
        following new item:

        ``Sec. 1022. Treatment of property acquired from a decedent 
                  dying after December 31, 2009.''.

    (f) Effective Date.--
            (1) In general.--Except as provided in paragraph 
        (2), the amendments made by this section shall apply to 
        estates of decedents dying after December 31, 2009.
            (2) Transfers to nonresidents.--The amendments made 
        by subsection (e)(1) shall apply to transfers after 
        December 31, 2009.
            (3) Section 4947.--The amendment made by subsection 
        (e)(4) shall apply to deductions for taxable years 
        beginning after December 31, 2009.

                   Subtitle F--Conservation Easements

SEC. 551. EXPANSION OF ESTATE TAX RULE FOR CONSERVATION EASEMENTS.

    (a) Repeal of Certain Restrictions on Where Land Is 
Located.--Clause (i) of section 2031(c)(8)(A) (defining land 
subject to a qualified conservation easement) is amended to 
read as follows:
                            ``(i) which is located in the 
                        United States or any possession of the 
                        United States,''.
    (b) Clarification of Date for Determining Value of Land and 
Easement.--Section 2031(c)(2) (defining applicable percentage) 
is amended by adding at the end the following new sentence: 
``The values taken into account under the preceding sentence 
shall be such values as of the date of the contribution 
referred to in paragraph (8)(B).''.
    (c) Effective Date.--The amendments made by this section 
shall apply to estates of decedents dying after December 31, 
2000.

     Subtitle G--Modifications of Generation-Skipping Transfer Tax

SEC. 561. DEEMED ALLOCATION OF GST EXEMPTION TO LIFETIME TRANSFERS TO 
                    TRUSTS; RETROACTIVE ALLOCATIONS.

    (a) In General.--Section 2632 (relating to special rules 
for allocation of GST exemption) is amended by redesignating 
subsection (c) as subsection (e) and by inserting after 
subsection (b) the following new subsections:
    ``(c) Deemed Allocation to Certain Lifetime Transfers to 
GST Trusts.--
            ``(1) In general.--If any individual makes an 
        indirect skip during such individual's lifetime, any 
        unused portion of such individual's GST exemption shall 
        be allocated to the property transferred to the extent 
        necessary to make the inclusion ratio for such property 
        zero. If the amount of the indirect skip exceeds such 
        unused portion, the entire unused portion shall be 
        allocated to the property transferred.
            ``(2) Unused portion.--For purposes of paragraph 
        (1), the unused portion of an individual's GST 
        exemption is that portion of such exemption which has 
        not previously been--
                    ``(A) allocated by such individual,
                    ``(B) treated as allocated under subsection 
                (b) with respect to a direct skip occurring 
                during or before the calendar year in which the 
                indirect skip is made, or
                    ``(C) treated as allocated under paragraph 
                (1) with respect to a prior indirect skip.
            ``(3) Definitions.--
                    ``(A) Indirect skip.--For purposes of this 
                subsection, the term `indirect skip' means any 
                transfer of property (other than a direct skip) 
                subject to the tax imposed by chapter 12 made 
                to a GST trust.
                    ``(B) GST trust.--The term `GST trust' 
                means a trust that could have a generation-
                skipping transfer with respect to the 
                transferor unless--
                            ``(i) the trust instrument provides 
                        that more than 25 percent of the trust 
                        corpus must be distributed to or may be 
                        withdrawn by one or more individuals 
                        who are non-skip persons--
                                    ``(I) before the date that 
                                the individual attains age 46,
                                    ``(II) on or before one or 
                                more dates specified in the 
                                trust instrument that will 
                                occur before the date that such 
                                individual attains age 46, or
                                    ``(III) upon the occurrence 
                                of an event that, in accordance 
                                with regulations prescribed by 
                                the Secretary, may reasonably 
                                be expected to occur before the 
                                date that such individual 
                                attains age 46,
                            ``(ii) the trust instrument 
                        provides that more than 25 percent of 
                        the trust corpus must be distributed to 
                        or may be withdrawn by one or more 
                        individuals who are non-skip persons 
                        and who are living on the date of death 
                        of another person identified in the 
                        instrument (by name or by class) who is 
                        more than 10 years older than such 
                        individuals,
                            ``(iii) the trust instrument 
                        provides that, if one or more 
                        individuals who are non-skip persons 
                        die on or before a date or event 
                        described in clause (i) or (ii), more 
                        than 25 percent of the trust corpus 
                        either must be distributed to the 
                        estate or estates of one or more of 
                        such individuals or is subject to a 
                        general power of appointment 
                        exercisable by one or more of such 
                        individuals,
                            ``(iv) the trust is a trust any 
                        portion of which would be included in 
                        the gross estate of a non-skip person 
                        (other than the transferor) if such 
                        person died immediately after the 
                        transfer,
                            ``(v) the trust is a charitable 
                        lead annuity trust (within the meaning 
                        of section 2642(e)(3)(A)) or a 
                        charitable remainder annuity trust or a 
                        charitable remainder unitrust (within 
                        the meaning of section 664(d)), or
                            ``(vi) the trust is a trust with 
                        respect to which a deduction was 
                        allowed under section 2522 for the 
                        amount of an interest in the form of 
                        the right to receive annual payments of 
                        a fixed percentage of the net fair 
                        market value of the trust property 
                        (determined yearly) and which is 
                        required to pay principal to a non-skip 
                        person if such person is alive when the 
                        yearly payments for which the deduction 
                        was allowed terminate.

                For purposes of this subparagraph, the value of 
                transferred property shall not be considered to 
                be includible in the gross estate of a non-skip 
                person or subject to a right of withdrawal by 
                reason of such person holding a right to 
                withdraw so much of such property as does not 
                exceed the amount referred to in section 
                2503(b) with respect to any transferor, and it 
                shall be assumed that powers of appointment 
                held by non-skip persons will not be exercised.
            ``(4) Automatic allocations to certain gst 
        trusts.--For purposes of this subsection, an indirect 
        skip to which section 2642(f) applies shall be deemed 
        to have been made only at the close of the estate tax 
        inclusion period. The fair market value of such 
        transfer shall be the fair market value of the trust 
        property at the close of the estate tax inclusion 
        period.
            ``(5) Applicability and effect.--
                    ``(A) In general.--An individual--
                            ``(i) may elect to have this 
                        subsection not apply to--
                                    ``(I) an indirect skip, or
                                    ``(II) any or all transfers 
                                made by such individual to a 
                                particular trust, and
                            ``(ii) may elect to treat any trust 
                        as a GST trust for purposes of this 
                        subsection with respect to any or all 
                        transfers made by such individual to 
                        such trust.
                    ``(B) Elections.--
                            ``(i) Elections with respect to 
                        indirect skips.--An election under 
                        subparagraph (A)(i)(I) shall be deemed 
                        to be timely if filed on a timely filed 
                        gift tax return for the calendar year 
                        in which the transfer was made or 
                        deemed to have been made pursuant to 
                        paragraph (4) or on such later date or 
                        dates as may be prescribed by the 
                        Secretary.
                            ``(ii) Other elections.--An 
                        election under clause (i)(II) or (ii) 
                        of subparagraph (A) may be made on a 
                        timely filed gift tax return for the 
                        calendar year for which the election is 
                        to become effective.
    ``(d) Retroactive Allocations.--
            ``(1) In general.--If--
                    ``(A) a non-skip person has an interest or 
                a future interest in a trust to which any 
                transfer has been made,
                    ``(B) such person--
                            ``(i) is a lineal descendant of a 
                        grandparent of the transferor or of a 
                        grandparent of the transferor's spouse 
                        or former spouse, and
                            ``(ii) is assigned to a generation 
                        below the generation assignment of the 
                        transferor, and
                    ``(C) such person predeceases the 
                transferor,

        then the transferor may make an allocation of any of 
        such transferor's unused GST exemption to any previous 
        transfer or transfers to the trust on a chronological 
        basis.
            ``(2) Special rules.--If the allocation under 
        paragraph (1) by the transferor is made on a gift tax 
        return filed on or before the date prescribed by 
        section 6075(b) for gifts made within the calendar year 
        within which the non-skip person's death occurred--
                    ``(A) the value of such transfer or 
                transfers for purposes of section 2642(a) shall 
                be determined as if such allocation had been 
                made on a timely filed gift tax return for each 
                calendar year within which each transfer was 
                made,
                    ``(B) such allocation shall be effective 
                immediately before such death, and
                    ``(C) the amount of the transferor's unused 
                GST exemption available to be allocated shall 
                be determined immediately before such death.
            ``(3) Future interest.--For purposes of this 
        subsection, a person has a future interest in a trust 
        if the trust may permit income or corpus to be paid to 
        such person on a date or dates in the future.''.
    (b) Conforming Amendment.--Paragraph (2) of section 2632(b) 
is amended by striking ``with respect to a prior direct skip'' 
and inserting ``or subsection (c)(1)''.
    (c) Effective Dates.--
            (1) Deemed allocation.--Section 2632(c) of the 
        Internal Revenue Code of 1986 (as added by subsection 
        (a)), and the amendment made by subsection (b), shall 
        apply to transfers subject to chapter 11 or 12 made 
        after December 31, 2000, and to estate tax inclusion 
        periods ending after December 31, 2000.
            (2) Retroactive allocations.--Section 2632(d) of 
        the Internal Revenue Code of 1986 (as added by 
        subsection (a)) shall apply to deaths of non-skip 
        persons occurring after December 31, 2000.

SEC. 562. SEVERING OF TRUSTS.

    (a) In General.--Subsection (a) of section 2642 (relating 
to inclusion ratio) is amended by adding at the end the 
following new paragraph:
            ``(3) Severing of trusts.--
                    ``(A) In general.--If a trust is severed in 
                a qualified severance, the trusts resulting 
                from such severance shall be treated as 
                separate trusts thereafter for purposes of this 
                chapter.
                    ``(B) Qualified severance.--For purposes of 
                subparagraph (A)--
                            ``(i) In general.--The term 
                        `qualified severance' means the 
                        division of a single trust and the 
                        creation (by any means available under 
                        the governing instrument or under local 
                        law) of two or more trusts if--
                                    ``(I) the single trust was 
                                divided on a fractional basis, 
                                and
                                    ``(II) the terms of the new 
                                trusts, in the aggregate, 
                                provide for the same succession 
                                of interests of beneficiaries 
                                as are provided in the original 
                                trust.
                            ``(ii) Trusts with inclusion ratio 
                        greater than zero.--If a trust has an 
                        inclusion ratio of greater than zero 
                        and less than 1, a severance is a 
                        qualified severance only if the single 
                        trust is divided into two trusts, one 
                        of which receives a fractional share of 
                        the total value of all trust assets 
                        equal to the applicable fraction of the 
                        single trust immediately before the 
                        severance. In such case, the trust 
                        receiving such fractional share shall 
                        have an inclusion ratio of zero and the 
                        other trust shall have an inclusion 
                        ratio of 1.
                            ``(iii) Regulations.--The term 
                        `qualified severance' includes any 
                        other severance permitted under 
                        regulations prescribed by the 
                        Secretary.
                    ``(C) Timing and manner of severances.--A 
                severance pursuant to this paragraph may be 
                made at any time. The Secretary shall prescribe 
                by forms or regulations the manner in which the 
                qualified severance shall be reported to the 
                Secretary.''.
    (b) Effective Date.--The amendment made by this section 
shall apply to severances after December 31, 2000.

SEC. 563. MODIFICATION OF CERTAIN VALUATION RULES.

    (a) Gifts for Which Gift Tax Return Filed or Deemed 
Allocation Made.--Paragraph (1) of section 2642(b) (relating to 
valuation rules, etc.) is amended to read as follows:
            ``(1) Gifts for which gift tax return filed or 
        deemed allocation made.--If the allocation of the GST 
        exemption to any transfers of property is made on a 
        gift tax return filed on or before the date prescribed 
        by section 6075(b) for such transfer or is deemed to be 
        made under section 2632 (b)(1) or (c)(1)--
                    ``(A) the value of such property for 
                purposes of subsection (a) shall be its value 
                as finally determined for purposes of chapter 
                12 (within the meaning of section 2001(f)(2)), 
                or, in the case of an allocation deemed to have 
                been made at the close of an estate tax 
                inclusion period, its value at the time of the 
                close of the estate tax inclusion period, and
                    ``(B) such allocation shall be effective on 
                and after the date of such transfer, or, in the 
                case of an allocation deemed to have been made 
                at the close of an estate tax inclusion period, 
                on and after the close of such estate tax 
                inclusion period.''.
    (b) Transfers at Death.--Subparagraph (A) of section 
2642(b)(2) is amended to read as follows:
                    ``(A) Transfers at death.--If property is 
                transferred as a result of the death of the 
                transferor, the value of such property for 
                purposes of subsection (a) shall be its value 
                as finally determined for purposes of chapter 
                11; except that, if the requirements prescribed 
                by the Secretary respecting allocation of post-
                death changes in value are not met, the value 
                of such property shall be determined as of the 
                time of the distribution concerned.''.
    (c) Effective Date.--The amendments made by this section 
shall apply to transfers subject to chapter 11 or 12 of the 
Internal Revenue Code of 1986 made after December 31, 2000.

SEC. 564. RELIEF PROVISIONS.

    (a) In General.--Section 2642 is amended by adding at the 
end the following new subsection:
    ``(g) Relief Provisions.--
            ``(1) Relief from late elections.--
                    ``(A) In general.--The Secretary shall by 
                regulation prescribe such circumstances and 
                procedures under which extensions of time will 
                be granted to make--
                            ``(i) an allocation of GST 
                        exemption described in paragraph (1) or 
                        (2) of subsection (b), and
                            ``(ii) an election under subsection 
                        (b)(3) or (c)(5) of section 2632.

                Such regulations shall include procedures for 
                requesting comparable relief with respect to 
                transfers made before the date of the enactment 
                of this paragraph.
                    ``(B) Basis for determinations.--In 
                determining whether to grant relief under this 
                paragraph, the Secretary shall take into 
                account all relevant circumstances, including 
                evidence of intent contained in the trust 
                instrument or instrument of transfer and such 
                other factors as the Secretary deems relevant. 
                For purposes of determining whether to grant 
                relief under this paragraph, the time for 
                making the allocation (or election) shall be 
                treated as if not expressly prescribed by 
                statute.
            ``(2) Substantial compliance.--An allocation of GST 
        exemption under section 2632 that demonstrates an 
        intent to have the lowest possible inclusion ratio with 
        respect to a transfer or a trust shall be deemed to be 
        an allocation of so much of the transferor's unused GST 
        exemption as produces the lowest possible inclusion 
        ratio. In determining whether there has been 
        substantial compliance, all relevant circumstances 
        shall be taken into account, including evidence of 
        intent contained in the trust instrument or instrument 
        of transfer and such other factors as the Secretary 
        deems relevant.''.
    (b) Effective Dates.--
            (1) Relief from late elections.--Section 2642(g)(1) 
        of the Internal Revenue Code of 1986 (as added by 
        subsection (a)) shall apply to requests pending on, or 
        filed after, December 31, 2000.
            (2) Substantial compliance.--Section 2642(g)(2) of 
        such Code (as so added) shall apply to transfers 
        subject to chapter 11 or 12 of the Internal Revenue 
        Code of 1986 made after December 31, 2000. No 
        implication is intended with respect to the 
        availability of relief from late elections or the 
        application of a rule of substantial compliance on or 
        before such date.

        Subtitle H--Extension of Time for Payment of Estate Tax

SEC. 571. INCREASE IN NUMBER OF ALLOWABLE PARTNERS AND SHAREHOLDERS IN 
                    CLOSELY HELD BUSINESSES.

    (a) In General.--Paragraphs (1)(B)(ii), (1)(C)(ii), and 
(9)(B)(iii)(I) of section 6166(b) (relating to definitions and 
special rules) are each amended by striking ``15'' and 
inserting ``45''.
    (b) Effective Date.--The amendments made by this section 
shall apply to estates of decedents dying after December 31, 
2001.

SEC. 572. EXPANSION OF AVAILABILITY OF INSTALLMENT PAYMENT FOR ESTATES 
                    WITH INTERESTS QUALIFYING LENDING AND FINANCE 
                    BUSINESSES.

    (a) In General.--Section 6166(b) (relating to definitions 
and special rules) is amended by adding at the end the 
following new paragraph:
            ``(10) Stock in qualifying lending and finance 
        business treated as stock in an active trade or 
        business company.--
                    ``(A) In general.--If the executor elects 
                the benefits of this paragraph, then--
                            ``(i) Stock in qualifying lending 
                        and finance business treated as stock 
                        in an active trade or business 
                        company.--For purposes of this section, 
                        any asset used in a qualifying lending 
                        and finance business shall be treated 
                        as an asset which is used in carrying 
                        on a trade or business.
                            ``(ii) 5-year deferral for 
                        principal not to apply.--The executor 
                        shall be treated as having selected 
                        under subsection (a)(3) the date 
                        prescribed by section 6151(a).
                            ``(iii) 5 equal installments 
                        allowed.--For purposes of applying 
                        subsection (a)(1), `5' shall be 
                        substituted for `10'.
                    ``(B) Definitions.--For purposes of this 
                paragraph--
                            ``(i) Qualifying lending and 
                        finance business.--The term `qualifying 
                        lending and finance business' means a 
                        lending and finance business, if--
                                    ``(I) based on all the 
                                facts and circumstances 
                                immediately before the date of 
                                the decedent's death, there was 
                                substantial activity with 
                                respect to the lending and 
                                finance business, or
                                    ``(II) during at least 3 of 
                                the 5 taxable years ending 
                                before the date of the 
                                decedent's death, such business 
                                had at least 1 full-time 
                                employee substantially all of 
                                whose services were the active 
                                management of such business, 10 
                                full-time, nonowner employees 
                                substantially all of whose 
                                services were directly related 
                                to such business, and 
                                $5,000,000 in gross receipts 
                                from activities described in 
                                clause (ii).
                            ``(ii) Lending and finance 
                        business.--The term `lending and 
                        finance business' means a trade or 
                        business of--
                                    ``(I) making loans,
                                    ``(II) purchasing or 
                                discounting accounts 
                                receivable, notes, or 
                                installment obligations,
                                    ``(III) engaging in rental 
                                and leasing of real and 
                                tangible personal property, 
                                including entering into leases 
                                and purchasing, servicing, and 
                                disposing of leases and leased 
                                assets,
                                    ``(IV) rendering services 
                                or making facilities available 
                                in the ordinary course of a 
                                lending or finance business, 
                                and
                                    ``(V) rendering services or 
                                making facilities available in 
                                connection with activities 
                                described in subclauses (I) 
                                through (IV) carried on by the 
                                corporation rendering services 
                                or making facilities available, 
                                or another corporation which is 
                                a member of the same affiliated 
                                group (as defined in section 
                                1504 without regard to section 
                                1504(b)(3)).
                            ``(iii) Limitation.--The term 
                        `qualifying lending and finance 
                        business' shall not include any 
                        interest in an entity, if the stock or 
                        debt of such entity or a controlled 
                        group (as defined in section 267(f)(1)) 
                        of which such entity was a member was 
                        readily tradable on an established 
                        securities market or secondary market 
                        (as defined by the Secretary) at any 
                        time within 3 years before the date of 
                        the decedent's death.''.
    (b) Effective Date.--The amendment made by this section 
shall apply to estates of decedents dying after December 31, 
2001.

SEC. 572. CLARIFICATION OF AVAILABILITY OF INSTALLMENT PAYMENT.

    (a) In General.--Subparagraph (B) of section 6166(b)(8) 
(relating to all stock must be non-readily-tradable stock) is 
amended to read as follows:
                    ``(B) All stock must be non-readily-
                tradable stock.--
                            ``(i) In general.--No stock shall 
                        be taken into account for purposes of 
                        applying this paragraph unless it is 
                        non-readily-tradable stock (within the 
                        meaning of paragraph (7)(B)).
                            ``(ii) Special application where 
                        only holding company stock is non-
                        readily-tradable stock.--If the 
                        requirements of clause (i) are not met, 
                        but all of the stock of each holding 
                        company taken into account is non-
                        readily-tradable, then this paragraph 
                        shall apply, but subsection (a)(1) 
                        shall be applied by substituting `5' 
                        for `10'.''.
    (b) Effective Date.--The amendment made by this section 
shall apply to estates of decedents dying after December 31, 
2001.

                      Subtitle I--Other Provisions

SEC. 581. WAIVER OF STATUTE OF LIMITATION FOR TAXES ON CERTAIN FARM 
                    VALUATIONS.

    If on the date of the enactment of this Act (or at any time 
within 1 year after the date of the enactment) a refund or 
credit of any overpayment of tax resulting from the application 
of section 2032A(c)(7)(E) of the Internal Revenue Code of 1986 
is barred by any law or rule of law, the refund or credit of 
such overpayment shall, nevertheless, be made or allowed if 
claim therefor is filed before the date 1 year after the date 
of the enactment of this Act.

   TITLE VI--PENSION AND INDIVIDUAL RETIREMENT ARRANGEMENT PROVISIONS

               Subtitle A--Individual Retirement Accounts

SEC. 601. MODIFICATION OF IRA CONTRIBUTION LIMITS.

    (a) Increase in Contribution Limit.--
            (1) In general.--Paragraph (1)(A) of section 219(b) 
        (relating to maximum amount of deduction) is amended by 
        striking ``$2,000'' and inserting ``the deductible 
        amount''.
            (2) Deductible amount.--Section 219(b) is amended 
        by adding at the end the following new paragraph:
            ``(5) Deductible amount.--For purposes of paragraph 
        (1)(A)--
                    ``(A) In general.--The deductible amount 
                shall be determined in accordance with the 
                following table:

``For taxable years beginning in:              The deductible amount is:
            2002 through 2004.................................   $3,000 
            2005 through 2007.................................   $4,000 
            2008 and thereafter...............................   $5,000.

                    ``(B) Catch-up contributions for 
                individuals 50 or older.--
                            ``(i) In general.--In the case of 
                        an individual who has attained the age 
                        of 50 before the close of the taxable 
                        year, the deductible amount for such 
                        taxable year shall be increased by the 
                        applicable amount.
                            ``(ii) Applicable amount.--For 
                        purposes of clause (i), the applicable 
                        amount shall be the amount determined 
                        in accordance with the following table:

``For taxable years beginning in:              The applicable amount is:
            2002 through 2005.................................     $500 
            2006 and thereafter...............................   $1,000.

                    ``(C) Cost-of-living adjustment.--
                            ``(i) In general.--In the case of 
                        any taxable year beginning in a 
                        calendar year after 2008, the $5,000 
                        amount under subparagraph (A) shall be 
                        increased by an amount equal to--
                                    ``(I) such dollar amount, 
                                multiplied by
                                    ``(II) the cost-of-living 
                                adjustment determined under 
                                section 1(f)(3) for the 
                                calendar year in which the 
                                taxable year begins, determined 
                                by substituting `calendar year 
                                2007' for `calendar year 1992' 
                                in subparagraph (B) thereof.
                            ``(ii) Rounding rules.--If any 
                        amount after adjustment under clause 
                        (i) is not a multiple of $500, such 
                        amount shall be rounded to the next 
                        lower multiple of $500.''.
    (b) Conforming Amendments.--
            (1) Section 408(a)(1) is amended by striking ``in 
        excess of $2,000 on behalf of any individual'' and 
        inserting ``on behalf of any individual in excess of 
        the amount in effect for such taxable year under 
        section 219(b)(1)(A)''.
            (2) Section 408(b)(2)(B) is amended by striking 
        ``$2,000'' and inserting ``the dollar amount in effect 
        under section 219(b)(1)(A)''.
            (3) Section 408(b) is amended by striking 
        ``$2,000'' in the matter following paragraph (4) and 
        inserting ``the dollar amount in effect under section 
        219(b)(1)(A)''.
            (4) Section 408(j) is amended by striking 
        ``$2,000''.
            (5) Section 408(p)(8) is amended by striking 
        ``$2,000'' and inserting ``the dollar amount in effect 
        under section 219(b)(1)(A)''.
    (c) Effective Date.--The amendments made by this section 
shall apply to taxable years beginning after December 31, 2001.

SEC. 602. DEEMED IRAS UNDER EMPLOYER PLANS.

    (a) In General.--Section 408 (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) Deemed IRAs Under Qualified Employer Plans.--
            ``(1) General rule.--If--
                    ``(A) a qualified employer plan elects to 
                allow employees to make voluntary employee 
                contributions to a separate account or annuity 
                established under the plan, and
                    ``(B) under the terms of the qualified 
                employer plan, such account or annuity meets 
                the applicable requirements of this section or 
                section 408A for an individual retirement 
                account or annuity,

        then such account or annuity shall be treated for 
        purposes of this title in the same manner as an 
        individual retirement plan and not as a qualified 
        employer plan (and contributions to such account or 
        annuity as contributions to an individual retirement 
        plan and not to the qualified employer plan). For 
        purposes of subparagraph (B), the requirements of 
        subsection (a)(5) shall not apply.
            ``(2) Special rules for qualified employer plans.--
        For purposes of this title, a qualified employer plan 
        shall not fail to meet any requirement of this title 
        solely by reason of establishing and maintaining a 
        program described in paragraph (1).
            ``(3) Definitions.--For purposes of this 
        subsection--
                    ``(A) Qualified employer plan.--The term 
                `qualified employer plan' has the meaning given 
                such term by section 72(p)(4); except such term 
                shall not include a government plan which is 
                not a qualified plan unless the plan is an 
                eligible deferred compensation plan (as defined 
                in section 457(b)).
                    ``(B) Voluntary employee contribution.--The 
                term `voluntary employee contribution' means 
                any contribution (other than a mandatory 
                contribution within the meaning of section 
                411(c)(2)(C))--
                            ``(i) which is made by an 
                        individual as an employee under a 
                        qualified employer plan which allows 
                        employees to elect to make 
                        contributions described in paragraph 
                        (1), and
                            ``(ii) with respect to which the 
                        individual has designated the 
                        contribution as a contribution to which 
                        this subsection applies.''.
    (b) Amendment of ERISA.--
            (1) In general.--Section 4 of the Employee 
        Retirement Income Security Act of 1974 (29 U.S.C. 1003) 
        isamended by adding at the end the following new 
subsection:
    ``(c) If a pension plan allows an employee to elect to make 
voluntary employee contributions to accounts and annuities as 
provided in section 408(q) of the Internal Revenue Code of 
1986, such accounts and annuities (and contributions thereto) 
shall not be treated as part of such plan (or as a separate 
pension plan) for purposes of any provision of this title other 
than section 403(c), 404, or 405 (relating to exclusive 
benefit, and fiduciary and co-fiduciary responsibilities).''.
            (2) Conforming amendment.--Section 4(a) of such Act 
        (29 U.S.C. 1003(a)) is amended by inserting ``or (c)'' 
        after ``subsection (b)''.
    (c) Effective Date.--The amendments made by this section 
shall apply to plan years beginning after December 31, 2002.

                     Subtitle B--Expanding Coverage

SEC. 611. INCREASE IN BENEFIT AND CONTRIBUTION LIMITS.

    (a) Defined Benefit Plans.--
            (1) Dollar limit.--
                    (A) Subparagraph (A) of section 415(b)(1) 
                (relating to limitation for defined benefit 
                plans) is amended by striking ``$90,000'' and 
                inserting ``$160,000''.
                    (B) Subparagraphs (C) and (D) of section 
                415(b)(2) are each amended in the headings and 
                the text, by striking ``$90,000'' and inserting 
                ``$160,000'',
                    (C) Paragraph (7) of section 415(b) 
                (relating to benefits under certain 
                collectively bargained plans) is amended by 
                striking ``the greater of $68,212 or one-half 
                the amount otherwise applicable for such year 
                under paragraph (1)(A) for `$90,000' '' and 
                inserting ``one-half the amount otherwise 
                applicable for such year under paragraph (1)(A) 
                for `$160,000' ''.
            (2) Limit reduced when benefit begins before age 
        62.--Subparagraph (C) of section 415(b)(2) is amended 
        by striking ``the social security retirement age'' each 
        place it appears in the heading and text and inserting 
        ``age 62'' and by striking the second sentence.
            (3) Limit increased when benefit begins after age 
        65.--Subparagraph (D) of section 415(b)(2) is amended 
        by striking ``the social security retirement age'' each 
        place it appears in the heading and text and inserting 
        ``age 65''.
            (4) Cost-of-living adjustments.--Subsection (d) of 
        section 415 (related to cost-of-living adjustments) is 
        amended--
                    (A) by striking ``$90,000'' in paragraph 
                (1)(A) and inserting ``$160,000''; and
                    (B) in paragraph (3)(A)--
                            (i) by striking ``$90,000'' in the 
                        heading and inserting ``$160,000''; and
                            (ii) by striking ``October 1, 
                        1986'' and inserting ``July 1, 2001''.
            (5) Conforming amendments.--
                    (A) Section 415(b)(2) is amended by 
                striking subparagraph (F).
                    (B) Section 415(b)(9) is amended to read as 
                follows:
            ``(9) Special rule for commercial airline pilots.--
                    ``(A) In general.--Except as provided in 
                subparagraph (B), in the case of any 
                participant who is a commercial airline pilot, 
                if, as of the time of the participant's 
                retirement, regulations prescribed by the 
                Federal Aviation Administration require an 
                individual to separate from service as a 
                commercial airline pilot after attaining any 
                age occurring on or after age 60 and before age 
                62, paragraph (2)(C) shall be applied by 
                substituting such age for age 62.
                    ``(B) Individuals who separate from service 
                before age 60.--If a participant described in 
                subparagraph (A) separates from service before 
                age 60, the rules of paragraph (2)(C) shall 
                apply.''.
                    (C) Section 415(b)(10)(C)(i) is amended by 
                striking ``applied without regard to paragraph 
                (2)(F)''.
    (b) Defined Contribution Plans.--
            (1) Dollar limit.--Subparagraph (A) of section 
        415(c)(1) (relating to limitation for defined 
        contribution plans) is amended by striking ``$30,000'' 
        and inserting ``$40,000''.
            (2) Cost-of-living adjustments.--Subsection (d) of 
        section 415 (related to cost-of-living adjustments) is 
        amended--
                    (A) by striking ``$30,000'' in paragraph 
                (1)(C) and inserting ``$40,000''; and
                    (B) in paragraph (3)(D)--
                            (i) by striking ``$30,000'' in the 
                        heading and inserting ``$40,000''; and
                            (ii) by striking ``October 1, 
                        1993'' and inserting ``July 1, 2001''.
    (c) Qualified Trusts.--
            (1) Compensation limit.--Sections 401(a)(17), 
        404(l), 408(k), and 505(b)(7) are each amended by 
        striking ``$150,000'' each place it appears and 
        inserting ``$200,000''.
            (2) Base period and rounding of cost-of-living 
        adjustment.--Subparagraph (B) of section 401(a)(17) is 
        amended--
                    (A) by striking ``October 1, 1993'' and 
                inserting ``July 1, 2001''; and
                    (B) by striking ``$10,000'' both places it 
                appears and inserting ``$5,000''.
    (d) Elective Deferrals.--
            (1) In general.--Paragraph (1) of section 402(g) 
        (relating to limitation on exclusion for elective 
        deferrals) is amended to read as follows:
            ``(1) In general.--
                    ``(A) Limitation.--Notwithstanding 
                subsections (e)(3) and (h)(1)(B), the elective 
                deferrals of any individual for any taxable 
                year shall be included in such individual's 
                gross income to the extent the amount of such 
                deferrals for the taxable year exceeds the 
                applicable dollar amount.
                    ``(B) Applicable dollar amount.--For 
                purposes of subparagraph (A), the applicable 
                dollar amount shall be the amount determined in 
                accordance with the following table:

``For taxable years beginning                             The applicable
    in calendar year:                                     dollar amount:
            2002..............................................  $11,000 
            2003..............................................  $12,000 
            2004..............................................  $13,000 
            2005..............................................  $14,000 
            2006 or thereafter...............................$15,000.''.

            (2) Cost-of-living adjustment.--Paragraph (5) of 
        section 402(g) is amended to read as follows:
            ``(5) Cost-of-living adjustment.--In the case of 
        taxable years beginning after December 31, 2006, the 
        Secretary shall adjust the $15,000 amount under 
        paragraph (1)(B) at the same time and in the same 
        manner as under section 415(d), except that the base 
        period shall be the calendar quarter beginning July 1, 
        2005, and any increase under this paragraph which is 
        not a multiple of $500 shall be rounded to the next 
        lowest multiple of $500.''.
            (3) Conforming amendments.--
                    (A) Section 402(g) (relating to limitation 
                on exclusion for elective deferrals), as 
                amended by paragraphs (1) and (2), is further 
                amended by striking paragraph (4) and 
                redesignating paragraphs (5), (6), (7), (8), 
                and (9) as paragraphs (4), (5), (6), (7), and 
                (8), respectively.
                    (B) Paragraph (2) of section 457(c) is 
                amended by striking ``402(g)(8)(A)(iii)'' and 
                inserting ``402(g)(7)(A)(iii)''.
                    (C) Clause (iii) of section 501(c)(18)(D) 
                is amended by striking ``(other than paragraph 
                (4) thereof)''.
    (e) Deferred Compensation Plans of State and Local 
Governments and Tax-Exempt Organizations.--
            (1) In general.--Section 457 (relating to deferred 
        compensation plans of State and local governments and 
        tax-exempt organizations) is amended--
                    (A) in subsections (b)(2)(A) and (c)(1) by 
                striking ``$7,500'' each place it appears and 
                inserting ``the applicable dollar amount''; and
                    (B) in subsection (b)(3)(A) by striking 
                ``$15,000'' and inserting ``twice the dollar 
                amount in effect under subsection (b)(2)(A)''.
            (2) Applicable dollar amount; cost-of-living 
        adjustment.--Paragraph (15) of section 457(e) is 
        amended to read as follows:
            ``(15) Applicable dollar amount.--
                    ``(A) In general.--The applicable dollar 
                amount shall be the amount determined in 
                accordance with the following table:

``For taxable years beginning                             The applicable
    in calendar year:                                     dollar amount:
            2002..............................................  $11,000 
            2003..............................................  $12,000 
            2004..............................................  $13,000 
            2005..............................................  $14,000 
            2006 or thereafter................................  $15,000.

                    ``(B) Cost-of-living adjustments.--In the 
                case of taxable years beginning after December 
                31, 2006, the Secretary shall adjust the 
                $15,000 amount under subparagraph (A) at the 
                same time and in the same manner as under 
                section 415(d), except that the base period 
                shall be the calendar quarter beginning July 1, 
                2005, and any increase under this paragraph 
                which is not a multiple of $500 shall be 
                rounded to the next lowest multiple of $500.''.
    (f) Simple Retirement Accounts.--
            (1) Limitation.--Clause (ii) of section 
        408(p)(2)(A) (relating to general rule for qualified 
        salary reduction arrangement) is amended by striking 
        ``$6,000'' and inserting ``the applicable dollar 
        amount''.
            (2) Applicable dollar amount.--Subparagraph (E) of 
        408(p)(2) is amended to read as follows:
                    ``(E) Applicable dollar amount; cost-of-
                living adjustment.--
                            ``(i) In general.--For purposes of 
                        subparagraph (A)(ii), the applicable 
                        dollar amount shall be the amount 
                        determined in accordance with the 
                        following table:

``For years beginning in calendar year:    The applicable dollar amount:
            2002..............................................   $7,000 
            2003..............................................   $8,000 
            2004..............................................   $9,000 
            2005 or thereafter................................  $10,000.

                            ``(ii) Cost-of-living adjustment.--
                        In the case of a year beginning after 
                        December 31, 2005, the Secretary shall 
                        adjust the $10,000 amount under clause 
                        (i) at the same time and in the same 
                        manner as under section 415(d), except 
                        that the base period taken into account 
                        shall be the calendar quarter beginning 
                        July 1, 2004, and any increase under 
                        this subparagraph which is not a 
                        multiple of $500 shall be rounded to 
                        the next lower multiple of $500.''.
            (3) Conforming amendments.--
                    (A) Subclause (I) of section 
                401(k)(11)(B)(i) is amended by striking 
                ``$6,000'' and inserting ``the amount in effect 
                under section 408(p)(2)(A)(ii)''.
                    (B) Section 401(k)(11) is amended by 
                striking subparagraph (E).
    (g) Certain Compensation Limits.--
            (1) In general.--Subparagraph (A) of section 
        401(c)(2) (defining earned income) is amended by adding 
        at the end thereof the following new sentence: ``For 
        purposes of this part only (other than sections 419 and 
        419A), this subparagraph shall be applied as if the 
        term `trade or business' for purposes of section 1402 
        included service described in section 1402(c)(6).''.
            (2) Simple retirement accounts.--Clause (ii) of 
        section 408(p)(6)(A) (defining self-employed) is 
        amended by adding at the end the following new 
        sentence: ``The preceding sentence shall be applied as 
        if the term `trade or business' for purposes of section 
        1402 included service described in section 
        1402(c)(6).''.
    (h) Rounding Rule Relating to Defined Benefit Plans and 
Defined Contribution Plans.--Paragraph (4) of section 415(d) is 
amended to read as follows:
            ``(4) Rounding.--
                    ``(A) $160,000 amount.--Any increase under 
                subparagraph (A) of paragraph (1) which is not 
                a multiple of $5,000 shall be rounded to the 
                next lowest multiple of $5,000.
                    ``(B) $40,000 amount.--Any increase under 
                subparagraph (C) of paragraph (1) which is not 
                a multiple of $1,000 shall be rounded to the 
                next lowest multiple of $1,000.''.
    (i) Effective Dates.--
            (1) In general.--The amendments made by this 
        section shall apply to years beginning after December 
        31, 2001.
            (2) Defined benefit plans.--The amendments made by 
        subsection (a) shall apply to years ending after 
        December 31, 2001.

SEC. 612. PLAN LOANS FOR SUBCHAPTER S OWNERS, PARTNERS, AND SOLE 
                    PROPRIETORS.

    (a) In General.--Subparagraph (B) of section 4975(f)(6) 
(relating to exemptions not to apply to certain transactions) 
is amended by adding at the end the following new clause:
                            ``(iii) Loan exception.--For 
                        purposes of subparagraph (A)(i), the 
                        term `owner-employee' shall only 
                        include a person described in subclause 
                        (II) or (III) of clause (i).''.
    (b) Amendment of ERISA.--Section 408(d)(2) of the Employee 
Retirement Income Security Act of 1974 (29 U.S.C. 1108(d)(2)) 
is amended by adding at the end the following new subparagraph:
    ``(C) For purposes of paragraph (1)(A), the term `owner-
employee' shall only include a person described in clause (ii) 
or (iii) of subparagraph (A).''.
    (c) Effective Date.--The amendment made by this section 
shall apply to years beginning after December 31, 2001.

SEC. 613. MODIFICATION OF TOP-HEAVY RULES.

    (a) Simplification of Definition of Key Employee.--
            (1) In general.--Section 416(i)(1)(A) (defining key 
        employee) is amended--
                    (A) by striking ``or any of the 4 preceding 
                plan years'' in the matter preceding clause 
                (i);
                    (B) by striking clause (i) and inserting 
                the following:
                            ``(i) an officer of the employer 
                        having an annual compensation greater 
                        than $130,000,'';
                    (C) by striking clause (ii) and 
                redesignating clauses (iii) and (iv) as clauses 
                (ii) and (iii), respectively; and
                    (D) by striking the second sentence in the 
                matter following clause (iii), as redesignated 
                by subparagraph (C), and by inserting the 
                following: ``in the case of plan years 
                beginning after December 31, 2002, the $130,000 
                amount in clause (i) shall be adjusted at the 
                same time and in the same manner as under 
                section 415(d), except that the base period 
                shall be the calendar quarter beginning July 1, 
                2001, and any increase under this sentence 
                which is not a multiple of $5,000 shall be 
                rounded to the next lower multiple of 
                $5,000.''.
            (2) Conforming amendment.--Section 
        416(i)(1)(B)(iii) is amended by striking ``and 
        subparagraph (A)(ii)''.
    (b) Matching Contributions Taken Into Account for Minimum 
Contribution Requirements.--Section 416(c)(2)(A) (relating to 
defined contribution plans) is amended by adding at the end the 
following: ``Employer matching contributions (as defined in 
section 401(m)(4)(A)) shall be taken into account for purposes 
of this subparagraph (and any reduction under this sentence 
shall not be taken into account in determining whether section 
401(k)(4)(A) applies).''.
    (c) Distributions During Last Year Before Determination 
Date Taken Into Account.--
            (1) In general.--Paragraph (3) of section 416(g) is 
        amended to read as follows:
            ``(3) Distributions during last year before 
        determination date taken into account.--
                    ``(A) In general.--For purposes of 
                determining--
                            ``(i) the present value of the 
                        cumulative accrued benefit for any 
                        employee, or
                            ``(ii) the amount of the account of 
                        any employee,

                such present value or amount shall be increased 
                by the aggregate distributions made with 
                respect to such employee under the plan during 
                the 1-year period ending on the determination 
                date. The preceding sentence shall also apply 
                to distributions under a terminated plan which 
                if it had not been terminated would have been 
                required to be included in an aggregation 
                group.
                    ``(B) 5-year period in case of in-service 
                distribution.--In the case of any distribution 
                made for a reason other than separation from 
                service, death, or disability, subparagraph (A) 
                shall be applied by substituting `5-year 
                period' for `1-year period'.''.
            (2) Benefits not taken into account.--Subparagraph 
        (E) of section 416(g)(4) is amended--
                    (A) by striking ``last 5 years'' in the 
                heading and inserting ``last year before 
                determination date''; and
                    (B) by striking ``5-year period'' and 
                inserting ``1-year period''.
    (d) Definition of Top-Heavy Plans.--Paragraph (4) of 
section 416(g) (relating to other special rules for top-heavy 
plans) is amended by adding at the end the following new 
subparagraph:
                    ``(H) Cash or deferred arrangements using 
                alternative methods of meeting 
                nondiscrimination requirements.--The term `top-
                heavy plan' shall not include a plan which 
                consists solely of--
                            ``(i) a cash or deferred 
                        arrangement which meets the 
                        requirements of section 401(k)(12), and
                            ``(ii) matching contributions with 
                        respect to which the requirements of 
                        section 401(m)(11) are met.

                If, but for this subparagraph, a plan would be 
                treated as a top-heavy plan because it is a 
                member of an aggregation group which is a top-
                heavy group, contributions under the plan may 
                be taken into account in determining whether 
                any other plan in the group meets the 
                requirements of subsection (c)(2).''.
    (e) Frozen Plan Exempt From Minimum Benefit Requirement.--
Subparagraph (C) of section 416(c)(1) (relating to defined 
benefit plans) is amended--
                    (A) by striking ``clause (ii)'' in clause 
                (i) and inserting ``clause (ii) or (iii)''; and
                    (B) by adding at the end the following:
                            ``(iii) Exception for frozen 
                        plan.--For purposes of determining an 
                        employee's years ofservice with the 
employer, any service with the employer shall be disregarded to the 
extent that such service occurs during a plan year when the plan 
benefits (within the meaning of section 410(b)) no key employee or 
former key employee.''.
    (f) Effective Date.--The amendments made by this section 
shall apply to years beginning after December 31, 2001.

SEC. 614. ELECTIVE DEFERRALS NOT TAKEN INTO ACCOUNT FOR PURPOSES OF 
                    DEDUCTION LIMITS.

    (a) In General.--Section 404 (relating to deduction for 
contributions of an employer to an employees' trust or annuity 
plan and compensation under a deferred payment plan) is amended 
by adding at the end the following new subsection:
    ``(n) Elective Deferrals Not Taken Into Account for 
Purposes of Deduction Limits.--Elective deferrals (as defined 
in section 402(g)(3)) shall not be subject to any limitation 
contained in paragraph (3), (7), or (9) of subsection (a), and 
such elective deferrals shall not be taken into account in 
applying any such limitation to any other contributions.''.
    (b) Effective Date.--The amendment made by this section 
shall apply to years beginning after December 31, 2001.

SEC. 615. REPEAL OF COORDINATION REQUIREMENTS FOR DEFERRED COMPENSATION 
                    PLANS OF STATE AND LOCAL GOVERNMENTS AND TAX-EXEMPT 
                    ORGANIZATIONS.

    (a) In General.--Subsection (c) of section 457 (relating to 
deferred compensation plans of State and local governments and 
tax-exempt organizations), as amended by section 611, is 
amended to read as follows:
    ``(c) Limitation.--The maximum amount of the compensation 
of any one individual which may be deferred under subsection 
(a) during any taxable year shall not exceed the amount in 
effect under subsection (b)(2)(A) (as modified by any 
adjustment provided under subsection (b)(3)).''.
    (b) Effective Date.--The amendment made by subsection (a) 
shall apply to years beginning after December 31, 2001.

SEC. 616. DEDUCTION LIMITS.

    (a) Modification of Limits.--
            (1) Stock bonus and profit sharing trusts.--
                    (A) In general.--Subclause (I) of section 
                404(a)(3)(A)(i) (relating to stock bonus and 
                profit sharing trusts) is amended by striking 
                ``15 percent'' and inserting ``25 percent''.
                    (B) Conforming amendment.--Subparagraph (C) 
                of section 404(h)(1) is amended by striking 
                ``15 percent'' each place it appears and 
                inserting ``25 percent''.
            (2) Defined contribution plans.--
                    (A) In general.--Clause (v) of section 
                404(a)(3)(A) (relating to stock bonus and 
                profit sharing trusts) is amended to read as 
                follows:
                            ``(v) Defined contribution plans 
                        subject to the funding standards.--
                        Except as provided by the Secretary, a 
                        defined contribution plan which is 
                        subject to the funding standards of 
                        section 412 shall be treated in the 
                        same manner as a stock bonus or profit-
                        sharing plan for purposes of this 
                        subparagraph.''
                    (B) Conforming amendments.--
                            (i) Section 404(a)(1)(A) is amended 
                        by inserting ``(other than a trust to 
                        which paragraph (3) applies)'' after 
                        ``pension trust''.
                            (ii) Section 404(h)(2) is amended 
                        by striking ``stock bonus or profit-
                        sharing trust'' and inserting ``trust 
                        subject to subsection (a)(3)(A)''.
                            (iii) The heading of section 
                        404(h)(2) is amended by striking 
                        ``stock bonus and profit-sharing 
                        trust'' and inserting ``certain 
                        trusts''.
    (b) Compensation.--
            (1) In general.--Section 404(a) (relating to 
        general rule) is amended by adding at the end the 
        following:
            ``(12) Definition of compensation.--For purposes of 
        paragraphs (3), (7), (8), and (9), the term 
        `compensation' shall include amounts treated as 
        `participant's compensation' under subparagraph (C) or 
        (D) of section 415(c)(3).''.
            (2) Conforming amendments.--
                    (A) Subparagraph (B) of section 404(a)(3) 
                is amended by striking the last sentence 
                thereof.
                    (B) Clause (i) of section 4972(c)(6)(B) is 
                amended by striking ``(within the meaning of 
                section 404(a))'' and inserting ``(within the 
                meaning of section 404(a) and as adjusted under 
                section 404(a)(12))''.
    (c) Effective Date.--The amendments made by this section 
shall apply to years beginning after December 31, 2001.

SEC. 617. OPTION TO TREAT ELECTIVE DEFERRALS AS AFTER-TAX ROTH 
                    CONTRIBUTIONS.

    (a) In General.--Subpart A of part I of subchapter D of 
chapter 1 (relating to deferred compensation, etc.) is amended 
by inserting after section 402 the following new section:

``SEC. 402A. OPTIONAL TREATMENT OF ELECTIVE DEFERRALS AS ROTH 
                    CONTRIBUTIONS.

    ``(a) General Rule.--If an applicable retirement plan 
includes a qualified Roth contribution program--
            ``(1) any designated Roth contribution made by an 
        employee pursuant to the program shall be treated as an 
        elective deferral for purposes of this chapter, except 
        that such contribution shall not be excludable from 
        gross income, and
            ``(2) such plan (and any arrangement which is part 
        of such plan) shall not be treated as failing to meet 
        any requirement of this chapter solely by reason of 
        including such program.
    ``(b) Qualified Roth Contribution Program.--For purposes of 
this section--
            ``(1) In general.--The term `qualified Roth 
        contribution program' means a program under which an 
        employee may elect to make designated Roth 
        contributions in lieu of all or a portion of elective 
        deferrals the employee is otherwise eligible to make 
        under the applicable retirement plan.
            ``(2) Separate accounting required.--A program 
        shall not be treated as a qualified Roth contribution 
        program unless the applicable retirement plan--
                    ``(A) establishes separate accounts 
                (`designated Roth accounts') for the designated 
                Roth contributions of each employee and any 
                earnings properly allocable to the 
                contributions, and
                    ``(B) maintains separate recordkeeping with 
                respect to each account.
    ``(c) Definitions and Rules Relating to Designated Roth 
Contributions.--For purposes of this section--
            ``(1) Designated roth contribution.--The term 
        `designated Roth contribution' means any elective 
        deferral which--
                    ``(A) is excludable from gross income of an 
                employee without regard to this section, and
                    ``(B) the employee designates (at such time 
                and in such manner as the Secretary may 
                prescribe) as not being so excludable.
            ``(2) Designation limits.--The amount of elective 
        deferrals which an employee may designate under 
        paragraph (1) shall not exceed the excess (if any) of--
                    ``(A) the maximum amount of elective 
                deferrals excludable from gross income of the 
                employee for the taxable year (without regard 
                to this section), over
                    ``(B) the aggregate amount of elective 
                deferrals of the employee for the taxable year 
                which the employee does not designate under 
                paragraph (1).
            ``(3) Rollover contributions.--
                    ``(A) In general.--A rollover contribution 
                of any payment or distribution from a 
                designated Roth account which is otherwise 
                allowable under this chapter may be made only 
                if the contribution is to--
                            ``(i) another designated Roth 
                        account of the individual from whose 
                        account the payment or distribution was 
                        made, or
                            ``(ii) a Roth IRA of such 
                        individual.
                    ``(B) Coordination with limit.--Any 
                rollover contribution to a designated Roth 
                account under subparagraph (A) shall not be 
                taken into account for purposes of paragraph 
                (1).
    ``(d) Distribution Rules.--For purposes of this title--
            ``(1) Exclusion.--Any qualified distribution from a 
        designated Roth account shall not be includible in 
        gross income.
            ``(2) Qualified distribution.--For purposes of this 
        subsection--
                    ``(A) In general.--The term `qualified 
                distribution' has the meaning given such term 
                by section 408A(d)(2)(A) (without regard to 
                clause (iv) thereof).
                    ``(B) Distributions within nonexclusion 
                period.--A payment or distribution from a 
                designated Roth account shall not be treated as 
                a qualified distribution if such payment or 
                distribution is made within the 5-taxable-year 
                period beginning with the earlier of--
                            ``(i) the first taxable year for 
                        which the individual made a designated 
                        Roth contribution to any designated 
                        Roth account established for such 
                        individual under the same applicable 
                        retirement plan, or
                            ``(ii) if a rollover contribution 
                        was made to such designated Roth 
                        account from a designated Roth account 
                        previously established for such 
                        individual under another applicable 
                        retirement plan, the first taxable year 
                        for which the individual made a 
                        designated Roth contribution to such 
                        previously established account.
                    ``(C) Distributions of excess deferrals and 
                contributions and earnings thereon.--The term 
                `qualified distribution' shall not include any 
                distribution of any excess deferral under 
                section 402(g)(2) or any excess contribution 
                under section 401(k)(8), and any income on the 
                excess deferral or contribution.
            ``(3) Treatment of distributions of certain excess 
        deferrals.--Notwithstanding section 72, if any excess 
        deferral under section 402(g)(2) attributable to a 
        designated Roth contribution is not distributed on or 
        before the 1st April 15 following the close of the 
        taxable year in which such excess deferral is made, the 
        amount of such excess deferral shall--
                    ``(A) not be treated as investment in the 
                contract, and
                    ``(B) be included in gross income for the 
                taxable year in which such excess is 
                distributed.
            ``(4) Aggregation rules.--Section 72 shall be 
        applied separately with respect to distributions and 
        payments from a designated Roth account and other 
        distributions and payments from the plan.
    ``(e) Other Definitions.--For purposes of this section--
            ``(1) Applicable retirement plan.--The term 
        `applicable retirement plan' means--
                    ``(A) an employees' trust described in 
                section 401(a) which is exempt from tax under 
                section 501(a), and
                    ``(B) a plan under which amounts are 
                contributed by an individual's employer for an 
                annuity contract described in section 403(b).
            ``(2) Elective deferral.--The term `elective 
        deferral' means any elective deferral described in 
        subparagraph (A) or (C) of section 402(g)(3).''.
    (b) Excess Deferrals.--Section 402(g) (relating to 
limitation on exclusion for elective deferrals) is amended--
            (1) by adding at the end of paragraph (1)(A) (as 
        added by section 201(c)(1)) the following new sentence: 
        ``The preceding sentence shall not apply the portion of 
        such excess as does not exceed the designated Roth 
        contributions of the individual for the taxable 
        year.''; and
            (2) by inserting ``(or would be included but for 
        the last sentence thereof)'' after ``paragraph (1)'' in 
        paragraph (2)(A).
    (c) Rollovers.--Subparagraph (B) of section 402(c)(8) is 
amended by adding at the end the following:

                ``If any portion of an eligible rollover 
                distribution is attributable to payments or 
                distributions from a designated Roth account 
                (as defined in section 402A), an eligible 
                retirement plan with respect to such portion 
                shall include only another designated Roth 
                account and a Roth IRA.''.
    (d) Reporting Requirements.--
            (1) W-2 information.--Section 6051(a)(8) is amended 
        by inserting ``, including the amount of designated 
        Roth contributions (as defined in section 402A)'' 
        before the comma at the end.
            (2) Information.--Section 6047 is amended by 
        redesignating subsection (f) as subsection (g) and by 
        inserting after subsection (e) the following new 
        subsection:
    ``(f) Designated Roth Contributions.--The Secretary shall 
require the plan administrator of each applicable retirement 
plan (as defined in section 402A) to make such returns and 
reports regarding designated Roth contributions (as defined in 
section 402A) to the Secretary, participants and beneficiaries 
of the plan, and such other persons as the Secretary may 
prescribe.''.
    (e) Conforming Amendments.--
            (1) Section 408A(e) is amended by adding after the 
        first sentence the following new sentence: ``Such term 
        includes a rollover contribution described in section 
        402A(c)(3)(A).''.
            (2) The table of sections for subpart A of part I 
        of subchapter D of chapter 1 is amended by inserting 
        after the item relating to section 402 the following 
        new item:

        ``Sec. 402A. Optional treatment of elective deferrals as Roth 
                  contributions.''.
    (f) Effective Date.--The amendments made by this section 
shall apply to taxable years beginning after December 31, 2005.

SEC. 618. NONREFUNDABLE CREDIT TO CERTAIN INDIVIDUALS FOR ELECTIVE 
                    DEFERRALS AND IRA CONTRIBUTIONS.

    (a) In General.--Subpart A of part IV of subchapter A of 
chapter 1 (relating to nonrefundable personal credits) is 
amended by inserting after section 25A the following new 
section:

``SEC. 25B. ELECTIVE DEFERRALS AND IRA CONTRIBUTIONS BY CERTAIN 
                    INDIVIDUALS.

    ``(a) Allowance of Credit.--In the case of an eligible 
individual, there shall be allowed as a credit against the tax 
imposed by this subtitle for the taxable year an amount equal 
to the applicable percentage of so much of the qualified 
retirement savings contributions of the eligible individual for 
the taxable year as do not exceed $2,000.
    ``(b) Applicable Percentage.--For purposes of this section, 
the applicable percentage is the percentage determined in 
accordance with the following table:


------------------------------------------------------------------------
                    Adjusted Gross Income
-------------------------------------------------------------
    Joint return           Head of a        All other cases   Applicable
---------------------      household     -------------------- percentage
                     --------------------
   Over     Not over    Over    Not over    Over    Not over
------------------------------------------------------------------------
           $30,000    ........  $22,500   ........  $15,000          50
 30,000     32,500     22,500    24,375    15,000    16,250          20
 32,500     50,000     24,375    37,500    16,250    25,000          10
 50,000    .........   37,500   ........   25,000   ........          0
------------------------------------------------------------------------


    ``(c) Eligible Individual.--For purposes of this section--
            ``(1) In general.--The term `eligible individual' 
        means any individual if such individual has attained 
        the age of 18 as of the close of the taxable year.
            ``(2) Dependents and full-time students not 
        eligible.--The term `eligible individual' shall not 
        include--
                    ``(A) any individual with respect to whom a 
                deduction under section 151 is allowed to 
                another taxpayer for a taxable year beginning 
                in the calendar year in which such individual's 
                taxable year begins, and
                    ``(B) any individual who is a student (as 
                defined in section 151(c)(4)).
    ``(d) Qualified Retirement Savings Contributions.--For 
purposes of this section--
            ``(1) In general.--The term `qualified retirement 
        savings contributions' means, with respect to any 
        taxable year, the sum of--
                    ``(A) the amount of the qualified 
                retirement contributions (as defined in section 
                219(e)) made by the eligible individual,
                    ``(B) the amount of--
                            ``(i) any elective deferrals (as 
                        defined in section 402(g)(3)) of such 
                        individual, and
                            ``(ii) any elective deferral of 
                        compensation by such individual under 
                        an eligible deferred compensation plan 
                        (as defined in section 457(b)) of an 
                        eligible employer described in section 
                        457(e)(1)(A), and
                    ``(C) the amount of voluntary employee 
                contributions by such individual to any 
                qualified retirement plan (as defined in 
                section 4974(c)).
            ``(2) Reduction for certain distributions.--
                    ``(A) In general.--The qualified retirement 
                savings contributions determined under 
                paragraph (1) shall be reduced (but not below 
                zero) by the sum of--
                            ``(i) any distribution from a 
                        qualified retirement plan (as defined 
                        in section 4974(c)), or from an 
                        eligible deferred compensation plan (as 
                        defined in section 457(b)), received by 
                        the individual during the testing 
                        period which is includible in gross 
                        income, and
                            ``(ii) any distribution from a Roth 
                        IRA or a Roth account received by the 
                        individual during the testing period 
                        which is not a qualified rollover 
                        contribution (as defined in section 
                        408A(e)) to a Roth IRA or a rollover 
                        under section 402(c)(8)(B) to a Roth 
                        account.
                    ``(B) Testing period.--For purposes of 
                subparagraph (A), the testing period, with 
                respect to a taxable year, is the period which 
                includes--
                            ``(i) such taxable year,
                            ``(ii) the 2 preceding taxable 
                        years, and
                            ``(iii) the period after such 
                        taxable year and before the due date 
                        (including extensions) for filing the 
                        return of tax for such taxable year.
                    ``(C) Excepted distributions.--There shall 
                not be taken into account under subparagraph 
                (A)--
                            ``(i) any distribution referred to 
                        in section 72(p), 401(k)(8), 401(m)(6), 
                        402(g)(2), 404(k), or 408(d)(4), and
                            ``(ii) any distribution to which 
                        section 408A(d)(3) applies.
                    ``(D) Treatment of distributions received 
                by spouse of individual.--For purposes of 
                determining distributions received by an 
                individual under subparagraph (A) for any 
                taxable year, any distribution received by the 
                spouse of such individual shall be treated as 
                received by such individual if such individual 
                and spouse file a joint return for such taxable 
                year and for the taxable year during which the 
                spouse receives the distribution.
    ``(e) Adjusted Gross Income.--For purposes of this section, 
adjusted gross income shall be determined without regard to 
sections 911, 931, and 933.
    ``(f) Investment in the Contract.--Notwithstanding any 
other provision of law, a qualified retirement savings 
contribution shall not fail to be included in determining the 
investment in the contract for purposes of section 72 by reason 
of the credit under this section.
    ``(g) Termination.--This section shall not apply to taxable 
years beginning after December 31, 2006.''.
    (b) Credit Allowed Against Regular Tax and Alternative 
Minimum Tax.--
            (1) In general.--Section 25B, as added by 
        subsection (a), is amended by inserting after 
        subsection (f) the following new subsection:
    ``(g) Limitation Based on Amount of Tax.--The credit 
allowed under subsection (a) for the taxable year shall not 
exceed the excess of--
            ``(1) the sum of the regular tax liability (as 
        defined in section 26(b)) plus the tax imposed by 
        section 55, over
            ``(2) the sum of the credits allowable under this 
        subpart (other than this section and section 23) and 
        section 27 for the taxable year.''
            (2) Conforming amendments.--
                    (A) Section 24(b)(3)(B), as amended by 
                sections 201(b) and 203(d), is amended by 
                striking ``section 23'' and inserting 
                ``sections 23 and 25B''.
                    (B) Section 25(e)(1)(C), as amended by 
                section 201(b), is amended by inserting 
                ``25B,'' after ``24,''.
                    (C) Section 26(a)(1), as amended by 
                sections 201(b) and 203, is amended by striking 
                ``and 24'' and inserting ``, 24, and 25B''.
                    (D) Section 904(h), as amended by sections 
                201(b) and 203, is amended by striking ``and 
                24'' and inserting ``, 24, and 25B''.
                    (E) Section 1400C(d), as amended by 
                sections 201(b) and 203, is amended by striking 
                ``and 24'' and inserting ``, 24, and 25B''.
    (c) Conforming Amendment.--The table of sections for 
subpart A of part IV of subchapter A of chapter 1, as amended 
by section 432, is amended by inserting after the item relating 
to section 25A the following new item:

        ``Sec. 25B. Elective deferrals and IRA contributions by certain 
                  individuals.''

    (d) Effective Date.--The amendments made by this section 
shall apply to taxable years beginning after December 31, 2001.

SEC. 619. CREDIT FOR PENSION PLAN STARTUP COSTS OF SMALL EMPLOYERS.

    (a) In General.--Subpart D of part IV of subchapter A of 
chapter 1 (relating to business related credits) is amended by 
adding at the end the following new section:

``SEC. 45E. SMALL EMPLOYER PENSION PLAN STARTUP COSTS.

    ``(a) General Rule.--For purposes of section 38, in the 
case of an eligible employer, the small employer pension plan 
startup cost credit determined under this section for any 
taxable year is an amount equal to 50 percent of the qualified 
startup costs paid or incurred by the taxpayer during the 
taxable year.
    ``(b) Dollar Limitation.--The amount of the credit 
determined under this section for any taxable year shall not 
exceed--
            ``(1) $500 for the first credit year and each of 
        the 2 taxable years immediately following the first 
        credit year, and
            ``(2) zero for any other taxable year.
    ``(c) Eligible Employer.--For purposes of this section--
            ``(1) In general.--The term `eligible employer' has 
        the meaning given such term by section 408(p)(2)(C)(i).
            ``(2) Requirement for new qualified employer 
        plans.--Such term shall not include an employer if, 
        during the 3-taxable year period immediately preceding 
        the 1st taxable year for which the credit under this 
        section is otherwise allowable for a qualified employer 
        plan of the employer, the employer or any member of any 
        controlled group including the employer (or any 
        predecessor of either) established or maintained a 
        qualified employer plan with respect to which 
        contributions were made, or benefits were accrued, for 
        substantially the same employees as are in the 
        qualified employer plan.
    ``(d) Other Definitions.--For purposes of this section--
            ``(1) Qualified startup costs.--
                    ``(A) In general.--The term `qualified 
                startup costs' means any ordinary and necessary 
                expenses of an eligible employer which are paid 
                or incurred in connection with--
                            ``(i) the establishment or 
                        administration of an eligible employer 
                        plan, or
                            ``(ii) the retirement-related 
                        education of employees with respect to 
                        such plan.
                    ``(B) Plan must have at least 1 
                participant.--Such term shall not include any 
                expense in connection with a plan that does not 
                have at least 1 employee eligible to 
                participate who is not a highly compensated 
                employee.
            ``(2) Eligible employer plan.--The term `eligible 
        employer plan' means a qualified employer plan within 
        the meaning of section 4972(d).
            ``(3) First credit year.--The term `first credit 
        year' means--
                    ``(A) the taxable year which includes the 
                date that the eligible employer plan to which 
                such costs relate becomes effective, or
                    ``(B) at the election of the eligible 
                employer, the taxable year preceding the 
                taxable year referred to in subparagraph (A).
    ``(e) Special Rules.--For purposes of this section--
            ``(1) Aggregation rules.--All persons treated as a 
        single employer under subsection (a) or (b) of section 
        52, or subsection (n) or (o) of section 414, shall be 
        treated as one person. All eligible employer plans 
        shall be treated as 1 eligible employer plan.
            ``(2) Disallowance of deduction.--No deduction 
        shall be allowed for that portion of the qualified 
        startup costs paid or incurred for the taxable year 
        which is equal to the credit determined under 
        subsection (a).
            ``(3) Election not to claim credit.--This section 
        shall not apply to a taxpayer for any taxable year if 
        such taxpayer elects to have this section not apply for 
        such taxable year.''
    (b) Credit Allowed as Part of General Business Credit.--
Section 38(b) (defining current year business credit) is 
amended by striking ``plus'' at the end of paragraph (12), by 
striking the period at the end of paragraph (13) and inserting 
``, plus'', and by adding at the end the following new 
paragraph:
            ``(14) in the case of an eligible employer (as 
        defined in section 45E(c)), the small employer pension 
        plan startup cost credit determined under section 
        45E(a).''
    (c) Conforming Amendments.--
            (1) Section 39(d) is amended by adding at the end 
        the following new paragraph:
            ``(10) No carryback of small employer pension plan 
        startup cost credit before january 1, 2002.--No portion 
        of the unused business credit for any taxable year 
        which is attributable to the small employer pension 
        plan startup cost credit determined under section 45E 
        may be carried back to a taxable year beginning before 
        January 1, 2002.''
            (2) Subsection (c) of section 196 is amended by 
        striking ``and'' at the end of paragraph (8), by 
        striking the period at the end of paragraph (9) and 
        inserting ``, and'', and by adding at the end the 
        following new paragraph:
            ``(10) the small employer pension plan startup cost 
        credit determined under section 45E(a).''
            (3) The table of sections for subpart D of part IV 
        of subchapter A of chapter 1 is amended by adding at 
        the end the following new item:

        ``Sec. 45E. Small employer pension plan startup costs.''

    (d) Effective Date.--The amendments made by this section 
shall apply to costs paid or incurred in taxable years 
beginning after December 31, 2001, with respect to qualified 
employer plans established after such date.

SEC. 620. ELIMINATION OF USER FEE FOR REQUESTS TO IRS REGARDING PENSION 
                    PLANS.

    (a) Elimination of Certain User Fees.--The Secretary of the 
Treasury or the Secretary's delegate shall not require payment 
of user fees under the program established under section 10511 
of the Revenue Act of 1987 for requests to the Internal Revenue 
Service for determination letters with respect to the qualified 
status of a pension benefit plan maintained solely by one or 
more eligible employers or any trust which is part of the plan. 
The preceding sentence shall not apply to any request--
            (1) made after the later of--
                    (A) the fifth plan year the pension benefit 
                plan is in existence; or
                    (B) the end of any remedial amendment 
                period with respect to the plan beginning 
                within the first 5 plan years; or
            (2) made by the sponsor of any prototype or similar 
        plan which the sponsor intends to market to 
        participating employers.
    (b) Pension Benefit Plan.--For purposes of this section, 
the term ``pension benefit plan'' means a pension, profit-
sharing, stock bonus, annuity, or employee stock ownership 
plan.
    (c) Eligible Employer.--For purposes of this section, the 
term ``eligible employer'' means an eligible employer (as 
defined in section 408(p)(2)(C)(i)(I) of the Internal Revenue 
Code of 1986) which has at least one employee who is not a 
highly compensated employee (as defined in section 414(q)) and 
is participating in the plan. The determination of whether an 
employer is an eligible employer under this section shall be 
made as of the date of the request described in subsection (a).
    (d) Determination of Average Fees Charged.--For purposes of 
any determination of average fees charged, any request to which 
subsection (a) applies shall not be taken into account.
    (e) Effective Date.--The provisions of this section shall 
apply with respect to requests made after December 31, 2001.

SEC. 621. TREATMENT OF NONRESIDENT ALIENS ENGAGED IN INTERNATIONAL 
                    TRANSPORTATION SERVICES.

    (a) Exclusion From Income Sourcing Rules.--The second 
sentence of section 861(a)(3) (relating to gross income from 
sources within the United States) is amended by striking 
``except for purposes of sections 79 and 105 and subchapter 
D,''.
    (b) Effective Date.--The amendment made by subsection (a) 
shall apply to remuneration for services performed in plan 
years beginning after December 31, 2001.

                Subtitle C--Enhancing Fairness for Women

SEC. 631. CATCH-UP CONTRIBUTIONS FOR INDIVIDUALS AGE 50 OR OVER.

    (a) In General.--Section 414 (relating to definitions and 
special rules) is amended by adding at the end the following 
new subsection:
    ``(v) Catch-up Contributions for Individuals Age 50 or 
Over.--
            ``(1) In general.--An applicable employer plan 
        shall not be treated as failing to meet any requirement 
        of this title solely because the plan permits an 
        eligible participant to make additional elective 
        deferrals in any plan year.
            ``(2) Limitation on amount of additional 
        deferrals.--
                    ``(A) In general.--A plan shall not permit 
                additional elective deferrals under paragraph 
                (1) for any year in an amount greater than the 
                lesser of--
                            ``(i) the applicable dollar amount, 
                        or
                            ``(ii) the excess (if any) of--
                                    ``(I) the participant's 
                                compensation (as defined in 
                                section 415(c)(3)) for the 
                                year, over
                                    ``(II) any other elective 
                                deferrals of the participant 
                                for such year which are made 
                                without regard to this 
                                subsection.
                    ``(B) Applicable dollar amount.--For 
                purposes of this paragraph--
                            ``(i) In the case of an applicable 
                        employer plan other than a plan 
                        described in section 401(k)(11) or 
                        408(p), the applicable dollar amount 
                        shall be determined in accordance with 
                        the following table:

``For taxable years                                       The applicable
    beginning in:                                      dollar amount is:
    2002......................................................   $1,000 
    2003......................................................   $2,000 
    2004......................................................   $3,000 
    2005......................................................   $4,000 
    2006 and thereafter.......................................   $5,000.

                            ``(ii) In the case of an applicable 
                        employer plan described in section 
                        401(k)(11) or 408(p), the applicable 
                        dollar amount shall be determined in 
                        accordance with the following table:

``For taxable years                                       The applicable
    beginning in:                                      dollar amount is:
        2002..................................................     $500 
        2003..................................................   $1,000 
        2004..................................................   $1,500 
        2005..................................................   $2,000 
        2006 and thereafter...................................   $2,500.

                    ``(C) Cost-of-living adjustment.--In the 
                case of a year beginning after December 31, 
                2006, the Secretary shall adjust annually the 
                $5,000 amount in subparagraph (B)(i) and the 
                $2,500 amount in subparagraph (B)(ii) for 
                increases in the cost-of-living at the same 
                time and in the same manner as adjustments 
                under section 415(d); except that the base 
                period taken into account shall be the calendar 
                quarter beginning July 1, 2005, and any 
                increase under this subparagraph which is not a 
                multiple of $500 shall be rounded to the next 
                lower multiple of $500.''.
            ``(3) Treatment of contributions.--In the case of 
        any contribution to a plan under paragraph (1)--
                    ``(A) such contribution shall not, with 
                respect to the year in which the contribution 
                is made--
                            ``(i) be subject to any otherwise 
                        applicable limitation contained in 
                        section 402(g), 402(h), 403(b), 404(a), 
                        404(h), 408(k), 408(p), 415, or 457, or
                            ``(ii) be taken into account in 
                        applying such limitations to other 
                        contributions or benefits under such 
                        plan or any other such plan, and
                    ``(B) except as provided in paragraph (4), 
                such plan shall not be treated as failing to 
                meet the requirements of section 401(a)(4), 
                401(a)(26), 401(k)(3), 401(k)(11), 401(k)(12), 
                403(b)(12), 408(k), 408(p), 408B, 410(b), or 
                416 by reason of the making of (or the right to 
                make) such contribution.
            ``(4) Application of nondiscrimination rules.--
                    ``(A) In general.--An applicable employer 
                plan shall be treated as failing to meet the 
                nondiscrimination requirements under section 
                401(a)(4) with respect to benefits, rights, and 
                features unless the plan allows all eligible 
                participants to make the same election with 
                respect to the additional elective deferrals 
                under this subsection.
                    ``(B) Aggregation.--For purposes of 
                subparagraph (A), all plans maintained by 
                employers who are treated as a single employer 
                under subsection (b), (c), (m), or (o) of 
                section 414 shall be treated as 1 plan.
            ``(5) Eligible participant.--For purposes of this 
        subsection, the term `eligible participant' means, with 
        respect to any plan year, a participant in a plan--
                    ``(A) who has attained the age of 50 before 
                the close of the plan year, and
                    ``(B) with respect to whom no other 
                elective deferrals may (without regard to this 
                subsection) be made to the plan for the plan 
                year by reason of the application of any 
                limitation or other restriction described in 
                paragraph (3) or comparable limitation or 
                restriction contained in the terms of the plan.
            ``(6) Other definitions and rules.--For purposes of 
        this subsection--
                    ``(A) Applicable employer plan.--The term 
                `applicable employer plan' means--
                            ``(i) an employees' trust described 
                        in section 401(a) which is exempt from 
                        tax under section 501(a),
                            ``(ii) a plan under which amounts 
                        are contributed by an individual's 
                        employer for an annuity contract 
                        described in section 403(b),
                            ``(iii) an eligible deferred 
                        compensation plan under section 457 of 
                        an eligible employer described in 
                        section 457(e)(1)(A), and
                            ``(iv) an arrangement meeting the 
                        requirements of section 408 (k) or (p).
                    ``(B) Elective deferral.--The term 
                `elective deferral' has the meaning given such 
                term by subsection (u)(2)(C).
                    ``(C) Exception for section 457 plans.--
                This subsection shall not apply to an 
                applicable employer plan described in 
                subparagraph (A)(iii) for any year to which 
                section 457(b)(3) applies.''.
    (b) Effective Date.--The amendment made by this section 
shall apply to contributions in taxable years beginning after 
December 31, 2001.

SEC. 632. EQUITABLE TREATMENT FOR CONTRIBUTIONS OF EMPLOYEES TO DEFINED 
                    CONTRIBUTION PLANS.

    (a) Equitable Treatment.--
            (1) In general.--Subparagraph (B) of section 
        415(c)(1) (relating to limitation for defined 
        contribution plans) is amended by striking ``25 
        percent'' and inserting ``100 percent''.
            (2) Application to section 403(b).--Section 403(b) 
        is amended--
                    (A) by striking ``the exclusion allowance 
                for such taxable year'' in paragraph (1) and 
                inserting ``the applicable limit under section 
                415'',
                    (B) by striking paragraph (2), and
                    (C) by inserting ``or any amount received 
                by a former employee after the fifth taxable 
                year following the taxable year in which such 
                employee was terminated'' before the period at 
                the end of the second sentence of paragraph 
                (3).
            (3) Conforming amendments.--
                    (A) Subsection (f) of section 72 is amended 
                by striking ``section 403(b)(2)(D)(iii))'' and 
                inserting ``section 403(b)(2)(D)(iii), as in 
                effect before the enactment of the Economic 
                Growth and Tax Relief Reconciliation Act of 
                2001''.
                    (B) Section 404(a)(10)(B) is amended by 
                striking ``, the exclusion allowance under 
                section 403(b)(2),''.
                    (C) Section 415(a)(2) is amended by 
                striking ``, and the amount of the contribution 
                for such portion shall reduce the exclusion 
                allowance as provided in section 403(b)(2)''.
                    (D) Section 415(c)(3) is amended by adding 
                at the end the following new subparagraph:
                    ``(E) Annuity contracts.--In the case of an 
                annuity contract described in section 403(b), 
                the term `participant's compensation' means the 
                participant's includible compensation 
                determined under section 403(b)(3).''.
                    (E) Section 415(c) is amended by striking 
                paragraph (4).
                    (F) Section 415(c)(7) is amended to read as 
                follows:
            ``(7) Certain contributions by church plans not 
        treated as exceeding limit.--
                    ``(A) In general.--Notwithstanding any 
                other provision of this subsection, at the 
                election of a participant who is an employee of 
                a church or a convention or association of 
                churches, including an organization described 
                in section 414(e)(3)(B)(ii), contributions and 
                other additions for an annuity contract or 
                retirement income account described in section 
                403(b) with respect to such participant, when 
                expressed as an annual addition to such 
                participant's account, shall be treated as not 
                exceeding the limitation of paragraph (1) if 
                such annual addition is not in excess of 
                $10,000.
                    ``(B) $40,000 aggregate limitation.--The 
                total amount of additions with respect to any 
                participant which may be taken into account for 
                purposes of this subparagraph for all years may 
                not exceed $40,000.
                    ``(C) Annual addition.--For purposes of 
                this paragraph, the term `annual addition' has 
                the meaning given such term by paragraph 
                (2).''.
                    (G) Subparagraph (B) of section 402(g)(7) 
                (as redesignated by section 611(c)(3)) is 
                amended by inserting before the period at the 
                end the following: ``(as in effect before the 
                enactment of the Economic Growth and Tax Relief 
                Reconciliation Act of 2001''.
                    (H) Section 664(g) is amended--
                            (i) in paragraph (3)(E) by striking 
                        ``limitations under section 415(c)'' 
                        and inserting ``applicable limitation 
                        under paragraph (7)'', and
                            (ii) by adding at the end the 
                        following new paragraph:
            ``(7) Applicable limitation.--
                    ``(A) In general.--For purposes of 
                paragraph (3)(E), the applicable limitation 
                under this paragraph with respect to a 
                participant is an amount equal to the lesser 
                of--
                            ``(i) $30,000, or
                            ``(ii) 25 percent of the 
                        participant's compensation (as defined 
                        in section 415(c)(3)).
                    ``(B) Cost-of-living adjustment.--The 
                Secretary shall adjust annually the $30,000 
                amount under subparagraph (A)(i) at the same 
                time and in the same manner as under section 
                415(d), except that the base period shall be 
                the calendar quarter beginning October 1, 1993, 
                and any increase under this subparagraph which 
                is not a multiple of $5,000 shall be rounded to 
                the next lowest multiple of $5,000.''.
            (4) Effective date.--The amendments made by this 
        subsection shall apply to years beginning after 
        December 31, 2001.
    (b) Special Rules for Sections 403(b) and 408.--
            (1) In general.--Subsection (k) of section 415 is 
        amended by adding at the end the following new 
        paragraph:
            ``(4) Special rules for sections 403(b) and 408.--
        For purposes of this section, any annuity contract 
        described in section 403(b) 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)). For purposes of this section, any 
        contribution by an employer to a simplified employee 
        pension plan for an individual for a taxable year shall 
        be treated as an employer contribution to a defined 
        contribution plan for such individual for such year.''.
            (2) Effective date.--
                    (A) In general.--The amendment made by 
                paragraph (1) shall apply to limitation years 
                beginning after December 31, 1999.
                    (B) Exclusion allowance.--Effective for 
                limitation years beginning in 2000, in the case 
                of any annuity contract described in section 
                403(b) of the Internal Revenue Code of 1986, 
                the amount of the contribution disqualified by 
                reason of section 415(g) of such Code shall 
                reduce the exclusion allowance as provided in 
                section 403(b)(2) of such Code.
            (3) Election to modify section 403(b) exclusion 
        allowance to conform to section 415 modification.--In 
        the case of taxable years beginning after December 31, 
        1999, and before January 1, 2002, a plan may disregard 
        the requirement in the regulations regarding the 
        exclusion allowance under section 403(b)(2) of the 
        Internal Revenue Code of 1986 that contributions to a 
        defined benefit pension plan be treated as previously 
        excluded amounts for purposes of the exclusion 
        allowance.
    (c) Deferred Compensation Plans of State and Local 
Governments and Tax-Exempt Organizations.--
            (1) In general.--Subparagraph (B) of section 
        457(b)(2) (relating to salary limitation on eligible 
        deferred compensation plans) is amended by striking 
        ``33\1/3\ percent'' and inserting ``100 percent''.
            (2) Effective date.--The amendment made by this 
        subsection shall apply to years beginning after 
        December 31, 2001.

SEC. 633. FASTER VESTING OF CERTAIN EMPLOYER MATCHING CONTRIBUTIONS.

    (a) In General.--Section 411(a) (relating to minimum 
vesting standards) is amended--
            (1) in paragraph (2), by striking ``A plan'' and 
        inserting ``Except as provided in paragraph (12), a 
        plan''; and
            (2) by adding at the end the following:
            ``(12) Faster vesting for matching contributions.--
        In the case of matching contributions (as defined in 
        section 401(m)(4)(A)), paragraph (2) shall be applied--
                    ``(A) by substituting `3 years' for `5 
                years' in subparagraph (A), and
                    ``(B) by substituting the following table 
                for the table contained in subparagraph (B):

                                                      The nonforfeitable
``Years of service:                                       percentage is:
            2.................................................       20 
            3.................................................       40 
            4.................................................       60 
            5.................................................       80 
            6.................................................   100.''.

    (b) Amendment of ERISA.--Section 203(a) of the Employee 
Retirement Income Security Act of 1974 (29 U.S.C. 1053(a)) is 
amended--
            (1) in paragraph (2), by striking ``A plan'' and 
        inserting ``Except as provided in paragraph (4), a 
        plan'', and
            (2) by adding at the end the following:
            ``(4) In the case of matching contributions (as 
        defined in section 401(m)(4)(A) of the Internal Revenue 
        Code of 1986), paragraph (2) shall be applied--
                    ``(A) by substituting `3 years' for `5 
                years' in subparagraph (A), and
                    ``(B) by substituting the following table 
                for the table contained in subparagraph (B):

                                                      The nonforfeitable
``Years of service:                                       percentage is:
        2.....................................................       20 
        3.....................................................       40 
        4.....................................................       60 
        5.....................................................       80 
        6.....................................................   100.''.

    (c) Effective Dates.--
            (1) In general.--Except as provided in paragraph 
        (2), the amendments made by this section shall apply to 
        contributions for plan years beginning after December 
        31, 2001.
            (2) Collective bargaining agreements.--In the case 
        of a plan maintained pursuant to one or more collective 
        bargaining agreements between employee representatives 
        and one or more employers ratified by the date of the 
        enactment of this Act, the amendments made by this 
        section shall not apply to contributions on behalf of 
        employees covered by any such agreement for plan years 
        beginning before the earlier of--
                    (A) the later of--
                            (i) the date on which the last of 
                        such collective bargaining agreements 
                        terminates (determined without regard 
                        to any extension thereof on or after 
                        such date of the enactment); or
                            (ii) January 1, 2002; or
                    (B) January 1, 2006.
            (3) Service required.--With respect to any plan, 
        the amendments made by this section shall not apply to 
        any employee before the date that such employee has 1 
        hour of service under such plan in any plan year to 
        which the amendments made by this section apply.

SEC. 634. MODIFICATION TO MINIMUM DISTRIBUTION RULES.

    The Secretary of the Treasury shall modify the life 
expectancy tables under the regulations relating to minimum 
distribution requirements under sections 401(a)(9), 408(a)(6) 
and (b)(3), 403(b)(10), and 457(d)(2) of the Internal Revenue 
Code to reflect current life expectancy.

SEC. 635. CLARIFICATION OF TAX TREATMENT OF DIVISION OF SECTION 457 
                    PLAN BENEFITS UPON DIVORCE.

    (a) In General.--Section 414(p)(11) (relating to 
application of rules to governmental and church plans) is 
amended--
            (1) by inserting ``or an eligible deferred 
        compensation plan (within the meaning of section 
        457(b))'' after ``subsection (e))''; and
            (2) in the heading, by striking ``governmental and 
        church plans'' and inserting ``certain other plans''.
    (b) Waiver of Certain Distribution Requirements.--Paragraph 
(10) of section 414(p) is amended by striking ``and section 
409(d)'' and inserting ``section 409(d), and section 457(d)''.
    (c) Tax Treatment of Payments From a Section 457 Plan.--
Subsection (p) of section 414 is amended by redesignating 
paragraph (12) as paragraph (13) and inserting after paragraph 
(11) the following new paragraph:
            ``(12) Tax treatment of payments from a section 457 
        plan.--If a distribution or payment from an eligible 
        deferred compensation plan described in section 457(b) 
        is made pursuant to a qualified domestic relations 
        order, rules similar to the rules of section 
        402(e)(1)(A) shall apply to such distribution or 
        payment.''.
    (d) Effective Date.--The amendment made by this section 
shall apply to transfers, distributions, and payments made 
after December 31, 2001.

SEC. 636. PROVISIONS RELATING TO HARDSHIP DISTRIBUTIONS.

    (a) Safe Harbor Relief.--
            (1) In general.--The Secretary of the Treasury 
        shall revise the regulations relating to hardship 
        distributions under section 401(k)(2)(B)(i)(IV) of the 
        Internal Revenue Code of 1986 to provide that the 
        period an employee is prohibited from making elective 
        and employee contributions in order for a distribution 
        to be deemed necessary to satisfy financial need shall 
        be equal to 6 months.
            (2) Effective date.--The revised regulations under 
        this subsection shall apply to years beginning after 
        December 31, 2001.
    (b) Hardship Distributions Not Treated as Eligible Rollover 
Distributions.--
            (1) Modification of definition of eligible 
        rollover.--Subparagraph (C) of section 402(c)(4) 
        (relating to eligible rollover distribution) is amended 
        to read as follows:
                    ``(C) any distribution which is made upon 
                hardship of the employee.''.
            (2) Effective date.--The amendment made by this 
        subsection shall apply to distributions made after 
        December 31, 2001.

SEC. 637. WAIVER OF TAX ON NONDEDUCTIBLE CONTRIBUTIONS FOR DOMESTIC OR 
                    SIMILAR WORKERS.

    (a) In General.--Section 4972(c)(6) (relating to exceptions 
to nondeductible contributions), as amended by section 616, is 
amended by striking ``and'' at the end of subparagraph (A), by 
striking the period and inserting ``, or'' at the end of 
subparagraph (B), and by inserting after subparagraph (B) the 
following new subparagraph:
                    ``(C) so much of the contributions to a 
                simple retirement account (within the meaning 
                of section 408(p)) or a simple plan (within the 
                meaning of section 401(k)(11)) which are not 
                deductible when contributed solely because such 
                contributions are not made in connection with a 
                trade or business of the employer.''
    (b) Exclusion of Certain Contributions.--Section 
4972(c)(6), as amended by subsection (a), is amended by adding 
at the end the following new sentence: ``Subparagraph (C) shall 
not apply to contributions made on behalf of the employer or a 
member of the employer's family (as defined in section 
447(e)(1)).''.
    (c) No Inference.--Nothing in the amendments made by this 
section shall be construed to infer the proper treatment of 
nondeductible contributions under the laws in effect before 
such amendments.
    (d) Effective Date.--The amendments made by this section 
shall apply to taxable years beginning after December 31, 2001.

          Subtitle D--Increasing Portability for Participants

SEC. 641. ROLLOVERS ALLOWED AMONG VARIOUS TYPES OF PLANS.

    (a) Rollovers From and to Section 457 Plans.--
            (1) Rollovers from section 457 plans.--
                    (A) In general.--Section 457(e) (relating 
                to other definitions and special rules) is 
                amended by adding at the end the following:
            ``(16) Rollover amounts.--
                    ``(A) General rule.--In the case of an 
                eligible deferred compensation plan established 
                and maintained by an employer described in 
                subsection (e)(1)(A), if--
                            ``(i) any portion of the balance to 
                        the credit of an employee in such plan 
                        is paid to such employee in an eligible 
                        rollover distribution (within the 
                        meaning of section 402(c)(4)),
                            ``(ii) the employee transfers any 
                        portion of the property such employee 
                        receives in such distribution to an 
                        eligible retirement plan described in 
                        section 402(c)(8)(B), and
                            ``(iii) in the case of a 
                        distribution of property other than 
                        money, the amount so transferred 
                        consists of the property distributed,
                then such distribution (to the extent so 
                transferred) shall not be includible in gross 
                income for the taxable year in which paid.
                    ``(B) Certain rules made applicable.--The 
                rules of paragraphs (2) through (7) and (9) of 
                section 402(c) and section 402(f) shall apply 
                for purposes of subparagraph (A).
                    ``(C) Reporting.--Rollovers under this 
                paragraph shall be reported to the Secretary in 
                the same manner as rollovers from qualified 
                retirement plans (as defined in section 
                4974(c)).''.
                    (B) Deferral limit determined without 
                regard to rollover amounts.--Section 457(b)(2) 
                (defining eligible deferred compensation plan) 
                is amended by inserting ``(other than rollover 
                amounts)'' after ``taxable year''.
                    (C) Direct rollover.--Paragraph (1) of 
                section 457(d) is amended by striking ``and'' 
                at the end of subparagraph (A), by striking the 
                period at the end of subparagraph (B) and 
                inserting ``, and'', and by inserting after 
                subparagraph (B) the following:
                    ``(C) in the case of a plan maintained by 
                an employer described in subsection (e)(1)(A), 
                the plan meets requirements similar to the 
                requirements of section 401(a)(31).

        Any amount transferred in a direct trustee-to-trustee 
        transfer in accordance with section 401(a)(31) shall 
        not be includible in gross income for the taxable year 
        of transfer.''.
                    (D) Withholding.--
                            (i) Paragraph (12) of section 
                        3401(a) is amended by adding at the end 
                        the following:
                    ``(E) under or to an eligible deferred 
                compensation plan which, at the time of such 
                payment, is a plan described in section 457(b) 
                which is maintained by an eligible employer 
                described in section 457(e)(1)(A), or''.
                            (ii) Paragraph (3) of section 
                        3405(c) is amended to read as follows:
            ``(3) Eligible rollover distribution.--For purposes 
        of this subsection, the term `eligible rollover 
        distribution' has the meaning given such term by 
        section 402(f)(2)(A).''.
                            (iii) Liability for withholding.--
                        Subparagraph (B) of section 3405(d)(2) 
                        is amended by striking ``or'' at the 
                        end of clause (ii), by striking the 
                        period at the end of clause (iii) and 
                        inserting ``, or'', and by adding at 
                        the end the following:
                            ``(iv) section 457(b) and which is 
                        maintained by an eligible employer 
                        described in section 457(e)(1)(A).''.
            (2) Rollovers to section 457 plans.--
                    (A) In general.--Section 402(c)(8)(B) 
                (defining eligible retirement plan) is amended 
                by striking ``and'' at the end of clause (iii), 
                by striking the period at the end of clause 
                (iv) and inserting ``, and'', and by inserting 
                after clause (iv) the following new clause:
                            ``(v) an eligible deferred 
                        compensation plan described in section 
                        457(b) which is maintained by an 
                        eligible employer described in section 
                        457(e)(1)(A).''.
                    (B) Separate accounting.--Section 402(c) is 
                amended by adding at the end the following new 
                paragraph:
            ``(10) Separate accounting.--Unless a plan 
        described in clause (v) of paragraph (8)(B) agrees to 
        separately account for amounts rolled into such plan 
        from eligible retirement plans not described in such 
        clause, the plan described in such clause may not 
        accept transfers or rollovers from such retirement 
        plans.''.
                    (C) 10 percent additional tax.--Subsection 
                (t) of section 72 (relating to 10-percent 
                additional tax on early distributions from 
                qualified retirement plans) is amended by 
                adding at the end the following new paragraph:
            ``(9) Special rule for rollovers to section 457 
        plans.--For purposes of this subsection, a distribution 
        from an eligible deferred compensation plan (as defined 
        in section 457(b)) of an eligible employer described in 
        section 457(e)(1)(A) shall be treated as a distribution 
        from a qualified retirement plan described in 
        4974(c)(1) to the extent that such distribution is 
        attributable to an amount transferred to an eligible 
        deferred compensation plan from a qualified retirement 
        plan (as defined in section 4974(c)).''.
    (b) Allowance of Rollovers From and To 403(b) Plans.--
            (1) Rollovers from section 403(b) plans.--Section 
        403(b)(8)(A)(ii) (relating to rollover amounts) is 
        amended by striking ``such distribution'' and all that 
        follows and inserting ``such distribution to an 
        eligible retirement plan described in section 
        402(c)(8)(B), and''.
            (2) Rollovers to section 403(b) plans.--Section 
        402(c)(8)(B) (defining eligible retirement plan), as 
        amended by subsection (a), is amended by striking 
        ``and'' at the end of clause (iv), by striking the 
        period at the end of clause (v) and inserting ``, 
        and'', and by inserting after clause (v) the following 
        new clause:
                            ``(vi) an annuity contract 
                        described in section 403(b).''.
    (c) Expanded Explanation to Recipients of Rollover 
Distributions.--Paragraph (1) of section 402(f) (relating to 
written explanation to recipients of distributions eligible for 
rollover treatment) is amended by striking ``and'' at the end 
of subparagraph (C), by striking the period at the end of 
subparagraph (D) and inserting ``, and'', and by adding at the 
end the following new subparagraph:
                    ``(E) of the provisions under which 
                distributions from the eligible retirement plan 
                receiving the distribution may be subject to 
                restrictions and tax consequences which are 
                different from those applicable to 
                distributions from the plan making such 
                distribution.''.
    (d) Spousal Rollovers.--Section 402(c)(9) (relating to 
rollover where spouse receives distribution after death of 
employee) is amended by striking ``; except that'' and all that 
follows up to the end period.
    (e) Conforming Amendments.--
            (1) Section 72(o)(4) is amended by striking ``and 
        408(d)(3)'' and inserting ``403(b)(8), 408(d)(3), and 
        457(e)(16)''.
            (2) Section 219(d)(2) is amended by striking ``or 
        408(d)(3)'' and inserting ``408(d)(3), or 457(e)(16)''.
            (3) Section 401(a)(31)(B) is amended by striking 
        ``and 403(a)(4)'' and inserting ``, 403(a)(4), 
        403(b)(8), and 457(e)(16)''.
            (4) Subparagraph (A) of section 402(f)(2) is 
        amended by striking ``or paragraph (4) of section 
        403(a)'' and inserting ``, paragraph (4) of section 
        403(a), subparagraph (A) of section 403(b)(8), or 
        subparagraph (A) of section 457(e)(16)''.
            (5) Paragraph (1) of section 402(f) is amended by 
        striking ``from an eligible retirement plan''.
            (6) Subparagraphs (A) and (B) of section 402(f)(1) 
        are amended by striking ``another eligible retirement 
        plan'' and inserting ``an eligible retirement plan''.
            (7) Subparagraph (B) of section 403(b)(8) is 
        amended to read as follows:
                    ``(B) Certain rules made applicable.--The 
                rules of paragraphs (2) through (7) and (9) of 
                section 402(c) and section 402(f) shall apply 
                for purposes of subparagraph (A), except that 
                section 402(f) shall be applied to the payor in 
                lieu of the plan administrator.''.
            (8) Section 408(a)(1) is amended by striking ``or 
        403(b)(8),'' and inserting ``403(b)(8), or 
        457(e)(16)''.
            (9) Subparagraphs (A) and (B) of section 415(b)(2) 
        are each amended by striking ``and 408(d)(3)'' and 
        inserting ``403(b)(8), 408(d)(3), and 457(e)(16)''.
            (10) Section 415(c)(2) is amended by striking ``and 
        408(d)(3)'' and inserting ``408(d)(3), and 
        457(e)(16)''.
            (11) Section 4973(b)(1)(A) is amended by striking 
        ``or 408(d)(3)'' and inserting ``408(d)(3), or 
        457(e)(16)''.
    (f) Effective Date; Special Rule.--
            (1) Effective date.--The amendments made by this 
        section shall apply to distributions after December 31, 
        2001.
            (2) Reasonable notice.--No penalty shall be imposed 
        on a plan for the failure to provide the information 
        required by the amendment made by subsection (c) with 
        respect to any distribution made before the date that 
        is 90 days after the date on which the Secretary of the 
        Treasury issues a safe harbor rollover notice after the 
        date of the enactment of this Act, if the administrator 
        of such plan makes a reasonable attempt to comply with 
        such requirement.
            (3) Special rule.--Notwithstanding any other 
        provision of law, subsections (h)(3) and (h)(5) of 
        section 1122 of the Tax Reform Act of 1986 shall not 
        apply to any distribution from an eligible retirement 
        plan (as defined in clause (iii) or (iv) of section 
        402(c)(8)(B) of the Internal Revenue Code of 1986) on 
        behalf of an individual if there was a rollover to such 
        plan on behalf of such individual which is permitted 
        solely by reason of any amendment made by this section.

SEC. 642. ROLLOVERS OF IRAS INTO WORKPLACE RETIREMENT PLANS.

    (a) In General.--Subparagraph (A) of section 408(d)(3) 
(relating to rollover amounts) is amended by adding ``or'' at 
the end of clause (i), by striking clauses (ii) and (iii), and 
by adding at the end the following:
                            ``(ii) the entire amount received 
                        (including money and any other 
                        property) is paid into an eligible 
                        retirement plan for the benefit of such 
                        individual not later than the 60th day 
                        after the date on which the payment or 
                        distribution is received, except that 
                        the maximum amount which may be paid 
                        into such plan may not exceed the 
                        portion of the amount received which is 
                        includible in gross income (determined 
                        without regard to this paragraph).

                For purposes of clause (ii), the term `eligible 
                retirement plan' means an eligible retirement 
                plan described in clause (iii), (iv), (v), or 
                (vi) of section 402(c)(8)(B).''.
    (b) Conforming Amendments.--
            (1) Paragraph (1) of section 403(b) is amended by 
        striking ``section 408(d)(3)(A)(iii)'' and inserting 
        ``section 408(d)(3)(A)(ii)''.
            (2) Clause (i) of section 408(d)(3)(D) is amended 
        by striking ``(i), (ii), or (iii)'' and inserting ``(i) 
        or (ii)''.
            (3) Subparagraph (G) of section 408(d)(3) is 
        amended to read as follows:
                    ``(G) Simple retirement accounts.--In the 
                case of any payment or distribution out of a 
                simple retirement account (as defined in 
                subsection (p)) to which section 72(t)(6) 
                applies, this paragraph shall not apply unless 
                such payment or distribution is paid into 
                another simple retirement account.''.
    (c) Effective Date; Special Rule.--
            (1) Effective date.--The amendments made by this 
        section shall apply to distributions after December 31, 
        2001.
            (2) Special rule.--Notwithstanding any other 
        provision of law, subsections (h)(3) and (h)(5) of 
        section 1122 of the Tax Reform Act of 1986 shall not 
        apply to any distribution from an eligible retirement 
        plan (as defined in clause (iii) or (iv) of section 
        402(c)(8)(B) of the Internal Revenue Code of 1986) on 
        behalf of an individual if there was a rollover to such 
        plan on behalf of such individual which is permitted 
        solely by reason of the amendments made by this 
        section.

SEC. 643. ROLLOVERS OF AFTER-TAX CONTRIBUTIONS.

    (a) Rollovers From Exempt Trusts.--Paragraph (2) of section 
402(c) (relating to maximum amount which may be rolled over) is 
amended by adding at the end the following: ``The preceding 
sentence shall not apply to such distribution to the extent--
                    ``(A) such portion is transferred in a 
                direct trustee-to-trustee transfer to a 
                qualified trust which is part of a plan which 
                is a defined contribution plan and which agrees 
                to separately account for amounts so 
                transferred, including separately accounting 
                for the portion of such distribution which is 
                includible in gross income and the portion of 
                such distribution which is not so includible, 
                or
                    ``(B) such portion is transferred to an 
                eligible retirement plan described in clause 
                (i) or (ii) of paragraph (8)(B).''.
    (b) Optional Direct Transfer of Eligible Rollover 
Distributions.--Subparagraph (B) of section 401(a)(31) 
(relating to limitation) is amended by adding at the end the 
following: ``The preceding sentence shall not apply to such 
distribution if the plan to which such distribution is 
transferred--
                            ``(i) agrees to separately account 
                        for amounts so transferred, including 
                        separately accounting for the portion 
                        of such distribution which is 
                        includible in gross income and the 
                        portion of such distribution which is 
                        not so includible, or
                            ``(ii) is an eligible retirement 
                        plan described in clause (i) or (ii) of 
                        section 402(c)(8)(B).''.
    (c) Rules for Applying Section 72 to IRAs.--Paragraph (3) 
of section 408(d) (relating to special rules for applying 
section 72) is amended by inserting at the end the following:
                    ``(H) Application of section 72.--
                            ``(i) In general.--If--
                                    ``(I) a distribution is 
                                made from an individual 
                                retirement plan, and
                                    ``(II) a rollover 
                                contribution is made to an 
                                eligible retirement plan 
                                described in section 
                                402(c)(8)(B)(iii), (iv), (v), 
                                or (vi) with respect to all or 
                                part of such distribution,

                        then, notwithstanding paragraph (2), 
                        the rules of clause (ii) shall apply 
                        for purposes of applying section 72.
                            ``(ii) Applicable rules.--In the 
                        case of a distribution described in 
                        clause (i)--
                                    ``(I) section 72 shall be 
                                applied separately to such 
                                distribution,
                                    ``(II) notwithstanding the 
                                pro rata allocation of income 
                                on, and investment in, the 
                                contract to distributions under 
                                section 72, the portion of such 
                                distribution rolled over to an 
                                eligible retirement plan 
                                described in clause (i) shall 
                                be treated as from income on 
                                the contract (to the extent of 
                                the aggregate income on the 
                                contract from all individual 
                                retirement plans of the 
                                distributee), and
                                    ``(III) appropriate 
                                adjustments shall be made in 
                                applying section 72 to other 
                                distributions in such taxable 
                                year and subsequent taxable 
                                years.''.
    (d) Effective Date.--The amendments made by this section 
shall apply to distributions made after December 31, 2001.

SEC. 644. HARDSHIP EXCEPTION TO 60-DAY RULE.

    (a) Exempt Trusts.--Paragraph (3) of section 402(c) 
(relating to transfer must be made within 60 days of receipt) 
is amended to read as follows:
            ``(3) Transfer must be made within 60 days of 
        receipt.--
                    ``(A) In general.--Except as provided in 
                subparagraph (B), paragraph (1) shall not apply 
                to any transfer of a distribution made after 
                the 60th day following the day on which the 
                distributee received the property distributed.
                    ``(B) Hardship exception.--The Secretary 
                may waive the 60-day requirement under 
                subparagraph (A) where the failure to waive 
                such requirement would be against equity or 
                good conscience, including casualty, disaster, 
                or other events beyond the reasonable control 
                of the individual subject to such 
                requirement.''.
    (b) IRAs.--Paragraph (3) of section 408(d) (relating to 
rollover contributions), as amended by section 643, is amended 
by adding after subparagraph (H) the following new 
subparagraph:
                    ``(I) Waiver of 60-day requirement.--The 
                Secretary may waive the 60-day requirement 
                under subparagraphs (A) and (D) where the 
                failure to waive such requirement would be 
                against equity or good conscience, including 
                casualty, disaster, or other events beyond the 
                reasonable control of the individual subject to 
                such requirement.''.
    (c) Effective Date.--The amendments made by this section 
shall apply to distributions after December 31, 2001.

SEC. 645. TREATMENT OF FORMS OF DISTRIBUTION.

    (a) Plan Transfers.--
            (1) Amendment of internal revenue code.--Paragraph 
        (6) of section 411(d) (relating to accrued benefit not 
        to be decreased by amendment) is amended by adding at 
        the end the following:
                    ``(D) Plan transfers.--
                            ``(i) In general.--A defined 
                        contribution plan (in this subparagraph 
                        referred to as the `transferee plan') 
                        shall not be treated as failing to meet 
                        the requirements of this subsection 
                        merely because the transferee plan does 
                        not provide some or all of the forms of 
                        distribution previously available under 
                        another defined contribution plan (in 
                        this subparagraph referred to as the 
                        `transferor plan') to the extent that--
                                    ``(I) the forms of 
                                distribution previously 
                                available under the transferor 
                                plan applied to the account of 
                                a participant or beneficiary 
                                under the transferor plan that 
                                was transferred from the 
                                transferor plan to the 
                                transferee plan pursuant to a 
                                direct transfer rather than 
                                pursuant to a distribution from 
                                the transferor plan,
                                    ``(II) the terms of both 
                                the transferor plan and the 
                                transferee plan authorize the 
                                transfer described in subclause 
                                (I),
                                    ``(III) the transfer 
                                described in subclause (I) was 
                                made pursuant to a voluntary 
                                election by the participant or 
                                beneficiary whose account was 
                                transferred to the transferee 
                                plan,
                                    ``(IV) the election 
                                described in subclause (III) 
                                was made after the participant 
                                or beneficiary received a 
                                notice describing the 
                                consequences of making the 
                                election, and
                                    ``(V) the transferee plan 
                                allows the participant or 
                                beneficiary described in 
                                subclause (III) to receive any 
                                distribution to which the 
                                participant or beneficiary is 
                                entitled under the transferee 
                                plan in the form of a single 
                                sum distribution.
                            ``(ii) Special rule for mergers, 
                        etc.--Clause (i) shall apply to plan 
                        mergers and other transactions having 
                        the effect of a direct transfer, 
                        including consolidations of benefits 
                        attributable to different employers 
                        within a multiple employer plan.
                    ``(E) Elimination of form of 
                distribution.--Except to the extent provided in 
                regulations, a defined contribution plan shall 
                not be treated as failing to meet the 
                requirements of this section merely because of 
                the elimination of a form of distribution 
                previously available thereunder. This 
                subparagraph shall not apply to the elimination 
                of a form of distribution with respect to any 
                participant unless--
                            ``(i) a single sum payment is 
                        available to such participant at the 
                        same time or times as the form of 
                        distribution being eliminated, and
                            ``(ii) such single sum payment is 
                        based on the same or greater portion of 
                        the participant's account as the form 
                        of distribution being eliminated.''.
            (2) Amendment of erisa.--Section 204(g) of the 
        Employee Retirement Income Security Act of 1974 (29 
        U.S.C. 1054(g)) is amended by adding at the end the 
        following:
    ``(4)(A) A defined contribution plan (in this subparagraph 
referred to as the `transferee plan') shall not be treated as 
failing to meet the requirements of this subsection merely 
because the transferee plan does not provide some or all of the 
forms of distribution previously available under another 
defined contribution plan (in this subparagraph referred to as 
the `transferor plan') to the extent that--
            ``(i) the forms of distribution previously 
        available under the transferor plan applied to the 
        account of a participant or beneficiary under the 
        transferor plan that was transferred from the 
        transferor plan to the transferee plan pursuant to a 
        direct transfer rather than pursuant to a distribution 
        from the transferor plan;
            ``(ii) the terms of both the transferor plan and 
        the transferee plan authorize the transfer described in 
        clause (i);
            ``(iii) the transfer described in clause (i) was 
        made pursuant to a voluntary election by the 
        participant or beneficiary whose account was 
        transferred to the transferee plan;
            ``(iv) the election described in clause (iii) was 
        made after the participant or beneficiary received a 
        notice describing the consequences of making the 
        election; and
            ``(v) the transferee plan allows the participant or 
        beneficiary described in clause (iii) to receive any 
        distribution to which the participant or beneficiary is 
        entitled under the transferee plan in the form of a 
        single sum distribution.
    ``(B) Subparagraph (A) shall apply to plan mergers and 
other transactions having the effect of a direct transfer, 
including consolidations of benefits attributable to different 
employers within a multiple employer plan.
    ``(5) Except to the extent provided in regulations 
promulgated by the Secretary of the Treasury, a defined 
contribution plan shall not be treated as failing to meet the 
requirements of this subsection merely because of the 
elimination of a form of distribution previously available 
thereunder. This paragraph shall not apply to the elimination 
of a form of distribution with respect to any participant 
unless--
            ``(A) a single sum payment is available to such 
        participant at the same time or times as the form of 
        distribution being eliminated; and
            ``(B) such single sum payment is based on the same 
        or greater portion of the participant's account as the 
        form of distribution being eliminated.''.
            (3) Effective date.--The amendments made by this 
        subsection shall apply to years beginning after 
        December 31, 2001.
    (b) Regulations.--
            (1) Amendment of internal revenue code.--Paragraph 
        (6)(B) of section 411(d) (relating to accrued benefit 
        not to be decreased by amendment) is amended by 
        inserting after the second sentence the following: 
        ``The Secretary shall by regulations provide that this 
        subparagraph shall not apply to any plan amendment 
        which reduces or eliminates benefits or subsidies which 
        create significant burdens or complexities for the plan 
        and plan participants, unless such amendment adversely 
        affects the rights of any participant in a more than de 
        minimis manner.''.
            (2) Amendment of erisa.--Section 204(g)(2) of the 
        Employee Retirement Income Security Act of 1974 (29 
        U.S.C. 1054(g)(2)) is amended by inserting after the 
        second sentence the following: ``The Secretary of the 
        Treasury shall by regulations provide that this 
        paragraph shall not apply to any plan amendment which 
        reduces or eliminates benefits or subsidies which 
        create significant burdens or complexities for the plan 
        and plan participants, unless such amendment adversely 
        affects the rights of any participant in a more than de 
        minimis manner.''.
            (3) Secretary directed.--Not later than December 
        31, 2003, the Secretary of the Treasury is directed to 
        issue regulations under section 411(d)(6) of the 
        Internal Revenue Code of 1986 and section 204(g) of the 
        Employee Retirement Income Security Act of 1974, 
        including the regulations required by the amendment 
        made by this subsection. Such regulations shall apply 
        to plan years beginning after December 31, 2003, or 
        such earlier date as is specified by the Secretary of 
        the Treasury.

SEC. 646. RATIONALIZATION OF RESTRICTIONS ON DISTRIBUTIONS.

    (a) Modification of Same Desk Exception.--
            (1) Section 401(k).--
                    (A) Section 401(k)(2)(B)(i)(I) (relating to 
                qualified cash or deferred arrangements) is 
                amended by striking ``separation from service'' 
                and inserting ``severance from employment''.
                    (B) Subparagraph (A) of section 401(k)(10) 
                (relating to distributions upon termination of 
                plan or disposition of assets or subsidiary) is 
                amended to read as follows:
                    ``(A) In general.--An event described in 
                this subparagraph is the termination of the 
                plan without establishment or maintenance of 
                another defined contribution plan (other than 
                an employee stock ownership plan as defined in 
                section 4975(e)(7)).''.
                    (C) Section 401(k)(10) is amended--
                            (i) in subparagraph (B)--
                                    (I) by striking ``An 
                                event'' in clause (i) and 
                                inserting ``A termination''; 
                                and
                                    (II) by striking ``the 
                                event'' in clause (i) and 
                                inserting ``the termination'';
                            (ii) by striking subparagraph (C); 
                        and
                            (iii) by striking ``or disposition 
                        of assets or subsidiary'' in the 
                        heading.
            (2) Section 403(b).--
                    (A) Paragraphs (7)(A)(ii) and (11)(A) of 
                section 403(b) are each amended by striking 
                ``separates from service'' and inserting ``has 
                a severance from employment''.
                    (B) The heading for paragraph (11) of 
                section 403(b) is amended by striking 
                ``separation from service'' and inserting 
                ``severance from employment''.
            (3) Section 457.--Clause (ii) of section 
        457(d)(1)(A) is amended by striking ``is separated from 
        service'' and inserting ``has a severance from 
        employment''.
    (b) Effective Date.--The amendments made by this section 
shall apply to distributions after December 31, 2001.

SEC. 647. PURCHASE OF SERVICE CREDIT IN GOVERNMENTAL DEFINED BENEFIT 
                    PLANS.

    (a) Section 403(b) Plans.--Subsection (b) of section 403 is 
amended by adding at the end the following new paragraph:
            ``(13) Trustee-to-trustee transfers to purchase 
        permissive service credit.--No amount shall be 
        includible in gross income by reason of a direct 
        trustee-to-trustee transfer to a defined benefit 
        governmental plan (as defined in section 414(d)) if 
        such transfer is--
                    ``(A) for the purchase of permissive 
                service credit (as defined in section 
                415(n)(3)(A)) under such plan, or
                    ``(B) a repayment to which section 415 does 
                not apply by reason of subsection (k)(3) 
                thereof.''.
    (b) Section 457 Plans.--Subsection (e) of section 457, as 
amended by section 641, is amended by adding after paragraph 
(16) the following new paragraph:
            ``(17) Trustee-to-trustee transfers to purchase 
        permissive service credit.--No amount shall be 
        includible in gross income by reason of a direct 
        trustee-to-trustee transfer to a defined benefit 
        governmental plan (as defined in section 414(d)) if 
        such transfer is--
                    ``(A) for the purchase of permissive 
                service credit (as defined in section 
                415(n)(3)(A)) under such plan, or
                    ``(B) a repayment to which section 415 does 
                not apply by reason of subsection (k)(3) 
                thereof.''.
    (c) Effective Date.--The amendments made by this section 
shall apply to trustee-to-trustee transfers after December 31, 
2001.

SEC. 648. EMPLOYERS MAY DISREGARD ROLLOVERS FOR PURPOSES OF CASH-OUT 
                    AMOUNTS.

    (a) Qualified Plans.--
            (1) Amendment of internal revenue code.--Section 
        411(a)(11) (relating to restrictions on certain 
        mandatory distributions) is amended by adding at the 
        end the following:
                    ``(D) Special rule for rollover 
                contributions.--A plan shall not fail to meet 
                the requirements of this paragraph if, under 
                the terms of the plan, the present value of the 
                nonforfeitable accrued benefit is determined 
                without regard to that portion of such benefit 
                which is attributable to rollover contributions 
                (and earnings allocable thereto). For purposes 
                of this subparagraph, the term `rollover 
                contributions' means any rollover contribution 
                under sections 402(c), 403(a)(4), 403(b)(8), 
                408(d)(3)(A)(ii), and 457(e)(16).''.
            (2) Amendment of erisa.--Section 203(e) of the 
        Employee Retirement Income Security Act of 1974 (29 
        U.S.C. 1053(c)) is amended by adding at the end the 
        following:
    ``(4) A plan shall not fail to meet the requirements of 
this subsection if, under the terms of the plan, the present 
value of the nonforfeitable accrued benefit is determined 
without regard to that portion of such benefit which is 
attributable to rollover contributions (and earnings allocable 
thereto). For purposes of this subparagraph, the term `rollover 
contributions' means any rollover contribution under sections 
402(c), 403(a)(4), 403(b)(8), 408(d)(3)(A)(ii), and 457(e)(16) 
of the Internal Revenue Code of 1986.''.
    (b) Eligible Deferred Compensation Plans.--Clause (i) of 
section 457(e)(9)(A) is amended by striking ``such amount'' and 
inserting ``the portion of such amount which is not 
attributable to rollover contributions (as defined in section 
411(a)(11)(D))''.
    (c) Effective Date.--The amendments made by this section 
shall apply to distributions after December 31, 2001.

SEC. 649. MINIMUM DISTRIBUTION AND INCLUSION REQUIREMENTS FOR SECTION 
                    457 PLANS.

    (a) Minimum Distribution Requirements.--Paragraph (2) of 
section 457(d) (relating to distribution requirements) is 
amended to read as follows:
            ``(2) Minimum distribution requirements.--A plan 
        meets the minimum distribution requirements of this 
        paragraph if such plan meets the requirements of 
        section 401(a)(9).''.
    (b) Inclusion in Gross Income.--
            (1) Year of inclusion.--Subsection (a) of section 
        457 (relating to year of inclusion in gross income) is 
        amended to read as follows:
    ``(a) Year of Inclusion in Gross Income.--
            ``(1) In general.--Any amount of compensation 
        deferred under an eligible deferred compensation plan, 
        and any income attributable to the amounts so deferred, 
        shall be includible in gross income only for the 
        taxable year in which such compensation or other 
        income--
                    ``(A) is paid to the participant or other 
                beneficiary, in the case of a plan of an 
                eligible employer described in subsection 
                (e)(1)(A), and
                    ``(B) is paid or otherwise made available 
                to the participant or other beneficiary, in the 
                case of a plan of an eligible employer 
                described in subsection (e)(1)(B).
            ``(2) Special rule for rollover amounts.--To the 
        extent provided in section 72(t)(9), section 72(t) 
        shall apply to any amount includible in gross income 
        under this subsection.''.
            (2) Conforming amendments.--
                    (A) So much of paragraph (9) of section 
                457(e) as precedes subparagraph (A) is amended 
                to read as follows:
            ``(9) Benefits of tax exempt organization plans not 
        treated as made available by reason of certain 
        elections, etc.--In the case of an eligible deferred 
        compensation plan of an employer described in 
        subsection (e)(1)(B)--''.
                    (B) Section 457(d) is amended by adding at 
                the end the following new paragraph:
            ``(3) Special rule for government plan.--An 
        eligible deferred compensation plan of an employer 
        described in subsection (e)(1)(A) shall not be treated 
        as failing to meet the requirements of this subsection 
        solely by reason of making a distribution described in 
        subsection (e)(9)(A).''.
    (c) Effective Date.--The amendments made by subsections (a) 
and (b) shall apply to distributions after December 31, 2001.

       Subtitle E--Strengthening Pension Security and Enforcement

                       PART I--GENERAL PROVISIONS

SEC. 651. REPEAL OF 160 PERCENT OF CURRENT LIABILITY FUNDING LIMIT.

    (a) Amendments to Internal Revenue Code.--Section 412(c)(7) 
(relating to full-funding limitation) is amended--
            (1) by striking ``the applicable percentage'' in 
        subparagraph (A)(i)(I) and inserting ``in the case of 
        plan years beginning before January 1, 2004, the 
        applicable percentage''; and
            (2) by amending subparagraph (F) to read as 
        follows:
                    ``(F) Applicable percentage.--For purposes 
                of subparagraph (A)(i)(I), the applicable 
                percentage shall be determined in accordance 
                with the following table:
``In the case of any plan year                            The applicable
    beginning in--                                       percentage is--
            2002..............................................     165  
            2003..............................................   170.''.
    (b) Amendment of ERISA.--Section 302(c)(7) of the Employee 
Retirement Income Security Act of 1974 (29 U.S.C. 1082(c)(7)) 
is amended--
            (1) by striking ``the applicable percentage'' in 
        subparagraph (A)(i)(I) and inserting ``in the case of 
        plan years beginning before January 1, 2004, the 
        applicable percentage'', and
            (2) by amending subparagraph (F) to read as 
        follows:
                    ``(F) Applicable percentage.--For purposes 
                of subparagraph (A)(i)(I), the applicable 
                percentage shall be determined in accordance 
                with the following table:
``In the case of any plan year                            The applicable
    beginning in alendar year--                          percentage is--
            2002..............................................      165 
            2003..............................................   170.''.

    (c) Effective Date.--The amendments made by this section 
shall apply to plan years beginning after December 31, 2001.

SEC. 652. MAXIMUM CONTRIBUTION DEDUCTION RULES MODIFIED AND APPLIED TO 
                    ALL DEFINED BENEFIT PLANS.

    (a) In General.--Subparagraph (D) of section 404(a)(1) 
(relating to special rule in case of certain plans) is amended 
to read as follows:
                    ``(D) Special rule in case of certain 
                plans.--
                            ``(i) In general.--In the case of 
                        any defined benefit plan, except as 
                        provided in regulations, the maximum 
                        amount deductible under the limitations 
                        of this paragraph shall not be less 
                        than the unfunded current liability 
                        determined under section 412(l).
                            ``(ii) Plans with 100 or less 
                        participants.--For purposes of this 
                        subparagraph, in the case of a plan 
                        which has 100 or less participants for 
                        the plan year, unfunded current 
                        liability shall not include the 
                        liability attributable to benefit 
                        increases for highly compensated 
                        employees (as defined in section 
                        414(q)) resulting from a plan amendment 
                        which is made or becomes effective, 
                        whichever is later, within the last 2 
                        years.
                            ``(iii) Rule for determining number 
                        of participants.--For purposes of 
                        determining the number of plan 
                        participants, all defined benefit plans 
                        maintained by the same employer (or any 
                        member of such employer's controlled 
                        group (within the meaning of section 
                        412(l)(8)(C))) shall be treated as one 
                        plan, but only employees of such member 
                        or employer shall be taken into 
                        account.
                            ``(iv) Plans maintained by 
                        professional service employers.--In the 
                        case of a plan which, subject to 
                        section 4041 of the Employee Retirement 
                        Income Security Act of 1974, terminates 
                        during the plan year, clause (i) shall 
                        be applied by substituting for unfunded 
                        current liability the amount required 
                        to make the plan sufficient for benefit 
                        liabilities (within the meaning of 
                        section 4041(d) of such Act).''.
    (b) Conforming Amendment.--Paragraph (6) of section 
4972(c), as amended by sections 616 and 637, is amended--
            (1) by striking subparagraph (A) and redesignating 
        subparagraphs (B) and (C) as subparagraphs (A) and (B), 
        respectively,
            (2) by striking the first sentence following 
        subparagraph (B) (as so redesignated),
            (3) by striking ``subparagraph (B)'' in the next to 
        last sentence and inserting ``subparagraph (A)'', and
            (4) by striking ``Subparagraph (C)'' in the last 
        sentence and inserting ``Subparagraph (B)''.
    (c) Effective Date.--The amendments made by this section 
shall apply to plan years beginning after December 31, 2001.

SEC. 653. EXCISE TAX RELIEF FOR SOUND PENSION FUNDING.

    (a) In General.--Subsection (c) of section 4972 (relating 
to nondeductible contributions) is amended by adding at the end 
the following new paragraph:
            ``(7) Defined benefit plan exception.--In 
        determining the amount of nondeductible contributions 
        for any taxable year, an employer may elect for such 
        year not to take into account any contributions to a 
        defined benefit plan except to the extent that such 
        contributions exceed the full-funding limitation (as 
        defined in section 412(c)(7), determined without regard 
        to subparagraph (A)(i)(I) thereof). For purposes of 
        this paragraph, the deductible limits under section 
        404(a)(7) shall first be applied to amounts contributed 
        to defined contribution plans and then to amounts 
        described in this paragraph. If an employer makes an 
        election under this paragraph for a taxable year, 
        paragraph (6) shall not apply to such employer for such 
        taxable year.''.
    (b) Effective Date.--The amendment made by this section 
shall apply to years beginning after December 31, 2001.

SEC. 654. TREATMENT OF MULTIEMPLOYER PLANS UNDER SECTION 415.

    (a) Compensation Limit.--
            (1) In general.--Paragraph (11) of section 415(b) 
        (relating to limitation for defined benefit plans) is 
        amended to read as follows:
            ``(11) Special limitation rule for governmental and 
        multiemployer plans.--In the case of a governmental 
        plan (as defined in section 414(d)) or a multiemployer 
        plan (as defined in section 414(f)), subparagraph (B) 
        of paragraph (1) shall not apply.''.
            (2) Conforming amendment.--Section 415(b)(7) 
        (relating to benefits under certain collectively 
        bargained plans) is amended by inserting ``(other than 
        a multiemployer plan)'' after ``defined benefit plan'' 
        in the matter preceding subparagraph (A).
    (b) Combining and Aggregation of Plans.--
            (1) Combining of plans.--Subsection (f) of section 
        415 (relating to combining of plans) is amended by 
        adding at the end the following:
            ``(3) Exception for multiemployer plans.--
        Notwithstanding paragraph (1) and subsection (g), a 
        multiemployer plan (as defined in section 414(f)) shall 
        not be combined or aggregated--
                    ``(A) with any other plan which is not a 
                multiemployer plan for purposes of applying 
                subsection (b)(1)(B) to such other plan, or
                    ``(B) with any other multiemployer plan for 
                purposes of applying the limitations 
                established in this section.''.
            (2) Conforming amendment for aggregation of 
        plans.--Subsection (g) of section 415 (relating to 
        aggregation of plans) is amended by striking ``The 
        Secretary'' and inserting ``Except as provided in 
        subsection (f)(3), the Secretary''.
    (c) Effective Date.--The amendments made by this section 
shall apply to years beginning after December 31, 2001.

SEC. 655. PROTECTION OF INVESTMENT OF EMPLOYEE CONTRIBUTIONS TO 401(K) 
                    PLANS.

    (a) In General.--Section 1524(b) of the Taxpayer Relief Act 
of 1997 is amended to read as follows:
    ``(b) Effective Date.--
            ``(1) In general.--Except as provided in paragraph 
        (2), the amendments made by this section shall apply to 
        elective deferrals for plan years beginning after 
        December 31, 1998.
            ``(2) Nonapplication to previously acquired 
        property.--The amendments made by this section shall 
        not apply to any elective deferral which is invested in 
        assets consisting of qualifying employer securities, 
        qualifying employer real property, or both, if such 
        assets were acquired before January 1, 1999.''.
    (b) Effective Date.--The amendment made by this section 
shall apply as if included in the provision of the Taxpayer 
Relief Act of 1997 to which it relates.

SEC. 656. PROHIBITED ALLOCATIONS OF STOCK IN S CORPORATION ESOP.

    (a) In General.--Section 409 (relating to qualifications 
for tax credit employee stock ownership plans) is amended by 
redesignating subsection (p) as subsection (q) and by inserting 
after subsection (o) the following new subsection:
    ``(p) Prohibited Allocations of Securities in an S 
Corporation.--
            ``(1) In general.--An employee stock ownership plan 
        holding employer securities consisting of stock in an S 
        corporation shall provide that no portion of the assets 
        of the plan attributable to (or allocable in lieu of) 
        such employer securities may, during a nonallocation 
        year, accrue (or be allocated directly or indirectly 
        under any plan of the employer meeting the requirements 
        of section 401(a)) for the benefit of any disqualified 
        person.
            ``(2) Failure to meet requirements.--
                    ``(A) In general.--If a plan fails to meet 
                the requirements of paragraph (1), the plan 
                shall be treated as having distributed to any 
                disqualified person the amount allocated to the 
                account of such person in violation of 
                paragraph (1) at the time of such allocation.
                    ``(B) Cross reference.--
          ``For excise tax relating to violations of paragraph (1) and 
        ownership of synthetic equity, see section 4979A.

            ``(3) Nonallocation year.--For purposes of this 
        subsection--
                    ``(A) In general.--The term `nonallocation 
                year' means any plan year of an employee stock 
                ownership plan if, at any time during such plan 
                year--
                            ``(i) such plan holds employer 
                        securities consisting of stock in an S 
                        corporation, and
                            ``(ii) disqualified persons own at 
                        least 50 percent of the number of 
                        shares of stock in the S corporation.
                    ``(B) Attribution rules.--For purposes of 
                subparagraph (A)--
                            ``(i) In general.--The rules of 
                        section 318(a) shall apply for purposes 
                        of determining ownership, except that--
                                    ``(I) in applying paragraph 
                                (1) thereof, the members of an 
                                individual's family shall 
                                include members of the family 
                                described in paragraph (4)(D), 
                                and
                                    ``(II) paragraph (4) 
                                thereof shall not apply.
                            ``(ii) Deemed-owned shares.--
                        Notwithstanding the employee trust 
                        exception in section 318(a)(2)(B)(i), 
                        an individual shall be treated as 
                        owning deemed-owned shares of the 
                        individual.

                Solely for purposes of applying paragraph (5), 
                this subparagraph shall be applied after the 
                attribution rules of paragraph (5) have been 
                applied.
            ``(4) Disqualified person.--For purposes of this 
        subsection--
                    ``(A) In general.--The term `disqualified 
                person' means any person if--
                            ``(i) the aggregate number of 
                        deemed-owned shares of such person and 
                        the members of such person's family is 
                        at least 20 percent of the number of 
                        deemed-owned shares of stock in the S 
                        corporation, or
                            ``(ii) in the case of a person not 
                        described in clause (i), the number of 
                        deemed-owned shares of such person is 
                        at least 10 percent of the number of 
                        deemed-owned shares of stock in such 
                        corporation.
                    ``(B) Treatment of family members.--In the 
                case of a disqualified person described in 
                subparagraph (A)(i), any member of such 
                person's family with deemed-owned shares shall 
                be treated as a disqualified person if not 
                otherwise treated as a disqualified person 
                under subparagraph (A).
                    ``(C) Deemed-owned shares.--
                            ``(i) In general.--The term 
                        `deemed-owned shares' means, with 
                        respect to any person--
                                    ``(I) the stock in the S 
                                corporation constituting 
                                employer securities of an 
                                employee stock ownership plan 
                                which is allocated to such 
                                person under the plan, and
                                    ``(II) such person's share 
                                of the stock in such 
                                corporation which is held by 
                                such plan but which is not 
                                allocated under the plan to 
                                participants.
                            ``(ii) Person's share of 
                        unallocated stock.--For purposes of 
                        clause (i)(II), a person's share of 
                        unallocated S corporation stock held by 
                        such plan is the amount of the 
                        unallocated stock which would be 
                        allocated to such person if the 
                        unallocated stock were allocated to all 
                        participants in the same proportions as 
                        the most recent stock allocation under 
                        the plan.
                    ``(D) Member of family.--For purposes of 
                this paragraph, the term `member of the family' 
                means, with respect to any individual--
                            ``(i) the spouse of the individual,
                            ``(ii) an ancestor or lineal 
                        descendant of the individual or the 
                        individual's spouse,
                            ``(iii) a brother or sister of the 
                        individual or the individual's spouse 
                        and any lineal descendant of the 
                        brother or sister, and
                            ``(iv) the spouse of any individual 
                        described in clause (ii) or (iii).

                A spouse of an individual who is legally 
                separated from such individual under a decree 
                of divorce or separate maintenance shall not be 
                treated as such individual's spouse for 
                purposes of this subparagraph.
            ``(5) Treatment of synthetic equity.--For purposes 
        of paragraphs (3) and (4), in the case of a person who 
        owns synthetic equity in the S corporation, except to 
        the extent provided in regulations, the shares of stock 
        in such corporation on which such synthetic equity is 
        based shall be treated as outstanding stock in such 
        corporation and deemed-owned shares of such person if 
        such treatment of synthetic equity of 1 or more such 
        persons results in--
                    ``(A) the treatment of any person as a 
                disqualified person, or
                    ``(B) the treatment of any year as a 
                nonallocation year.

        For purposes of this paragraph, synthetic equity shall 
        be treated as owned by a person in the same manner as 
        stock is treated as owned by a person under the rules 
        of paragraphs (2) and (3) of section 318(a). If, 
        without regard to this paragraph, a person is treated 
        as a disqualified person or a year is treated as a 
        nonallocation year, this paragraph shall not be 
        construed to result in the person or year not being so 
        treated.
            ``(6) Definitions.--For purposes of this 
        subsection--
                    ``(A) Employee stock ownership plan.--The 
                term `employee stock ownership plan' has the 
                meaning given such term by section 4975(e)(7).
                    ``(B) Employer securities.--The term 
                `employer security' has the meaning given such 
                term by section 409(l).
                    ``(C) Synthetic equity.--The term 
                `synthetic equity' means any stock option, 
                warrant, restricted stock, deferred issuance 
                stock right, or similar interest or right that 
                gives the holder the right to acquire or 
                receive stock of the S corporation in the 
                future. Except to the extent provided in 
                regulations, synthetic equity also includes a 
                stock appreciation right, phantom stock unit, 
                or similar right to a future cash payment based 
                on the value of such stock or appreciation in 
                such value.
            ``(7) Regulations and guidance.--
                    ``(A) In general.--The Secretary shall 
                prescribe such regulations as may be necessary 
                to carry out the purposes of this subsection.
                    ``(B) Avoidance or evasion.--The Secretary 
                may, by regulation or other guidance of general 
                applicability, provide that a nonallocation 
                year occurs in any case in which the principal 
                purpose of the ownership structure of an S 
                corporation constitutes an avoidance or evasion 
                of this subsection.''.
    (b) Coordination With Section 4975(e)(7).--The last 
sentence of section 4975(e)(7) (defining employee stock 
ownership plan) is amended by inserting ``, section 409(p),'' 
after ``409(n)''.
    (c) Excise Tax.--
            (1) Application of tax.--Subsection (a) of section 
        4979A (relating to tax on certain prohibited 
        allocations of employer securities) is amended--
                    (A) by striking ``or'' at the end of 
                paragraph (1), and
                    (B) by striking all that follows paragraph 
                (2) and inserting the following:
            ``(3) there is any allocation of employer 
        securities which violates the provisions of section 
        409(p), or a nonallocation year described in subsection 
        (e)(2)(C) with respect to an employee stock ownership 
        plan, or
            ``(4) any synthetic equity is owned by a 
        disqualified person in any nonallocation year,
there is hereby imposed a tax on such allocation or ownership 
equal to 50 percent of the amount involved.''.
            (2) Liability.--Section 4979A(c) (defining 
        liability for tax) is amended to read as follows:
    ``(c) Liability for Tax.--The tax imposed by this section 
shall be paid--
            ``(1) in the case of an allocation referred to in 
        paragraph (1) or (2) of subsection (a), by--
                    ``(A) the employer sponsoring such plan, or
                    ``(B) the eligible worker-owned 
                cooperative,
        which made the written statement described in section 
        664(g)(1)(E) or in section 1042(b)(3)(B) (as the case 
        may be), and
            ``(2) in the case of an allocation or ownership 
        referred to in paragraph (3) or (4) of subsection (a), 
        by the S corporation the stock in which was so 
        allocated or owned.''.
            (3) Definitions.--Section 4979A(e) (relating to 
        definitions) is amended to read as follows:
    ``(e) Definitions and Special Rules.--For purposes of this 
section--
            ``(1) Definitions.--Except as provided in paragraph 
        (2), terms used in this section have the same 
        respective meanings as when used in sections 409 and 
        4978.
            ``(2) Special rules relating to tax imposed by 
        reason of paragraph (3) or (4) of subsection (a).--
                    ``(A) Prohibited allocations.--The amount 
                involved with respect to any tax imposed by 
                reason of subsection (a)(3) is the amount 
                allocated to the account of any person in 
                violation of section 409(p)(1).
                    ``(B) Synthetic equity.--The amount 
                involved with respect to any tax imposed by 
                reason of subsection (a)(4) is the value of the 
                shares on which the synthetic equity is based.
                    ``(C) Special rule during first 
                nonallocation year.--For purposes of 
                subparagraph (A), the amount involved for the 
                first nonallocation year of anyemployee stock 
ownership plan shall be determined by taking into account the total 
value of all the deemed-owned shares of all disqualified persons with 
respect to such plan.
                    ``(D) Statute of limitations.--The 
                statutory period for the assessment of any tax 
                imposed by this section by reason of paragraph 
                (3) or (4) of subsection (a) shall not expire 
                before the date which is 3 years from the later 
                of--
                            ``(i) the allocation or ownership 
                        referred to in such paragraph giving 
                        rise to such tax, or
                            ``(ii) the date on which the 
                        Secretary is notified of such 
                        allocation or ownership.''.
    (d) Effective Dates.--
            (1) In general.--The amendments made by this 
        section shall apply to plan years beginning after 
        December 31, 2004.
            (2) Exception for certain plans.--In the case of 
        any--
                    (A) employee stock ownership plan 
                established after March 14, 2001, or
                    (B) employee stock ownership plan 
                established on or before such date if employer 
                securities held by the plan consist of stock in 
                a corporation with respect to which an election 
                under section 1362(a) of the Internal Revenue 
                Code of 1986 is not in effect on such date,

        the amendments made by this section shall apply to plan 
        years ending after March 14, 2001.

SEC. 657. AUTOMATIC ROLLOVERS OF CERTAIN MANDATORY DISTRIBUTIONS.

    (a) Direct Transfers of Mandatory Distributions.--
            (1) In general.--Section 401(a)(31) (relating to 
        optional direct transfer of eligible rollover 
        distributions), as amended by section 643, is amended 
        by redesignating subparagraphs (B), (C), and (D) as 
        subparagraphs (C), (D), and (E), respectively, and by 
        inserting after subparagraph (A) the following new 
        subparagraph:
                    ``(B) Certain mandatory distributions.--
                            ``(i) In general.--In case of a 
                        trust which is part of an eligible 
                        plan, such trust shall not constitute a 
                        qualified trust under this section 
                        unless the plan of which such trust is 
                        a part provides that if--
                                    ``(I) a distribution 
                                described in clause (ii) in 
                                excess of $1,000 is made, and
                                    ``(II) the distributee does 
                                not make an election under 
                                subparagraph (A) and does not 
                                elect to receive the 
                                distribution directly,

                        the plan administrator shall make such 
                        transfer to an individual retirement 
                        plan of a designated trustee or issuer 
                        and shall notify the distributee in 
                        writing (either separately or as part 
                        of the notice under section 402(f)) 
                        that the distribution may be 
                        transferred to another individual 
                        retirement plan.
                            ``(ii) Eligible plan.--For purposes 
                        of clause (i), the term `eligible plan' 
                        means a plan which provides that any 
                        nonforfeitable accrued benefit for 
                        which the present value (as determined 
                        under section 411(a)(11)) does not 
                        exceed $5,000 shall be immediately 
                        distributed to the participant.''.
            (2) Conforming amendments.--
                    (A) The heading of section 401(a)(31) is 
                amended by striking ``Optional direct'' and 
                inserting ``Direct''.
                    (B) Section 401(a)(31)(C), as redesignated 
                by paragraph (1), is amended by striking 
                ``Subparagraph (A)'' and inserting 
                ``Subparagraphs (A) and (B)''.
    (b) Notice Requirement.--Subparagraph (A) of section 
402(f)(1) is amended by inserting before the comma at the end 
the following: ``and that the automatic distribution by direct 
transfer applies to certain distributions in accordance with 
section 401(a)(31)(B)''.
    (c) Fiduciary Rules.--
            (1) In general.--Section 404(c) of the Employee 
        Retirement Income Security Act of 1974 (29 U.S.C. 
        1104(c)) is amended by adding at the end the following 
        new paragraph:
            ``(3) In the case of a pension plan which makes a 
        transfer to an individual retirement account or annuity 
        of a designated trustee or issuer under section 
        401(a)(31)(B) of the Internal Revenue Code of 1986, the 
        participant or beneficiary shall, for purposes of 
        paragraph (1), be treated as exercising control over 
        the assets in the account or annuity upon--
                    ``(A) the earlier of the earlier of--
                            ``(i) a rollover of all or a 
                        portion of the amount to another 
                        individual retirement account or 
                        annuity; or
                            ``(ii) one year after the transfer 
                        is made; or
                    ``(B) if the transfer is made in a manner 
                consistent with guidance provided by the 
                Secretary.''.
            (2) Regulations.--
                    (A) Automatic rollover safe harbor.--Not 
                later than 3 years after the date of enactment 
                of this Act, the Secretary of Labor shall 
                prescribe regulations providing for safe 
                harbors under which the designation of an 
                institution and investment of funds in 
                accordance with section 401(a)(31)(B) of the 
                Internal Revenue Code of 1986 is deemed to 
                satisfy the fiduciary requirements of section 
                404(a) of the Employee Retirement Income 
                Security Act of 1974 (29 U.S.C. 1104(a)).
                    (B) Use of low-cost individual retirement 
                plans.--The Secretary of the Treasury and the 
                Secretary of Labor may provide, and shall give 
                consideration to providing, special relief with 
                respect to the use of low-cost individual 
                retirement plans for purposes of transfers 
                under section 401(a)(31)(B) of the Internal 
                Revenue Code of 1986 and for other uses that 
                promote the preservation of assets for 
                retirement income purposes.
    (d) Effective Date.--The amendments made by this section 
shall apply to distributions made after final regulations 
implementing subsection (c)(2)(A) are prescribed.

SEC. 658. CLARIFICATION OF TREATMENT OF CONTRIBUTIONS TO MULTIEMPLOYER 
                    PLAN.

    (a) Not Considered Method of Accounting.--For purposes of 
section 446 of the Internal Revenue Code of 1986, a 
determination under section 404(a)(6) of such Code regarding 
the taxable year with respect to which a contribution to a 
multiemployer pension plan is deemed made shall not be treated 
as a method of accounting of the taxpayer. No deduction shall 
be allowed for any taxable year for any contribution to a 
multiemployer pension plan with respect to which a deduction 
was previously allowed.
    (b) Regulations.--The Secretary of the Treasury shall 
promulgate such regulations as necessary to clarify that a 
taxpayer shall not be allowed an aggregate amount of deductions 
for contributions to a multiemployer pension plan which exceeds 
the amount of such contributions made or deemed made under 
section 404(a)(6) of the Internal Revenue Code of 1986 to such 
plan.
    (c) Effective Date.--Subsection (a), and any regulations 
promulgated under subsection (b), shall be effective for years 
ending after the date of the enactment of this Act.

 PART II--TREATMENT OF PLAN AMENDMENTS REDUCING FUTURE BENEFIT ACCRUALS

SEC. 659. EXCISE TAX ON FAILURE TO PROVIDE NOTICE BY DEFINED BENEFIT 
                    PLANS SIGNIFICANTLY REDUCING FUTURE BENEFIT 
                    ACCRUALS.

    (a) Amendment of Internal Revenue Code.--
            (1) In general.--Chapter 43 (relating to qualified 
        pension, etc., plans) is amended by adding at the end 
        the following new section:

``SEC. 4980F. FAILURE OF APPLICABLE PLANS REDUCING BENEFIT ACCRUALS TO 
                    SATISFY NOTICE REQUIREMENTS.

    ``(a) Imposition of Tax.--There is hereby imposed a tax on 
the failure of any applicable pension plan to meet the 
requirements of subsection (e) with respect to any applicable 
individual.
    ``(b) Amount of Tax.--
            ``(1) In general.--The amount of the tax imposed by 
        subsection (a) on any failure with respect to any 
        applicable individual shall be $100 for each day in the 
        noncompliance period with respect to such failure.
            ``(2) Noncompliance period.--For purposes of this 
        section, the term `noncompliance period' means, with 
        respect to any failure, the period beginning on the 
        date the failure first occurs and ending on the date 
        the notice to which the failure relates is provided or 
        the failure is otherwise corrected.
    ``(c) Limitations on Amount of Tax.--
            ``(1) Tax not to apply where failure not discovered 
        and reasonable diligence exercised.--No tax shall be 
        imposed by subsection (a) on any failure during any 
        period for which it is established to the satisfaction 
        of the Secretary that any person subject to liability 
        for the tax under subsection (d) did not know that the 
        failure existed and exercised reasonable diligence to 
        meet the requirements of subsection (e).
            ``(2) Tax not to apply to failures corrected within 
        30 days.--No tax shall be imposed by subsection (a) on 
        any failure if--
                    ``(A) any person subject to liability for 
                the tax under subsection (d) exercised 
                reasonable diligence to meet the requirements 
                of subsection (e), and
                    ``(B) such person provides the notice 
                described in subsection (e) during the 30-day 
                period beginning on the first date such person 
                knew, or exercising reasonable diligence would 
                have known, that such failure existed.
            ``(3) Overall limitation for unintentional 
        failures.--
                    ``(A) In general.--If the person subject to 
                liability for tax under subsection (d) 
                exercised reasonable diligence to meet the 
                requirements of subsection (e), the tax imposed 
                by subsection (a) for failures during the 
                taxable year of the employer (or, in the case 
                of a multiemployer plan, the taxable year of 
                the trust forming part of the plan) shall not 
                exceed $500,000. For purposes of the preceding 
                sentence, all multiemployer plans of which the 
                same trust forms a part shall be treated as 1 
                plan.
                    ``(B) Taxable years in the case of certain 
                controlled groups.--For purposes of this 
                paragraph, if all persons who are treated as a 
                single employer for purposes of this section do 
                not have the same taxable year, the taxable 
                years taken into account shall be determined 
                under principles similar to the principles of 
                section 1561.
            ``(4) Waiver by secretary.--In the case of a 
        failure which is due to reasonable cause and not to 
        willful neglect, the Secretary may waive part or all of 
        the tax imposed by subsection (a) to the extent that 
        the payment of such tax would be excessive or otherwise 
        inequitable relative to the failure involved.
    ``(d) Liability for Tax.--The following shall be liable for 
the tax imposed by subsection (a):
            ``(1) In the case of a plan other than a 
        multiemployer plan, the employer.
            ``(2) In the case of a multiemployer plan, the 
        plan.
    ``(e) Notice Requirements for Plans Significantly Reducing 
Benefit Accruals.--
            ``(1) In general.--If an applicable pension plan is 
        amended to provide for a significant reduction in the 
        rate of future benefit accrual, the plan administrator 
        shall provide written notice to each applicable 
        individual (and to each employee organization 
        representing applicable individuals).
            ``(2) Notice.--The notice required by paragraph (1) 
        shall be written in a manner calculated to be 
        understood by the average plan participant and shall 
        provide sufficient information (as determined in 
        accordance with regulations prescribed by the 
        Secretary) to allow applicable individuals to 
        understand the effect of the plan amendment. The 
        Secretary may provide a simplified form of notice for, 
        or exempt from any notice requirement, a plan--
                    ``(A) which has fewer than 100 participants 
                who have accrued a benefit under the plan, or
                    ``(B) which offers participants the option 
                to choose between the new benefit formula and 
                the old benefit formula.
            ``(3) Timing of notice.--Except as provided in 
        regulations, the notice required by paragraph (1) shall 
        be provided within a reasonable time before the 
        effective date of the plan amendment.
            ``(4) Designees.--Any notice under paragraph (1) 
        may be provided to a person designated, in writing, by 
        the person to which it would otherwise be provided.
            ``(5) Notice before adoption of amendment.--A plan 
        shall not be treated as failing to meet the 
        requirements of paragraph (1) merely because notice is 
        provided before the adoption of the plan amendment if 
        no material modification of the amendment occurs before 
        the amendment is adopted.
    ``(f) Definitions and Special Rules.--For purposes of this 
section--
            ``(1) Applicable individual.--The term `applicable 
        individual' means, with respect to any plan amendment--
                    ``(A) each participant in the plan, and
                    ``(B) any beneficiary who is an alternate 
                payee (within the meaning of section 414(p)(8)) 
                under an applicable qualified domestic 
                relations order (within the meaning of section 
                414(p)(1)(A)),

        whose rate of future benefit accrual under the plan may 
        reasonably be expected to be significantly reduced by 
        such plan amendment.
            ``(2) Applicable pension plan.--The term 
        `applicable pension plan' means--
                    ``(A) any defined benefit plan, or
                    ``(B) an individual account plan which is 
                subject to the funding standards of section 
                412.
        Such term shall not include a governmental plan (within 
        the meaning of section 414(d)) or a church plan (within 
        the meaning of section 414(e)) with respect to which 
        the election provided by section 410(d) has not been 
        made.
            ``(3) Early retirement.--A plan amendment which 
        eliminates or significantly reduces any early 
        retirement benefit or retirement-type subsidy (within 
        the meaning of section 411(d)(6)(B)(i)) shall be 
        treated as having the effect of significantly reducing 
        the rate of future benefit accrual.
    ``(g) New Technologies.--The Secretary may by regulations 
allow any notice under subsection (e) to be provided by using 
new technologies.''.
            (2) Clerical amendment.--The table of sections for 
        chapter 43 is amended by adding at the end the 
        following new item:

         ``Sec. 4980F. Failure of applicable plans reducing benefit 
                  accruals to satisfy notice requirements.''.

    (b) Amendment of ERISA.--Subsection (h) of section 204 of 
the Employee Retirement Income Security Act of 1974 (29 U.S.C. 
1054) is amended to read as follows:
    ``(h)(1) An applicable pension plan may not be amended so 
as to provide for a significant reduction in the rate of future 
benefit accrual unless the plan administrator provides the 
notice described in paragraph (2) to each applicable individual 
(and to each employee organization representing applicable 
individuals).
    ``(2) The notice required by paragraph (1) shall be written 
in a manner calculated to be understood by the average plan 
participant and shall provide sufficient information (as 
determined in accordance with regulations prescribed by the 
Secretary of the Treasury) to allow applicable individuals to 
understand the effect of the plan amendment. The Secretary of 
the Treasury may provide a simplified form of notice for, or 
exempt from any notice requirement, a plan--
            ``(A) which has fewer than 100 participants who 
        have accrued a benefit under the plan, or
            ``(B) which offers participants the option to 
        choose between the new benefit formula and the old 
        benefit formula.
    ``(3) Except as provided in regulations prescribed by the 
Secretary of the Treasury, the notice required by paragraph (1) 
shall be provided within a reasonable time before the effective 
date of the plan amendment.
    ``(4) Any notice under paragraph (1) may be provided to a 
person designated, in writing, by the person to which it would 
otherwise be provided.
    ``(5) A plan shall not be treated as failing to meet the 
requirements of paragraph (1) merely because notice is provided 
before the adoption of the plan amendment if no material 
modification of the amendment occurs before the amendment is 
adopted.
    ``(6)(A) In the case of any egregious failure to meet any 
requirement of this subsection with respect to any plan 
amendment, the provisions of the applicable pension plan shall 
be applied as if such plan amendment entitled all applicable 
individuals to the greater of--
            ``(i) the benefits to which they would have been 
        entitled without regard to such amendment, or
            ``(ii) the benefits under the plan with regard to 
        such amendment.
    ``(B) For purposes of subparagraph (A), there is an 
egregious failure to meet the requirements of this subsection 
if such failure is within the control of the plan sponsor and 
is--
            ``(i) an intentional failure (including any failure 
        to promptly provide the required notice or information 
        after the plan administrator discovers an unintentional 
        failure to meet the requirements of this subsection),
            ``(ii) a failure to provide most of the individuals 
        with most of the information they are entitled to 
        receive under this subsection, or
            ``(iii) a failure which is determined to be 
        egregious under regulations prescribed by the Secretary 
        of the Treasury.
    ``(7) The Secretary of the Treasury may by regulations 
allow any notice under this subsection to be provided by using 
new technologies.
    ``(8) For purposes of this subsection--
            ``(A) The term `applicable individual' means, with 
        respect to any plan amendment--
                    ``(i) each participant in the plan; and
                    ``(ii) any beneficiary who is an alternate 
                payee (within the meaning of section 
                206(d)(3)(K)) under an applicable qualified 
                domestic relations order (within the meaning of 
                section 206(d)(3)(B)(i)),

        whose rate of future benefit accrual under the plan may 
        reasonably be expected to be significantly reduced by 
        such plan amendment.
            ``(B) The term `applicable pension plan' means--
                    ``(i) any defined benefit plan; or
                    ``(ii) an individual account plan which is 
                subject to the funding standards of section 412 
                of the Internal Revenue Code of 1986.
    ``(9) For purposes of this subsection, a plan amendment 
which eliminates or significantly reduces any early retirement 
benefit or retirement-type subsidy (within the meaning of 
subsection (g)(2)(A)) shall be treated as having the effect of 
significantly reducing the rate of future benefit accrual.''.
    (c) Effective Dates.--
            (1) In general.--The amendments made by this 
        section shall apply to plan amendments taking effect on 
        or after the date of the enactment of this Act.
            (2) Transition.--Until such time as the Secretary 
        of the Treasury issues regulations under sections 
        4980F(e)(2) and (3) of the Internal Revenue Code of 
        1986, and section 204(h) of the Employee Retirement 
        Income Security Act of 1974, as added by the amendments 
        made by this section, a plan shall be treated as 
        meeting the requirements of such sections if it makes a 
        good faith effort to comply with such requirements.
            (3) Special notice rule.--
                    (A) In general.--The period for providing 
                any notice required by the amendments made by 
                this section shall not end before the date 
                which is 3 months after the date of the 
                enactment of this Act.
                    (B) Reasonable notice.--The amendments made 
                by this section shall not apply to any plan 
                amendment taking effect on or after the date of 
                the enactment of this Act if, before April 25, 
                2001, notice was provided to participants and 
                beneficiaries adversely affected by the plan 
                amendment (or their representatives) which was 
                reasonably expected to notify them of the 
                nature and effective date of the plan 
                amendment.

                Subtitle F--Reducing Regulatory Burdens

SEC. 661. MODIFICATION OF TIMING OF PLAN VALUATIONS.

    (a) In General.--Paragraph (9) of section 412(c) (relating 
to annual valuation) is amended to read as follows:
            ``(9) Annual valuation.--
                    ``(A) In general.--For purposes of this 
                section, a determination of experience gains 
                and losses and a valuation of the plan's 
                liability shall be made not less frequently 
                than once every year, except that such 
                determination shall be made more frequently to 
                the extent required in particular cases under 
                regulations prescribed by the Secretary.
                    ``(B) Valuation date.--
                            ``(i) Current year.--Except as 
                        provided in clause (ii), the valuation 
                        referred to in subparagraph (A) shall 
                        be made as of a date within the plan 
                        year to which the valuation refers or 
                        within one month prior to the beginning 
                        of such year.
                            ``(ii) Use of prior year 
                        valuation.--The valuation referred to 
                        in subparagraph (A) may be made as of a 
                        date within the plan year prior to the 
                        year to which the valuation refers if, 
                        as of such date, the value of the 
                        assets of the plan are not less than 
                        125 percent of the plan's current 
                        liability (as defined in paragraph 
                        (7)(B)).
                            ``(iii) Adjustments.--Information 
                        under clause (ii) shall, in accordance 
                        with regulations, be actuarially 
                        adjusted to reflect significant 
                        differences in participants.''.
    (b) Amendment of ERISA.--Paragraph (9) of section 302(c) of 
the Employee Retirement Income Security Act of 1974 (29 U.S.C. 
1053(c)) is amended--
            (1) by inserting ``(A)'' after ``(9)'', and
            (2) by adding at the end the following:
    ``(B)(i) Except as provided in clause (ii), the valuation 
referred to in subparagraph (A) shall be made as of a date 
within the plan year to which the valuation refers or within 
one month prior to the beginning of such year.
    ``(ii) The valuation referred to in subparagraph (A) may be 
made as of a date within the plan year prior to the year to 
which the valuation refers if, as of such date, the value of 
the assets of the plan are not less than 125 percent of the 
plan's current liability (as defined in paragraph (7)(B)).
    ``(iii) Information under clause (ii) shall, in accordance 
with regulations, be actuarially adjusted to reflect 
significant differences in participants.''.
    (c) Effective Date.--The amendments made by this section 
shall apply to plan years beginning after December 31, 2001.

SEC. 662. ESOP DIVIDENDS MAY BE REINVESTED WITHOUT LOSS OF DIVIDEND 
                    DEDUCTION.

    (a) In General.--Section 404(k)(2)(A) (defining applicable 
dividends) is amended by striking ``or'' at the end of clause 
(ii), by redesignating clause (iii) as clause (iv), and by 
inserting after clause (ii) the following new clause:
                            ``(iii) is, at the election of such 
                        participants or their beneficiaries--
                                    ``(I) payable as provided 
                                in clause (i) or (ii), or
                                    ``(II) paid to the plan and 
                                reinvested in qualifying 
                                employer securities, or''.
    (b) Standards for Disallowance.--Section 404(k)(5)(A) 
(relating to disallowance of deduction) is amended by inserting 
``avoidance or'' before ``evasion''.
    (c) Effective Date.--The amendments made by this section 
shall apply to taxable years beginning after December 31, 2001.

SEC. 663. REPEAL OF TRANSITION RULE RELATING TO CERTAIN HIGHLY 
                    COMPENSATED EMPLOYEES.

    (a) In General.--Paragraph (4) of section 1114(c) of the 
Tax Reform Act of 1986 is hereby repealed.
    (b) Effective Date.--The repeal made by subsection (a) 
shall apply to plan years beginning after December 31, 2001.

SEC. 664. EMPLOYEES OF TAX-EXEMPT ENTITIES.

    (a) In General.--The Secretary of the Treasury shall modify 
Treasury Regulations section 1.410(b)-6(g) to provide that 
employees of an organization described in section 
403(b)(1)(A)(i) of the Internal Revenue Code of 1986 who are 
eligible to make contributions under section 403(b) of such 
Code pursuant to a salary reduction agreement may be treated as 
excludable with respect to a plan under section 401(k) or (m) 
of such Code that is provided under the same general 
arrangement as a plan under such section 401(k), if--
            (1) no employee of an organization described in 
        section 403(b)(1)(A)(i) of such Code is eligible to 
        participate in such section 401(k) plan or section 
        401(m) plan; and
            (2) 95 percent of the employees who are not 
        employees of an organization described in section 
        403(b)(1)(A)(i) of such Code are eligible to 
        participate in such plan under such section 401(k) or 
        (m).
    (b) Effective Date.--The modification required by 
subsection (a) shall apply as of the same date set forth in 
section 1426(b) of the Small Business Job Protection Act of 
1996.

SEC. 665. CLARIFICATION OF TREATMENT OF EMPLOYER-PROVIDED RETIREMENT 
                    ADVICE.

    (a) In General.--Subsection (a) of section 132 (relating to 
exclusion from gross income) is amended by striking ``or'' at 
the end of paragraph (5), by striking the period at the end of 
paragraph (6) and inserting ``, or'', and by adding at the end 
the following new paragraph:
            ``(7) qualified retirement planning services.''.
    (b) Qualified Retirement Planning Services Defined.--
Section 132 is amended by redesignating subsection (m) as 
subsection (n) and by inserting after subsection (l) the 
following:
    ``(m) Qualified Retirement Planning Services.--
            ``(1) In general.--For purposes of this section, 
        the term `qualified retirement planning services' means 
        any retirement planning advice or information provided 
        to an employee and his spouse by an employer 
        maintaining a qualified employer plan.
            ``(2) Nondiscrimination rule.--Subsection (a)(7) 
        shall apply in the case of highly compensated employees 
        only if such services are available on substantially 
        the same terms to each member of the group of employees 
        normally provided education and information regarding 
        the employer's qualified employer plan.
            ``(3) Qualified employer plan.--For purposes of 
        this subsection, the term `qualified employer plan' 
        means a plan, contract, pension, or account described 
        in section 219(g)(5).''.
    (c) Effective Date.--The amendments made by this section 
shall apply to years beginning after December 31, 2001.

SEC. 666. REPEAL OF THE MULTIPLE USE TEST.

    (a) In General.--Paragraph (9) of section 401(m) is amended 
to read as follows:
            ``(9) Regulations.--The Secretary shall prescribe 
        such regulations as may be necessary to carry out the 
        purposes of this subsection and subsection (k), 
        including regulations permitting appropriate 
        aggregation of plans and contributions.''.
    (b) Effective Date.--The amendment made by this section 
shall apply to years beginning after December 31, 2001.

                  Subtitle G--Miscellaneous Provisions

SEC. 671. TAX TREATMENT AND INFORMATION REQUIREMENTS OF ALASKA NATIVE 
                    SETTLEMENT TRUSTS.

    (a) Treatment of Alaska Native Settlement Trusts.--Subpart 
A of part I of subchapter J of chapter 1 (relating to general 
rules for taxation of trusts and estates) is amended by adding 
at the end the following new section:

``SEC. 646. TAX TREATMENT OF ELECTING ALASKA NATIVE SETTLEMENT TRUSTS.

    ``(a) In General.--If an election under this section is in 
effect with respect to any Settlement Trust, the provisions of 
this section shall apply in determining the income tax 
treatment of the Settlement Trust and its beneficiaries with 
respect to the Settlement Trust.
    ``(b) Taxation of Income of Trust.--Except as provided in 
subsection (f)(1)(B)(ii)--
            ``(1) In general.--There is hereby imposed on the 
        taxable income of an electing Settlement Trust, other 
        than its net capital gain, a tax at the lowest rate 
        specified in section 1(c).
            ``(2) Capital gain.--In the case of an electing 
        Settlement Trust with a net capital gain for the 
        taxable year, a tax is hereby imposed on such gain at 
        the rate of tax which would apply to such gain if the 
        taxpayer were subject to a tax on its other taxable 
        income at only the lowest rate specified in section 
        1(c).
Any such tax shall be in lieu of the income tax otherwise 
imposed by this chapter on such income or gain.
    ``(c) One-Time Election.--
            ``(1) In general.--A Settlement Trust may elect to 
        have the provisions of this section apply to the trust 
        and its beneficiaries.
            ``(2) Time and method of election.--An election 
        under paragraph (1) shall be made by the trustee of 
        such trust--
                    ``(A) on or before the due date (including 
                extensions) for filing the Settlement Trust's 
                return of tax for the first taxable year of 
                such trust ending after the date of the 
                enactment of this section, and
                    ``(B) by attaching to such return of tax a 
                statement specifically providing for such 
                election.
            ``(3) Period election in effect.--Except as 
        provided in subsection (f), an election under this 
        subsection--
                    ``(A) shall apply to the first taxable year 
                described in paragraph (2)(A) and all 
                subsequent taxable years, and
                    ``(B) may not be revoked once it is made.
    ``(d) Contributions to Trust.--
            ``(1) Beneficiaries of electing trust not taxed on 
        contributions.--In the case of an electing Settlement 
        Trust, no amount shall be includible in the gross 
        income of a beneficiary of such trust by reason of a 
        contribution to such trust.
            ``(2) Earnings and profits.--The earnings and 
        profits of the sponsoring Native Corporation shall not 
        be reduced on account of any contribution to such 
        Settlement Trust.
    ``(e) Tax Treatment of Distributions to Beneficiaries.--
Amounts distributed by an electing Settlement Trust during any 
taxable year shall be considered as having the following 
characteristics in the hands of the recipient beneficiary:
            ``(1) First, as amounts excludable from gross 
        income for the taxable year to the extent of the 
        taxable income of such trust for such taxable year 
        (decreased by any income tax paid by the trust with 
        respect to the income) plus any amount excluded from 
        gross income of the trust under section 103.
            ``(2) Second, as amounts excludable from gross 
        income to the extent of the amount described in 
        paragraph (1) for all taxable years for which an 
        election is in effect under subsection (c) with respect 
        to the trust, and not previously taken into account 
        under paragraph (1).
            ``(3) Third, as amounts distributed by the 
        sponsoring Native Corporation with respect to its stock 
        (within the meaning of section 301(a)) during such 
        taxable year and taxable to the recipient beneficiary 
        as amounts described in section 301(c)(1), to the 
        extent of current or accumulated earnings and profits 
        of the sponsoring Native Corporation as of the close of 
        such taxable year after proper adjustment is made for 
        all distributions made by the sponsoring Native 
        Corporation during such taxable year.
            ``(4) Fourth, as amounts distributed by the trust 
        in excess of the distributable net income of such trust 
        for such taxable year.

Amounts distributed to which paragraph (3) applies shall not be 
treated as a corporate distribution subject to section 311(b), 
and for purposes of determining the amount of a distribution 
for purposes of paragraph (3) and the basis to the recipients, 
section 643(e) and not section 301 (b) or (d) shall apply.
    ``(f) Special Rules Where Transfer Restrictions Modified.--
            ``(1) Transfer of beneficial interests.--If, at any 
        time, a beneficial interest in an electing Settlement 
        Trust may be disposed of to a person in a manner which 
        would not be permitted by section 7(h) of the Alaska 
        Native Claims Settlement Act (43 U.S.C. 1606(h)) if 
        such interest were Settlement Common Stock--
                    ``(A) no election may be made under 
                subsection (c) with respect to such trust, and
                    ``(B) if such an election is in effect as 
                of such time--
                            ``(i) such election shall cease to 
                        apply as of the first day of the 
                        taxable year in which such disposition 
                        is first permitted,
                            ``(ii) the provisions of this 
                        section shall not apply to such trust 
                        for such taxable year and all taxable 
                        years thereafter, and
                            ``(iii) the distributable net 
                        income of such trust shall be increased 
                        by the current or accumulated earnings 
                        and profits of the sponsoring Native 
                        Corporation as of the close of such 
                        taxable year after proper adjustment is 
                        made for all distributions made by the 
                        sponsoring Native Corporation during 
                        such taxable year.

        In no event shall the increase under clause (iii) 
        exceed the fair market value of the trust's assets as 
        of the date the beneficial interest of the trust first 
        becomes so disposable. The earnings and profits of the 
        sponsoring Native Corporation shall be adjusted as of 
        the last day of such taxable year by the amount of 
        earnings and profits so included in the distributable 
        net income of the trust.
            ``(2) Stock in corporation.--If--
                    ``(A) stock in the sponsoring Native 
                Corporation may be disposed of to a person in a 
                manner which would not be permitted by section 
                7(h) of the Alaska Native Claims Settlement Act 
                (43 U.S.C. 1606(h)) if such stock were 
                Settlement Common Stock, and
                    ``(B) at any time after such disposition of 
                stock is first permitted, such corporation 
                transfers assets to a Settlement Trust,

        paragraph (1)(B) shall be applied to such trust on and 
        after the date of the transfer in the same manner as if 
        the trust permitted dispositions of beneficial 
        interests in the trust in a manner not permitted by 
        such section 7(h).
            ``(3) Certain distributions.--For purposes of this 
        section, the surrender of an interest in a Native 
        Corporation or an electing Settlement Trust in order to 
        accomplish the whole or partial redemption of the 
        interest of a shareholder or beneficiary in such 
        corporation or trust, or to accomplish the whole or 
        partial liquidation of such corporation or trust, shall 
        be deemed to be a transfer permitted by section 7(h) of 
        the Alaska Native Claims Settlement Act.
    ``(g) Taxable Income.--For purposes of this title, the 
taxable income of an electing Settlement Trust shall be 
determined under section 641(b) without regard to any deduction 
under section 651 or 661.
    ``(h) Definitions.--For purposes of this section--
            ``(1) Electing settlement trust.--The term 
        `electing Settlement Trust' means a Settlement Trust 
        which has made the election, effective for a taxable 
        year, described in subsection (c).
            ``(2) Native corporation.--The term `Native 
        Corporation' has the meaning given such term by section 
        3(m) of the Alaska Native Claims Settlement Act (43 
        U.S.C. 1602(m)).
            ``(3) Settlement common stock.--The term 
        `Settlement Common Stock' has the meaning given such 
        term by section 3(p) of the Alaska Native Claims 
        Settlement Act (43 U.S.C. 1602(p)).
            ``(4) Settlement trust.--The term `Settlement 
        Trust' means a trust that constitutes a settlement 
        trust under section 3(t) of the Alaska Native Claims 
        Settlement Act (43 U.S.C. 1602(t)).
            ``(5) Sponsoring native corporation.--The term 
        `sponsoring Native Corporation' means the Native 
        Corporation which transfers assets to an electing 
        Settlement Trust.
    ``(i) Special Loss Disallowance Rule.--Any loss that would 
otherwise be recognized by a shareholder upon a disposition of 
a share of stock of a sponsoring Native Corporation shall be 
reduced (but not below zero) by the per share loss adjustment 
factor. The per share loss adjustment factor shall be the 
aggregate of all contributions to all electing Settlement 
Trusts sponsored by such Native Corporation made on or after 
the first day each trust is treated as an electing Settlement 
Trust expressed on a per share basis and determined as of the 
day of each such contribution.
    ``(j) Cross Reference.--

          ``For information required with respect to electing Settlement 
        Trusts and sponsoring Native Corporations, see section 6039H.''.

    (b) Reporting.--Subpart A of part III of subchapter A of 
chapter 61 of subtitle F (relating to information concerning 
persons subject to special provisions) is amended by inserting 
after section 6039G the following new section:

``SEC. 6039H. INFORMATION WITH RESPECT TO ALASKA NATIVE SETTLEMENT 
                    TRUSTS AND SPONSORING NATIVE CORPORATIONS.

    ``(a) Requirement.--The fiduciary of an electing Settlement 
Trust (as defined in section 646(h)(1)) shall include with the 
return of income of the trust a statement containing the 
information required under subsection (c).
    ``(b) Application With Other Requirements.--The filing of 
any statement under this section shall be in lieu of the 
reporting requirements under section 6034A to furnish any 
statement to a beneficiary regarding amounts distributed to 
such beneficiary (and such other reporting rules as the 
Secretary deems appropriate).
    ``(c) Required Information.--The information required under 
this subsection shall include--
            ``(1) the amount of distributions made during the 
        taxable year to each beneficiary,
            ``(2) the treatment of such distribution under the 
        applicable provision of section 646, including the 
        amount that is excludable from the recipient 
        beneficiary's gross income under section 646, and
            ``(3) the amount (if any) of any distribution 
        during such year that is deemed to have been made by 
        the sponsoring Native Corporation (as defined in 
        section 646(h)(5)).
    ``(d) Sponsoring Native Corporation.--
            ``(1) In general.--The electing Settlement Trust 
        shall, on or before the date on which the statement 
        under subsection (a) is required to be filed, furnish 
        such statement to the sponsoring Native Corporation (as 
        so defined).
            ``(2) Distributees.--The sponsoring Native 
        Corporation shall furnish each recipient of a 
        distribution described in section 646(e)(3) a statement 
        containing the amount deemed to have been distributed 
        to such recipient by such corporation for the taxable 
        year.''.
    (c) Clerical Amendment.--
            (1) The table of sections for subpart A of part I 
        of subchapter J of chapter 1 of such Code is amended by 
        adding at the end the following new item:

        ``Sec. 646. Tax treatment of electing Alaska Native Settlement 
                  Trusts.''.

            (2) The table of sections for subpart A of part III 
        of subchapter A of chapter 61 of subtitle F of such 
        Code is amended by inserting after the item relating to 
        section 6039G the following new item:

        ``Sec. 6039H. Information with respect to Alaska Native 
                  Settlement Trusts and sponsoring Native 
                  Corporations.''.

    (d) Effective Date.--The amendments made by this section 
shall apply to taxable years ending after the date of the 
enactment of this Act and to contributions made to electing 
Settlement Trusts for such year or any subsequent year.

                   TITLE VII--ALTERNATIVE MINIMUM TAX

SEC. 701. INCREASE IN ALTERNATIVE MINIMUM TAX EXEMPTION.

    (a) In General.--
            (1) Subparagraph (A) of section 55(d)(1) (relating 
        to exemption amount for taxpayers other than 
        corporations) is amended by striking ``$45,000'' and 
        inserting ``$45,000 ($49,000 in the case of taxable 
        years beginning in 2001, 2002, 2003, and 2004)''.
            (2) Subparagraph (B) of section 55(d)(1) (relating 
        to exemption amount for taxpayers other than 
        corporations) is amended by striking ``$33,750'' and 
        inserting ``$33,750 ($35,750 in the case of taxable 
        years beginning in 2001, 2002, 2003, and 2004)''.
    (b) Conforming Amendments.--
            (1) Paragraph (1) of section 55(d) is amended by 
        striking ``and'' at the end of subparagraph (B), by 
        striking subparagraph (C), and by inserting after 
        subparagraph (B) the following new subparagraphs:
                    ``(C) 50 percent of the dollar amount 
                applicable under paragraph (1)(A) in the case 
                of a married individual who files a separate 
                return, and
                    ``(D) $22,500 in the case of an estate or 
                trust.''.
            (2) Subparagraph (C) of section 55(d)(3) is amended 
        by striking ``paragraph (1)(C)'' and inserting 
        ``subparagraph (C) or (D) of paragraph (1)''.
            (3) The last sentence of section 55(d)(3) is 
        amended--
                    (A) by striking ``paragraph (1)(C)(i)'' and 
                inserting ``paragraph (1)(C)''; and
                    (B) by striking ``$165,000 or (ii) 
                $22,500'' and inserting ``the minimum amount of 
                such income (as so determined) for which the 
                exemption amount under paragraph (1)(C) is 
                zero, or (ii) such exemption amount (determined 
                without regard to this paragraph)''.
    (c) Effective Date.--The amendments made by this section 
shall apply to taxable years beginning after December 31, 2000.

                      TITLE VIII--OTHER PROVISIONS

SEC. 801. TIME FOR PAYMENT OF CORPORATE ESTIMATED TAXES.

    Notwithstanding section 6655 of the Internal Revenue Code 
of 1986--
            (1) 100 percent of the amount of any required 
        installment of corporate estimated tax which is 
        otherwise due in September 2001 shall not be due until 
        October 1, 2001; and
            (2) 20 percent of the amount of any required 
        installment of corporate estimated tax which is 
        otherwise due in September 2004 shall not be due until 
        October 1, 2004.

SEC. 802. EXPANSION OF AUTHORITY TO POSTPONE CERTAIN TAX-RELATED 
                    DEADLINES BY REASON OF PRESIDENTIALLY DECLARED 
                    DISASTER.

    (a) In General.--Section 7508A(a) (relating to authority to 
postpone certain tax-related deadlines by reason of 
presidentially declared disaster) is amended by striking ``90 
days'' and inserting ``120 days''.
    (b) Effective Date.--The amendment made by this section 
shall take effect on the date of enactment of this Act.

SEC. 803. NO FEDERAL INCOME TAX ON RESTITUTION RECEIVED BY VICTIMS OF 
                    THE NAZI REGIME OR THEIR HEIRS OR ESTATES.

    (a) In General.--For purposes of the Internal Revenue Code 
of 1986, any excludable restitution payments received by an 
eligible individual (or the individual's heirs or estate) and 
any excludable interest--
            (1) shall not be included in gross income; and
            (2) shall not be taken into account for purposes of 
        applying any provision of such Code which takes into 
        account excludable income in computing adjusted gross 
        income, including section 86 of such Code (relating to 
        taxation of Social Security benefits).

For purposes of such Code, the basis of any property received 
by an eligible individual (or the individual's heirs or estate) 
as part of an excludable restitution payment shall be the fair 
market value of such property as of the time of the receipt.
    (b) Eligible Individual.--For purposes of this section, the 
term ``eligible individual'' means a person who was persecuted 
on the basis of race, religion, physical or mental disability, 
or sexual orientation by Nazi Germany, any other Axis regime, 
or any other Nazi-controlled or Nazi-allied country.
    (c) Excludable Restitution Payment.--For purposes of this 
section, the term ``excludable restitution payment'' means any 
payment or distribution to an individual (or the individual's 
heirs or estate) which--
            (1) is payable by reason of the individual's status 
        as an eligible individual, including any amount payable 
        by any foreign country, the United States of America, 
        or any other foreign or domestic entity, or a fund 
        established by any such country or entity, any amount 
        payable as a result of a final resolution of a legal 
        action, and any amount payableunder a law providing for 
payments or restitution of property;
            (2) constitutes the direct or indirect return of, 
        or compensation or reparation for, assets stolen or 
        hidden from, or otherwise lost to, the individual 
        before, during, or immediately after World War II by 
        reason of the individual's status as an eligible 
        individual, including any proceeds of insurance under 
        policies issued on eligible individuals by European 
        insurance companies immediately before and during World 
        War II; or
            (3) consists of interest which is payable as part 
        of any payment or distribution described in paragraph 
        (1) or (2).
    (d) Excludable Interest.--For purposes of this section, the 
term ``excludable interest'' means any interest earned by--
            (1) escrow accounts or settlement funds established 
        pursuant to the settlement of the action entitled ``In 
        re: Holocaust Victim Assets Litigation,'' (E.D.N.Y.) 
        C.A. No. 96-4849,
            (2) funds to benefit eligible individuals or their 
        heirs created by the International Commission on 
        Holocaust Insurance Claims as a result of the Agreement 
        between the Government of the United States of America 
        and the Government of the Federal Republic of Germany 
        concerning the Foundation ``Remembrance, 
        Responsibility, and Future,'' dated July 17, 2000, or
            (3) similar funds subject to the administration of 
        the United States courts created to provide excludable 
        restitution payments to eligible individuals (or 
        eligible individuals' heirs or estates).
    (e) Effective Date.--
            (1) In general.--This section shall apply to any 
        amount received on or after January 1, 2000.
            (2) No inference.--Nothing in this Act shall be 
        construed to create any inference with respect to the 
        proper tax treatment of any amount received before 
        January 1, 2000.

           TITLE IX--COMPLIANCE WITH CONGRESSIONAL BUDGET ACT

SEC. 901. SUNSET OF PROVISIONS OF ACT.

    (a) In General.--All provisions of, and amendments made by, 
this Act shall not apply--
            (1) to taxable, plan, or limitation years beginning 
        after December 31, 2010, or
            (2) in the case of title V, to estates of decedents 
        dying, gifts made, or generation skipping transfers, 
        after December 31, 2010.
    (b) Application of Certain Laws.--The Internal Revenue Code 
of 1986 and the Employee Retirement Income Security Act of 1974 
shall be applied and administered to years, estates, gifts, and 
transfers described in subsection (a) as if the provisions and 
amendments described in subsection (a) had never been enacted.
    And the Senate agree to the same.

                                   William Thomas,
                                   Dick Armey,
                                 Managers on the Part of the House.

                                   Chuck Grassley,
                                   Orrin Hatch,
                                   Frank H. Murkowski,
                                   Don Nickles,
                                   Phil Gramm,
                                   Max Baucus,
                                   John Breaux,
                                Managers on the Part of the Senate.
       JOINT EXPLANATORY STATEMENT OF THE COMMITTEE OF CONFERENCE

      The managers on the part of the House and the Senate at 
the conference on the disagreeing votes of the two Houses on 
the amendment of the Senate to the bill (H.R. 1836), to provide 
for reconciliation pursuant to section 104 of the concurrent 
resolution on the budget for fiscal year 2002, submit the 
following joint statement to the House and the Senate in 
explanation of the effect of the action agreed upon by the 
managers and recommended in the accompanying conference report:
      The Senate amendment struck all of the House bill after 
the enacting clause and inserted a substitute text.
      The House recedes from its disagreement to the amendment 
of the Senate with an amendment that is a substitute for the 
House bill and the Senate amendment. The differences between 
the House bill, the Senate amendment, and the substitute agreed 
to in conference are noted below, except for clerical 
corrections, conforming changes made necessary by agreements 
reached by the conferees, and minor drafting and clerical 
changes.

                            C O N T E N T S

                                                                   Page
  I. Marginal Tax Rate Reduction....................................120
          A. Individual Income Tax Rate Structure (secs. 2 and 3 
              of the House bill, sec. 101 of the Senate amendment 
              and sec. 1 of the Code)............................   120
          B. Increase Starting Point for Phase-Out of Itemized 
              Deductions (sec. 102 of the Senate amendment and 
              sec. 68 of the Code)...............................   129
          C. Phase-out of Special Rules for Personal Exemptions 
              (sec. 103 of the Senate amendment and sec. 
              151(d)(3) of the Code).............................   130
 II. Tax Benefits Relating to Children..............................131
          A. Increase and Expand the Child Tax Credit (sec. 2 of 
              the House bill, secs. 201 and 204 of the Senate 
              amendment and sec. 24 of the Code).................   131
          B. Sense of the Senate Regarding Child Credit Expansion 
              (sec. 202 of the Senate amendment).................   134
          C. Extension and Expansion of Adoption Tax Benefits 
              (sec. 2 of H.R. 622, sec. 203 of the Senate 
              amendment, and secs. 23 and 137 of the Code).......   134
          D. Expansion of Dependent Care Tax Credit (sec. 205 of 
              the Senate amendment and sec. 21 of the Code)......   137
          E. Tax Credit for Employer-Provided Child Care 
              Facilities (secs. 206 and 207 of the Senate 
              amendment and new sec. 45D of the Code)............   138
III. Marriage Penalty Relief Provisions.............................140
          A. Standard Deduction Marriage Penalty Relief (sec. 2 
              of H.R. 6, sec. 301 of the Senate amendment and 
              sec. 63 of the Code)...............................   140
          B. Expansion of the 15-Percent Rate Bracket For Married 
              Couples Filing Joint Returns (sec. 3 of H.R. 6, 
              sec. 302 of the Senate amendment and sec. 1 of the 
              Code)..............................................   141
          C. Marriage Penalty Relief and Simplification Relating 
              to the Earned Income Credit (sec. 2(b)(2) of the 
              House bill, sec. 4 of H.R. 6, sec. 303 of the 
              Senate amendment, and sec. 32 of the Code).........   143
 IV. Education Incentives...........................................147
          A. Modifications to Education IRAs (sec. 401 and 414 of 
              the Senate amendment and secs. 530 and 127 of the 
              Code)..............................................   147
          B. Private Prepaid Tuition Programs; Exclusion From 
              Gross Income of Education Distributions From 
              Qualified Tuition Programs (sec. 402 of the Senate 
              amendment and sec. 529 of the Code)................   153
          C. Exclusion for Employer-Provided Educational 
              Assistance (sec. 411 of the Senate amendment and 
              sec. 127 of the Code)..............................   157
          D. Modifications to Student Loan Interest Deduction 
              (sec. 412 of the Senate amendment and sec. 221 of 
              the Code)..........................................   158
          E. Eliminate Tax on Awards Under the National Health 
              Service Corps Scholarship Program and the F. Edward 
              Hebert Armed Forces Health Professions Scholarship 
              and Financial Assistance Program (sec. 413 of the 
              Senate amendment and sec. 117 of the Code).........   159
          F. Tax Benefits for Certain Types of Bonds for 
              Educational Facilities and Activities (secs. 421-
              422 of the Senate amendment and secs. 142 and 146-
              148 of the Code)...................................   160
          G. Modify Rules Governing Tax-Exempt Bonds for Section 
              501(c)(3) Organizations as Applied to Organizations 
              Engaged in Timber Conservation Activities (sec. 423 
              of the Senate amendment and sec. 145 of the Code)..   164
          H. Deduction for Qualified Higher Education Expenses 
              (sec. 431 of the Senate amendment and new sec. 222 
              of the Code).......................................   165
          I. Credit for Interest on Qualified Higher Education 
              Loans (sec. 432 of the Senate amendment and new 
              sec. 25B of the Code)..............................   168
          J. Deduction for Qualified Emergency Response Expenses 
              of Eligible Emergency Response Professionals (sec. 
              433 of the Senate amendment and new sec. 224 of the 
              Code)..............................................   169
          K. Enhanced Deduction for Charitable Contribution of 
              Book Inventory for Educational Purposes (sec. 434 
              of the Senate amendment and sec. 170 of the Code)..   170
          L. Deduction for Qualified Professional Development 
              Expenses of Elementary and Secondary School 
              Teachers (sec. 442 of the Senate amendment and new 
              sec. 223 of the Code)..............................   171
          M. Credit for Classroom Materials (sec. 443 of the 
              Senate amendment and new sec. 30B of the Code).....   174
  V. Estate, Gift, and Generation-Skipping Transfer Tax Provisions..175
          A. Phaseout and Repeal of Estate and Generation-
              Skipping Transfer Taxes; Increase in Gift Tax 
              Unified Credit Effective Exemption (secs. 101, 201, 
              301, and 401-402 of H.R. 8, secs. 501-542 of the 
              Senate amendment, secs. 121, 684, 1014, 1040, 1221, 
              2001-2210, 2501, 2502, 2503, 2505, 2511, 2601-2663, 
              4947, 6018, 6019, and 7701 of the Code, and new 
              secs. 1022, 2058, 2210, 2664, and 6716 of the Code)   175
          B. Expand Estate Tax Rule for Conservation Easements 
              (sec. 501 of H.R. 8, sec. 551 of the Senate 
              amendment, and sec. 2031 of the Code)..............   194
          C. Modify Generation-Skipping Transfer Rax Rules.......   196
              1. Deemed allocation of the generation-skipping 
                  transfer tax exemption to lifetime transfers to 
                  trusts that are not direct skips (sec. 601 of 
                  H.R. 8, sec. 561 of the Senate amendment, and 
                  sec. 2632 of the Code).........................   196
              2. Retroactive allocation of the generation-
                  skipping transfer tax exemption (sec. 601 of 
                  H.R. 8, sec. 561 of the Senate amendment, and 
                  sec. 2632 of the Code).........................   199
              3. Severing of trusts holding property having an 
                  inclusion ratio of greater than zero (sec. 602 
                  of H.R. 8, sec. 562 of the Senate amendment, 
                  and sec. 2642 of the Code).....................   200
              4. Modification of certain valuation rules (sec. 
                  603 of H.R. 8, sec. 563 of the Senate 
                  amendment, and sec. 2642 of the Code)..........   201
              5. Relief from late elections (sec. 604 of H.R. 8, 
                  sec. 564 of the Senate amendment, and sec. 2642 
                  of the Code)...................................   202
              6. Substantial compliance (sec. 604 of the House 
                  bill, sec. 564 of the Senate amendment, and 
                  sec. 2642 of the Code).........................   203
          D. Expand and Modify Availability of Installment 
              Payment of Estate Tax for Closely-Held Businesses 
              (sec. 701 of H.R. 8, secs. 571 and 572 of the 
              Senate amendment, and sec. 6166 of the Code).......   203
 VI. Pension and Individual Retirement Arrangement Provisions.......205
          A. Individual Retirement Arrangements (``IRAs'') (sec. 
              101 of the House bill, secs. 601-603 of the Senate 
              amendment and secs. 219, 408, and 408A of the Code)   205
          B. Pension Provisions..................................   210
              1. Expanding Coverage..............................   210
                (a) Increase in benefit and contribution limits 
                  (secs. 201 and 209 of the House bill, sec. 611 
                  of the Senate amendment, and secs. 401(a)(17), 
                  401(c)(2), 402(g), 408(p), 415 and 457 of the 
                  Code)..........................................   210
                (b) Plan loans or S corporation shareholders, 
                  partners, and sole proprietors (sec. 202 of the 
                  House bill, sec. 612 of the Senate amendment, 
                  and sec. 4975 of the Code).....................   214
                (c) Modification of top-heavy rules (sec. 203 of 
                  the House bill, sec. 613 of the Senate 
                  amendment, and sec. 416 of the Code)...........   216
                (d) Elective deferrals not taken into account for 
                  purposes of deduction limits (sec. 204 of the 
                  House bill, sec. 614 of the Senate amendment, 
                  and sec. 404 of the Code)......................   220
                (e) Repeal of coordination requirements for 
                  deferred compensation plans of state and local 
                  governments and tax-exempt organizations (sec. 
                  205 of the House bill, sec. 615 of the Senate 
                  amendment, and sec. 457 of the Code)...........   221
                (f) Eliminate IRS user fees for certain 
                  determination letter requests regarding 
                  employer plans (sec. 206 of the House bill and 
                  sec. 621 of the Senate amendment)..............   222
                (g) Deduction limits (sec. 207 of the House bill, 
                  sec. 616 of the Senate amendment, and sec. 404 
                  of the Code)...................................   224
                (h) Option to treat elective deferrals as after-
                  tax contributions (sec. 208 of the bill, sec. 
                  617 of the Senate amendment, and new sec. 402A 
                  of the Code)...................................   225
                (i) Certain nonresident aliens excluded in 
                  applying minimum coverage requirements (sec. 
                  210 of the House bill, sec. 622 of the Senate 
                  amendment, and secs. 410(b)(3) and 861(a)(3) of 
                  the Code)......................................   228
                (j) Nonrefundable credit to certain individuals 
                  for elective deferrals and IRA contributions 
                  (sec. 618 of the Senate amendment and new sec. 
                  25B of the Code)...............................   229
                (k) Small business tax credit for qualified 
                  retirement plan contributions (sec. 619 of the 
                  Senate amendment and new sec. 45E of the Code).   231
                (l) Small business tax credit for new retirement 
                  plan expenses (sec. 620 of the Senate amendment 
                  and new sec. 45E of the Code)..................   233
              2. Enhancing Fairness for Women....................   234
                (a) Additional salary reduction catch-up 
                  contributions (sec. 301 of the House bill, sec. 
                  631 of the Senate amendment, and sec 414 of the 
                  Code)..........................................   234
                (b) Equitable treatment for contributions of 
                  employees to defined contribution plans (sec. 
                  302 of the House bill, sec. 632 of the Senate 
                  amendment, and secs. 403(b), 415, and 457 of 
                  the Code)......................................   237
                (c) Faster vesting of employer matching 
                  contributions (sec. 303 of the House bill, sec. 
                  63 of the Senate amendment, and sec. 411 of the 
                  Code)..........................................   240
                (d) Modifications to minimum distribution rules 
                  (sec. 304 of the House bill, sec. 634 of the 
                  Senate amendment, and sec. 401(a)(9) of the 
                  Code)..........................................   241
                (e) Clarification of tax treatment of division of 
                  section 457 plan benefits upon divorce (sec. 
                  305 of the House bill, sec. 635 of the Senate 
                  amendment, and secs. 414(p) and 457 of the 
                  Code)..........................................   244
                (f) Provisions relating to hardship withdrawals 
                  (sec. 306 of the House bill, sec. 636 of the 
                  Senate amendment, and sec. 401(k) and 402 of 
                  the Code)......................................   245
                (g) Pension coverage for domestic and similar 
                  workers (sec. 307 of the House bill, sec. 637 
                  of the Senate amendment, and sec. 4972(c)(6) of 
                  the Code)......................................   247
              3. Increasing Portability for Participants.........   248
                (a) Rollovers of retirement plan and IRA 
                  distributions (secs. 401-403 and 409 of the 
                  House bill, secs. 641-643 and 649 of the Senate 
                  amendment, and secs. 401, 402, 403(b), 408, 
                  457, and 3405 of the Code).....................   248
                (b) Waiver of 60-day rule (sec. 404 of the House 
                  bill, sec. 644 of the Senate amendment, and 
                  secs. 402 and 408 of the Code).................   252
                (c) Treatment of forms of distribution (sec. 405 
                  of the House bill, sec. 645 of the Senate 
                  amendment, and sec. 411(d)(6) of the Code).....   253
                (d) Rationalization of restrictions on 
                  distributions (sec. 406 of the House bill, sec. 
                  646 of the Senate amendment, and secs. 401(k), 
                  and 403(b), and 457 of the Code)...............   256
                (e) Purchase of service credit under government 
                  pension plans (sec. 407 of the House bill, sec. 
                  647 of the Senate amendment, and secs. 403(b) 
                  and 457 of the Code)...........................   258
                (f) Employers may disregard rollovers for 
                  purposes of cash-out rules (sec. 408 of the 
                  House bill, sec. 648 of the Senate amendment, 
                  and secs. 411(a)(11) of the Code)..............   259
                (g) Minimum distribution and inclusion 
                  requirements for section 457 plans (sec. 409 of 
                  the House bill, sec. 649 of the Senate 
                  amendment, and sec. 457 of the Code)...........   259
              4. Strengthening Pension Security and Enforcement..   260
                (a) Phase in repeal of 160 percent of current 
                  liability funding limit; deduction for 
                  contributions to fund termination liability 
                  (sec. 501-502 of the House bill, secs. 651-652 
                  of the Senate amendment, and secs. 404(a)(1), 
                  412(c)(7), and 4972(c) of the Code)............   260
                (b) Excise tax relief for sound pension funding 
                  (sec. 503 of the House bill, sec. 653 of the 
                  Senate amendment, and secs. 4972 of the Code)..   263
                (c) Notice of significant reduction in plan 
                  benefit accruals (sec. 504 of the House bill, 
                  sec. 659 of the Senate amendment, and new sec. 
                  4980F of the Code).............................   264
                (d) Modifications to section 415 limits for 
                  multiemployer plans (sec. 505 of the House 
                  bill, sec. 654 of the Senate amendment, and 
                  sec. 415 the Code).............................   270
                (e) Investment of employee contributions in 
                  401(k) plans (sec. 506 of the House bill, sec. 
                  655 of the Senate amendment, and sec. 1524(6) 
                  of the Taxpayer Relief Act of 1997)............   271
                (f) Periodic pension benefit statements (sec. 507 
                  of the House bill and sec. 105(a) of ERISA)....   272
                (g) Prohibited allocations of stock in an S 
                  corporation ESOP (sec. 508 of the House bill, 
                  sec. 656 of the Senate amendment, and secs. 409 
                  and 4979a of the Code).........................   274
                (h) Automatic rollovers of certain mandatory 
                  distributions (sec. 657 of the Senate amendment 
                  and secs. 401(a)(31) and 402(f)(1) of the Code 
                  and sec. 404(c) of ERISA)......................   277
                (i) Clarification of Treatment of contributions 
                  to a multiemployer plan (sec. 658 of the bill).   278
              5. Reducing regulatory burdens.....................   279
                (a) Modification of timing of plan valuations 
                  (sec. 601 of the House bill, sec. 661 of the 
                  Senate amendment, and secs. 412 of the Code)...   279
                (b) ESOP dividends may be reinvested without loss 
                  of divided deduction (sec. 602 of the House 
                  bill, sec. 662 of the Senate amendment, and 
                  sec. 404 of the Code)..........................   280
                (c) Repeal transition rule relating to certain 
                  highly compensated employees (sec. 603 of the 
                  House bill, sec. 663 of the Senate amendment, 
                  and sec. 1114(c)(4) of the Tax Reform Act of 
                  1986)..........................................   282
                (d) Employees of tax-exempt entities (sec. 604 of 
                  the House bill and sec. 664 of the Senate 
                  amendment).....................................   282
                (e) Treatment of employer-provide retirement 
                  advice (sec. 605 of the House bill, sec. 665 of 
                  the Senate amendment, and sec. 132 of the Code)   283
                (f) Reporting simplification (sec. 606 of the 
                  House bill and sec. 666 of the Senate 
                  amendment).....................................   284
                (g) Improvement to Employee Plans Compliance 
                  Resolution System (sec. 607 of the House bill 
                  and sec. 667 of the Senate amendment)..........   286
                (h) Repeal of the multiple use test (sec. 608 of 
                  the House bill, sec. 668 of the Senate 
                  amendment, and sec. 401(m) of the Code)........   287
                (i) Flexibility in nondiscrimination, coverage, 
                  and line of business rules (sec. 609 of the 
                  House bill, sec. 669 of the Senate amendment, 
                  and secs. 401(a)(4), 410(b), and 414(r) of the 
                  Code)..........................................   289
                (j) Extension to all governmental plans of 
                  moratorium on application of certain 
                  nondiscrimination rules applicable to state and 
                  local government plans (sec. 610 of the House 
                  bill, sec. 670 of the Senate amendment, sec. 
                  1505 of the Taxpayer Relief Act of 1997, and 
                  secs. 401(a) and 401(k) of the Code)...........   290
                (k) Notice and consent period regarding 
                  distributions (sec. 611 of the House bill and 
                  sec. 417 of the Code)..........................   291
                (l) Annual report dissemination (sec. 612 of the 
                  House bill and sec. 104(b)(3) of ERISA)........   292
                (m) Modifications to the SAVER Act (sec. 613 of 
                  the House bill and sec. 517 of ERISA)..........   292
              6. Other ERISA provisions..........................   294
                (a) Extension of PBGC missing participants 
                  program (sec. 701 of the House bill, sec. of 
                  the Senate amendment, and secs. 206(f) and 4050 
                  of ERISA)......................................   294
                (b) Reduce PBGC premiums for small and new plans 
                  (secs. 702-703 of the House bill, secs. 682-683 
                  of the Senate amendment, and sec. 4006 of 
                  ERISA).........................................   295
                (c) Authorization for PBGC to pay interest on 
                  premium overpayment refunds (sec. 704 of the 
                  House bill, sec. 684 of the Senate amendment, 
                  and sec. 4007(b) of ERISA).....................   296
                (d) Rules for substantial owner benefits in 
                  terminated plans (sec. 705 of the House bill, 
                  sec. 685 of the Senate amendment, and secs. 
                  4021, 4022, 4043 and 4044 of ERISA)............   297
                (e) Civil penalties for breach of fiduciary 
                  responsibility (sec. 706 of the House bill and 
                  sec. 502 of ERISA).............................   298
                (f) Benefit suspension notice (sec. 707 of the 
                  House bill and sec. 203 of ERISA)..............   299
                (g) Studies (sec. 708 of the House bill).........   300
              7. Miscellaneous provisions........................   301
                (a) Tax treatment of electing Alaska Native 
                  Settlement Trusts (section 691 of the Senate 
                  amendment and new sections 646 and 6039H of the 
                  Code, modifying Code sections including 1(e), 
                  301, 641, 651, 661, and 6034A).................   301
              8. Provisions relating to plan amendments (sec. 801 
                  of the House bill).............................   305
VII. Alternative Minimum Tax........................................306
          A. Individual Alternative Minimum Tax Relief (sec. 3(c) 
              of H.R. 6, sec. 701 of the Senate amendment and 
              sec. 55 of the Code)...............................   306
VIII.Other Provisions...............................................307

          A. Modification to Corporate Estimated Tax Requirements 
              (secs. 801 and 815 of the Senate amendment)........   307
          B. Authority to Postpone Certain Tax-Related Deadlines 
              by Reason of Presidentially Declared Disaster (sec. 
              802 of the Senate amendment and sec. 7508A of the 
              Code)..............................................   308
          C. Income Tax Treatment of Certain Restitution Payments 
              to Holocaust Victims (sec. 803 of the Senate 
              amendment).........................................   309
          D. Treatment of Survivor Annuity Payments with Respect 
              to Public Safety Officers (sec. 804 of the Senate 
              amendment).........................................   310
          E. Circuit Breaker (sec. 805 of the Senate amendment)..   311
          F. Acceleration of Health Insurance Deduction for Self-
              Employed Individuals (secs. 806 and 807 of the 
              Senate amendment and sec. 162(l) of the Code)......   312
          G. Enhanced Deduction for Charitable Contribution of 
              Literary, Musical, and Artistic Compositions (sec. 
              808 of the Senate amendment and sec. 170 of the 
              Code)..............................................   313
          H. Estate Tax Recapture from Cash Rents to Specially-
              Valued Property (sec. 809 of the Senate amendment).   315
          I. Extension of Research and Experimentation Tax Credit 
              and New Vaccine Research Credit (sec. 810 and 811 
              of the Senate amendment and sec. 41 and new sec. 
              45G of the Code)...................................   316
          J. Acceleration of Round II Empowerment Zone Wage 
              Credit (sec. 812 of the Senate amendment and sec. 
              1396 of the Code)..................................   318
          K. Treatment of Certain Hospital Support Organizations 
              in Determining Acquisition Indebtedness (sec. 813 
              of the Senate amendment and sec. 514 of the Code)..   318
          L. Modify Rules Governing Tax-Exempt Bonds for Certain 
              Private Water Facilities (sec. 814 of the Senate 
              amendment and sec. 142 of the Code)................   319
          M. Combined Employment Tax Reporting (sec. 816 of the 
              Senate amendment and sec. 6103(d)(5) of the Code)..   320
          N. Reporting Requirements of State and Local Political 
              Organizations (secs. 901-904 of the Senate 
              amendment and secs. 527 and 6012 of the Code)......   321
 IX. Compliance with Congressional Budget Act (secs. 111, 211, 311, 
     451, 581, 695, 711, and 821 of the Senate amendment)...........325
  X. Tax Complexity Analysis........................................326
Estimated Budget Effects of the Conference Agreement for H.R. 
  1836...........................................................   333

                     I. MARGINAL TAX RATE REDUCTION


  A. Individual Income Tax Rate Structure (Secs. 2 and 3 of the House 
     bill, Sec. 101 of the Senate Amendment and Sec. 1 of the Code)


                              present law

      Under the Federal individual income tax system, an 
individual who is a citizen or a resident of the United States 
generally is subject to tax on worldwide taxable income. 
Taxable income is total gross income less certain exclusions, 
exemptions, and deductions. An individual may claim either a 
standard deduction or itemized deductions.
      An individual's income tax liability is determined by 
computing his or her regular income tax liability and, if 
applicable, alternative minimum tax liability.

Regular income tax liability

      Regular income tax liability is determined by applying 
the regular income tax rate schedules (or tax tables) to the 
individual's taxable income. This tax liability is then reduced 
by any applicable tax credits. The regular income tax rate 
schedules are divided into several ranges of income, known as 
income brackets, and the marginal tax rate increases as the 
individual's income increases. The income bracket amounts are 
adjusted annually for inflation. Separate rate schedules apply 
based on filing status: single individuals (other than heads of 
households and surviving spouses), heads of households, married 
individuals filing joint returns (including surviving spouses), 
married individuals filing separate returns, and estates and 
trusts. Lower rates may apply to capital gains.
      For 2001, the regular income tax rate schedules for 
individuals are shown in Table 1, below. The rate bracket 
breakpoints for married individuals filing separate returns are 
exactly one-half of the rate brackets for married individuals 
filing joint returns. A separate, compressed rate schedule 
applies to estates and trusts.

         TABLE 1.--INDIVIDUAL REGULAR INCOME TAX RATES FOR 2001
------------------------------------------------------------------------
                                       But not   Then regular income tax
     If taxable income is over:         over:            equals:
------------------------------------------------------------------------
                           Single individuals

$0..................................    $27,050  15% of taxable income
$27,050.............................    $65,550  $4,057.50, plus 28% of
                                                  the amount over
                                                  $27,050
$65,550.............................   $136,750  $14,837.50, plus 31% of
                                                  the amount over
                                                  $65,550
$136,750............................   $297,350  $36,909.50, plus 36% of
                                                  the amount over
                                                  $136,750
Over $297,350.......................  .........  $94,725.50, plus 39.6%
                                                  of the amount over
                                                  $297,350

                           Heads of households

$0..................................    $36,250  15% of taxable income
$36,250.............................    $93,650  $5,437.50, plus 28% of
                                                  the amount over
                                                  $36,250
$93,650.............................   $151,650  $21,509.50, plus 31% of
                                                  the amount over
                                                  $93,650
$151,650............................   $297,350  $39,489.50, plus 36% of
                                                  the amount over
                                                  $151,650
Over $297,350.......................  .........  $91,941.50, plus 39.6%
                                                  of the amount over
                                                  $297,350

                Married individuals filing joint returns

$0..................................    $45,200  15% of taxable income
$45,200.............................   $109,250  $6,780.00, plus 28% of
                                                  the amount over
                                                  $45,200
$109,250............................   $166,500  $24,714.50, plus 31% of
                                                  the amount over
                                                  $109,250
$166,500............................   $297,350  $42,461.50, plus 36% of
                                                  the amount over
                                                  $166,500
Over $297,350.......................  .........  $89,567.50, plus 39.6%
                                                  of the amount over
                                                  $297,350
------------------------------------------------------------------------

                               House Bill

In general
      The House bill creates a new low-rate regular income tax 
bracket for a portion of taxable income that is currently taxed 
at 15 percent. The bill reduces the other regular income tax 
rates and consolidates rate brackets. By 2006, the present-law 
structure of five regular income tax rates (15 percent, 28 
percent, 31 percent, 36 percent and 39.6 percent) will be 
reduced to four rates of 10 percent, 15 percent, 25 percent, 
and 33 percent.
New low-rate bracket
      The bill establishes a new regular income tax rate 
bracket for a portion of taxable income that is currently taxed 
at 15 percent, as shown in Table 2, below. The taxable income 
levels for the new low-rate bracket will be adjusted annually 
for inflation for taxable years beginning after December 31, 
2006.

                                     TABLE 2.--PROPOSED NEW LOW-RATE BRACKET
----------------------------------------------------------------------------------------------------------------
                                                                  Taxable income
                                                 ------------------------------------------------  Proposed new
                  Calendar Year                       Single         Heads of     Married filing       rate
                                                    individuals      household     joint returns
----------------------------------------------------------------------------------------------------------------
2001-2002.......................................        0-$6,000       0-$10,000       0-$12,000             12%
2003-2005.......................................        0-$6,000       0-$10,000       0-$12,000             11%
2006............................................        0-$6,000       0-$10,000       0-$12,000             10%
2007 and later..................................         Adjust annually for inflation \1\                  10%
----------------------------------------------------------------------------------------------------------------
\1\ The new low-rate bracket for joint returns and head of household returns will be rounded down to the nearest
  $50. The bracket for single individuals and married individuals filing separately will be one-half the bracket
  for joint returns (after adjustment of that bracket for inflation).

Modification of 15-percent bracket
      The 15-percent regular income tax bracket is modified to 
begin at the end of the new low-rate regular income tax 
bracket. The 15-percent regular income tax bracket ends at the 
same level as under present law. H.R. 6 also makes other 
changes to the 15-percent rate bracket.\1\
---------------------------------------------------------------------------
    \1\ See discussion of the marriage penalty relief in the 15-percent 
bracket.
---------------------------------------------------------------------------
Reduction of other rates and consolidation of rate brackets
      The present-law regular income tax rates of 28 percent 
and 31 percent are phased down to 25 percent over five years, 
effective for taxable years beginning after December 31, 2001. 
The taxable income level for the new 25-percent rate bracket 
begins at the level at which the 28-percent rate bracket begins 
under present law and ends at the level at which the 31-percent 
rate bracket ends under present law.
      The present-law regular income tax rates of 36 percent 
and 39.6 percent are phased down to 33 percent over five years, 
effective for taxable years beginning after December 31, 2001. 
The taxable income level for the new 33-percent rate bracket 
begins at the level at which the 36-percent rate bracket begins 
under present law.
      Table 3, below, shows the schedule of proposed regular 
income tax rate reductions.

                              TABLE 3.--PROPOSED REGULAR INCOME TAX RATE REDUCTIONS
----------------------------------------------------------------------------------------------------------------
                                                     28% rate        31% rate        36% rate       39.6% rate
                  Calendar Year                     reduced to:     reduced to:     reduced to:     reduced to:
----------------------------------------------------------------------------------------------------------------
2002............................................             27%             30%             35%             38%
2003............................................             27%             29%             35%             37%
2004............................................             26%             28%             34%             36%
2005............................................             26%             27%             34%             35%
2006 and later..................................             25%             25%             33%             33%
----------------------------------------------------------------------------------------------------------------

Projected regular income tax rate schedules under the proposal
      Table 4, below, shows the projected individual regular 
income tax rate schedules when the rate reductions are fully 
phased in (i.e., for 2006). As under present law, the rate 
brackets for married taxpayers filing separate returns under 
the bill are one half the rate brackets for married individuals 
filing joint returns. In addition, appropriate adjustments are 
made to the separate, compressed rate schedule for estate and 
trusts.

   TABLE 4.--INDIVIDUAL REGULAR INCOME TAX RATES FOR 2006 (PROJECTED)
------------------------------------------------------------------------
                                               Then regular income tax
           If taxable income is:                       equals:
------------------------------------------------------------------------
                           Single individuals

$0-6,000..................................  10% of taxable income
$6,000-30,950.............................  $600, plus 15 percent of the
                                             amount over $6,000
$30,950-$156,300..........................  $4,342.50, plus 25% of the
                                             amount over $30,950
Over $156,300.............................  $35,680, plus 33% of the
                                             amount over $156,300

                           Heads of households

$0-$10,000................................  10% of taxable income
$10,000-$41,450...........................  $1,000, plus 15% of the
                                             amount over $10,000
$41,450-$173,300..........................  $5,717.50, plus 25% of the
                                             amount over $41,450
Over $173,300.............................  $38,680, plus 33% of the
                                             amount over $173,300

                Married individuals filing joint returns

$0-$12,000................................  10% of taxable income
$12,000-$51,700...........................  $1,200, plus 15% of the
                                             amount over $12,000
$51,700-$190,300..........................  $7,155, plus 25% of the
                                             amount over $51,700
$190,300..................................  $41,805, plus 33% of the
                                             amount over $190,300
------------------------------------------------------------------------

Revised wage withholding for 2001
      Under present law, the Secretary of the Treasury is 
authorized to prescribe appropriate income tax withholding 
tables or computational procedures for the withholding of 
income taxes from wages paid by employers. The Secretary is 
expected to make appropriate revisions to the wage withholding 
tables to reflect the proposed rate reduction for calendar year 
2001 as expeditiously as possible.
Transfer to Social Security and Medicare trust funds
      The House bill provides that the amounts transferred to 
the Social Security and Medicare trust funds are determined as 
if the rate reductions in the bill were not enacted. Thus, 
there will be no reduction in transfers to these funds as a 
result of the bill.
      Effective date.--The provisions of the House bill 
generally apply to taxable years beginning after December 31, 
2000, except that the conforming amendments to certain 
withholding provisions under the bill are effective for amounts 
paid more than 60 days after the date of enactment.

                            Senate Amendment

In general
      The Senate amendment creates a new 10-percent regular 
income tax bracket for a portion of taxable income that is 
currently taxed at 15 percent, effective for taxable years 
beginning after December 31, 2000. The Senate amendment also 
reduces other regular income tax rates. By 2007, the present-
law individual income tax rates of 28 percent, 31 percent, 36 
percent and 39.6 percent will be lowered to 25 percent, 28 
percent, 33 percent, and 36 percent, respectively.
New low-rate bracket
      The Senate amendment establishes a new 10-percent regular 
income tax rate bracket for a portion of taxable income that is 
currently taxed at 15 percent, as shown in Table 3, below. The 
taxable income levels for the new 10-percent rate bracket will 
be adjusted annually for inflation for taxable years beginning 
after December 31, 2006. The new low-rate bracket for joint 
returns and head of household returns will be rounded down to 
the nearest $50. The bracket for single individuals and married 
individuals filing separately will be one-half the bracket for 
joint returns (after adjustment for inflation).
      The 10-percent rate bracket applies to the first $6,000 
of taxable income for single individuals, $10,000 of taxable 
income for heads of households, and $12,000 for married couples 
filing joint returns.
Modification of 15-percent bracket
      The 15-percent regular income tax bracket is modified to 
begin at the end of the new low-rate regular income tax 
bracket. The 15-percent regular income tax bracket ends at the 
same level as under present law. The Senate amendment also 
makes other changes to the 15-percent rate bracket.\2\
---------------------------------------------------------------------------
    \2\ See the discussion of marriage penalty relief in sec. 302 of 
the Senate amendment.
---------------------------------------------------------------------------
Reduction of other rates
      The present-law regular income tax rates of 28 percent, 
31 percent, 36 percent, and 39.6 percent are phased-down over 
six years to 25 percent, 28 percent, 33 percent, and 36 
percent, effective for taxable years beginning after December 
31, 2001. The taxable income levels for the new rates are the 
same as the taxable income levels that apply under the present-
law rates.
      Table 5, below, shows the schedule of regular income tax 
rate reductions.

                                  TABLE 5.--REGULAR INCOME TAX RATE REDUCTIONS
----------------------------------------------------------------------------------------------------------------
                                                     28% rate        31% rate        36% rate       39.6% rate
                  Calendar year                     reduced to:     reduced to:     reduced to:     reduced to:
----------------------------------------------------------------------------------------------------------------
2002-2004.......................................             27%             30%             35%           38.6%
2005-2006.......................................             26%             29%             34%           37.6%
2007 and later..................................             25%             28%             33%             36%
----------------------------------------------------------------------------------------------------------------

Projected regular income tax rate schedules under the Senate amendment
      Table 6, below, shows the projected individual regular 
income tax rate schedules when the rate reductions are fully 
phased-in (i.e., for 2007). As under present law, the rate 
brackets for married taxpayers filing separate returns will be 
one half the rate brackets for married individuals filing joint 
returns. In addition, appropriate adjustments will be made to 
the separate, compressed rate schedule for estate and trusts.

   TABLE 6.--INDIVIDUAL REGULAR INCOME TAX RATES FOR 2007 (PROJECTED)
------------------------------------------------------------------------
                                       But not   Then regular income tax
        If taxable income is:           over:            equals:
------------------------------------------------------------------------
                           Single individuals

$0..................................     $6,150  10% of taxable income
$6,150..............................    $31,700  $615, plus 15% of the
                                                  amount over $6,150
$31,700.............................    $76,800  $4,447.50, plus 25% of
                                                  the amount over
                                                  $31,700
$76,800.............................   $160,250  $15,722.50 plus 28% of
                                                  the amount over
                                                  $76,800
$160,250............................   $348,350  $39,088.50 plus 33% of
                                                  the amount over
                                                  $160,250
Over $348,350.......................  .........  $101,161.50, plus 36%
                                                  of the amount over
                                                  $348,350

                           Heads of households

$0..................................    $10,250  10% of taxable income
$10,250.............................    $42,500  $1,025, plus 15% of the
                                                  amount over $10,250
$42,500.............................   $109,700  $5,862.50, plus 25% of
                                                  the amount over
                                                  $42,500
$109,700............................   $177,650  $22,662.50, plus 28% of
                                                  the amount over
                                                  $109,700
$177,650............................   $348,350  $41,688.50, plus 33% of
                                                  the amount over
                                                  $177,650
Over $348,350.......................  .........  $98,019.50, plus 36% of
                                                  the amount over
                                                  $348,350

                Married individuals filing joint returns

$0..................................    $12,300  10% of taxable income
$12,300.............................  \3\$59,25  $1,230, plus 15% of the
                                              0   amount over $12,300
$59,250.............................   $128,000  $8,272.50, plus 25% of
                                                  the amount over
                                                  $59,250
$128,000............................   $195,050  $25,460, plus 28% of
                                                  the amount over
                                                  $128,000
$195,050............................   $348,350  $44,234, plus 33% of
                                                  the amount over
                                                  $195,050
Over $348,350.......................  .........  $94,823, plus 36% of
                                                  the amount over
                                                  $348,350
------------------------------------------------------------------------
\3\ The end point of the 15-percent rate bracket for married individuals
  filing joint returns also reflects the phase-in of the increase in the
  size of the 15-percent bracket in section 302 of the Senate amendment.

Revised wage withholding for 2001
      Under present law, the Secretary of the Treasury is 
authorized to prescribe appropriate income tax withholding 
tables or computational procedures for the withholding of 
income taxes from wages paid by employers. The Secretary is 
expected to make appropriate revisions to the wage withholding 
tables to reflect the rate reduction for calendar year 2001 as 
expeditiously as possible.
      Effective date.--The new 10-percent rate bracket is 
effective for taxable years beginning after December 31, 2000. 
The reduction in the 28 percent, 31 percent, 36 percent, and 
39.6 percent rates is phased-in beginning in taxable years 
beginning after December 31, 2001.

                          Conference Agreement

In general
      The conference agreement creates a new 10-percent regular 
income tax bracket for a portion of taxable income that is 
currently taxed at 15 percent, effective for taxable years 
beginning after December 31, 2000. The conference agreement 
also reduces the other regular income tax rates, effective July 
1, 2001. By 2006, the present-law regular income tax rates (28 
percent, 31 percent, 36 percent and 39.6 percent) will be 
lowered to 25 percent, 28 percent, 33 percent, and 35 percent, 
respectively.
New low-rate bracket
      The conference agreement establishes a new 10-percent 
income tax rate bracket for a portion of taxable income that is 
currently taxed at 15 percent. The 10-percent rate bracket 
applies to the first $6,000 of taxable income for single 
individuals, $10,000 of taxable income for heads of households, 
and $12,000 for married couples filing joint returns. This 
$6,000 increases to $7,000 and this $12,000 increases to 
$14,000 for 2008 and thereafter.
      The taxable income levels for the new low-rate bracket 
will be adjusted annually for inflation for taxable years 
beginning after December 31, 2008. The new low-rate bracket for 
joint returns and head of household returns will be rounded 
down to the nearest $50. The bracket for single individuals and 
married individuals filing separately will be one-half for 
joint returns (after adjustment of that bracket for inflation).
Rate reduction credit for 2001
      The conference agreement includes a rate reduction credit 
for 2001 to more immediately achieve one of the purposes behind 
the new bottom rate bracket for 2001 that was included in both 
the House bill and the Senate amendment. The conferees have 
chosen to utilize this credit mechanism (and the issuance of 
checks described below) because it will deliver economic 
stimulus to the economy more rapidly than would implementation 
of a new 10-percent rate bracket, even if that were accompanied 
by an immediate implementation of new wage withholding tables. 
Accordingly, this rate reduction credit operates in lieu of the 
new 10-percent income tax rate bracket for 2001.
      This credit is computed in the following manner. 
Taxpayers would be entitled to a credit in tax year 2001 of 5 
percent (the difference between the 15-percent rate and the 10-
percent rate) of the amount of income that would have been 
eligible for the new 10-percent rate. Taxpayers may not receive 
a credit in excess of their income tax liability (determined 
after nonrefundable credits).
      Most taxpayers will receive this credit in the form of a 
check issued by the Department of the Treasury. The amount of 
the check would be computed in the same manner as the credit, 
except that it will be done on the basis of tax returns filed 
for 2000 (instead of 2001). The conferees anticipate that the 
Department of the Treasury will make every effort to issue all 
checks before October 1, 2001, to taxpayers who timely filed 
their 2000 tax returns. Taxpayers who filed late or pursuant to 
extensions will receive their checks later in the fall.
      Taxpayers would reconcile the amount of the credit with 
the check they receive in the following manner. They would 
complete a worksheet calculating the amount of the credit based 
on their 2001 tax return. They would then subtract from the 
credit the amount of the check they received. For many 
taxpayers, these two amounts would be the same. If, however, 
the result is a positive number (because, for example, the 
taxpayer paid no tax in 2000 but is paying tax in 2001), the 
taxpayer may claim that amount as a credit against 2001 tax 
liability. If, however, the result is negative (because, for 
example, the taxpayer paid tax in 2000 but owes no tax for 
2001), the taxpayer is not required to repay that amount to the 
Treasury. Otherwise, the checks have no effect on tax returns 
filed in 2001; the amount is not includible in gross income and 
it does not otherwise reduce the amount of withholding. In no 
event may the Department of the Treasury issue checks after 
December 31, 2001.\4\ This is designed to prevent errors by 
taxpayers who might claim the full amount of the credit on 
their 2001 tax returns and file those returns early in 2002, at 
the same time the Treasury check might be mailed to them. 
Payment of the credit (or the check) is treated, for all 
purposes of the Code,\5\ as a payment of tax. As such, the 
credit or the check is subject to the refund offset provisions, 
such as those applicable to past-due child support under 
section 6402 of the Code.
---------------------------------------------------------------------------
    \4\ For administrative reasons, the Department of the Treasury may 
need to establish an earlier termination date in order to fully 
implement the intent of this provision.
    \5\ A special rule provides that no interest will be paid with 
respect to the checks.
---------------------------------------------------------------------------
      In general, taxpayers eligible for the credit (and the 
check) are individuals other than estates or trusts, 
nonresident aliens, or dependents. The determination of this 
status for the relevant year is made on the basis of the 
information filed on the tax return.
      The conferees understand that, in light of the large 
number of checks that are being issued, the issuance of checks 
will take several months.\6\ Accordingly, no interest will be 
paid with respect to these checks. The conferees understand 
that checks will be issued in the order of the last two digits 
of the taxpayer identification number (which is generally a 
taxpayer's social security number), from lowest to highest. 
Payment by check is the only mechanism for receiving the 
payment prior to filing the 2001 tax return; taxpayers may not 
file either amended returns or claims for tentative refunds for 
tax year 2000 to claim these amounts.
---------------------------------------------------------------------------
    \6\ The conferees investigated the possibility of utilizing 
electronic means, instead of paper checks, to deliver these amounts 
even more rapidly, but doing so was not possible because of limitations 
on available data on individual's banking accounts.
---------------------------------------------------------------------------
      The conferees anticipate that the IRS will send notices 
to most taxpayers approximately one month after enactment. The 
notices will inform taxpayers of the computation of their 
checks and the approximate date by which they can expect to 
receive their check. This information should decrease the 
number of telephone calls made by taxpayers to the IRS 
inquiring when their check will be issued.
Modification of 15-percent bracket
      The 15-percent regular income tax bracket is modified to 
begin at the end of the new low-rate regular income tax 
bracket. The 15-percent regular income tax bracket ends at the 
same level as under present law. The conference agreement also 
makes other changes to the 15-percent rate bracket.\7\
---------------------------------------------------------------------------
    \7\ See discussion of the conference agreement regarding marriage 
penalty relief in the 15-percent bracket.
---------------------------------------------------------------------------
Reduction of other rates and consolidation of rate brackets
      The present-law regular income tax rates of 28 percent, 
31 percent, 36 percent, and 39.6 percent are phased down over 
six years to 25 percent, 28 percent, 33 percent, and 35 
percent, effective after June 30, 2001. Accordingly, for 
taxable years beginning during 2001, the rate reduction will 
come in the form of a blended tax rate. The taxable income 
levels for the new rates in all taxable years are the same as 
the taxable income levels that apply under the present-law 
rates.
      Table 7, below, shows the schedule of regular income tax 
rate reductions.

                                  TABLE 7.--REGULAR INCOME TAX RATE REDUCTIONS
----------------------------------------------------------------------------------------------------------------
                                                     28% rate        31% rate        36% rate       39.6% rate
                  Calendar year                     reduced to:     reduced to:     reduced to:     reduced to:
----------------------------------------------------------------------------------------------------------------
2001\1\-2003....................................             27%             30%             35%           38.6%
2004-2005.......................................             26%             29%             34%           37.6%
2006 and later..................................             25%             28%             33%             35%
----------------------------------------------------------------------------------------------------------------
\1\ Effective July 1, 2001.

Projected regular income tax rate schedules under the proposal
      Table 8, below, shows the projected individual regular 
income tax rate schedules when the rate reductions are fully 
phased in (i.e., for 2006). As under present law, the rate 
brackets for married taxpayers filing separate returns under 
the bill are one half the rate brackets for married individuals 
filing joint returns. In addition, appropriate adjustments are 
made to the separate, compressed rate schedule for estates and 
trusts.

   TABLE 8.--INDIVIDUAL REGULAR INCOME TAX RATES FOR 2006 (PROJECTED)
------------------------------------------------------------------------
                                       But not   Then regular income tax
        If taxable income is:           over:            equals:
------------------------------------------------------------------------
                           Single individuals

$0..................................     $6,000  10% of taxable income
$6,000..............................    $30,950  $600, plus 15% of the
                                                  amount over $6,000
$30,950.............................    $74,950  $4,342.50, plus 25% of
                                                  the amount over
                                                  $30,950
$74,950.............................   $156,300  $15,342.50, plus 28% of
                                                  the amount over
                                                  $74,950
$156,300............................   $339,850  $38,120.50, plus 33% of
                                                  the amount over
                                                  $156,300
Over $339,850.......................  .........  $98,692, plus 35% of
                                                  the amount over
                                                  $339,850

                           Heads of households

$0..................................    $10,000  10% of taxable income
$10,000.............................    $41,450  $1,000, plus 15% of the
                                                  amount over $10,000
$41,450.............................   $107,000  $5,717.50, plus 25% of
                                                  the amount over
                                                  $41,450
$107,000............................   $173,300  $22,105, plus 28% of
                                                  the amount over
                                                  $107,000
$173,300............................   $339,850  $40,669, plus 33% of
                                                  the amount over
                                                  $173,300
Over $339,850.......................  .........  $95,630.50, plus 35% of
                                                  the amount over
                                                  $339,850

                Married individuals filing joint returns

$0..................................    $12,000  10% of taxable income
$12,000.............................  \8\ $57,8  $1,200, plus 15% of the
                                             50   amount over $12,000
$57,850.............................   $124,900  $8,077.50, plus 25% of
                                                  the amount over
                                                  $57,850
$124,900............................   $190,300  $24,840, plus 28% of
                                                  the amount over
                                                  $124,900
$190,300............................   $339,850  $43,152, plus 33% of
                                                  the amount over
                                                  $190,300
Over $339,850.......................  .........  $92,503.50, plus 35% of
                                                  the amount over
                                                  $339,850
------------------------------------------------------------------------
\8\ The end point of the 15-percent rate bracket for married individuals
  filing joint returns also reflects the phase-in of the increase in the
  size of the 15-percent bracket in section 302 of the bill, below.

Revised wage withholding for 2001
      Under present law, the Secretary of the Treasury is 
authorized to prescribe appropriate income tax withholding 
tables or computational procedures for the withholding of 
income taxes from wages paid by employers. The Secretary is 
expected to make appropriate revisions to the wage withholding 
tables to reflect the rate reduction that will be effective 
beginning July 1, 2001, as expeditiously as possible.
Transfer to Social Security and Medicare trust funds
      The conference agreement does not follow the House bill.
      Effective date.--The provisions of the conference 
agreement generally apply to taxable years beginning after 
December 31, 2000. The reductions in the tax rates, other than 
the new 10-percent rate, are effective after June 30, 2001. The 
conforming amendments to certain withholding provisions under 
the bill are effective for amounts paid more than 60 days after 
the date of enactment.

 B. Increase Starting Point for Phase-Out of Itemized Deductions (Sec. 
          102 of the Senate Amendment and Sec. 68 of the Code)

                              Present Law

Itemized deductions
      Taxpayers may choose to claim either the basic standard 
deduction (and additional standard deductions, if applicable) 
or itemized deductions (subject to certain limitations) for 
certain expenses incurred during the taxable year. Among these 
deductible expenses are unreimbursed medical expenses, 
investment interest, casualty and theft losses, wagering 
losses, charitable contributions, qualified residence interest, 
State and local income and property taxes, unreimbursed 
employee business expenses, and certain other miscellaneous 
expenses.
Overall limitation on itemized deductions (``Pease'' limitation)
      Under present law, the total amount of otherwise 
allowable itemized deductions (other than medical expenses, 
investment interest, and casualty, theft, or wagering losses) 
is reduced by three percent of the amount of the taxpayer's 
adjusted gross income in excess of $132,950 in 2001 ($66,475 
for married couples filing separate returns). These amounts are 
adjusted annually for inflation. In computing this reduction of 
total itemized deductions, all present-law limitations 
applicable to such deductions (such as the separate floors) are 
first applied and, then, the otherwise allowable total amount 
of itemized deductions is reduced in accordance with this 
provision. Under this provision, the otherwise allowable 
itemized deductions may not be reduced by more than 80 percent.

                               House Bill

      No provision.

                            Senate Amendment

      The Senate amendment increases the starting point of the 
overall limitation on itemized deductions for all taxpayers 
(other than married couples filing separate returns) to the 
starting point of the personal exemption phase-out for married 
couples filing a joint return. This amount is projected under 
present law to be $245,500 in 2009. The starting point of the 
overall limitation on itemized deductions for married couples 
filing separate returns would continue to be one-half of the 
amount for other taxpayers.
      Effective date.--The provision is effective for taxable 
years beginning after December 31, 2008.

                          Conference Agreement

      The conference agreement repeals the overall limitation 
on itemized deductions for all taxpayers. The repeal is phased-
in over five years, as follows. The otherwise applicable 
overall limitation on itemized deductions is reduced by one-
third in taxable years beginning in 2006 and 2007, and by two-
thirds in taxable years beginning in 2008 and 2009. The overall 
limitation is repealed for taxable years beginning after 
December 31, 2009.
      Effective date.--The conference agreement is effective 
for taxable years beginning after December 31, 2005.

C. Phase-out of Special Rules for Personal Exemptions (Sec. 103 of the 
            Senate Amendment and Sec. 151(d)(3) of the Code)

                              Present Law

      In order to determine taxable income, an individual 
reduces adjusted gross income by any personal exemptions, 
deductions, and either the applicable standard deduction or 
itemized deductions. Personal exemptions generally are allowed 
for the taxpayer, his or her spouse, and any dependents. For 
2001, the amount deductible for each personal exemption is 
$2,900. This amount is adjusted annually for inflation.
      Under present law, the deduction for personal exemptions 
is phased-out ratably for taxpayers with adjusted gross income 
over certain thresholds. The applicable thresholds for 2001 are 
$132,950 for single individuals, $199,450 for married 
individuals filing a joint return, $166,200 for heads of 
households, and $99,725 for married individuals filing separate 
returns. These thresholds are adjusted annually for inflation.
      The total amount of exemptions that may be claimed by a 
taxpayer is reduced by two percent for each $2,500 (or portion 
thereof) by which the taxpayer's adjusted gross income exceeds 
the applicable threshold. The phase-out rate is two percent for 
each $1,250 for married taxpayers filing separate returns. 
Thus, the personal exemptions claimed are phased-out over a 
$122,500 range ($61,250 for married taxpayers filing separate 
returns), beginning at the applicable threshold. The size of 
these phase-out ranges ($122,500/$61,250) is not adjusted for 
inflation. For 2001, the point at which a taxpayer's personal 
exemptions are completely phased-out is $255,450 for single 
individuals, $321,950 for married individuals filing a joint 
return, $288,700 for heads of households, and $160,975 for 
married individuals filing separate returns.

                               House Bill

      No provision.

                            Senate Amendment

      The Senate amendment repeals the personal exemption 
phase-out.
      Effective date.--The provision is effective for taxable 
years beginning after December 31, 2008.

                          Conference Agreement

      The conference agreement follows the Senate amendment, 
with a modification. The modification provides for a five-year 
phase-in of the repeal of the personal exemption phase-out. 
Under the five-year phase-in, the otherwise applicable personal 
exemption phase-out is reduced by one-third in taxable years 
beginning in 2006 and 2007, and is reduced by two-thirds in 
taxable years beginning in 2008 and 2009. The repeal is fully 
effective for taxable years beginning after December 31, 2009.

                 II. TAX BENEFITS RELATING TO CHILDREN

A. Increase and Expand the Child Tax Credit (sec. 2 of the House Bill, 
   Secs. 201 and 204 of the Senate Amendment and Sec. 24 of the Code)

                              Present Law

In general
      Under present law, an individual may claim a $500 tax 
credit for each qualifying child under the age of 17. In 
general, a qualifying child is an individual for whom the 
taxpayer can claim a dependency exemption and who is the 
taxpayer's son or daughter (or descendent of either), stepson 
or stepdaughter, or eligible foster child.
      The child tax credit is phased-out for individuals with 
income over certain thresholds. Specifically, the otherwise 
allowable child tax credit is reduced by $50 for each $1,000 
(or fraction thereof) of modified adjusted gross income over 
$75,000 for single individuals or heads of households, $110,000 
for married individuals filing joint returns, and $55,000 for 
married individuals filing separate returns. Modified adjusted 
gross income is the taxpayer's total gross income plus certain 
amounts excluded from gross income (i.e., excluded income of 
U.S. citizens or residents living abroad (sec. 911); residents 
of Guam, American Samoa, and the Northern Mariana Islands (sec. 
931); and residents of Puerto Rico (sec. 933)). The length of 
the phase-out range depends on the number of qualifying 
children. For example, the phase-out range for a single 
individual with one qualifying child is between $75,000 and 
$85,000 of modified adjusted gross income. The phase-out range 
for a single individual with two qualifying children is between 
$75,000 and $95,000.
      The child tax credit is not adjusted annually for 
inflation.
Refundability
      In general, the child tax credit is nonrefundable. 
However, for families with three or more qualifying children, 
the child tax credit is refundable up to the amount by which 
the taxpayer's social security taxes exceed the taxpayer's 
earned income credit.
Alternative minimum tax liability
      An individual's alternative minimum tax liability reduces 
the amount of the refundable earned income credit and, for 
taxable years beginning after December 31, 2001, the amount of 
the refundable child credit for families with three or more 
children. This is known as the alternative minimum tax offset 
of refundable credits.
      Through 2001, an individual generally may reduce his or 
her tentative alternative minimum tax liability by 
nonrefundable personal tax credits (such as the $500 child tax 
credit and the adoption tax credit). For taxable years 
beginning after December 31, 2001, nonrefundable personal tax 
credits may not reduce an individual's income tax liability 
below his or her tentative alternative minimum tax.

                               House Bill

In general
      No provision. However, H.R. 6, as passed by the House, 
contains a provision that increases the child tax credit to 
$1,000, phased in over six years, beginning in 2001. Table 10, 
below, shows the proposed increase in the amount of the child 
tax credit under the provision.

Table 10.--Increase of the Child Tax Credit

                                                           Credit amount
        Taxable year                                           per child
2001..........................................................      $600
2002..........................................................      $600
2003..........................................................      $700
2004..........................................................      $800
2005..........................................................      $900
2006 and thereafter...........................................    $1,000
Refundability
      No provision. However, H.R. 6 extends the present-law 
refundability of the child tax credit to families with fewer 
than three children.
Alternative minimum tax
      No provision. However, H.R. 6 provides that the 
refundable child tax credit will no longer be reduced by the 
amount of the alternative minimum tax. In addition, H.R. 6 
allows the child tax credit to the extent of the full amount of 
the individual's regular income tax and alternative minimum 
tax.
      Effective date.--No provision. However, the provisions of 
H.R. 6 generally are effective for taxable years beginning 
after December 31, 2000.

                            Senate Amendment

In general
      The Senate amendment increases the child tax credit to 
$1,000, phased-in over eleven years, effective for taxable 
years beginning after December 31, 2000.
      Table 11, below, shows the increase of the child tax 
credit.

Table 11.--Increase of the Child Tax Credit

                                                           Credit amount
        Calendar year                                          per child
2001-2003.....................................................      $600
2004-2006.....................................................      $700
2007-2009.....................................................      $800
2010..........................................................      $900
2011 and later................................................    $1,000
Refundability
      The Senate amendment makes the child credit refundable to 
the extent of 15 percent of the taxpayer's earned income in 
excess of $10,000.\9\ Thus, in 2001, families with earned 
income of at least $14,000 and one child will get a refundable 
credit of $600. Families with three or more children are 
allowed a refundable credit for the amount by which the 
taxpayer's social security taxes exceed the taxpayer's earned 
income credit (the present-law rule), if that amount is greater 
than 15 percent of the taxpayer's earned income in excess of 
$10,000. The Senate amendment also provides that the refundable 
portion of the child credit does not constitute income and 
shall not be treated as resources for purposes of determining 
eligibility or the amount or nature of benefits or assistance 
under any Federal program or any State or local program 
financed with Federal funds.
---------------------------------------------------------------------------
    \9\ For these purposes, earned income is defined as under section 
32, as amended by this bill.
---------------------------------------------------------------------------
Alternative minimum tax
      Same as H.R. 6.
      Effective date.--The provision is effective for taxable 
years beginning after December 31, 2000.

                          Conference Agreement

In general
      The conference agreement increases the child tax credit 
to $1,000, phased-in over ten years, effective for taxable 
years beginning after December 31, 2000.
      Table 12, below, shows the increase of the child tax 
credit.

Table 12.--Increase of the Child Tax Credit

                                                           Credit amount
        Calendar year                                          per child
2001-2004.....................................................      $600
2005-2008.....................................................      $700
2009..........................................................      $800
2010 and later................................................    $1,000
Refundability
      The conference agreement makes the child credit 
refundable to the extent of 10 percent of the taxpayer's earned 
income in excess of $10,000 for calendar years 2001-2004. The 
percentage is increased to 15 percent for calendar years 2005 
and thereafter. The $10,000 amount is indexed for inflation 
beginning in 2002. Families with three or more children are 
allowed a refundable credit for the amount by which the 
taxpayer's social security taxes exceed the taxpayer's earned 
income credit (the present-law rule), if that amount is greater 
than the refundable credit based on the taxpayer's earned 
income in excess of $10,000. The conference agreement also 
provides that the refundable portion of the child credit does 
not constitute income and shall not be treated as resources for 
purposes of determining eligibility or the amount or nature of 
benefits or assistance under any Federal program or any State 
or local program financed with Federal funds.
Alternative minimum tax
      The conference agreement follows H.R. 6 and the Senate 
amendment.
      Effective date.--The provision generally is effective for 
taxable years beginning after December 31, 2000. The provision 
relating to allowing the child tax credit against alternative 
minimum tax is effective for taxable years beginning after 
December 31, 2001.

 B. Sense of the Senate Regarding Child Credit Expansion (Sec. 202 of 
                         the Senate Amendment)

                              Present Law

      Under present law, an individual may claim a $500 tax 
credit for each qualifying child under the age of 17. In 
general, a qualifying child is an individual for whom the 
taxpayer can claim a dependency exemption and who is the 
taxpayer's son or daughter (or descendent of either), stepson 
or stepdaughter, or eligible foster child.

                               House Bill

      No provision.

                            Senate Amendment

      The Senate amendment provides a Sense of the Senate 
resolution that the expansion of the child credit included in 
the Senate amendment be retained in the conference agreement.

                          Conference Agreement

      The conference agreement does not include the Senate 
amendment.

  C. Extension and Expansion of Adoption Tax Benefits (Sec. 2 of H.R. 
  622, Sec. 203 of the Senate Amendment, and Secs. 23 and 137 of the 
                                 Code)

                              Present Law

Tax credit
            In general
      A tax credit is allowed for qualified adoption expenses 
paid or incurred by a taxpayer. The maximum credit is $5,000 
per eligible child ($6,000 for a special needs child). An 
eligible child is an individual (1) who has not attained age 18 
or (2) is physically or mentally incapable of caring for 
himself or herself. A special needs child is an eligible child 
who is a citizen or resident of the United States who a State 
has determined: (1) cannot or should not be returned to the 
home of the birth parents; and (2) has a specific factor or 
condition (such as the child's ethnic background, age, or 
membership in a minority or sibling group, or the presence of 
factors such as medical conditions, or physical, mental, or 
emotional handicaps) because of which the child cannot be 
placed with adoptive parents without adoption assistance.
      Qualified adoption expenses are reasonable and necessary 
adoption fees, court costs, attorneys fees, and other expenses 
that are: (1) directly related to, and the principal purpose of 
which is for, the legal adoption of an eligible child by the 
taxpayer; (2) not incurred in violation of State or Federal 
law, or in carrying out any surrogate parenting arrangement; 
(3) not for the adoption of the child of the taxpayer's spouse; 
and (4) not reimbursed (e.g., by an employer).
      Qualified adoption expenses may be incurred in one or 
more taxable years, but the credit may not exceed $5,000 per 
adoption ($6,000 for a special needs child). The adoption 
credit is phased out ratably for taxpayers with modified 
adjusted gross income between $75,000 and $115,000. Modified 
adjusted gross income is the sum of the taxpayer's adjusted 
gross income plus amounts excluded from income under Code 
sections 911, 931, and 933 (relating to the exclusion of income 
of U.S. citizens or residents living abroad; residents of Guam, 
American Samoa, and the Northern Mariana Islands; and residents 
of Puerto Rico, respectively).
      The adoption credit for special needs children is 
permanent. The adoption credit with respect to other children 
does not apply to expenses paid or incurred after December 31, 
2001.
            Alternative minimum tax
      Through 2001, the adoption credit generally reduces the 
individual's regular income tax and alternative minimum tax. 
For taxable years beginning after December 31, 2001, the 
otherwise allowable adoption credit is allowed only to the 
extent that the individual's regular income tax liability 
exceeds the individual's tentative minimum tax, determined 
without regard to the minimum tax foreign tax credit.
Exclusion from income
      A maximum $5,000 exclusion from the gross income of an 
employee is allowed for qualified adoption expenses paid or 
reimbursed by an employer under an adoption assistance program. 
The maximum excludible amount is $6,000 for special needs 
adoptions. The exclusion is phased out ratably for taxpayers 
with modified adjusted gross income between $75,000 and 
$115,000. Modified adjusted gross income is the sum of the 
taxpayer's adjusted gross income plus amounts excluded from 
income under Code sections 911, 931, and 933 (relating to the 
exclusion of income of U.S. citizens or residents living 
abroad; residents of Guam, American Samoa, and the Northern 
Mariana Islands; and residents of Puerto Rico, respectively). 
For purposes of this exclusion, modified adjusted gross income 
also includes all employer payments and reimbursements for 
adoption expenses whether or not they are taxable to the 
employee. The exclusion does not apply for purposes of payroll 
taxes. Adoption expenses paid or reimbursed by the employer 
under an adoption assistance program are not eligible for the 
adoption credit. A taxpayer may be eligible for the adoption 
credit (with respect to qualified adoption expenses he or she 
incurs) and also for the exclusion (with respect to different 
qualified adoption expenses paid or reimbursed by his or her 
employer).
      The exclusion from income does not apply to amounts paid 
or expenses incurred after December 31, 2001.

                               House Bill

Tax credit
      No provision. However, H.R. 622, the ``Hope for Children 
Act,'' as passed by the House, permanently extends the adoption 
credit for children other than special needs children. The 
maximum credit is increased to $10,000 per eligible child, 
including special needs children. The beginning point of the 
income phase-out range is increased to $150,000 of modified 
adjusted gross income. Therefore, the adoption credit is 
phased-out for taxpayers with modified adjusted gross income of 
$190,000 or more. Finally, the adoption credit is allowed 
against the alternative minimum tax permanently.
Exclusion from income
      No provision. However, H.R. 622 permanently extends the 
exclusion from income for employer-provided adoption 
assistance. The maximum exclusion is increased to $10,000 per 
eligible child, including special needs children. The beginning 
point of the income phase-out range is increased to $150,000 of 
modified adjusted gross income. Therefore, the exclusion is not 
available to taxpayers with modified adjusted gross income of 
$190,000 or more.
      Effective date.--Generally, the provision of H.R. 622 is 
effective for taxable years beginning after December 31, 2001. 
Qualified expenses paid or incurred in taxable years beginning 
on or before December 31, 2001, remain subject to the present-
law dollar limits.

                            Senate Amendment

Tax credit
      Same as H.R. 622, with one modification. The Senate 
amendment provides a $10,000 credit in the year a special needs 
adoption is finalized regardless of whether the taxpayer has 
qualified adoption expenses. No credit is allowed with respect 
to the adoption of a special needs child if the adoption is not 
finalized.
Exclusion from income
      Same as H.R. 622, with one modification. The Senate 
amendment provides a $10,000 exclusion in the case of a special 
needs adoption regardless of whether the taxpayer has qualified 
adoption expenses.
      Effective date.--The provision is effective for taxable 
years beginning after December 31, 2001.

                          Conference Agreement

      The conference agreement follows the Senate amendment 
with one modification. The provisions of the Senate amendment 
that extend the tax credit and exclusion from income for 
special needs adoptions regardless of whether the taxpayer has 
qualified adoption expenses are effective for taxable years 
beginning after December 31, 2002.

   D. Expansion of Dependent Care Tax Credit (sec. 205 of the Senate 
                   amendment and sec. 21 of the Code)

                              present law

Dependent care tax credit
      A taxpayer who maintains a household that includes one or 
more qualifying individuals may claim a nonrefundable credit 
against income tax liability for up to 30 percent of a limited 
amount of employment-related expenses. Eligible employment-
related expenses are limited to $2,400 if there is one 
qualifying individual or $4,800 if there are two or more 
qualifying individuals. Thus, the maximum credit is $720 if 
there is one qualifying individual and $1,440 if there are two 
or more qualifying individuals. The applicable dollar limit 
($2,400/$4,800) of otherwise eligible employment-related 
expenses is reduced by any amount excluded from income under an 
employer-provided dependent care assistance program. For 
example, a taxpayer with one qualifying individual who has 
$2,400 of otherwise eligible employment-related expenses but 
who excludes $1,000 of dependent care assistance must reduce 
the dollar limit of eligible employment-related expenses for 
the dependent care tax credit by the amount of the exclusion to 
$1,400 ($2,400-$1,000 = $1,400).
      A qualifying individual is (1) a dependent of the 
taxpayer under the age of 13 for whom the taxpayer is eligible 
to claim a dependency exemption, (2) a dependent of the 
taxpayer who is physically or mentally incapable of caring for 
himself or herself, or (3) the spouse of the taxpayer; if the 
spouse is physically or mentally incapable of caring for 
himself or herself.
      The 30 percent credit rate is reduced, but not below 20 
percent, by 1 percentage point for each $2,000 (or fraction 
thereof) of adjusted gross income above $10,000. The credit is 
not available to married taxpayers unless they file a joint 
return.
Exclusion for employer-provided dependent care
      Amounts paid or incurred by an employer for dependent 
care assistance provided to an employee generally are excluded 
from the employee's gross income and wages if the assistance is 
furnished under a program meeting certain requirements. These 
requirements include that the program be described in writing, 
satisfy certain nondiscrimination rules, and provide for 
notification to all eligible employees. Dependent care 
assistance expenses eligible for the exclusion are defined the 
same as employment-related expenses with respect to a 
qualifying individual under the dependent care tax credit.
      The dependent care exclusion is limited to $5,000 per 
year, except that a married taxpayer filing a separate return 
may exclude only $2,500. Dependent care expenses excluded from 
income are not eligible for the dependent care tax credit (sec. 
21(c)).

                               house bill

      No provision.

                            senate amendment

      The Senate amendment increases the maximum amount of 
eligible employment-related expenses from $2,400 to $3,000, if 
there is one qualifying individual (from $4,800 to $6,000, if 
there are two or more qualifying individuals). The Senate 
amendment also increases the maximum credit from 30 percent to 
40 percent. Thus, the maximum credit is $1,200, if there is one 
qualifying individual and $2,400, if there are two or more 
qualifying individuals. Finally, the Senate amendment modifies 
the phase-down of the credit. Under the Senate amendment, the 
40-percent credit rate is reduced, but not below 20 percent, by 
1 percentage point for each $2,000 (or fraction thereof) of 
adjusted gross income above $20,000. Therefore, the credit 
percentage is reduced to 20 percent for taxpayers with adjusted 
gross income over $58,000.
      Effective date.--The provision is effective for taxable 
years beginning after December 31, 2001.

                          conference agreement

      The conference agreement follows the Senate amendment, 
with modifications. Under the conference agreement, the maximum 
credit is 35 percent. Further, the conference agreement 
provides that the phase-down of the credit applies with respect 
to adjusted gross income above $15,000. Therefore, the credit 
percentage is reduced to 20 percent for taxpayers with adjusted 
gross income over $43,000.
      Effective date.--The conference agreement provision is 
effective for taxable years beginning after December 31, 2002.

 E. Tax Credit for Employer-Provided Child Care Facilities (Secs. 206 
     and 207 of the Senate Amendment and New Sec. 45D of the Code)

                              present law

      Present law does not provide a tax credit to employers 
for supporting child care or child care resource and referral 
services. An employer, however, may be able to deduct such 
expenses as ordinary and necessary business expenses. 
Alternatively, the employer may be required to capitalize the 
expenses and claim depreciation deductions over time.

                               house bill

      No provision.

                            senate amendment

      Under the Senate amendment, taxpayers receive a tax 
credit equal to 25 percent of qualified expenses for employee 
child care and 10 percent of qualified expenses for child care 
resource and referral services. The maximum total credit that 
may be claimed by a taxpayer cannot exceed $150,000 per taxable 
year.
      Qualified child care expenses include costs paid or 
incurred: (1) to acquire, construct, rehabilitate or expand 
property that is to be used as part of the taxpayer's qualified 
child care facility; \10\ (2) for the operation of the 
taxpayer's qualified child care facility, including the costs 
of training and certain compensation for employees of the child 
care facility, and scholarship programs; or (3) under a 
contract with a qualified child care facility to provide child 
care services to employees of the taxpayer. To be a qualified 
child care facility, the principal use of the facility must be 
for child care (unless it is the principal residence of the 
taxpayer), and the facility must meet all applicable State and 
local laws and regulations, including any licensing laws. A 
facility is not treated as a qualified child care facility with 
respect to a taxpayer unless: (1) it has open enrollment to the 
employees of the taxpayer; (2) use of the facility (or 
eligibility to use such facility) does not discriminate in 
favor of highly compensated employees of the taxpayer (within 
the meaning of section 414(q); and (3) at least 30 percent of 
the children enrolled in the center are dependents of the 
taxpayer's employees, if the facility is the principal trade or 
business of the taxpayer. Qualified child care resource and 
referral expenses are amounts paid or incurred under a contract 
to provide child care resource and referral services to the 
employees of the taxpayer. Qualified child care services and 
qualified child care resource and referral expenditures must be 
provided (or be eligible for use) in a way that does not 
discriminate in favor of highly compensated employees of the 
taxpayer (within the meaning of section 414(q).
---------------------------------------------------------------------------
    \10\ In addition, a depreciation deduction (or amortization in lieu 
of depreciation) must be allowable with respect to the property and the 
property must not be part of the principal residence of the taxpayer or 
any employee of the taxpayer.
---------------------------------------------------------------------------
      Any amounts for which the taxpayer may otherwise claim a 
tax deduction are reduced by the amount of these credits. 
Similarly, if the credits are taken for expenses of acquiring, 
constructing, rehabilitating, or expanding a facility, the 
taxpayer's basis in the facility is reduced by the amount of 
the credits.
      Credits taken for the expenses of acquiring, 
constructing, rehabilitating, or expanding a qualified facility 
are subject to recapture for the first ten years after the 
qualified child care facility is placed in service. The amount 
of recapture is reduced as a percentage of the applicable 
credit over the ten-year recapture period. Recapture takes 
effect if the taxpayer either ceases operation of the qualified 
child care facility or transfers its interest in the qualified 
child care facility without securing an agreement to assume 
recapture liability for the transferee. Other rules apply.
      Effective date.--The provision is effective for taxable 
years beginning after December 31, 2001.

                          conference Agreement

      The conference agreement follows the Senate amendment.

                III. MARRIAGE PENALTY RELIEF PROVISIONS

 A. Standard Deduction Marriage Penalty`Relief (Sec. 2 of H.R. 6, Sec. 
          301 of the Senate Amendment and Sec. 63 of the Code)

                              present law

Marriage penalty
      A married couple generally is treated as one tax unit 
that must pay tax on the couple's total taxable income. 
Although married couples may elect to file separate returns, 
the rate schedules and other provisions are structured so that 
filing separate returns usually results in a higher tax than 
filing a joint return. Other rate schedules apply to single 
persons and to single heads of households.
      A ``marriage penalty'' exists when the combined tax 
liability of a married couple filing a joint return is greater 
than the sum of the tax liabilities of each individual computed 
as if they were not married. A ``marriage bonus'' exists when 
the combined tax liability of a married couple filing a joint 
return is less than the sum of the tax liabilities of each 
individual computed as if they were not married.
Basic standard deduction
      Taxpayers who do not itemize deductions may choose the 
basic standard deduction (and additional standard deductions, 
if applicable),\11\ which is subtracted from adjusted gross 
income (``AGI'') in arriving at taxable income. The size of the 
basic standard deduction varies according to filing status and 
is adjusted annually for inflation. For 2001, the basic 
standard deduction amount for single filers is 60 percent of 
the basic standard deduction amount for married couples filing 
joint returns. Thus, two unmarried individuals have standard 
deductions whose sum exceeds the standard deduction for a 
married couple filing a joint return.
---------------------------------------------------------------------------
    \11\ Additional standard deductions are allowed with respect to any 
individual who is elderly (age 65 or over) or blind.
---------------------------------------------------------------------------

                               house bill

      No provision. However, H.R. 6, as passed by the House, 
contains a provision that increases the basic standard 
deduction for a married couple filing a joint return to twice 
the basic standard deduction for an unmarried individual filing 
a single return. The basic standard deduction for a married 
taxpayer filing separately will continue to equal one-half of 
the basic standard deduction for a married couple filing 
jointly; thus, the basic standard deduction for unmarried 
individuals filing a single return and for married couples 
filing separately will be the same.
      Effective date.--The provision is effective for taxable 
years beginning after December 31, 2001.

                            Senate Amendment

      The Senate amendment is the same as H.R. 6 except that 
the increase in the standard deduction is phased-in over five 
years beginning in 2005 and would be fully phased-in for 2009 
and thereafter. Table 13, below, shows the standard deduction 
for married couples filing a joint return as a percentage of 
the standard deduction for single individuals during the phase-
in period.

Table 13.--Phase-In of Increase of Standard Deduction for Married 
Couples Filing Joint Returns

Calendar Year       Standard Deduction for Joint Returns as Percentage 
                    of Standard Deduction for Single Returns
        2005..................................................      174%
        2006..................................................      184%
        2007..................................................      187%
        2008..................................................      190%
        2009 and later........................................      200%

      Effective date.--The provision is effective for taxable 
years beginning after December 31, 2004.

                          conference agreement

      The conference agreement follows the Senate amendment.

B. Expansion of the 15-Percent Rate Bracket for Married Couples Filing 
 Joint Returns (Sec. 3 of H.R. 6, Sec. 302 of the Senate Amendment and 
                          Sec. 1 of the Code)

                              present law

In general
      Under the Federal individual income tax system, an 
individual who is a citizen or resident of the United States 
generally is subject to tax on worldwide taxable income. 
Taxable income is total gross income less certain exclusions, 
exemptions, and deductions. An individual may claim either a 
standard deduction or itemized deductions.
      An individual's income tax liability is determined by 
computing his or her regular income tax liability and, if 
applicable, alternative minimum tax liability.
Regular income tax liability
      Regular income tax liability is determined by applying 
the regular income tax rate schedules (or tax tables) to the 
individual's taxable income and then is reduced by any 
applicable tax credits. The regular income tax rate schedules 
are divided into several ranges of income, known as income 
brackets, and the marginal tax rate increases as the 
individual's income increases. The income bracket amounts are 
adjusted annually for inflation. Separate rate schedules apply 
based on filing status: single individuals (other than heads of 
households and surviving spouses), heads of households, married 
individuals filing joint returns (including surviving spouses), 
married individuals filing separate returns, and estates and 
trusts. Lower rates may apply to capital gains.
      In general, the bracket breakpoints for single 
individuals are approximately 60 percent of the rate bracket 
breakpoints for married couples filing joint returns.\12\ The 
rate bracket breakpoints for married individuals filing 
separate returns are exactly one-half of the rate brackets for 
married individuals filing joint returns. A separate, 
compressed rate schedule applies to estates and trusts.
---------------------------------------------------------------------------
    \12\ The rate bracket breakpoint for the 39.6 percent marginal tax 
rate is the same for single individuals and married couples filing 
joint returns.
---------------------------------------------------------------------------

                               House Bill

      No provision. However, H.R. 6, as passed by the House, 
contains a provision that increases the size of the 15-percent 
regular income tax rate bracket for a married couple filing a 
joint return to twice the size of the corresponding rate 
bracket for an unmarried individual filing a single return. 
This increase is phased in over six years as shown in Table 15, 
below. Therefore, this provision is fully effective (i.e., the 
size of the lowest regular income tax rate bracket for a 
married couple filing a joint return is twice the size of the 
lowest regular income tax rate bracket for an unmarried 
individual filing a single return) for taxable years beginning 
after December 31, 2008.

Table 15.--Increase in Size of 15-Percent Rate Bracket for Married 
Couples Filing a Joint Return

Taxable year        Size of 15-percent rate bracket for married couple 
                    filing joint return as percentage of rate bracket 
                    for unmarried individuals
        2004..................................................      172%
        2005..................................................      178%
        2006..................................................      183%
        2007..................................................      189%
        2008..................................................      195%
        2009 and thereafter...................................      200%
      Effective date.--The provision is effective for taxable 
years beginning after December 31, 2003.

                            senate amendment

      The Senate amendment increases the size of the 15-percent 
regular income tax rate bracket for a married couple filing a 
joint return to twice the size of the corresponding rate 
bracket for an unmarried individual filing a single return. The 
increase is phased-in over five years, beginning in 2005. 
Therefore, this provision is fully effective (i.e., the size of 
the 15-percent regular income tax rate bracket for a married 
couple filing a joint return would be twice the size of the 15-
percent regular income tax rate bracket for an unmarried 
individual filing a single return) for taxable years beginning 
after December 31, 2008. Table 16, below, shows the increase in 
the size of the 15-percent bracket during the phase-in period.

Table 16.--Increase in Size of 15-Percent Rate Bracket for Married 
Couples Filing a Joint Return

Taxable year        End point of 15-percent rate bracket for married 
                    couple filing joint return as percentage of end 
                    point of 15-percent rate bracket for unmarried 
                    individuals
        2005..................................................      174%
        2006..................................................      184%
        2007..................................................      187%
        2008..................................................      190%
        2009 and thereafter...................................      200%
      Effective date.--The provision is effective for taxable 
years beginning after December 31, 2004.

                          conference agreement

      The conference agreement increases the size of the 15-
percent regular income tax rate bracket for a married couple 
filing a joint return to twice the size of the corresponding 
rate bracket for an unmarried individual filing a single 
return. The increase is phased-in over four years, beginning in 
2005. Therefore, this provision is fully effective (i.e., the 
size of the 15-percent regular income tax rate bracket for a 
married couple filing a joint return would be twice the size of 
the 15-percent regular income tax rate bracket for an unmarried 
individual filing a single return) for taxable years beginning 
after December 31, 2007. Table 17, below, shows the increase in 
the size of the 15-percent bracket during the phase-in period.

Table 17.--Increase in Size of 15-Percent Rate Bracket for Married 
Couples Filing a Joint Return

Taxable year        End point of 15-percent rate bracket for married 
                    couple filing joint return as percentage of end 
                    point of 15-percent rate bracket for unmarried 
                    individuals
        2005..................................................      180%
        2006..................................................      187%
        2007..................................................      193%
        2008 and thereafter...................................      200%
      Effective date.--The provision is effective for taxable 
years beginning after December 31, 2004.

 C. Marriage Penalty Relief and Simplification Relating to the Earned 
 Income Credit (Sec. 2(b)(2) of the House bill, Sec. 4 of H.R. 6, Sec. 
         303 of the Senate Amendment, and Sec. 32 of the Code)

                              Present Law

In general
      Eligible low-income workers are able to claim a 
refundable earned income credit. The amount of the credit an 
eligible taxpayer may claim depends upon the taxpayer's income 
and whether the taxpayer has one, more than one, or no 
qualifying children.
      The earned income credit is not available to married 
individuals who file separate returns. No earned income credit 
is allowed if the taxpayer has disqualified income in excess of 
$2,450 (for 2001) for the taxable year.\13\ In addition, no 
earned income credit is allowed if an eligible individual is 
the qualifying child of another taxpayer.\14\
---------------------------------------------------------------------------
    \13\ Sec. 32(i). Disqualified income is the sum of: (1) interest 
and dividends includible in gross income for the taxable year; (2) tax-
exempt income received or accrued in the taxable year; (3) net income 
from rents and royalties for the taxable year not derived in the 
ordinary course of business; (4) capital gain net income for the 
taxpayer year; and (5) net passive income for the taxable year. Sec. 
32(i)(2).
    \14\ Sec. 32(c)(1)(B).
---------------------------------------------------------------------------
Definition of qualifying child and tie-breaker rules
      To claim the earned income credit, a taxpayer must either 
(1) have a qualifying child or (2) meet the requirements for 
childless adults. A qualifying child must meet a relationship 
test, an age test, and a residence test. First, the qualifying 
child must be the taxpayer's child, stepchild, adopted child, 
grandchild, or foster child. Second, the child must be under 
age 19 (or under age 24 if a full-time student) or permanently 
and totally disabled regardless of age. Third, the child must 
live with the taxpayer in the United States for more than half 
the year (a full year for foster children).
      An individual satisfies the relationship test under the 
earned income credit if the individual is the taxpayer's: (1) 
son or daughter or a descendant of either;\15\ (2) stepson or 
stepdaughter; or (3) eligible foster child. An eligible foster 
child is an individual (1) who is a brother, sister, 
stepbrother, or stepsister of the taxpayer (or a descendant of 
any such relative), or who is placed with the taxpayer by an 
authorized placement agency, and (2) who the taxpayer cares for 
as her or his own child. A married child of the taxpayer is not 
treated as meeting the relationship test unless the taxpayer is 
entitled to a dependency exemption with respect to the married 
child (e.g., the support test is satisfied) or would be 
entitled to the exemption if the taxpayer had not waived the 
exemption to the noncustodial parent.\16\
---------------------------------------------------------------------------
    \15\ A child who is legally adopted or placed with the taxpayer for 
adoption by an authorized adoption agency is treated as the taxpayer's 
own child. Sec. 32(c)(3)(B)(iv).
    \16\ Sec. 32(c)(3)(B)(ii).
---------------------------------------------------------------------------
      If a child otherwise qualifies with respect to more than 
one person, the child is treated as a qualifying child only of 
the person with the highest modified adjusted gross income.
      ``Modified adjusted gross income'' means adjusted gross 
income determined without regard to certain losses and 
increased by certain amounts not includible in gross 
income.\17\ The losses disregarded are: (1) net capital losses 
(up to $3,000); (2) net losses from estates and trusts; (3) net 
losses from nonbusiness rents and royalties; (4) 75 percent of 
the net losses from businesses, computed separately with 
respect to sole proprietorships (other than farming), farming 
sole proprietorships, and other businesses. The amounts added 
to adjusted gross income to arrive at modified adjusted gross 
income include: (1) tax-exempt interest; and (2) nontaxable 
distributions from pensions, annuities, and individual 
retirement plans (but not nontaxable rollover distributions or 
trustee-to-trustee transfers).
---------------------------------------------------------------------------
    \17\ Sec. 32(c)(5).
---------------------------------------------------------------------------
Definition of earned income
      To claim the earned income credit, the taxpayer must have 
earned income. Earned income consists of wages, salaries, other 
employee compensation, and net earnings from self 
employment.\18\ Employee compensation includes anything of 
value received by the taxpayer from the employer in return for 
services of the employee, including nontaxable earned income. 
Nontaxable forms of compensation treated as earned income 
include the following: (1) elective deferrals under a cash or 
deferred arrangement or section 403(b) annuity (sec. 402(g)); 
(2) employer contributions for nontaxable fringe benefits, 
including contributions for accident and health insurance (sec. 
106), dependent care (sec. 129), adoption assistance (sec. 
137), educational assistance (sec. 127), and miscellaneous 
fringe benefits (sec. 132); (3) salary reduction contributions 
under a cafeteria plan (sec. 125); (4) meals and lodging 
provided for the convenience of the employer (sec. 119), and 
(5) housing allowance or rental value of a parsonage for the 
clergy (sec. 107). Some of these items are not required to be 
reported on the Wage and Tax Statement (Form W-2).
---------------------------------------------------------------------------
    \18\ Sec. 32(c)(2)(A).
---------------------------------------------------------------------------
Calculation of the credit
      The maximum earned income credit is phased in as an 
individual's earned income increases. The credit phases out for 
individuals with earned income (or if greater, modified 
adjusted gross income) over certain levels. In the case of a 
married individual who files a joint return, the earned income 
credit both for the phase-in and phase-out is calculated based 
on the couples' combined income.
      The credit is determined by multiplying the credit rate 
by the taxpayer's earned income up to a specified earned income 
amount. The maximum amount of the credit is the product of the 
credit rate and the earned income amount. The maximum credit 
amount applies to taxpayers with (1) earnings at or above the 
earned income amount and (2) modified adjusted gross income (or 
earnings, if greater) at or below the phase-out threshold 
level.
      For taxpayers with modified adjusted gross income (or 
earned income, if greater) in excess of the phase-out 
threshold, the credit amount is reduced by the phase-out rate 
multiplied by the amount of earned income (or modified adjusted 
gross income, if greater) in excess of the phase-out threshold. 
In other words, the credit amount is reduced, falling to $0 at 
the ``breakeven'' income level, the point where a specified 
percentage of ``excess'' income above the phase-out threshold 
offsets exactly the maximum amount of the credit. The earned 
income amount and the phase-out threshold are adjusted annually 
for inflation. Table 18, below, shows the earned income credit 
parameters for taxable year 2001.\19\
---------------------------------------------------------------------------
    \19\ The table is based on Rev. Proc. 2001-13.

            TABLE 18.--EARNED INCOME CREDIT PARAMETERS (2001)
------------------------------------------------------------------------
                                   Two or more      One           No
                                    qualifying   qualifying   qualifying
                                     children      child      children.
------------------------------------------------------------------------
Credit rate (percent)............       40.00%       34.00%        7.65%
Earned income amount.............      $10,020       $7,140       $4,760
Maximum credit...................       $4,008       $2,428         $364
Phase-out begins.................      $13,090      $13,090       $5,950
Phase-out rate (percent).........       21.06%       15.98%        7.65%
Phase-out ends...................      $32,121      $28,281      $10,710
------------------------------------------------------------------------

      An individual's alternative minimum tax liability reduces 
the amount of the refundable earned income credit.\20\
---------------------------------------------------------------------------
    \20\ Sec. 32(h).
---------------------------------------------------------------------------

                               house bill

      The House bill provides that the earned income credit 
will no longer be reduced by the amount of the alternative 
minimum tax. The same provision is included in H.R. 6, as 
passed by the House.
      In addition, H.R. 6 increases the earned income amount 
used to calculate the earned income credit for married 
taxpayers who file a joint return to 110 percent of the earned 
income amount for all other taxpayers eligible for the earned 
income credit.
      H.R. 6 also simplifies the definition of earned income by 
excluding nontaxable earned income amounts from the definition 
of earned income for earned income credit purposes. Thus, under 
H.R. 6, earned income includes wages, salaries, tips, and other 
employee compensation, if includible in gross income for the 
taxable year, plus net earnings from self-employment.
      Effective date.--The House bill is effective for taxable 
years beginning after December 31, 2000.

                            senate amendment

      For married taxpayers who file a joint return, the Senate 
amendment increases the beginning and ending of the earned 
income credit phase-out by $3,000. These beginning and ending 
points are to be adjusted annually for inflation after 2002.
      The Senate amendment simplifies the definition of earned 
income by excluding nontaxable employee compensation from the 
definition of earned income for earned income credit purposes. 
Thus, under the Senate amendment, earned income includes wages, 
salaries, tips, and other employee compensation, if includible 
in gross income for the taxable year, plus net earnings from 
self employment.
      The Senate amendment repeals the present-law provision 
that reduces the earned income credit by the amount of an 
individual's alternative minimum tax.
      The Senate amendment simplifies the calculation of the 
earned income credit by replacing modified adjusted gross 
income with adjusted gross income.
      The Senate amendment provides that the relationship test 
is met if the individual is the taxpayer's son, daughter, 
stepson, stepdaughter, or a descendant of any such 
individuals.\21\ A brother, sister, stepbrother, stepsister, or 
a descendant of such individuals, also qualifies if the 
taxpayer cares for such individual as his or her own child. A 
foster child satisfies the relationship test as well. A foster 
child is defined as an individual who is placed with the 
taxpayer by an authorized placement agency and who the taxpayer 
cares for as his or her own child. In order to be a qualifying 
child, in all cases the child must have the same principal 
place of abode as the taxpayer for over one-half of the taxable 
year.
---------------------------------------------------------------------------
    \21\ As under present law, an adopted child is treated as a child 
of the taxpayer by blood.
---------------------------------------------------------------------------
      The Senate amendment changes the present-law tie-breaking 
rule. Under the Senate amendment, if an individual would be a 
qualifying child with respect to more than one taxpayer, and 
more than one taxpayer claims the earned income credit with 
respect to that child, then the following tie-breaking rules 
apply. First, if one of the individuals claiming the child is 
the child's parent (or parents who file a joint return), then 
the child is considered the qualifying child of the parent (or 
parents). Second, if both parents claim the child and the 
parents do not file a joint return together, then the child is 
considered a qualifying child first of the parent with whom the 
child resided for the longest period of time during the year, 
and second of the parent with the highest adjusted gross 
income. Finally, if none of the taxpayers claiming the child as 
a qualifying child is the child's parent, the child is 
considered a qualifying child with respect to the taxpayer with 
the highest adjusted gross income.
      The Senate amendment authorizes the IRS, beginning in 
2004, to use math error authority to deny the earned income 
credit if the Federal Case Registry of Child Support Orders 
indicates that the taxpayer is the noncustodial parent of the 
child with respect to whom the credit is claimed.
      It is the intent of the Senate that by September 2002, 
the Department of the Treasury, in consultation with the 
National Taxpayer Advocate, deliver to the Senate Committee on 
Finance and the House Committee on Ways and Means a study of 
the Federal Case Registry database. The study is to cover (1) 
the accuracy and timeliness of the data in the Federal Case 
Registry, (2) the efficacy of using math error authority in 
this instance in reducing costs due to erroneous or fraudulent 
claims, and (3) the implications of using math error authority 
in this instance, given the findings on the accuracy and 
timeliness of the data.
      Effective date.--The Senate amendment generally is 
effective for taxable years beginning after December 31, 2001. 
The Senate amendment to authorize the IRS to use math error 
authority if the Federal Case Registry of Child Support Orders 
indicates the taxpayer is the noncustodial parent is effective 
beginning in 2004.

                          conference agreement

      The conference agreement follows the Senate amendment, 
except under the conference agreement, for married taxpayers 
filing a joint return, the earned income credit phase-out 
amount is increased as follows: by $1,000 in the case of 
taxable years beginning in 2002, 2003, and 2004; by $2,000 in 
the case of taxable years beginning in 2005, 2006, and 2007; 
and by $3,000 in the case of taxable years beginning after 
2007. The $3,000 amount is to be adjusted annually for 
inflation after 2008.
      The conferees realize that the expansion of the earned 
income credit may create a financial hardship on U.S. 
possessions with mirror codes and that further study of such 
effects is necessary.

                        IV. EDUCATION INCENTIVES

  A. Modifications to Education IRAs (Sec. 401 and 414 of the Senate 
              Amendment and Secs. 530 and 127 of the Code)

                              present law

In general
      Section 530 of the Code provides tax-exempt status to 
education individual retirement accounts (``education IRAs''), 
meaning certain trusts or custodial accounts which are created 
or organized in the United States exclusively for the purpose 
of paying the qualified higher education expenses of a 
designated beneficiary. Contributions to education IRAs may be 
made only in cash.\22\ Annual contributions to education IRAs 
may not exceed $500 per beneficiary (except in cases involving 
certain tax-free rollovers, as described below) and may not be 
made after the designated beneficiary reaches age 18.
---------------------------------------------------------------------------
    \22\ Special estate and gift tax rules apply to contributions made 
to and distributions made from education IRAs.
---------------------------------------------------------------------------
Phase-out of contribution limit
      The $500 annual contribution limit for education IRAs is 
generally phased-out ratably for contributors with modified 
adjusted gross income (between $95,000 and $110,000). The 
phase-out range for married taxpayers filing a joint return is 
$150,000 to $160,000 of modified adjusted gross income. 
Individuals with modified adjusted gross income above the 
phase-out range are not allowed to make contributions to an 
education IRA established on behalf of any individual.
Treatment of distributions
      Earnings on contributions to an education IRA generally 
are subject to tax when withdrawn. However, distributions from 
an education IRA are excludable from the gross income of the 
beneficiary to the extent that the total distribution does not 
exceed the ``qualified higher education expenses'' incurred by 
the beneficiary during the year the distribution is made.
      If the qualified higher education expenses of the 
beneficiary for the year are less than the total amount of the 
distribution (i.e., contributions and earnings combined) from 
an education IRA, then the qualified higher education expenses 
are deemed to be paid from a pro-rata share of both the 
principal and earnings components of the distribution. Thus, in 
such a case, only a portion of the earnings are excludable 
(i.e., the portion of the earnings based on the ratio that the 
qualified higher education expenses bear to the total amount of 
the distribution) and the remaining portion of the earnings is 
includible in the beneficiary's gross income.
      The earnings portion of a distribution from an education 
IRA that is includible in income is also subject to an 
additional 10-percent tax. The 10-percent additional tax does 
not apply if a distribution is made on account of the death or 
disability of the designated beneficiary, or on account of a 
scholarship received by the designated beneficiary.
      The additional 10-percent tax also does not apply to the 
distribution of any contribution to an education IRA made 
during the taxable year if such distribution is made on or 
before the date that a return is required to be filed 
(including extensions of time) by the beneficiary for the 
taxable year during which the contribution was made (or, if the 
beneficiary is not required to file such a return, April 15th 
of the year following the taxable year during which the 
contribution was made).
      Present law allows tax-free transfers or rollovers of 
account balances from one education IRA benefiting one 
beneficiary to another education IRA benefiting another 
beneficiary (as well as redesignations of the named 
beneficiary), provided that the new beneficiary is a member of 
the family of the old beneficiary and is under age 30.
      Any balance remaining in an education IRA is deemed to be 
distributed within 30 days after the date that the beneficiary 
reaches age 30 (or, if earlier, within 30 days of the date that 
the beneficiary dies).
Qualified higher education expenses
      The term ``qualified higher education expenses'' includes 
tuition, fees, books, supplies, and equipment required for the 
enrollment or attendance of the designated beneficiary at an 
eligible education institution, regardless of whether the 
beneficiary is enrolled at an eligible educational institution 
on a full-time, half-time, or less than half-time basis. 
Qualified higher education expenses include expenses with 
respect to undergraduate or graduate-level courses. In 
addition, qualified higher education expenses include amounts 
paid or incurred to purchase tuition credits (or to make 
contributions to an account) under a qualified State tuition 
program, as defined in section 529, for the benefit of the 
beneficiary of the education IRA.
      Moreover, qualified higher education expenses include, 
within limits, room and board expenses for any academic period 
during which the beneficiary is at least a half-time student. 
Room and board expenses that may be treated as qualified higher 
education expenses are limited to the minimum room and board 
allowance applicable to the student in calculating costs of 
attendance for Federal financial aid programs under section 472 
of the Higher Education Act of 1965, as in effect on the date 
of enactment of the Small Business Job Protection Act of 1996 
(August 20, 1996). Thus, room and board expenses cannot exceed 
the following amounts: (1) for a student living at home with 
parents or guardians, $1,500 per academic year; (2) for a 
student living in housing owned or operated by the eligible 
education institution, the institution's ``normal'' room and 
board charge; and (3) for all other students, $2,500 per 
academic year.
      Qualified higher education expenses generally include 
only out-of-pocket expenses. Such qualified higher education 
expenses do not include expenses covered by educational 
assistance for the benefit of the beneficiary that is 
excludable from gross income. Thus, total qualified higher 
education expenses are reduced by scholarship or fellowship 
grants excludablefrom gross income under present-law section 
117, as well as any other tax-free educational benefits, such as 
employer-provided educational assistance that is excludable from the 
employee's gross income under section 127.
      Present law also provides that if any qualified higher 
education expenses are taken into account in determining the 
amount of the exclusion for a distribution from an education 
IRA, then no deduction (e.g., for trade or business expenses), 
exclusion (e.g., for interest on education savings bonds) or 
credit is allowed with respect to such expenses.
      Eligible educational institutions are defined by 
reference to section 481 of the Higher Education Act of 1965. 
Such institutions generally are accredited post-secondary 
educational institutions offering credit toward a bachelor's 
degree, an associate's degree, a graduate-level or professional 
degree, or another recognized post-secondary credential. 
Certain proprietary institutions and post-secondary vocational 
institutions also are eligible institutions. The institution 
must be eligible to participate in Department of Education 
student aid programs.
Time for making contributions
      Contributions to an education IRA for a taxable year are 
taken into account in the taxable year in which they are made.
Coordination with HOPE and Lifetime Learning credits
      If an exclusion from gross income is allowed for 
distributions from an education IRA with respect to an 
individual, then neither the HOPE nor Lifetime Learning credit 
may be claimed in the same taxable year with respect to the 
same individual. However, an individual may elect to waive the 
exclusion with respect to distributions from an education IRA. 
If such a waiver is made, then the HOPE or Lifetime Learning 
credit may be claimed with respect to the individual for the 
taxable year.
Coordination with qualified tuition programs
      An excise tax is imposed on contributions to an education 
IRA for a year if contributions are made by anyone to a 
qualified State tuition program on behalf of the same 
beneficiary in the same year. The excise tax is equal to 6 
percent of the contributions to the education IRA. The excise 
tax is imposed each year after the contribution is made, unless 
the contributions are withdrawn.

                               House Bill

      No provision.

                            Senate Amendment

Annual contribution limit
      The Senate amendment increases the annual limit on 
contributions to education IRAs from $500 to $2,000. Thus, 
aggregate contributions that may be made by all contributors to 
one (or more) education IRAs established on behalf of any 
particular beneficiary is limited to $2,000 for each year.
Qualified education expenses
      The Senate amendment expands the definition of qualified 
education expenses that may be paid tax-free from an education 
IRA to include ``qualified elementary and secondary school 
expenses,'' meaning expenses for (1) tuition, fees, academic 
tutoring, special need services, books, supplies, and other 
equipment incurred in connection with the enrollment or 
attendance of the beneficiary at a public, private, or 
religious school providing elementary or secondary education 
(kindergarten through grade 12) as determined under State law, 
(2) room and board, uniforms, transportation, and supplementary 
items or services (including extended day programs) required or 
provided by such a school in connection with such enrollment or 
attendance of the beneficiary, and (3) the purchase of any 
computer technology or equipment (as defined in sec. 
170(e)(6)(F)(i)) or Internet access and related services, if 
such technology, equipment, or services are to be used by the 
beneficiary and the beneficiary's family during any of the 
years the beneficiary is in school. Computer software primarily 
involving sports, games, or hobbies is not considered a 
qualified elementary and secondary school expense unless the 
software is educational in nature.
Phase-out of contribution limit
      The Senate amendment increases the phase-out range for 
married taxpayers filing a joint return so that it is twice the 
range for single taxpayers. Thus, the phase-out range for 
married taxpayers filing a joint return is $190,000 to $220,000 
of modified adjusted gross income.
Special needs beneficiaries
      The Senate amendment provides that the rule prohibiting 
contributions to an education IRA after the beneficiary attains 
18 does not apply in the case of a special needs beneficiary 
(as defined by Treasury Department regulations). In addition, a 
deemed distribution of any balance in an education IRA does not 
occur when a special needs beneficiary reaches age 30. Finally, 
the age 30 limitation does not apply in the case of a rollover 
contribution for the benefit of a special needs beneficiary or 
a change in beneficiaries to a special needs beneficiary.
Contributions by persons other than individuals
      The Senate amendment clarifies that corporations and 
other entities (including tax-exempt organizations) are 
permitted to make contributions to education IRAs, regardless 
of the income of the corporation or entity during the year of 
the contribution.
Exclusion for employer contributions
      The Senate amendment provides an exclusion from gross 
income for certain employer contributions to an education IRA 
for the employee, the employee's spouse, or a lineal descendent 
of the employee or his or her spouse (provided such individual 
otherwise meets the eligibility requirements for education 
IRAs). The maximum amount excludable is $500 per year per each 
beneficiary. Thus, for example, if an employee has two children 
under age 18, theemployer could contribute $500 each year to an 
education IRA for each child. The exclusion does not apply to self-
employed individuals. The employer is required to report the amount of 
any education IRA contributions on the employee's W-2 for the year.
      In order to be excludable from gross income, the 
contribution must be made pursuant to a plan that meets the 
requirements of an educational assistance program under section 
127.\23\ Thus, for example, the plan must be in writing and 
must satisfy nondiscrimination rules.
---------------------------------------------------------------------------
    \23\ Contributions to education IRAs are not subject to the $5,250 
annual limit on the exclusion for employer-provided educational 
assistance, and are not taken into account for purposes of applying 
that limit to other education assistance. Rather, such contributions 
are subject to the $500 per beneficiary limit described above.
---------------------------------------------------------------------------
      Education IRA contributions that are excludable from 
gross income are treated as earnings for purposes of 
determining the amount includible in gross income, if any, due 
to a withdrawal from the education IRA.
      The exclusion does not apply for Social Security tax 
purposes.
Contributions permitted until April 15
      Under the Senate amendment, individual contributors to 
education IRAs are deemed to have made a contribution on the 
last day of the preceding taxable year if the contribution is 
made on account of such taxable year and is made not later than 
the time prescribed by law for filing the individual's Federal 
income tax return for such taxable year (not including 
extensions). Thus, individual contributors generally may make 
contributions for a year until April 15 of the following year.
Qualified room and board expenses
      The Senate amendment modifies the definition of room and 
board expenses considered to be qualified higher education 
expenses. This modification is described with the provisions 
relating to qualified tuition programs, below.
Coordination with HOPE and Lifetime Learning credits
      The Senate amendment allows a taxpayer to claim a HOPE 
credit or Lifetime Learning credit for a taxable year and to 
exclude from gross income amounts distributed (both the 
contributions and the earnings portions) from an education IRA 
on behalf of the same student as long as the distribution is 
not used for the same educational expenses for which a credit 
was claimed.
Coordination with qualified tuition programs
      The Senate amendment repeals the excise tax on 
contributions made by any person to an education IRA on behalf 
of a beneficiary during any taxable year in which any 
contributions are made by anyone to a qualified State tuition 
program on behalf of the same beneficiary.
      If distributions from education IRAs and qualified 
tuition programs exceed the beneficiary's qualified higher 
education expenses for the year (after reduction by amounts 
used in claiming the HOPE or Lifetime Learning credit), the 
beneficiary is required to allocate the expenses between the 
distributions to determine the amount includible in income.
      Effective date.--The provisions modifying education IRAs 
are effective for taxable years beginning after December 31, 
2001.

                          Conference Agreement

      The conference agreement follows the Senate amendment, 
except that the conference agreement does not include the 
exclusion for employer contributions. As under the Senate 
amendment, the conference agreement provides that certain age 
limitations do not apply in the case of special needs 
beneficiaries. The conferees intend that Treasury regulations 
will define a special needs beneficiary to include an 
individual who because of a physical, mental, or emotional 
condition (including learning disability) requires additional 
time to complete his or her education. The conference agreement 
clarifies the rule relating to computer software by providing 
that computer software involving sports, games, or hobbies is 
not considered a qualified elementary and secondary school 
expense unless the software is predominantly educational in 
nature.
      Effective date.--The conference agreement follows the 
Senate amendment.

  B. Private Prepaid Tuition Programs; Exclusion From Gross Income of 
 Education Distributions From Qualified Tuition Programs (Sec. 402 of 
             the Senate Amendment and Sec. 529 of the Code)

                              Present Law

      Section 529 of the Code provides tax-exempt status to 
``qualified State tuition programs,'' meaning certain programs 
established and maintained by a State (or agency or 
instrumentality thereof) under which persons may (1) purchase 
tuition credits or certificates on behalf of a designated 
beneficiary that entitle the beneficiary to a waiver or payment 
of qualified higher education expenses of the beneficiary, or 
(2) make contributions to an account that is established for 
the purpose of meeting qualified higher education expenses of 
the designated beneficiary of the account (a ``savings account 
plan''). The term ``qualified higher education expenses'' 
generally has the same meaning as does the term for purposes of 
education IRAs (as described above) and, thus, includes 
expenses for tuition, fees, books, supplies, and equipment 
required for the enrollment or attendance at an eligible 
educational institution,\24\ as well as certain room and board 
expenses for any period during which the student is at least a 
half-time student.
---------------------------------------------------------------------------
    \24\ An ``eligible education institution'' is defined the same for 
purposes of education IRAs (described above) and qualified State 
tuition programs.
---------------------------------------------------------------------------
      No amount is included in the gross income of a 
contributor to, or a beneficiary of, a qualified State tuition 
program with respect to any distribution from, or earnings 
under, such program, except that (1) amounts distributed or 
educational benefits provided to a beneficiary are included in 
the beneficiary's gross income (unless excludable under another 
Code section) to the extent such amounts or the value of the 
educational benefits exceed contributions made on behalf of the 
beneficiary, and (2) amounts distributed to a contributor 
(e.g., when a parent receives a refund) are included in the 
contributor's gross income to the extent such amounts exceed 
contributions made on behalf of the beneficiary.\25\
---------------------------------------------------------------------------
    \25\ Distributions from qualified State tuition programs are 
treated as representing a pro-rata share of the contributions and 
earnings in the account.
---------------------------------------------------------------------------
      A qualified State tuition program is required to provide 
that purchases or contributions only be made in cash.\26\ 
Contributors and beneficiaries are not allowed to direct the 
investment of contributions to the program (or earnings 
thereon). The program is required to maintain a separate 
accounting for each designated beneficiary. A specified 
individual must be designated as the beneficiary at the 
commencement of participation in a qualified State tuition 
program (i.e., when contributions are first made to purchase an 
interest in such a program), unless interests in such a program 
are purchased by a State or local government or a tax-exempt 
charity described in section 501(c)(3) as part of a scholarship 
program operated by such government or charity under which 
beneficiaries to be named in the future will receive such 
interests as scholarships.
---------------------------------------------------------------------------
    \26\ Special estate and gift tax rules apply to contributions made 
to and distributions made from qualified State tuition programs.
---------------------------------------------------------------------------
      A transfer of credits (or other amounts) from one account 
benefiting one designated beneficiary to another account 
benefiting a different beneficiary is considered a distribution 
(as is a change in the designated beneficiary of an interest in 
a qualified State tuition program), unless the beneficiaries 
are members of the same family. For this purpose, the term 
``member of the family'' means: (1) the spouse of the 
beneficiary; (2) a son or daughter of the beneficiary or a 
descendent of either; (3) a stepson or stepdaughter of the 
beneficiary; (4) a brother, sister, stepbrother or stepsister 
of the beneficiary; (5) the father or mother of the beneficiary 
or an ancestor of either; (6) a stepfather or stepmother of the 
beneficiary; (7) a son or daughter of a brother or sister of 
the beneficiary; (8) a brother or sister of the father or 
mother of the beneficiary; (9) a son-in-law, daughter-in-law, 
father-in-law, mother-in-law, brother-in-law, or sister-in-law 
of the beneficiary; or (10) the spouse of any person described 
in (2)-(9).
      Earnings on an account may be refunded to a contributor 
or beneficiary, but the State or instrumentality must impose a 
more than de minimis monetary penalty unless the refund is (1) 
used for qualified higher education expenses of the 
beneficiary, (2) made on account of the death or disability of 
the beneficiary, (3) made on account of a scholarship received 
by the beneficiary, or (4) a rollover distribution.
      To the extent that a distribution from a qualified State 
tuition program is used to pay for qualified tuition and 
related expenses (as defined in sec. 25A(f)(1)), the 
beneficiary (or another taxpayer claiming the beneficiary as a 
dependent) may claim the HOPE credit or Lifetime Learning 
credit with respect to such tuition and related expenses 
(assuming that the other requirements for claiming the HOPE 
credit or Lifetime Learning credit are satisfied and the 
modified AGI phase-out for those credits does not apply).

                               House Bill

      No provision.

                            Senate Amendment

Qualified tuition program
      The Senate amendment expands the definition of 
``qualified tuition program'' to include certain prepaid 
tuition programs established and maintained by one or more 
eligible educational institutions (which may be private 
institutions) that satisfy the requirements under section 529 
(other than the present-law State sponsorship rule). In the 
case of a qualified tuition program maintained by one or more 
private eligible educational institutions, persons are able to 
purchase tuition credits or certificates on behalf of a 
designated beneficiary (as set forth in sec. 529(b)(1)(A)(i)), 
but would not be able to make contributions to a savings 
account plan (as described in sec. 529(b)(1)(A)(ii)). Except to 
the extent provided in regulations, a tuition program 
maintained by a private institution is not treated as qualified 
unless it has received a ruling or determination from the IRS 
that the program satisfies applicable requirements.
Exclusion from gross income
      Under the Senate amendment, an exclusion from gross 
income is provided for distributions made in taxable years 
beginning after December 31, 2001, from qualified Statetuition 
programs to the extent that the distribution is used to pay for 
qualified higher education expenses. This exclusion from gross income 
is extended to distributions from qualified tuition programs 
established and maintained by an entity other than a State (or agency 
or instrumentality thereof) for distributions made in taxable years 
after December 31, 2003.
Qualified higher education expenses
      The Senate amendment provides that, for purposes of the 
exclusion for distributions from qualified tuition plans, the 
maximum room and board allowance is the amount applicable to 
the student in calculating costs of attendance for Federal 
financial aid programs under section 472 of the Higher 
Education Act of 1965, as in effect on the date of enactment, 
or, in the case of a student living in housing owned or 
operated by an eligible educational institution, the actual 
amount charged the student by the educational institution for 
room and board.\27\
---------------------------------------------------------------------------
    \27\ This definition also applies to distributions from education 
IRAs.
---------------------------------------------------------------------------
Coordination with HOPE and Lifetime Learning credits
      The Senate amendment allows a taxpayer to claim a HOPE 
credit or Lifetime Learning credit for a taxable year and to 
exclude from gross income amounts distributed (both the 
principal and the earnings portions) from a qualified tuition 
program on behalf of the same student as long as the 
distribution is not used for the same expenses for which a 
credit was claimed.
Rollovers for benefit of same beneficiary
      The Senate amendment provides that a transfer of credits 
(or other amounts) from one qualified tuition program for the 
benefit of a designated beneficiary to another qualified 
tuition program for the benefit of the same beneficiary is not 
considered a distribution. This rollover treatment does not 
apply to more than one transfer within any 12-month period with 
respect to the same beneficiary.
Member of family
      The Senate amendment provides that, for purposes of tax-
free rollovers and changes of designated beneficiaries, a 
``member of the family'' includes first cousins of the original 
beneficiary.
      Effective date.--The provisions are effective for taxable 
years beginning after December 31, 2001, except that the 
exclusion from gross income for certain distributions from a 
qualified tuition program established and maintained by an 
entity other than a State (or agency or instrumentality 
thereof) is effective for taxable years beginning after 
December 31, 2003.

                          Conference Agreement

      The conference agreement follows the Senate amendment, 
with modifications. The conference agreement modifies the 
definition of qualified higher education expenses to include 
expenses of a special needs beneficiary which are necessary in 
connection with his or her enrollment or attendance at the 
eligible education institution.\28\ A special needs beneficiary 
would be defined as under the provisions relating to education 
IRAs, described above.
---------------------------------------------------------------------------
    \28\ This definition also applies to distributions from education 
IRAs.
---------------------------------------------------------------------------
      The conference agreement repeals the present-law rule 
that a qualified State tuition program must impose a more than 
de minimis monetary penalty on any refund of earnings not used 
for qualified higher education expenses of the beneficiary 
(except in certain circumstances). Instead, the conference 
agreement imposes an additional 10-percent tax on the amount of 
a distribution from a qualified tuition plan that is includible 
in gross income (like the additional tax that applies to such 
distributions from education IRAs). The same exceptions that 
apply to the 10-percent additional tax with respect to 
education IRAs apply. A special rule applies because the 
exclusion for earnings on distributions used for qualified 
higher education expenses does not apply to qualified tuition 
programs of private institutions until 2004. Under the special 
rule, the additional 10-percent tax does not apply to any 
payment in a taxable year beginning before January 1, 2004, 
which is includible in gross income but used for qualified 
higher education expenses. Thus, for example, the earnings 
portion of a distribution from a qualified tuition program of a 
private institution that is made in 2003 and that is used for 
qualified higher education expenses is not subject to the 
additional tax, even though the earnings portion is includible 
in gross income. Conforming the penalty to the education IRA 
provisions will make it easier for taxpayers to allocate 
expenses between the various education tax incentives.\29\ For 
example, under the conference agreement, a taxpayer who 
receives distributions from an education IRA and a qualified 
tuition program in the same year is required to allocate 
qualified expenses in order to determine the amount excludable 
from income. Other interactions between the various provisions 
also arise under the conference agreement. For example, a 
taxpayer may need to know the amount excludable from income due 
to a distribution from a qualified tuition program in order to 
determine the amount of expenses eligible for the tuition 
deduction. The conferees expect that the Secretary will 
exercise the existing authority under sections 529(d) and 
530(h) to require appropriate reporting, e.g., the amount of 
distributions and the earnings portions of distributions 
(taxable and nontaxable), to facilitate the provisions of the 
conference agreement.
---------------------------------------------------------------------------
    \29\ The conferees also believe that this change is appropriate in 
light of the expansion of qualified tuition programs to include 
programs maintained by private institutions.
---------------------------------------------------------------------------
      The conference agreement provides that, in order for a 
tuition program of a private eligible education institution to 
be a qualified tuition program, assets of the program must be 
held in a trust created or organized in the United States for 
the exclusive benefit of designated beneficiaries that complies 
with the requirements under section 408(a)(2) and (5). Under 
these rules, the trustee must be a bank or other person who 
demonstrates that it will administer the trust in accordance 
with applicable requirements and the assets of the trust may 
not be commingled with other property except in a common trust 
fund or common investment fund.
      As under the Senate amendment, the conference agreement 
provides that a transfer of credits (or other amounts) from one 
qualified tuition program for the benefit of a designated 
beneficiary to another qualified tuition program for the 
benefit of the same beneficiary is not considered a 
distribution. This rollover treatment does not apply to more 
than one transfer within any 12-month period with respect to 
the same beneficiary. The conferees intend that this provision 
will allow, for example, transfers between a prepaid tuition 
program and a savings program maintained by the same State and 
between a State plan and a private prepaid tuition program.

C. Exclusion for Employer-Provided Educational Assistance (Sec. 411 of 
             the Senate Amendment and Sec. 127 of the Code)

                              Present Law

      Educational expenses paid by an employer for its 
employees are generally deductible by the employer.
      Employer-paid educational expenses are excludable from 
the gross income and wages of an employee if provided under a 
section 127 educational assistance plan or if the expenses 
qualify as a working condition fringe benefit under section 
132. Section 127 provides an exclusion of $5,250 annually for 
employer-provided educational assistance. The exclusion does 
not apply to graduate courses beginning after June 30, 1996. 
The exclusion for employer-provided educational assistance for 
undergraduate courses expires with respect to courses beginning 
after December 31, 2001.
      In order for the exclusion to apply, certain requirements 
must be satisfied. The educational assistance must be provided 
pursuant to a separate written plan of the employer. The 
educational assistance program must not discriminate in favor 
of highly compensated employees. In addition, not more than 
five percent of the amounts paid or incurred by the employer 
during the year for educational assistance under a qualified 
educational assistance plan can be provided for the class of 
individuals consisting of more than five percent owners of the 
employer (and their spouses and dependents).
      Educational expenses that do not qualify for the section 
127 exclusion may be excludable from income as a working 
condition fringe benefit.\30\ In general, education qualifies 
as a working condition fringe benefit if the employee could 
have deducted the education expenses under section 162 if the 
employee paid for the education. In general, education expenses 
are deductible by an individual under section 162 if the 
education (1) maintains or improves a skill required in a trade 
or business currently engaged in by the taxpayer, or (2) meets 
the express requirements of the taxpayer's employer, applicable 
law or regulations imposed as a condition of continued 
employment. However, education expenses are generally not 
deductible if they relate to certain minimum educational 
requirements or to education or training that enables a 
taxpayer to begin working in a new trade or business.\31\
---------------------------------------------------------------------------
    \30\ These rules also apply in the event that section 127 expires.
    \31\ In the case of an employee, education expenses (if not 
reimbursed by the employer) may be claimed as an itemized deduction 
only if such expenses, along with other miscellaneous expenses, exceed 
two percent of the taxpayer's AGI. An individual's total deductions may 
also be reduced by the overall limitation on itemized deductions under 
section 68. These limitations do not apply in determining whether an 
item is excludable from income as a working condition fringe benefit.
---------------------------------------------------------------------------

                               House Bill

      No provision.

                            Senate Amendment

      The provision extends the exclusion for employer-provided 
educational assistance to graduate education and makes the 
exclusion (as applied to both undergraduate and graduate 
education) permanent.
      Effective date.--The provision is effective with respect 
to courses beginning after December 31, 2001.

                          Conference Agreement

      The conference agreement follows the Senate amendment.

 D. Modifications to Student Loan Interest Deduction (Sec. 412 of the 
               Senate Amendment and Sec. 221 of the Code)

                              Present Law

      Certain individuals may claim an above-the-line deduction 
for interest paid on qualified education loans, subject to a 
maximum annual deduction limit. The deduction is allowed only 
with respect to interest paid on a qualified education loan 
during the first 60 months in which interest payments are 
required. Required payments of interest generally do not 
include voluntary payments, such as interest payments made 
during a period of loan forbearance. Months during which 
interest payments are not required because the qualified 
education loan is in deferral or forbearance do not count 
against the 60-month period. No deduction is allowed to an 
individual if that individual is claimed as a dependent on 
another taxpayer's return for the taxable year.
      A qualified education loan generally is defined as any 
indebtedness incurred solely to pay for certain costs of 
attendance (including room and board) of a student (who may be 
the taxpayer, the taxpayer's spouse, or any dependent of the 
taxpayer as of the time the indebtedness was incurred) who is 
enrolled in a degree program on at least a half-time basis at 
(1) an accredited post-secondary educational institution 
defined by reference to section 481 of the Higher Education Act 
of 1965, or (2) an institution conducting an internship or 
residency program leading to a degree or certificate from an 
institution of higher education, a hospital, or a health care 
facility conducting postgraduate training.
      The maximum allowable annual deduction is $2,500. The 
deduction is phased-out ratably for single taxpayers with 
modified adjusted gross income between $40,000 and $55,000 and 
for married taxpayers filing joint returns with modified 
adjusted gross income between $60,000 and $75,000. The income 
ranges will be adjusted for inflation after 2002.

                               House Bill

      No provision.

                            Senate Amendment

      The Senate amendment increases the income phase-out 
ranges for eligibility for the student loan interest deduction 
to $50,000 to $65,000 for single taxpayers and to $100,000 to 
$130,000 for married taxpayers filing joint returns. These 
income phase-out ranges are adjusted annually for inflation 
after 2002.
      The Senate amendment repeals both the limit on the number 
of months during which interest paid on a qualified education 
loan is deductible and the restriction that voluntary payments 
of interest are not deductible.
      Effective date.--The provision is effective for interest 
paid on qualified education loans after December 31, 2001.

                          Conference Agreement

      The conference agreement follows the Senate amendment.

  E. Eliminate Tax on Awards Under the National Health Service Corps 
   Scholarship Program and the F. Edward Hebert Armed Forces Health 
 Professions Scholarship and Financial Assistance Program (Sec. 413 of 
             the Senate Amendment and Sec. 117 of the Code)

                              Present Law

      Section 117 excludes from gross income amounts received 
as a qualified scholarship by an individual who is a candidate 
for a degree and used for tuition and fees required for the 
enrollment or attendance (or for fees, books, supplies, and 
equipment required for courses of instruction) at a primary, 
secondary, or post-secondary educational institution. The tax-
free treatment provided by section 117 does not extend to 
scholarship amounts covering regular living expenses, such as 
room and board. In addition to the exclusion for qualified 
scholarships, section 117 provides an exclusion from gross 
income for qualified tuition reductions for certain education 
provided to employees (and their spouses and dependents) of 
certain educational organizations.
      The exclusion for qualified scholarships and qualified 
tuition reductions does not apply to any amount received by a 
student that represents payment for teaching, research, or 
other services by the student required as a condition for 
receiving the scholarship or tuition reduction.
      The National Health Service Corps Scholarship Program 
(the ``NHSC Scholarship Program'') and the F. Edward Hebert 
Armed Forces Health Professions Scholarship and Financial 
Assistance Program (the ``Armed Forces Scholarship Program'') 
provide education awards to participants on the condition that 
the participants provide certain services. In the case of the 
NHSC Program, the recipient of the scholarship is obligated to 
provide medical services in a geographic area (or to an 
underserved population group or designated facility) identified 
by the Public Health Service as having a shortage of health 
care professionals. In the case of the Armed Forces Scholarship 
Program, the recipient of the scholarship is obligated to serve 
a certain number of years in the military at an armed forces 
medical facility. Because the recipients are required to 
perform services in exchange for the education awards, the 
awards used to pay higher education expenses are taxable income 
to the recipient.

                               House Bill

      No provision.

                            Senate Amendment

      The Senate amendment provides that amounts received by an 
individual under the NHSC Scholarship Program or the Armed 
Forces Scholarship Program are eligible for tax-free treatment 
as qualified scholarships under section 117, without regard to 
any service obligation by the recipient. As with other 
qualified scholarships under section 117, the tax-free 
treatment does not apply to amounts received by students for 
regular living expenses, including room and board.
      Effective date.--The provision is effective for education 
awards received after December 31, 2001.

                          Conference Agreement

      The conference agreement follows the Senate amendment.

 F. Tax Benefits for Certain Types of Bonds for Educational Facilities 
and Activities (Secs. 421-422 of the Senate Amendment and Secs. 142 and 
                          146-148 of the Code)

                              Present Law

Tax-exempt bonds
            In general
      Interest on debt \32\ incurred by States or local 
governments is excluded from income if the proceeds of the 
borrowing are used to carry out governmental functions of those 
entities or the debt is repaid with governmental funds (sec. 
103). \33\ Like other activities carried out or paid for by 
States and local governments, the construction, renovation, and 
operation of public schools is an activity eligible for 
financing with the proceeds of tax-exempt bonds.
---------------------------------------------------------------------------
    \32\ Hereinafter referred to as ``State or local government 
bonds.''
    \33\ Interest on this debt is included in calculating the 
``adjusted current earnings'' preference of the corporate alternative 
minimum tax.
---------------------------------------------------------------------------
      Interest on bonds that nominally are issued by States or 
local governments, but the proceeds of which are used (directly 
or indirectly) by a private person and payment of which is 
derived from funds of such a private person is taxable unless 
the purpose of the borrowing is approved specifically in the 
Code or in a non-Code provision of a revenue Act. These bonds 
are called ``private activity bonds.'' \34\ The term ``private 
person'' includes the Federal Government and all other 
individuals and entities other than States or local 
governments.
---------------------------------------------------------------------------
    \34\ Interest on private activity bonds (other than qualified 
501(c)(3) bonds) is a preference item in calculating the alternative 
minimum tax.
---------------------------------------------------------------------------
            Private activities eligible for financing with tax-exempt 
                    private activity bonds
      Present law includes several exceptions permitting States 
or local governments to act as conduits providing tax-exempt 
financing for private activities. Both capital expenditures and 
limited working capital expenditures of charitable 
organizations described in section 501(c)(3) of the Code--
including elementary, secondary, and post-secondary schools--
may be financed with tax-exempt private activity bonds 
(``qualified 501(c)(3) bonds'').
      States or local governments may issue tax-exempt 
``exempt-facility bonds'' to finance property for certain 
private businesses. Business facilities eligible for this 
financing include transportation (airports, ports, local mass 
commuting, and high speed intercity rail facilities); privately 
owned and/or privately operated public works facilities 
(sewage, solid waste disposal, local district heating or 
cooling, and hazardous waste disposal facilities); privately-
owned and/or operated low-income rental housing; and certain 
private facilities for the local furnishing of electricity or 
gas. A further provision allows tax-exempt financing for 
``environmental enhancements of hydro-electric generating 
facilities.'' Tax-exempt financing also is authorized for 
capital expenditures for small manufacturing facilities and 
land and equipment for first-time farmers (``qualified small-
issue bonds''), local redevelopment activities (``qualified 
redevelopment bonds''), and eligible empowerment zone and 
enterprise community businesses. Tax-exempt private activity 
bonds also may be issued to finance limited non-business 
purposes: certain student loans and mortgage loans for owner-
occupied housing (``qualified mortgage bonds'' and ``qualified 
veterans' mortgage bonds'').
      Private activity tax-exempt bonds may not be issued to 
finance schools for private, for-profit businesses.
      In most cases, the aggregate volume of private activity 
tax-exempt bonds is restricted by annual aggregate volume 
limits imposed on bonds issued by issuers within each State. 
These annual volume limits are equal to $62.50 per resident of 
the State, or $187.5 million if greater. The volume limits are 
scheduled to increase to the greater of $75 per resident of the 
State or $225 million in calendar year 2002. After 2002, the 
volume limits will be indexed annually for inflation.
            Arbitrage restrictions on tax-exempt bonds
      The Federal income tax does not apply to the income of 
States and local governments that is derived from the exercise 
of an essential governmental function. To prevent these tax-
exempt entities from issuing more Federally subsidized tax-
exempt bonds than is necessary for the activity being financed 
or from issuing such bonds earlier than needed for the purpose 
of the borrowing, the Code includes arbitrage restrictions 
limiting the ability to profit from investment of tax-exempt 
bond proceeds. In general, arbitrage profits may be earned only 
during specified periods (e.g., defined ``temporary periods'' 
before funds are needed for the purpose of the borrowing) or on 
specified types of investments (e.g., ``reasonably required 
reserve or replacement funds''). Subject to limited exceptions, 
profits that are earned during these periods or on such 
investments must be rebated to the Federal Government.
      Present law includes three exceptions to the arbitrage 
rebate requirements applicable to education-related bonds. 
First, issuers of all types of tax-exempt bonds are not 
required to rebate arbitrage profits if all of the proceeds of 
the bonds are spent for the purpose of the borrowing within six 
months after issuance. \35\
---------------------------------------------------------------------------
    \35\ In the case of governmental bonds (including bonds to finance 
public schools), the six-month expenditure exception is treated as 
satisfied if at least 95 percent of the proceeds is spent within six 
months and the remaining five percent is spent within 12 months after 
the bonds are issued.
---------------------------------------------------------------------------
      Second, in the case of bonds to finance certain 
construction activities, including school construction and 
renovation, the six-month period is extended to 24 months. 
Arbitrage profits earned on construction proceeds are not 
required to be rebated if all such proceeds (other than certain 
retainage amounts) are spent by the end of the 24-month period 
and prescribed intermediate spending percentages are satisfied. 
\36\ Issuers qualifying for this ``construction bond'' 
exception may elect to be subject to a fixed penalty payment 
regime in lieu of rebate if they fail to satisfy the spending 
requirements.
---------------------------------------------------------------------------
    \36\ Retainage amounts are limited to no more than five percent of 
the bond proceeds, and these amounts must be spent for the purpose of 
the borrowing no later than 36 months after the bonds are issued.
---------------------------------------------------------------------------
      Third, governmental bonds issued by ``small'' governments 
are not subject to the rebate requirement. Small governments 
are defined as general purpose governmental units that issue no 
more than $5 million of tax-exempt governmental bonds in a 
calendar year. The $5 million limit is increased to $10 million 
if at least $5 million of the bonds are used to finance public 
schools.
Qualified zone academy bonds
      As an alternative to traditional tax-exempt bonds, States 
and local governments are given the authority to issue 
``qualified zone academy bonds.'' Under present law, a total of 
$400 million of qualified zone academy bonds may be issued in 
each of 1998 through 2001. The $400 million aggregate bond 
authority is allocated each year to the States according to 
their respective populations of individuals below the poverty 
line. Each State, in turn, allocates the credit to qualified 
zone academies within such State. A State may carry over any 
unused allocation for up to two years (three years for 
authority arising before 2000).
      Certain financial institutions (i.e., banks, insurance 
companies, and corporations actively engaged in the business of 
lending money) that hold qualified zone academy bonds are 
entitled to a nonrefundable tax credit in an amount equal to a 
credit rate multiplied by the face amount of the bond. An 
eligible financial institution holding a qualified zone academy 
bond on the credit allowance date (i.e., each one-year 
anniversary of the issuance of the bond) is entitled to a 
credit. The credit amount is includible in gross income (as if 
it were a taxable interest payment on the bond), and the credit 
may be claimed against regular income tax and alternative 
minimum tax liability.
      The Treasury Department sets the credit rate daily at a 
rate estimated to allow issuance of qualified zone academy 
bonds without discount and without interest cost to the issuer. 
The maximum term of the bonds also is determined by the 
Treasury Department, so that the present value of the 
obligation to repay the bond is 50 percent of the face value of 
the bond. Present value is determined using as a discount rate 
the average annual interest rate of tax-exempt obligations with 
a term of 10 years or more issued during the month.
      ``Qualified zone academy bonds'' are defined as bonds 
issued by a State or local government, provided that: (1) at 
least 95 percent of the proceeds is used for the purpose of 
renovating, providing equipment to, developing course materials 
for use at, or training teachers and other school personnel in 
a ``qualified zone academy'' and (2) private entities have 
promised to contribute to the qualified zone academy certain 
equipment, technical assistance or training, employee services, 
or other property or services with a value equal to at least 10 
percent of the bond proceeds.
      A school is a ``qualified zone academy'' if (1) the 
school is a public school that provides education and training 
below the college level, (2) the school operates a special 
academic program in cooperation with businesses to enhance the 
academic curriculum and increase graduation and employment 
rates, and (3) either (a) the school is located in a designated 
empowerment zone or a designated enterprise community, or (b) 
it is reasonably expected that at least 35 percent of the 
students at the school will be eligible for free or reduced-
cost lunches under the school lunch program established under 
the National School Lunch Act.

                               House Bill

      No provision.

                            Senate Amendment

Increase amount of governmental bonds that may be issued by governments 
        qualifying for the ``small governmental unit'' arbitrage rebate 
        exception
      The additional amount of governmental bonds for public 
schools that small governmental units may issue without being 
subject to the arbitrage rebate requirements is increased from 
$5 million to $10 million. Thus, these governmental units may 
issue up to $15 million of governmental bonds in a calendar 
year provided that at least $10 million of the bonds are used 
to finance public school construction expenditures.
Allow issuance of tax-exempt private activity bonds for public school 
        facilities
      The private activities for which tax-exempt bonds may be 
issued are expanded to include elementary and secondary public 
school facilities which are owned by private, for-profit 
corporations pursuant to public-private partnership agreements 
with a State or local educational agency. The term school 
facility includes school buildings and functionally related and 
subordinate land (including stadiums or other athletic 
facilities primarily used for school events) \37\ and 
depreciable personal property used in the school facility. The 
school facilities for which these bonds are issued must be 
operated by a public educational agency as part of a system of 
public schools.
---------------------------------------------------------------------------
    \37\ The present-law limit on the amount of the proceeds of a 
private activity bond issue that may be used to finance land 
acquisition does not apply to these bonds.
---------------------------------------------------------------------------
      A public-private partnership agreement is defined as an 
arrangement pursuant to which the for-profit corporate party 
constructs, rehabilitates, refurbishes or equips a school 
facility for a public school agency (typically pursuant to a 
lease arrangement). The agreement must provide that, at the end 
of the contract term, ownership of the bond-financed property 
is transferred to the public school agency party to the 
agreement for no additional consideration.
      Issuance of these bonds is subject to a separate annual 
per-State private activity bond volume limit equal to $10 per 
resident ($5 million, if greater) in lieu of the present-law 
State private activity bond volume limits. As with the present-
law State private activity bond volume limits, States can 
decide how to allocate the bond authority to State and local 
government agencies. Bond authority that is unused in the year 
in which it arises may be carried forward for up to three years 
for public school projects under rules similar to the 
carryforward rules of the present-law private activity bond 
volume limits.
      Effective date.--The provisions are effective for bonds 
issued after December 31, 2001.

                          Conference Agreement

      The conference agreement follows the Senate amendment.

   G. Modify Rules Governing Tax-Exempt Bonds for Section 501(c)(3) 
      Organizations as Applied to Organizations Engaged in Timber 
Conservation Activities (Sec. 423 of the Senate Amendment and Sec. 145 
                              of the Code)

                              Present Law

      Interest on State or local government bonds is tax-exempt 
when the proceeds of the bonds are used to finance activities 
carried out by or paid for by those governmental units. 
Interest on bonds issued by State or local governments acting 
as conduit borrowers for private businesses is taxable unless a 
specific exception is included in the Code. One such exemption 
allows tax-exempt bonds to be issued to finance activities of 
non-profit organizations described in Code section 501(c)(3) 
(``qualified 501(c)(3) bonds'').
      Qualified 501(c)(3) bonds may be issued only to finance 
exempt, as opposed to unrelated business, activities of these 
organizations. However, if the bonds are issued to finance 
property which is intended to be, or is in fact, sold to a 
private business while the bonds are outstanding, bond interest 
may be taxable. An example of such an issue would be qualified 
501(c)(3) bonds issued to finance purchase of land and standing 
timber, when the timber was to be sold.
      As is true of other private activities receiving tax-
exempt financing, beneficiaries of qualified 501(c)(3) bonds 
are restricted in the arrangements they may have with private 
businesses relating to control and use of bond-financed 
property.

                               House Bill

      No provision.

                            Senate Amendment

      The Senate amendment modifies the rules governing 
issuance of qualified 501(c)(3) bonds to permit issuance of 
long-term bonds for the acquisition of timber land by 
organizations a principal purpose of which is conservation of 
that land as timber land. Under these rules, the bonds will not 
have to be repaid (to avoid loss of tax-exemption on interest) 
when the timber is harvested and sold. In addition, the Senate 
amendment provision allows these section 501(c)(3) 
organizations to enter into certain otherwise prohibited timber 
management arrangements with private businesses without losing 
tax-exemption on bonds used to finance the property and timber.
      Effective date.--The provision is effective for bonds 
issued after December 31, 2001, and before January 1, 2005.

                          Conference Agreement

      The conference agreement does not include the Senate 
amendment provision.

 H. Deduction for Qualified Higher Education Expenses (Sec. 431 of the 
             Senate Amendment and New Sec. 222 of the Code)

                              present law

Deduction for education expenses
      Under present law, an individual taxpayer generally may 
not deduct the education and training expenses of the taxpayer 
or the taxpayer's dependents. However, a deduction for 
education expenses generally is allowed under Internal Revenue 
Code (``the Code'') section 162 if the education or training 
(1) maintains or improves a skill required in a trade or 
business currently engaged in by the taxpayer, or (2) meets the 
express requirements of the taxpayer's employer, or 
requirements of applicable law or regulations, imposed as a 
condition of continued employment (Treas. Reg. sec. 1.162-5). 
Education expenses are not deductible if they relate to certain 
minimum educational requirements or to education or training 
that enables a taxpayer to begin working in a new trade or 
business. In the case of an employee, education expenses (if 
not reimbursed by the employer) may be claimed as an itemized 
deduction only if such expenses meet the above described 
criteria for deductibility under section 162 and only to the 
extent that the expenses, along with other miscellaneous 
deductions, exceed two percent of the taxpayer's adjusted gross 
income.
HOPE and Lifetime Learning credits
            HOPE credit
      Under present law, individual taxpayers are allowed to 
claim a nonrefundable credit, the ``HOPE'' credit, against 
Federal income taxes of up to $1,500 per student per year for 
qualified tuition and related expenses paid for the first two 
years of the student's post secondary education in a degree or 
certificate program. The HOPE credit rate is 100 percent on the 
first $1,000 of qualified tuition and related expenses, and 50 
percent on the next $1,000 of qualified tuition and related 
expenses.\38\ The qualified tuition and related expenses must 
be incurred on behalf of the taxpayer, the taxpayer's spouse, 
or a dependent of the taxpayer. The HOPE credit is available 
with respect to an individual student for two taxable years, 
provided that the student has not completed the first two years 
of post-secondary education before the beginning of the second 
taxable year.\39\ The HOPE credit that a taxpayer may otherwise 
claim is phased-out ratably for taxpayers with modified AGI 
between $40,000 and $50,000 ($80,000 and $100,000 for joint 
returns). For taxable years beginning after 2001, the $1,500 
maximum HOPE credit amount and the AGI phase-out ranges are 
indexed for inflation.
---------------------------------------------------------------------------
    \38\ Thus, an eligible student who incurs $1,000 of qualified 
tuition and related expenses is eligible (subject to the AGI phase-out) 
for a $1,000 HOPE credit. If an eligible student incurs $2,000 of 
qualified tuition and related expenses, then he or she is eligible for 
a $1,500 HOPE credit.
    \39\ The HOPE credit may not be claimed against a taxpayer's 
alternative minimum tax liability.
---------------------------------------------------------------------------
      The HOPE credit is available for ``qualified tuition and 
related expenses,'' which include tuition and fees required to 
be paid to an eligible educational institution as a condition 
of enrollment or attendance of an eligible student at the 
institution. Charges and fees associated with meals, lodging, 
insurance, transportation, and similar personal, living, or 
family expenses are not eligible for the credit. The expenses 
of education involving sports, games, or hobbies are not 
qualified tuition and related expenses unless this education is 
part of the student's degree program.
      Qualified tuition and related expenses generally include 
only out-of-pocket expenses. Qualified tuition and related 
expenses do not include expenses covered by employer-provided 
educational assistance and scholarships that are not required 
to be included in the gross income of either the student or the 
taxpayer claiming the credit. Thus, total qualified tuition and 
related expenses are reduced by any scholarship or fellowship 
grants excludable from gross income under section 117 and any 
other tax free educational benefits received by the student (or 
the taxpayer claiming the credit) during the taxable year.
            Lifetime Learning credit
      Individual taxpayers are allowed to claim a nonrefundable 
credit, the Lifetime Learning credit, against Federal income 
taxes equal to 20 percent of qualified tuition and related 
expenses incurred during the taxable year on behalf of the 
taxpayer, the taxpayer's spouse, or any dependents. For 
expenses paid after June 30, 1998, and prior to January 1, 
2003, up to $5,000 of qualified tuition and related expenses 
per taxpayer return are eligible for the Lifetime Learning 
credit (i.e., the maximum credit per taxpayer return is 
$1,000). For expenses paid after December 31, 2002, up to 
$10,000 of qualified tuition and related expenses per taxpayer 
return will be eligible for the Lifetime Learning credit (i.e., 
the maximum credit per taxpayer return will be $2,000).
      In contrast to the HOPE credit, a taxpayer may claim the 
Lifetime Learning credit for an unlimited number of taxable 
years. Also in contrast to the HOPE credit, the maximum amount 
of the Lifetime Learning credit that may be claimed on a 
taxpayer's return will not vary based on the number of students 
in the taxpayer's family--that is, the HOPE credit is computed 
on a per student basis, while the Lifetime Learning credit is 
computed on a family wide basis. The Lifetime Learning credit 
amount that a taxpayer may otherwise claim is phased-out 
ratably for taxpayers with modified AGI between $40,000 and 
$50,000 ($80,000 and $100,000 for joint returns).

                               house bill

      No provision.

                            senate amendment

      The Senate amendment permits taxpayers an above-the-line 
deduction for qualified higher education expenses paid by the 
taxpayer during a taxable year. Qualified higher education 
expenses are defined in the same manner as for purposes of the 
HOPE credit.
      In 2002 and 2003, taxpayers with adjusted gross income 
\40\ that does not exceed $65,000 ($130,000 in the case of 
married couples filing joint returns) are entitled to a maximum 
deduction of $3,000 per year. Taxpayers with adjusted gross 
income above these thresholds would not be entitled to a 
deduction. In 2004 and 2005, taxpayers with adjusted gross 
income that does not exceed $65,000 ($130,000 in the case of 
married taxpayers filing joint returns) are entitled to a 
maximum deduction of $5,000 and taxpayers with adjusted gross 
income that does not exceed $80,000 ($160,000 in the case of 
married taxpayers filing joint returns) are entitled to a 
maximum deduction of $2,000.
---------------------------------------------------------------------------
    \40\ The provision contains ordering rules for use in determining 
adjusted gross income for purposes of the deduction.
---------------------------------------------------------------------------
      Taxpayers are not eligible to claim the deduction and a 
HOPE or Lifetime Learning Credit in the same year with respect 
to the same student. A taxpayer may not claim a deduction for 
amounts taken into account in determining the amount excludable 
due to a distribution (i.e., the earnings and contribution 
portion of a distribution) from an education IRA or the amount 
of interest excludable with respect to education savings bonds. 
A taxpayer may not claim a deduction for the amount of a 
distribution from a qualified tuition plan that is excludable 
from income; however, a taxpayer may claim a deduction for the 
amount of a distribution from a qualified tuition plan that is 
not attributable to earnings. Thus, for example, if a taxpayer 
receives a distribution of $100 from a qualified tuition plan 
which is used for tuition, $10 of which represents earnings, 
the taxpayer would be entitled to claim the deduction with 
respect to the $90 representing a return of contributions. On 
the other hand, if the distribution were from an education IRA, 
the $90 would not be eligible for the deduction.
      Effective date.--The provision is effective for payments 
made in taxable years beginning after December 31, 2001, and 
before January 1, 2006.

                          conference agreement

      The conference agreement follows the Senate amendment 
with the modification that the maximum deduction in 2004 and 
2005 is $4,000 for taxpayers with adjusted gross income that 
does not exceed $65,000 ($130,000 in the case of married 
taxpayers filing joint returns).

I. Credit for Interest on Qualified Higher Education Loans (Sec. 432 of 
           the Senate Amendment and New Sec. 25B of the Code)

                              present law

      An above-the-line deduction for interest paid on 
qualified education loans is permitted during the first 60 
months in which interest payments are required. Required 
payments of interest generally do not include voluntary 
payments, such as interest payments made during a period of 
loan forbearance. Months during which interest payments are not 
required because the qualified education loan is in deferral or 
forbearance do not count against the 60-month period. No 
deduction is allowed to an individual if that individual is 
claimed as a dependent on another taxpayer's return for the 
taxable year.
      The maximum allowable annual deduction is $2,500. The 
deduction is phased-out ratably for single taxpayers with 
modified adjusted gross income between $40,000 and $55,000 and 
for married taxpayers filing joint returns with modified 
adjusted gross income between $60,000 and $75,000. The income 
ranges will be adjusted for inflation after 2002.\41\
---------------------------------------------------------------------------
    \41\ Another section of the Senate amendment makes certain 
modifications to present law.
---------------------------------------------------------------------------
      A qualified education loan generally is defined as any 
indebtedness incurred solely to pay for certain costs of 
attendance (including room and board) of a student (who may be 
the taxpayer, the taxpayer's spouse, or any dependent of the 
taxpayer as of the time the indebtedness was incurred) who is 
enrolled in a degree program on at least a half-time basis at 
(1) an accredited post-secondary educational institution 
defined by reference to section 481 of the Higher Education Act 
of 1965, or (2) an institution conducting an internship or 
residency program leading to a degree or certificate from an 
institution of higher education, a hospital, or a health care 
facility conducting postgraduate training.

                               house bill

      No provision.

                            senate amendment

      The Senate amendment permits taxpayers a nonrefundable 
personal credit for interest paid on qualified education loans 
during the first 60 months in which interest payments are 
required. The maximum annual credit available would be $500.
      The credit is phased-out for single taxpayers with 
modified adjusted gross income between $35,000 and $45,000 and 
for married taxpayers filing joint returns with modified 
adjusted gross income between $70,000 and $90,000. These income 
phase-out ranges would be adjusted annually for inflation after 
2009.
      A taxpayer taking the credit in a taxable year for 
payment of interest on a qualified education loan would not be 
allowed a student loan interest deduction in such taxable year. 
Similarly, if the taxpayer took a deduction, the taxpayer would 
not qualify for the credit.
      Effective date.--The provision is effective for taxable 
years beginning after December 31, 2008.

                          conference agreement

      The conference agreement does not include the Senate 
amendment provision.

  J. Deduction for Qualified Emergency Response Expenses of Eligible 
Emergency Response Professionals (Sec. 433 of the Senate Amendment and 
                       New Sec. 224 of the Code)

                              present law

      Employee business expenses are deductible only as an 
itemized deduction and only to the extent that the expenses, 
along with the taxpayer's other allowable miscellaneous 
itemized deductions, exceed two percent of the taxpayer's 
adjusted gross income. Itemized deductions may be further 
reduced by the overall limitation on itemized deductions, which 
generally applies to taxpayers with adjusted gross income in 
excess of $132,950 (for 2001).

                               house bill

      No provision.

                            senate amendment

      The Senate amendment provides an above-the-line deduction 
for qualified expenses paid or incurred during the taxable year 
by an eligible emergency response professional.
      An eligible emergency response professional is (1) a 
full-time employee of a police or fire department organized and 
operated by a government to provide police protection or 
firefighting or emergency medical services within its 
jurisdiction, (2) a licensed emergency medical technician 
employed by a State or nonprofit agency to provide emergency 
medical services, or (3) a member of a volunteer fire 
department organized to provide firefighting or emergency 
medical services within an area that is not provided with other 
firefighting services. Qualified expenses means unreimbursed 
expenses for police and firefighter activities (as determined 
by the Secretary of Treasury).
      No other deduction or credit is allowed with respect to 
the amount taken into account under this provision. A deduction 
is allowed for qualified expenses under the provision only to 
the extent the amount of such expenses exceeds the amount 
excludable under the provisions relating to education savings 
bonds, education IRAs, and qualified tuition plans.
      Effective date.--The Senate amendment applies to taxable 
years beginning after December 31, 2001, and before January 1, 
2007.

                          conference agreement

      The conference agreement does not include the Senate 
amendment provision.

K. Enhanced Deduction for Charitable Contribution of Book Inventory for 
Educational Purposes (Sec. 434 of the Senate Amendment and Sec. 170 of 
                               the Code)

                              present law

      In the case of a charitable contribution of inventory or 
other ordinary-income or short-term capital gain property, the 
amount of the deduction is limited to the taxpayer's basis in 
the property. In the case of a charitable contribution of 
tangible personal property, the deduction is limited to the 
taxpayer's basis in such property if the use by the recipient 
charitable organization is unrelated to the organization's tax-
exempt purpose. In cases involving contributions to a private 
foundation (other than certain private operating foundations), 
the amount of the deduction is limited to the taxpayer's basis 
in the property.
      Under present law, a taxpayer's deduction for charitable 
contributions of book inventory generally is limited to the 
taxpayer's basis (typically, cost) in the inventory. However, 
certain corporations may claim a deduction in excess of basis 
for certain charitable contributions to charitable 
organizations other than private non-operating foundations. 
This enhanced deduction is equal to the lesser of (1) basis 
plus one-half of the item's appreciated value (i.e., basis plus 
one half of fair market value minus basis) or (2) two times 
basis. To be eligible for an enhanced deduction, (1) the use of 
the property by the donee must be related to the donee's exempt 
purpose and be used by the donee solely for the care of the 
ill, the needy, or infants; (2) the property must not be 
transferred by the donee in exchange for money, other property, 
or services; and (3) the taxpayer must receive a written 
statement from the donee agreeing to such conditions on use of 
the contributed property. The taxpayer also must establish that 
the fair market value of the donated item exceeds basis.

                               house bill

      No provision.

                            senate amendment

      The Senate amendment provides that contributions of book 
inventory to certain educational organizations are entitled to 
the present-law enhanced deduction. Eligible educational 
organizations are (1) educational organizations that normally 
maintain a regular faculty and curriculum and normally have a 
regularly enrolled body of pupils or students in attendance at 
the place where its educational activities are regularly 
carried on; (2) charities organized primarily for purposes of 
supporting elementary and secondary education; and (3) 
charities organized primarily to make books available to the 
general public at no cost or to operate a literacy program. 
Present-law requirements relating to use of the property by the 
donee and provision of a written statement by the donee apply.
      Effective date.--The deduction for contributions of book 
inventory for educational purposes applies to contributions 
made after the date of enactment.

                          conference agreement

      The conference agreement does not include the Senate 
amendment provision.

    L. Deduction for Qualified Professional Development Expenses of 
   Elementary and Secondary School Teachers (Sec. 442 of the Senate 
                Amendment and New Sec. 223 of the Code)

                              present law

Deduction for education expenses
      Under present law, an individual taxpayer generally may 
not deduct the education and training expenses of the taxpayer 
or the taxpayer's dependents. However, a deduction for 
education expenses generally is allowed under Internal Revenue 
Code (``the Code'') section 162 if the education or training 
(1) maintains or improves a skill required in a trade or 
business currently engaged in by the taxpayer, or (2) meets the 
express requirements of the taxpayer's employer, or 
requirements of applicable law or regulations, imposed as a 
condition of continued employment (Treas. Reg. sec. 1.162-5). 
Education expenses are not deductible if they relate to certain 
minimum educational requirements or to education or training 
that enables a taxpayer to begin working in a new trade or 
business. In the case of an employee, education expenses (if 
not reimbursed by the employer) may be claimed as an itemized 
deduction only if such expenses meet the above described 
criteria for deductibility under section 162 and only to the 
extent that the expenses, along with other miscellaneous 
deductions, exceed two percent of the taxpayer's adjusted gross 
income.
HOPE and Lifetime Learning credits
            HOPE credit
      Under present law, individual taxpayers are allowed to 
claim a nonrefundable credit, the ``HOPE'' credit, against 
Federal income taxes of up to $1,500 per student per year for 
qualified tuition and related expenses paid for the first two 
years of the student's post secondary education in a degree or 
certificate program. The HOPE credit rate is 100 percent on the 
first $1,000 of qualified tuition and related expenses, and 50 
percent on the next $1,000 of qualified tuition and related 
expenses.\42\ The qualified tuition and related expenses must 
be incurred on behalf of the taxpayer, the taxpayer's spouse, 
or a dependent of the taxpayer. The HOPE credit is available 
with respect to an individual student for two taxable years, 
provided that the student has not completed the first two years 
of post-secondary education before the beginning of the second 
taxable year.\43\ The HOPE credit that a taxpayer may otherwise 
claim is phased-out ratably for taxpayers with modified AGI 
between $40,000 and $50,000 ($80,000 and $100,000 for joint 
returns). For taxable years beginning after 2001, the $1,500 
maximum HOPE credit amount and the AGI phase-out ranges are 
indexed for inflation.
---------------------------------------------------------------------------
    \42\ Thus, an eligible student who incurs $1,000 of qualified 
tuition and related expenses is eligible (subject to the AGI phase-out) 
for a $1,000 HOPE credit. If an eligible student incurs $2,000 of 
qualified tuition and related expenses, then he or she is eligible for 
a $1,500 HOPE credit.
    \43\ The HOPE credit may not be claimed against a taxpayer's 
alternative minimum tax liability.
---------------------------------------------------------------------------
      The HOPE credit is available for ``qualified tuition and 
related expenses,'' which include tuition and fees required to 
be paid to an eligible educational institution as a condition 
of enrollment or attendance of an eligible student at the 
institution. Charges and fees associated with meals, lodging, 
insurance, transportation, and similar personal, living, or 
family expenses are not eligible for the credit. The expenses 
of education involving sports, games, or hobbies are not 
qualified tuition and related expenses unless this education is 
part of the student's degree program.
      Qualified tuition and related expenses generally include 
only out-of-pocket expenses. Qualified tuition and related 
expenses do not include expenses covered by employer-provided 
educational assistance and scholarships that are not required 
to be included in the gross income of either the student or the 
taxpayer claiming the credit. Thus, total qualified tuition and 
related expenses are reduced by any scholarship or fellowship 
grants excludable from gross income under section 117 and any 
other tax free educational benefits received by the student (or 
the taxpayer claiming the credit) during the taxable year.
            Lifetime Learning credit
      Individual taxpayers are allowed to claim a nonrefundable 
credit, the Lifetime Learning credit, against Federal income 
taxes equal to 20 percent of qualified tuition and related 
expenses incurred during the taxable year on behalf of the 
taxpayer, the taxpayer's spouse, or any dependents. For 
expenses paid after June 30, 1998, and prior to January 1, 
2003, up to $5,000 of qualified tuition and related expenses 
per taxpayer return are eligible for the Lifetime Learning 
credit (i.e., the maximum credit per taxpayer return is 
$1,000). For expenses paid after December 31, 2002, up to 
$10,000 of qualified tuition and related expenses per taxpayer 
return will be eligible for the Lifetime Learning credit (i.e., 
the maximum credit per taxpayer return will be $2,000).
      In contrast to the HOPE credit, a taxpayer may claim the 
Lifetime Learning credit for an unlimited number of taxable 
years. Also in contrast to the HOPE credit, the maximum amount 
of the Lifetime Learning credit that may be claimed on a 
taxpayer's return will not vary based on the number of students 
in the taxpayer's family--that is, the HOPE credit is computed 
on a per student basis, while the Lifetime Learning credit is 
computed on a family wide basis. The Lifetime Learning credit 
amount that a taxpayer may otherwise claim is phased-out 
ratably for taxpayers with modified AGI between $40,000 and 
$50,000 ($80,000 and $100,000 for joint returns).

                               house bill

      No provision.

                            senate amendment

      The Senate amendment provides an above-the-line deduction 
for up to $500 of qualified professional development expenses 
paid or incurred during the taxable year. The deduction 
isavailable to kindergarten through 12th grade teachers, instructors, 
counselors, principals, or aides who work in an elementary or secondary 
school \44\ for at least 900 hours during the school year.
---------------------------------------------------------------------------
    \44\ Elementary and secondary schools are defined by reference to 
section 14101 of the Elementary and Secondary Education Act of 1965.
---------------------------------------------------------------------------
      Qualified professional development expenses are tuition, 
fees, books, supplies, equipment, and transportation required 
for the enrollment or attendance in a qualified course of 
instruction. A qualified course of instruction is a course 
which: (1) is (a) directly related to the curriculum and 
academic subjects in which the individual provides instruction, 
(b) designed to enhance the ability of the individual to 
understand and use State standards for the academic subjects in 
which the individual provides instruction, (c) designed to 
provide instruction in how to teach children with different 
learning styles, particularly children with disabilities and 
children with special learning needs (including children who 
are gifted and talented), or (d) designed to provide 
instruction in how to best discipline children in the classroom 
and identify early and appropriate interventions to help 
children described in (c) learn; (2) is tied to (a) challenging 
State or local content standards and student performance 
standards or (b) strategies and programs that demonstrate 
effectiveness in increasing student academic achievement and 
student performance, or substantially increasing the knowledge 
and teaching skills of the individual; (3) is of sufficient 
intensity and duration to have a positive and lasting impact on 
the performance of the individual in the classroom \45\ (which 
does not include one-day or short-term workshops and 
conferences); and (3) is part of a program of professional 
development approved and certified by the appropriate local 
educational agency \46\ as furthering the goals described in 
(1) and (2).
---------------------------------------------------------------------------
    \45\ One-day or short-term workshops and conferences do not satisfy 
this requirement. This requirement does not apply to an activity that 
is one component described in a long-term comprehensive professional 
development plan established by the individual and his or her 
supervisor based on an assessment of the needs of the individual, the 
individual's students, and the local educational agency involved.
    \46\ Local education agency is as defined in section 14101 of the 
Elementary and Secondary Education Act of 1965, as in effect on the 
date of enactment.
---------------------------------------------------------------------------
      No other deduction or credit is allowed with respect to 
the amount taken into account under this provision. A deduction 
is allowed for qualified professional development expenses 
under the provision only to the extent the amount of such 
expenses exceeds the amount excludable under the provisions 
relating to education savings bonds, education IRAs, and 
qualified tuition plans.
      Effective date.--The provision is effective for taxable 
years beginning after December 31, 2000, and expires on 
December 31, 2005.

                          Conference Agreement

      The conference agreement does not include the Senate 
amendment provision.

M. Credit for Classroom Materials (Sec. 443 of the Senate Amendment and 
                       New Sec. 30B of the Code)

                              Present Law

      Unreimbursed employee business expenses are deductible 
only as an itemized deduction and only to the extent that the 
individual's total miscellaneous itemized deductions (including 
employee business expenses) exceed two percent of adjusted 
gross income.
      Taxpayers who itemize deductions may claim a deduction 
for contributions to qualified charitable organizations. Total 
deductible contributions may not exceed 50 percent of adjusted 
gross income. Other limits apply in the case of contributions 
to certain organizations and certain property.
      An individual's otherwise allowable itemized deductions 
may be further limited by the overall limitation on itemized 
deductions, which reduces itemized deductions for taxpayers 
with adjusted gross income in excess of $132,950 (for 2001).
      Depending on the particular facts and circumstances, a 
contribution by a teacher to the school and which he or she is 
employed may be deductible as an unreimbursed employee business 
expenses or as a charitable contribution.

                               House Bill

      No provision.

                            Senate Amendment

      The Senate amendment provides a nonrefundable personal 
credit equal to 50 percent of the qualified elementary and 
secondary education expenses paid or incurred by an eligible 
educator during the taxable year. The maximum credit cannot 
exceed $250 in any year. An eligible educators are kindergarten 
through 12th grade teachers, instructors, counselors, 
principals, or aides who work in an elementary or secondary 
school \47\ for at least 900 hours during the school year. 
Qualified elementary and secondary education expenses are 
expenses for books, supplies (other than nonathletic supplies 
for courses of instruction in health or physical education), 
computer equipment (including related software and services) 
and other equipment, and supplementary materials used by an 
eligible educator in the classroom.
---------------------------------------------------------------------------
    \47\ Elementary and secondary schools are defined by reference to 
section 14101 of the Elementary and Secondary Education Act of 1965.
---------------------------------------------------------------------------
      The credit may not exceed the excess (if any) of (1) the 
taxpayer's regular tax for the taxable year, reduced by the sum 
of certain other allowable credits over (2) the taxpayer's 
tentative minimum tax for the taxable year.
      No deduction is allowed for any expense for which a 
credit is allowed under the provision.
      A taxpayer may elect not to have the credit apply.
      Effective date.--The provision is effective for taxable 
years beginning after December 31, 2001, and expires on 
December 31, 2005.

                          Conference Agreement

      The conference agreement does not include the Senate 
amendment provision.

    V. ESTATE, GIFT, AND GENERATION-SKIPPING TRANSFER TAX PROVISIONS

   A. Phaseout and Repeal of Estate and Generation-Skipping Transfer 
 Taxes; Increase in Gift Tax Unified Credit Effective Exemption (Secs. 
   101, 201, 301, and 401-402 of H.R. 8, Secs. 501-542 of the Senate 
  Amendment, Secs. 121, 684, 1014, 1040, 1221, 2001-2210, 2501, 2502, 
 2503, 2505, 2511, 2601-2663, 4947, 6018, 6019, and 7701 of the Code, 
      and New Secs. 1022, 2058, 2210, 2664, and 6716 of the Code)

                              Present Law

Estate and gift tax rules
            In general
      Under present law, a gift tax is imposed on lifetime 
transfers and an estate tax is imposed on transfers at death. 
The gift tax and the estate tax are unified so that a single 
graduated rate schedule applies to cumulative taxable transfers 
made by a taxpayer during his or her lifetime and at death. The 
unified estate and gift tax rates begin at 18 percent on the 
first $10,000 of cumulative taxable transfers and reach 55 
percent on cumulative taxable transfers over $3 million. In 
addition, a 5-percent surtax is imposed on cumulative taxable 
transfers between $10 million and $17,184,000, which has the 
effect of phasing out the benefit of the graduated rates. Thus, 
these estates are subject to a top marginal rate of 60 percent. 
Estates over $17,184,000 are subject to a flat rate of 55 
percent on all amounts exceeding the unified credit effective 
exemption amount, as the benefit of the graduated rates has 
been phased out.
            Gift tax annual exclusion
      Donors of lifetime gifts are provided an annual exclusion 
of $10,000 (indexed for inflation occurring after 1997; the 
inflation-adjusted amount for 2001 remains at $10,000) of 
transfers of present interests in property to any one donee 
during the taxable year. If the non-donor spouse consents to 
split the gift with the donor spouse, then the annual exclusion 
is $20,000. Unlimited transfers between spouses are permitted 
without imposition of a gift tax.
            Unified credit
      A unified credit is available with respect to taxable 
transfers by gift and at death. The unified credit amount 
effectively exempts from tax transfers totaling $675,000 in 
2001, $700,000 in 2002 and 2003, $850,000 in 2004, $950,000 in 
2005, and $1 million in 2006 and thereafter. The benefit of the 
unified credit applies at the lowest estate and gift tax rates. 
For example, in 2001, the unified credit applies between the 
18-percent and 37-percent estate and gift tax rates. Thus, in 
2001, taxable transfers, after application of the unified 
credit, are effectively subject to estate and gift tax rates 
beginning at 37 percent.
            Transfers to a surviving spouse
      In general.--A 100-percent marital deduction generally is 
permitted for the value of property transferred between 
spouses. In addition, transfers of a ``qualified terminable 
interest'' also are eligible for the marital deduction. A 
``qualified terminable interest'' is property: (1) which passes 
from the decedent, (2) in which the surviving spouse has a 
``qualifying income interest for life,'' and (3) to which an 
election under these rules applies. A ``qualifying income 
interest for life'' exists if: (1) the surviving spouse is 
entitled to all the income from the property (payable annually 
or at more frequent intervals) or the right to use property 
during the spouse's life, and (2) no person has the power to 
appoint any part of the property to any person other than the 
surviving spouse.
      Transfers to surviving spouses who are not U.S. 
citizens.--A marital deduction generally is denied for property 
passing to a surviving spouse who is not a citizen of the 
United States. A marital deduction is permitted, however, for 
property passing to a qualified domestic trust of which the 
noncitizen surviving spouse is a beneficiary. A qualified 
domestic trust is a trust that has as its trustee at least one 
U.S. citizen or U.S. corporation. No corpus may be distributed 
from a qualified domestic trust unless the U.S. trustee has the 
right to withhold any estate tax imposed on the distribution.
      There is an estate tax imposed on (1) any distribution 
from a qualified domestic trust before the date of the death of 
the noncitizen surviving spouse and (2) the value of the 
property remaining in a qualified domestic trust on the date of 
death of the noncitizen surviving spouse. The tax is computed 
as an additional estate tax on the estate of the first spouse 
to die.
            Expenses, indebtedness, and taxes
      An estate tax deduction is allowed for funeral expenses 
and administration expenses of an estate. An estate tax 
deduction also is allowed for claims against the estate and 
unpaid mortgages on, or any indebtedness in respect of, 
property for which the value of the decedent's interest 
therein, undiminished by the debt, is included in the value of 
the gross estate.
      If the total amount of claims and debts against the 
estate exceeds the value of the property to which the claims 
relate, an estate tax deduction for the excess is allowed, 
provided such excess is paid before the due date of the estate 
tax return. A deduction for claims against the estate generally 
is permitted only if the claim is allowable by the law of the 
jurisdiction under which the estate is being administered.
      A deduction also is allowed for the full unpaid amount of 
any mortgage upon, or of any other indebtedness in respect of, 
any property included in the gross estate (including interest 
which has accrued thereon to the date of the decedent's death), 
provided that the full value of the underlying property is 
included in the decedent's gross estate.
            Basis of property received
      In general.--Gain or loss, if any, on the disposition of 
the property is measured by the taxpayer's amount realized 
(e.g., gross proceeds received) on the disposition, less the 
taxpayer's basis in such property. Basis generally represents a 
taxpayer's investment in property withcertain adjustments 
required after acquisition. For example, basis is increased by the cost 
of capital improvements made to the property and decreased by 
depreciation deductions taken with respect to the property.
      Property received from a donor of a lifetime gift takes a 
carryover basis. ``Carryover basis'' means that the basis in 
the hands of the donee is the same as it was in the hands of 
the donor. The basis of property transferred by lifetime gift 
also is increased, but not above fair market value, by any gift 
tax paid by the donor. The basis of a lifetime gift, however, 
generally cannot exceed the property's fair market value on the 
date of the gift. If the basis of the property is greater than 
the fair market value of the property on the date of gift, 
then, for purposes of determining loss, the basis is the 
property's fair market value on the date of gift.
      Property passing from a decedent's estate generally takes 
a stepped-up basis. ``Stepped-up basis'' for estate tax 
purposes means that the basis of property passing from a 
decedent's estate generally is the fair market value on the 
date of the decedent's death (or, if the alternate valuation 
date is elected, the earlier of six months after the decedent's 
death or the date the property is sold or distributed by the 
estate). This step up (or step down) in basis eliminates the 
recognition of income on any appreciation of the property that 
occurred prior to the decedent's death, and has the effect of 
eliminating the tax benefit from any unrealized loss.
      Special rule for community property.--In community 
property states, a surviving spouse's one-half share of 
community property held by the decedent and the surviving 
spouse (under the community property laws of any State, U.S. 
possession, or foreign country) generally is treated as having 
passed from the decedent, and thus is eligible for stepped-up 
basis. This rule applies if at least one-half of the whole of 
the community interest is includible in the decedent's gross 
estate.
      Special rules for interests in certain foreign 
entities.--Stepped-up basis treatment generally is denied to 
certain interests in foreign entities. Under present law, stock 
or securities in a foreign personal holding company take a 
carryover basis. Stock in a foreign investment company takes a 
stepped up basis reduced by the decedent's ratable share of the 
company's accumulated earnings and profits. In addition, stock 
in a passive foreign investment company (including those for 
which a mark-to-market election has been made) generally takes 
a carryover basis, except that a passive foreign investment 
company for which a decedent shareholder had made a qualified 
electing fund election is allowed a stepped-up basis. Stock 
owned by a decedent in a domestic international sales 
corporation (or former domestic international sales 
corporation) takes a stepped-up basis reduced by the amount (if 
any) which would have been included in gross income under 
section 995(c) as a dividend if the decedent had lived and sold 
the stock at its fair market value on the estate tax valuation 
date (i.e., generally the date of the decedent's death unless 
an alternate valuation date is elected).
            Provisions affecting small and family-owned businesses and 
                    farms
      Special-use valuation.--An executor can elect to value 
for estate tax purposes certain ``qualified real property'' 
used in farming or another qualifying closely-held trade or 
business at its current-use value, rather than its fair market 
value. The maximum reduction in value for such real property is 
$750,000 (adjusted for inflation occurring after 1997; the 
inflation-adjusted amount for 2001 is $800,000). Real property 
generally can qualify for special-use valuation if at least 50 
percent of the adjusted value of the decedent's gross estate 
consists of a farm or closely-held business assets in the 
decedent's estate (including both real and personal property) 
and at least 25 percent of the adjusted value of the gross 
estate consists of farm or closely-held business property. In 
addition, the property must be used in a qualified use (e.g., 
farming) by the decedent or a member of the decedent's family 
for five of the eight years before the decedent's death.
      If, after a special-use valuation election is made, the 
heir who acquired the real property ceases to use it in its 
qualified use within 10 years of the decedent's death, an 
additional estate tax is imposed in order to recapture the 
entire estate-tax benefit of the special-use valuation.
      Family-owned business deduction.--An estate is permitted 
to deduct the adjusted value of a qualified-family owned 
business interest of the decedent, up to $675,000.\48\ A 
qualified family-owned business interest is defined as any 
interest in a trade or business (regardless of the form in 
which it is held) with a principal place of business in the 
United States if the decedent's family owns at least 50 percent 
of the trade or business, two families own 70 percent, or three 
families own 90 percent, as long as the decedent's family owns 
at least 30 percent of the trade or business. An interest in a 
trade or business does not qualify if any interest in the 
business (or a related entity) was publicly-traded at any time 
within three years of the decedent's death. An interest in a 
trade or business also does not qualify if more than 35 percent 
of the adjusted ordinary gross income of the business for the 
year of the decedent's death was personal holding company 
income. In the case of a trade or business that owns an 
interest in another trade or business (i.e., ``tiered 
entities''), special look-through rules apply. The value of a 
trade or business qualifying as a family-owned business 
interest is reduced to the extent the business holds passive 
assets or excess cash or marketable securities.
---------------------------------------------------------------------------
    \48\ The qualified family-owned business deduction and the unified 
credit effective exemption amount are coordinated. If the maximum 
deduction amount of $675,000 is elected, then the unified credit 
effective exemption amount is $625,000, for a total of $1.3 million. If 
the qualified family-owned business deduction is less than $675,000, 
then the unified credit effective exemption amount is equal to 
$625,000, increased by the difference between $675,000 and the amount 
of the qualified family-owned business deduction. However, the unified 
credit effective exemption amount cannot be increased above such amount 
in effect for the taxable year.
---------------------------------------------------------------------------
      To qualify for the exclusion, the decedent (or a member 
of the decedent's family) must have owned and materially 
participated in the trade or business for at least five of the 
eight years preceding the decedent's date of death. In 
addition, at least one qualified heir (or member of the 
qualified heir's family) is required to materially participate 
in the trade or business for at least 10 years following the 
decedent's death.
      The qualified family-owned business rules provide a 
graduated recapture based on the number of years after the 
decedent's death in which the disqualifying event occurred. 
Under the provision, if the disqualifying event occurred within 
six years of the decedent's death, then 100 percent of the tax 
is recaptured. The remaining percentage of recapture based on 
the year afterthe decedent's death in which a disqualifying 
event occurs is as follows: the disqualifying event occurs during the 
seventh year after the decedent's death, 80 percent; during the eighth 
year after the decedent's death, 60 percent; during the ninth year 
after the decedent's death, 40 percent; and during the tenth year after 
the decedent's death, 20 percent. For purposes of the qualified family-
owned business deduction, the contribution of a qualified conservation 
easement is not considered a disposition that would trigger recapture 
of estate tax.
      In general, there is no requirement that the qualified 
heir (or members of his or her family) continue to hold or 
participate in the trade or business more than 10 years after 
the decedent's death. However, the 10-year recapture period can 
be extended for a period of up to two years if the qualified 
heir does not begin to use the property for a period of up to 
two years after the decedent's death.
      An estate can claim the benefits of both the qualified 
family-owned business deduction and special-use valuation. For 
purposes of determining whether the value of the trade or 
business exceeds 50 percent of the decedent's gross estate, 
then the property's special-use value is used if the estate 
claimed special-use valuation.
            State death tax credit
      A credit is allowed against the Federal estate tax for 
any estate, inheritance, legacy, or succession taxes actually 
paid to any State or the District of Columbia with respect to 
any property included in the decedent's gross estate. The 
maximum amount of credit allowable for State death taxes is 
determined under a graduated rate table, the top rate of which 
is 16 percent, based on the size of the decedent's adjusted 
taxable estate. Most States impose a ``pick-up'' or ``soak-up'' 
estate tax, which serves to impose a State tax equal to the 
maximum Federal credit allowed.
            Estate and gift taxation of nonresident noncitizens
      Nonresident noncitizens are subject to gift tax with 
respect to certain transfers by gift of U.S.-situated property. 
Such property includes real estate and tangible property 
located within the United States. Nonresident noncitizens 
generally are not subject to U.S. gift tax on the transfer of 
intangibles, such as stock or securities, regardless of where 
such property is situated.
      Estates of nonresident noncitizens generally are taxed at 
the same estate tax rates applicable to U.S. citizens, but the 
taxable estate includes only property situated within the 
United States that is owned by the decedent at death. This 
includes the value at death of all property, real or personal, 
tangible or intangible, situated in the United States. Special 
rules apply which treat certain property as being situated 
within and without the United States for these purposes.
      Unless modified by a treaty, a nonresident who is not a 
U.S. citizen generally is allowed a unified credit of $13,000, 
which effectively exempts $60,000 in assets from estate tax.
Generation-skipping transfer tax
      A generation-skipping transfer tax generally is imposed 
on transfers, either directly or through a trust or similar 
arrangement, to a ``skip person'' (i.e., a beneficiary in a 
generation more than one generation below that of the 
transferor). Transfers subject to the generation-skipping 
transfer tax include direct skips, taxable terminations, and 
taxable distributions. The generation-skipping transfer tax is 
imposed at a flat rate of 55 percent (i.e., the top estate and 
gift tax rate) on cumulative generation-skipping transfers in 
excess of $1 million (indexed for inflation occurring after 
1997; the inflation-adjusted amount for 2001 is $1,060,000).
Selected income tax provisions
            Transfers to certain foreign trusts and estates
      A transfer (during life or at death) by a U.S. person to 
a foreign trust or estate generally is treated as a sale or 
exchange of the property for an amount equal to the fair market 
value of the transferred property. The amount of gain that must 
be recognized by the transferor is equal to the excess of the 
fair market value of the property transferred over the adjusted 
basis (for purposes of determining gain) of such property in 
the hands of the transferor.
            Net operating loss and capital loss carryovers
      Under present law, a capital loss and net operating loss 
from business operations sustained by a decedent during his 
last taxable year are deductible only on the final return filed 
in his or her behalf. Such losses are not deductible by his or 
her estate.
            Transfers of property in satisfaction of a pecuniary 
                    bequest
      Under present law, gain or loss is recognized on the 
transfer of property in satisfaction of a pecuniary bequest 
(i.e., a bequest of a specific dollar amount) to the extent 
that the fair market value of the property at the time of the 
transfer exceeds the basis of the property, which generally is 
the basis stepped up to fair market value on the date of the 
decedent's death.
            Income tax exclusion for the gain on the sale of a 
                    principal residence
      A taxpayer generally can exclude up to $250,000 ($500,000 
if married filing a joint return) of gain realized on the sale 
or exchange of a principal residence. The exclusion is allowed 
each time a taxpayer sells or exchanges a principal residence 
that meets the eligibility requirements, but generally no more 
frequently than once every two years.
      To be eligible, a taxpayer must have owned the residence 
and occupied it as a principal residence for at least two of 
the five years prior to the sale or exchange. A taxpayer who 
fails to meet these requirements by reason of a change of place 
of employment, health, or other unforeseen circumstances is 
able to exclude the fraction of the $250,000 ($500,000 if 
married filing a joint return) equal to the fraction of two 
years that these requirements are met.
Excise tax on non-exempt trusts
      Under present law, non-exempt split-interest trusts are 
subject to certain restrictions that are applicable to private 
foundations if an income, estate, or gift tax charitable 
deduction was allowed with respect to the trust. A non-exempt 
split-interest trust subject to these rules would be prohibited 
from engaging in self-dealing, retaining any excess business 
holdings, and from making certain investments or taxable 
expenditures. Failure to comply with these restrictionswould 
subject the trust to certain excise taxes imposed on private 
foundations, which include excise taxes on self-dealing, excess 
business holdings, investments which jeopardize charitable purposes, 
and certain taxable expenditures.

                               house bill

      No provision. However, H.R. 8, as passed by the House, 
provides as follows:
Overview of H.R. 8
      Beginning in 2011, the estate, gift, and generation-
skipping transfers taxes are repealed. After repeal, the basis 
of assets received from a decedent generally will equal the 
basis of the decedent (i.e., carryover basis) at death. 
However, a decedent's estate is permitted to increase the basis 
of appreciated assets transferred by up to a total of $1.3 
million. The basis of appreciated property transferred to a 
surviving spouse can be increased (i.e., stepped up) by an 
additional $3 million. Thus, the basis of property transferred 
to a surviving spouse can be increased (i.e., stepped up) by a 
total of $4.3 million. In no case can the basis of an asset be 
adjusted above its fair market value. For these purposes, the 
executor will determine which assets and to what extent each 
asset receives a basis increase. The $1.3 million and $3 
million amounts are adjusted annually for inflation occurring 
after 2010.
      In 2002, the unified credit is replaced with a unified 
exemption, and the 5-percent surtax (which phases out the 
benefit of the graduated rates) and the rates in excess of 53 
percent are repealed. Beginning in 2003, the estate, gift, and 
generation-skipping transfer tax rates are further reduced each 
year until the estate, gift, and generation-skipping transfer 
taxes are repealed in 2011.
Phaseout and repeal of estate, gift, and generation-skipping transfer 
        taxes
            In general
      In 2002, the top estate and gift tax rates above 53 
percent are repealed, as is the 5-percent surtax, which phases 
out the benefit of the graduated rates. In 2003, all rates in 
excess of 50 percent are repealed. In each year 2004 through 
2006, each of the rates of tax is reduced by one percentage 
point. In each year 2007 through 2010, each of the rates of tax 
is reduced by two percentage points. The generation-skipping 
transfer tax rate in effect for a given year is the highest 
estate and gift tax rate in effect for that year. The reduction 
in estate and gift tax rates is coordinated with the income tax 
rates such that the highest estate and gift tax rate (and, 
thus, the generation-skipping transfer tax rate) will not be 
reduced below the top individual rate, and the lower estate and 
gift tax rates will not be reduced below the lowest individual 
tax rate. For each year 2002 through 2010, the State death tax 
credit rates are reduced in proportion to the reduction in the 
estate and gift tax rates.
      Beginning in 2011, the estate, gift, and generation-
skipping transfer taxes are repealed.
            Replace unified credit with unified exemption
      Beginning in 2002, the unified credit is replaced with a 
unified exemption amount. The unified exemption amount, which 
will follow the dollar amounts of the present-law unified 
credit effective exemption amounts, will be determined as 
follows: in 2002 and 2003, $700,000; in 2004, $850,000; in 
2005, $950,000; and in 2006 and thereafter (until repeal in 
2011), $1 million. For decedents who are not residents and not 
citizens of the United States, the exemption is $60,000.
Basis of property acquired from a decedent
            In general
      Beginning in 2011, after the estate, gift, and 
generation-skipping transfer taxes have been repealed, the 
present-law rules providing for a fair market value basis for 
property acquired from a decedent are repealed. Instead, a 
modified carryover basis regime generally takes effect. 
Recipients of property transferred at the decedent's death will 
receive a basis equal the lesser of the adjusted basis of the 
decedent or the fair market value of the property on the date 
of the decedent's death.
      The modified carryover basis rules apply to property 
acquired by bequest, devise, or inheritance, or by the 
decedent's estate from the decedent, property passing from the 
decedent to the extent such property passed without 
consideration, and certain other property to which the present 
law rules apply.\49\
---------------------------------------------------------------------------
    \49\ Sec. 1014(b)(2) and (3).
---------------------------------------------------------------------------
      Property acquired from a decedent is treated as if the 
property had been acquired by gift. Thus, the character of gain 
on the sale of property received from a decedent's estate is 
carried over to the heir. For example, real estate that has 
been depreciated and would be subject to recapture if sold by 
the decedent will be subject to recapture if sold by the heir.
            Property to which the modified carryover basis rules apply
      The modified carryover basis rules apply to property 
acquired from the decedent. Property acquired from the decedent 
is (1) property acquired by bequest, devise, or inheritance, 
(2) property acquired by the decedent's estate from the 
decedent, (3) property transferred by the decedent during his 
or her lifetime in trust to pay the income for life to or on 
the order or direction of the decedent, with the right reserved 
to the decedent at all times before his death to revoke the 
trust,\50\ (4) property transferred by the decedent during his 
lifetime in trust to pay the income for life to or on the order 
or direction of the decedent with the right reserved to the 
decedent at all times before his death to make any change to 
the enjoyment thereof through the exercise of a power to alter, 
amend, or terminate the trust,\51\ (5) property passing from 
the decedent by reason of the decedent's death to the extent 
such property passed without consideration (e.g., property held 
as joint tenants with right of survivorship or as tenants by 
the entireties), and (6) the surviving spouse's one-half share 
of certain community property held by the decedent and the 
surviving spouse as community property.
---------------------------------------------------------------------------
    \50\ This is the same property the basis of which is stepped up to 
date of death fair market value under present law sec. 1014(b)(2).
    \51\ This is the same property the basis of which is stepped up to 
date of death fair market value under present law sec. 1014(b)(3).
---------------------------------------------------------------------------
            Basis increase for certain property
      Amount of basis increase.--The bill allows an executor to 
increase (i.e., step up) the basis in assets owned by the 
decedent and acquired by the beneficiaries at death. Under this 
rule, each decedent's estate generally is permitted to increase 
(i.e., step up) the basis of assets transferred by up to a 
total of $1.3 million. The $1.3 million is increased by the 
amount of unused capital losses, net operating losses, and 
certain ``built-in'' losses of the decedent. In addition, the 
basis of property transferred to a surviving spouse can be 
increased by an additional $3 million. Thus, the basis of 
property transferred to surviving spouses can be increased by a 
total of $4.3 million. Nonresidents who are not U.S. citizens 
will be allowed to increase the basis of property by up to 
$60,000. The $60,000, $1.3 million, and $3 million amounts are 
adjusted annually for inflation occurring after 2010.
      Property eligible for basis increase.--In general, the 
basis of property may be increased above the decedent's 
adjusted basis in that property only if the property is owned, 
or is treated as owned, by the decedent at the time of the 
decedent's death. In the case of property held as joint tenants 
or tenants by the entireties with the surviving spouse, one-
half of the property is treated having been owned by the 
decedent and is thus eligible for the basis increase. In the 
case of property held jointly with a person other than the 
surviving spouse, the portion of the property attributable to 
the decedent's consideration furnished is treated as having 
been owned by the decedent and will be eligible for a basis 
increase. The decedent also is treated as the owner of property 
(which will be eligible for a basis increase) if the property 
was transferred by the decedent during his lifetime to a 
revocable trust that pays all of its income during the 
decedent's life to the decedent or at the direction of the 
decedent. The decedent also is treated as having owned the 
surviving spouse's one-half share of community property (which 
will be eligible for a basis increase) if at least one-half of 
the property was owned by, and acquired from, the decedent.\52\ 
The decedent shall not, however, be treated as owning any 
property solely by reason of holding a power of appointment 
with respect to such property.
---------------------------------------------------------------------------
    \52\ Thus, similar to the present law rule in sec. 1014(b)(6), both 
the decedent's and the surviving spouse's share of community property 
could be eligible for a basis increase.
---------------------------------------------------------------------------
      Property not eligible for a basis increase includes: (1) 
property that was acquired by the decedent by gift (other than 
from his or her spouse) during the three-year period ending on 
the date of the decedent's death; (2) property that constitutes 
a right to receive income in respect of a decedent; (3) stock 
or securities of a foreign personal holding company; (4) stock 
of a domestic international sales corporation (or former 
domestic international sales corporation); (5) stock of 
aforeign investment company; and (6) stock of a passive foreign 
investment company (except for which a decedent shareholder had made a 
qualified electing fund election).
      Rules applicable to basis increase.--Basis increase will 
be allocable on an asset-by-asset basis (e.g., basis increase 
can be allocated to a share of stock or a block of stock). 
However, in no case can the basis of an asset be adjusted above 
its fair market value. If the amount of basis increase is less 
than the fair market value of assets whose bases are eligible 
to be increased under these rules, the executor will determine 
which assets and to what extent each asset receives a basis 
increase.
Reporting requirements
            Lifetime gifts
      A donor is required to report to the Internal Revenue 
Service (``IRS'') the basis and character of any non-cash 
property transferred by gift with a value in excess of $25,000 
(except for gifts to charitable organizations). The donor is 
required to report to the IRS:
            The name and taxpayer identification number of the 
        donee,
            An accurate description of the property,
            The adjusted basis of the property in the hands of 
        the donor at the time of gift,
            The donor's holding period for such property,
            Sufficient information to determine whether any 
        gain on the sale of the property would be treated as 
        ordinary income,
            And any other information as the Treasury Secretary 
        may prescribe.
      Similar information (including the name, address, and 
phone number of the person making the return) is required to be 
provided to recipients of such property.
            Transfers at death
      For transfers at death of non-cash assets in excess of 
$1.3 million and for appreciated property the value of which 
exceeds $25,000 received by a decedent within three years of 
death, the executor of the estate (or the trustee of a 
revocable trust) would report to the IRS:
            The name and taxpayer identification number of the 
        recipient of the property,
            An accurate description of the property,
            The adjusted basis of the property in the hands of 
        the decedent and its fair market value at the time of 
        death,
            The decedent's holding period for the property,
            Sufficient information to determine whether any 
        gain on the sale of the property would be treated as 
        ordinary income,
            The amount of basis increase allocated to the 
        property, and
            Any other information as the Treasury Secretary may 
        prescribe.
            Penalties for failure to file required information
      Any donor required to report the basis and character of 
any non-cash property with a value in excess of $25,000 who 
fails to do so is liable for a penalty of $500 for each failure 
to report such information to the IRS and $50 for each failure 
to report such information to a beneficiary.
      Any person required to report to the IRS transfers at 
death of non-cash assets in excess of $1.3 million in value who 
fails to do so is liable for a penalty of $10,000 for the 
failure to report such information. Any person required to 
report to the IRS the receipt by a decedent of appreciated 
property valued in excess of $25,000 within three years of 
death who fails to do so is liable for a penalty of $500 for 
the failure to report such information to the IRS. There also 
is a penalty of $50 for each failure to report such information 
to a beneficiary.
      No penalty is imposed with respect to any failure that is 
due to reasonable cause. If any failure to report to the IRS or 
a beneficiary under the bill is due to intentional disregard of 
the rules, then the penalty is five percent of the fair market 
value of the property for which reporting was required, 
determined at the date of the decedent's death (for property 
passing at death) or determined at the time of gift (for a 
lifetime gift).
Certain tax benefits extending past the date for repeal of the estate 
        tax
      Prior to repeal of the estate tax, many estates may have 
claimed certain estate tax benefits which, upon certain events, 
may trigger a recapture tax. Because repeal of the estate tax 
is effective for decedents dying after December 31, 2010, these 
estate tax recapture provisions will continue to apply to 
estates of decedents dying before January 1, 2011.
            Qualified conservation easements
      A donor may have retained a development right in the 
conveyance of a conservation easement that qualified for the 
estate tax exclusion. Those with an interest in the land may 
later execute an agreement to extinguish the right. If an 
agreement to extinguish development rights is not entered into 
within the earlier of (1) two years after the date of the 
decedent's death or (2) the date of the sale of such land 
subject to the conservation easement, then those with an 
interest in the land are personally liable for an additional 
tax. This provision is retained after repeal of the estate tax, 
which will ensure that those persons with an interest in the 
land who fail to execute the agreement remain liable for any 
additional tax which may be due after repeal.
            Special-use valuation
      Property may have qualified for special-use valuation 
prior to repeal of the estate tax. If such property ceases to 
qualify for special-use valuation, for example, because an heir 
ceases to use the property in its qualified use within 10 years 
of the decedent's death, then the estate tax benefit is 
required to be recaptured. The recapture provision is retained 
after repeal of the estate tax, which will ensure that those 
estates that claimed this benefit prior to repeal of the estate 
tax will be subject to recapture if a disqualifying event 
occurs after repeal.
            Qualified family-owned business deduction
      Property may have qualified for the family-owned business 
deduction prior to repeal of the estate tax. If such property 
ceases to qualify for the family-owned business deduction, for 
example, because an heir ceases to use the property in its 
qualified use within 10 years of the decedent's death, then the 
estate-tax benefit is required to be recaptured. The recapture 
provision is retained after repeal of the estate tax, which 
will ensure that those estates that claimed this benefit prior 
to repeal of the estate tax would be subject to recapture if a 
disqualifying event occurs after repeal.
            Installment payment of estate tax for estates with an 
                    interest in a closely-held business
      The present-law installment payment rules are retained so 
that those estates that entered into an installment payment 
arrangement prior to repeal of the estate tax will continue to 
make their payments past the date for repeal.
      If more than 50 percent of the value of the closely-held 
business is distributed, sold, exchanged, or otherwise disposed 
of, the unpaid portion of the tax payable in installments must 
be paid upon notice and demand from the Treasury Secretary. 
This rule is retained after repeal of the estate tax, which 
will ensure that such dispositions that occur after repeal of 
the estate tax will continue to subject the estate to the 
unpaid portion of the tax upon notice and demand.
Transfers to foreign trusts, estates, and nonresidents who are not U.S. 
        citizens
      The present-law rule providing that transfers by a U.S. 
person to a foreign trust or estate generally is treated as a 
sale or exchange is expanded. Under the bill, transfers by a 
U.S. person to a nonresident who is not a U.S. citizen is 
treated as a sale or exchange of the property for an amount 
equal to the fair market value of the transferred property. The 
amount of gain that must be recognized by the transferor is 
equal to the excess of the fair market value of the property 
transferred over the adjusted basis of such property in the 
hands of the transferor.
Transfers of property in satisfaction of a pecuniary bequest
      Under the bill, gain or loss on the transfer of property 
in satisfaction of a pecuniary bequest is recognized only to 
the extent that the fair market value of the property at the 
time of the transfer exceeds the fair market value of the 
property on the date of the decedent's death (not the 
property's carryover basis).
Transfer of property subject to a liability
      The bill clarifies that gain is not recognized at the 
time of death when the estate or heir acquires from the 
decedent property subject to a liability that is greater than 
the decedent's basis in the property. Similarly, no gain is 
recognized by the estate on the distribution of such property 
to a beneficiary of the estate by reason of the liability.
Income tax exclusion for the gain on the sale of a principal residence
      The income tax exclusion of up to $250,000 of gain on the 
sale of a principal residence is extended to estates and heirs. 
Under the bill, if the decedent's estate or an heir sells the 
decedent's principal residence, $250,000 of gain can be 
excluded on the sale of the residence, provided the decedent 
used the property as a principal residence for two or more 
years during the five-year period prior to the sale. In 
addition, if an heir occupies the property as a principal 
residence, the decedent's period of ownership and occupancy of 
the property as a principal residence can be added to the 
heir's subsequent ownership and occupancy in determining 
whether the property was owned and occupied for two years as a 
principal residence.
Excise tax on nonexempt trusts
      Under the bill, split-interest trusts are subject to 
certain restrictions that are applicable to private foundations 
if an income tax charitable deduction, including an income tax 
charitable deduction by an estate or trust, was allowed with 
respect to transfers to the trust.
Anti-abuse rules
      The Treasury Secretary is given authority to treat a 
transfer that purports to be a gift as having never been 
transferred, if, in connection with such transfer, such 
treatment is appropriate to prevent income tax avoidance and 
(1) the transferor (or any person related to or designated by 
the transferor or such person) has received anything of value 
in connection with the transfer from the transferee directly or 
indirectly or (2) there is an understanding or expectation that 
the transferor (or any person related to or designated by the 
transferor or such person) will receive anything of value in 
connection with the transfer from the transferee directly or 
indirectly.
Study mandated by the bill
      The bill requires the Treasury Secretary to conduct a 
study of opportunities for avoidance of the income tax, if any, 
and potential increases in income tax revenues by reason of 
enactment of the bill. The results of such study are required 
to be submitted to the House Committee on Ways and Means and 
the Senate Committee on Finance no later than December 31, 
2002.
Interaction of the bill with death tax treaties
      The Committee expects that, where applicable, references 
in U.S. tax treaties to the unified credit under section 2010 
(as in effect prior to January 1, 2002) will be construed as 
applying, in a similar manner, to the unified exemption amount 
(as in effect for decedents dying and gifts made after December 
31, 2001).\53\
---------------------------------------------------------------------------
    \53\ See, e.g., Article 3, Protocol Amending the Convention Between 
the United States of America and the Federal Republic of Germany for 
the Avoidance of Double Taxation with Respect to Taxes on Estates, 
Inheritances, and Gifts (Senate Treaty Doc. 106-13, September 21, 
1999.) Under the protocol, a pro rata unified credit is provided to the 
estate of an individual domiciled in Germany (who is not a U.S. 
citizen) for purposes of computing U.S. estate tax. Such an individual 
domiciled in Germany is entitled to a credit against U.S. estate tax 
based on the extent to which the assets of the estate are situated in 
the United States.
---------------------------------------------------------------------------
      Effective date.--The unified credit is replaced with a 
unified exemption, the 5-percent surtax is repealed, and the 
rates in excess of 53 percent are repealed for estates of 
decedents dying and gifts and generation-skipping transfers 
made after December 31, 2001. The estate and gift tax rates in 
excess of 50 percent are repealed for estates of decedents 
dying and gifts and generation-skipping transfers made after 
December 31, 2002.
      The additional reductions in estate and gift tax rates 
and of the State death tax credit occur for decedents dying and 
gifts and generation-skipping transfers made in 2004 through 
2010.
      The estate, gift, and generation-skipping transfer taxes 
are repealed and the carryover basis regime takes effect for 
estates of decedents dying and gifts and generation-skipping 
transfers made after December 31, 2010.
      The provisions relating to purported gifts and 
recognition of gain on transfers to nonresidents who are not 
U.S. citizens are effective for transfers made after December 
31, 2010.

                            senate amendment

      The Senate amendment is similar to the provision in H.R. 
8; however, under the Senate amendment, the gift tax will not 
be repealed.
      The Senate amendment also includes the following 
modifications:
Phaseout and repeal of estate and generation-skipping transfer taxes; 
        modifications to gift tax
      The Senate amendment provides that the unified credit 
effective exemption amount will be increased and the estate and 
gift tax rates will be reduced over time. The unified credit 
effective exemption amount (for estate and gift tax purposes) 
will be increased to $1 million in 2002. For gift tax purposes, 
the unified credit effective exemption amount will remain at $1 
million in 2002 and thereafter. For estate tax purposes, the 
unified credit effective exemption amount and generation-
skipping transfer tax exemption will increase over time.

 TABLE 18.--UNIFIED CREDIT EXEMPTION AMOUNTS AND HIGHEST ESTATE AND GIFT
                                TAX RATES
------------------------------------------------------------------------
                          Estate and GST tax
    Calendar year         deathtime transfer     Highest estate and gift
                              exemption                 tax rates
------------------------------------------------------------------------
2002................  $1 million...............  50%
2003................  $1 million...............  49%
2004................  $2 million...............  48%
2005................  $3 million...............  47%
2006................  $3 million...............  46%
2007................  $3 million...............  45%
2008................  $3 million...............  45%
2009................  $3.5 million.............  45%
2010................  $4 million...............  45%
2011................  N/A (taxes repealed).....  40% (gift tax only)
------------------------------------------------------------------------

      Under the Senate amendment, except as provided in 
regulations, a transfer to a trust will be treated as a taxable 
gift beginning in 2011, unless the trust is treated as wholly 
owned by the donor or the donor's spouse under the grantor 
trust provisions of the Code.
      After repeal of the estate tax, the modified carryover 
basis rules provided in the House bill also apply under the 
Senate amendment.
Reduction in State death tax credit; deduction for State death taxes 
        paid
      The Senate amendment provides that, from 2002 through 
2004, the top State death tax credit rate is decreased from 16 
percent as follows: to 8 percent in 2002, to 7.2 percent in 
2003, and to 7.04 percent in 2004. In 2005, after the state 
death tax credit is repealed, there will be a deduction for 
death taxes (e.g., any estate, inheritance, legacy, or 
succession taxes) actually paid to any State or the District of 
Columbia, in respect of property included in the gross estate 
of the decedent. Such State taxes must have been paid and 
claimed before the later of: (1) four years after the filing of 
the estate tax return; or (2) (a) 60 days after a decision of 
the U.S. Tax Court determining the estate tax liability becomes 
final, (b) the expiration of the period of extension to pay 
estate taxes over time under section 6166, or (c) the 
expiration of the period of limitations in which to file a 
claim for refund or 60 days after a decision of a court in 
which such refund suit has been filed becomes final.
Reporting requirements
            In general
      For transfers at death, the Senate amendment contains 
reporting requirements identical to those provided in the House 
bill. For transfers during life, the Senate amendment provides 
that a donor is required to provide to recipients of property 
by gift the information relating to the property (e.g., the 
fair market value and basis of property) that was reported on 
the donor's gift tax return with respect to such property.
            Penalties for failure to comply with the reporting 
                    requirements
      Any donor required to provide to recipients of property 
by gift the information relating to the property that was 
reported on the donor's gift tax return (e.g., the fair market 
value and basis of property) with respect to such property who 
fails to do so is liable for a penalty of $50 for each failure 
to report such information to a donee.
      Any person required to report to the IRS transfers at 
death of non-cash assets in excess of $1.3 million in value who 
fails to do so is liable for a penalty of $10,000 for the 
failure to report such information. Any person required to 
report to the IRS the receipt by a decedent of appreciated 
property acquired by the decedent within three years of death 
for which a gift tax return was required to have been filed by 
the donor who fails to do so is liable for a penalty of $500 
for the failure to report such information to the IRS. There 
also is a penalty of $50 for each failure to report such 
information to a beneficiary.
      No penalty is imposed with respect to any failure that is 
due to reasonable cause. If any failure to report to the IRS or 
a beneficiary under the bill is due to intentional disregard of 
the rules, then the penalty is five percent of the fair market 
value of the property for which reporting was required, 
determined at the date of the decedent's death (for property 
passing at death) or determined at the time of gift (for a 
lifetime gift).
Certain tax benefits extending past the date for repeal of the estate 
        tax
      As under the House bill, there will continue to be (1) 
the additional estate tax for those with a retained development 
right with respect to property for which a conservation 
easement was claimed, (2) the additional estate tax imposed 
under the special-use valuation rules, (3) the additional tax 
imposed under the qualified family-owned business deduction 
rules, and (4) acceleration of tax under the installment 
payment of estate tax provisions.
      In addition, under the Senate amendment, there will 
continue to be an estate tax imposed on (1) any distribution 
prior to January 1, 2022, from a qualified domestic trust 
before the date of the death of the noncitizen surviving spouse 
and (2) the value of the property remaining in a qualified 
domestic trust on the date of death of the noncitizen surviving 
spouse if such surviving spouse dies before January 1, 2011.
      Effective date.--The estate and gift rate reductions, 
increases in the estate tax unified credit exemption equivalent 
amounts and generation-skipping transfer tax exemption amount, 
and reductions in and repeal of the state death tax credit are 
phased-in over time, beginning with estates of decedents dying 
and gifts and generation-skipping transfers made after December 
31, 2001. The repeal of the qualified family-owned business 
deduction is effective for estates of decedents dying after 
December 31, 2003.
      The estate and generation-skipping transfer taxes are 
repealed, and the carryover basis regime takes effect for 
estates of decedents dying and generation-skipping transfers 
made after December 31, 2010. The provisions relating to 
recognition of gain on transfers to nonresident noncitizens are 
effective for transfers made after December 31, 2010.
      The top gift tax rate will be 40 percent, and transfers 
to trusts generally will be treated as a taxable gift unless 
the trust is treated as wholly owned by the donor or the 
donor's spouse, effective for gifts made after December 31, 
2010.
      An estate tax on distributions made from a qualified 
domestic trust before the date of the death of the surviving 
spouse will no longer apply for distributions made after 
December 31, 2021. An estate tax on the value of property 
remaining in a qualified domestic trust on the date of death of 
the surviving spouse will no longer apply after December 31, 
2010.

                          Conference Agreement

Overview
      The conference agreement follows the Senate amendment 
with modifications. Under the conference agreement, the estate, 
gift, and generation-skipping transfer taxes are reduced 
between 2002 and 2009, and the estate and generation-skipping 
transfer taxes are repealed in 2010.
Phaseout and repeal of estate and generation-skipping transfer taxes
            In general
      Under the conference agreement, in 2002, the 5-percent 
surtax (which phases out the benefit of the graduated rates) 
and the rates in excess of 50 percent are repealed. In 
addition, in 2002, the unified credit effective exemption 
amount (for both estate and gift tax purposes) is increased to 
$1 million. In 2003, the estate and gift tax rates in excess of 
49 percent are repealed. In 2004, the estate and gift tax rates 
in excess of 48 percent are repealed, and the unified credit 
effective exemption amount for estate tax purposes is increased 
to $1.5 million. (The unified credit effective exemption amount 
for gift tax purposes remains at $1 million as increased in 
2002.) In addition, in 2004, the family-owned business 
deduction is repealed. In 2005, the estate and gift tax rates 
in excess of 47 percent are repealed. In 2006, the estate and 
gift tax rates in excess of 46 percent are repealed, and the 
unified credit effective exemption amount for estate tax 
purposes is increased to $2 million. In 2007, the estate and 
gift tax rates in excess of 45 percent are repealed. In 2009, 
the unified credit effective exemption amount is increased to 
$3.5 million. In 2010, the estate and generation-skipping 
transfer taxes are repealed.
      From 2002 through 2009, the estate and gift tax rates and 
unified credit effective exemption amount for estate tax 
purposes are as follows:

------------------------------------------------------------------------
                       Estate and GST tax
   Calendar year       deathtime transfer    Highest estate and gift tax
                           exemption                    rates
------------------------------------------------------------------------
2002..............  $1 million.............  50%
2003..............  $1 million.............  49%
2004..............  $1.5 million...........  48%
2005..............  $1.5 million...........  47%
2006..............  $2 million.............  46%
2007..............  $2 million.............  45%
2008..............  $2 million.............  45%
2009..............  $3.5 million...........  45%
2010..............  N/A (taxes repealed)...  top individual rate under
                                              the bill (gift tax only)
------------------------------------------------------------------------

      The generation-skipping transfer tax exemption for a 
given year (prior to repeal) is equal to the unified credit 
effective exemption amount for estate tax purposes. In 
addition, as under present law, the generation-skipping 
transfer tax rate for a given year will be the highest estate 
and gift tax rate in effect for such year.
            Repeal of estate and generation-skipping transfer taxes; 
                    modifications to gift tax
      In 2010, the estate and generation-skipping transfer 
taxes are repealed. Also beginning in 2010, the top gift tax 
rate will be the top individual income tax rate as provided 
under the bill, and, except as provided in regulations, a 
transfer to trust will be treated as a taxable gift, unless the 
trust is treated as wholly owned by the donor or the donor's 
spouse under the grantor trust provisions of the Code.
            Reduction in State death tax credit; deduction for State 
                    death taxes paid
      Under the conference agreement, from 2002 through 2004, 
the State death tax credit allowable under present law is 
reduced as follows: in 2002, the State death tax credit is 
reduced by 25 percent (from present law amounts); in 2003, the 
State death tax credit is reduced by 50 percent (from present 
law amounts); and in 2004, the State death tax credit is 
reduced by 75 percent (from present law amounts). In 2005, the 
State death tax credit is repealed, after which there will be a 
deduction for death taxes (e.g., any estate, inheritance, 
legacy, or succession taxes) actually paid to any State or the 
District of Columbia, in respect of property included in the 
gross estate of the decedent. Such State taxes must have been 
paid and claimed before the later of: (1) four years after the 
filing of the estate tax return; or (2) (a) 60 days after a 
decision of the U.S. Tax Court determining the estate tax 
liability becomes final, (b) the expiration of the period of 
extension to pay estate taxes over time under section 6166, or 
(c) the expiration of the period of limitations in which to 
file a claim for refund or 60 days after a decision of a court 
in which such refund suit has become final.
Basis of property acquired from a decedent
      The conference agreement includes the rules regarding the 
determination of basis of property acquired from a decedent 
after repeal of the estate tax included in H.R. 8 and the 
Senate amendment; however, these rules will be in effect 
beginning in 2010 (i.e., when the estate tax is repealed under 
the conference agreement).
Reporting requirements
      The conference agreement follows the Senate amendment.
Certain tax benefits extending past the date for repeal of the estate 
        tax
      The conference agreement follows the Senate amendment, 
with a modification regarding property in a qualified domestic 
trust. There will continue to be an estate tax imposed on (1) 
any distribution prior to January 1, 2021, from a qualified 
domestic trust before the date of the death of the noncitizen 
surviving spouse and (2) the value of the property remaining in 
a qualified domestic trust on the date of death of the 
noncitizen surviving spouse if such surviving spouse dies 
before January 1, 2010.
Transfers to foreign trusts, foreign estates, and nonresidents who are 
        not U.S. citizens
      The conference agreement follows H.R. 8 and the Senate 
amendment, with a modification. Under the conference agreement, 
beginning in 2010, only a transfer by a U.S. person's estate 
(i.e., by a U.S. person at death) to a nonresident who is not a 
U.S. citizen is treated as a sale or exchange of the property 
for an amount equal to the fair market value of the transferred 
property. The amount of gain that must be recognized by the 
transferor is equal to the excess of the fair market value of 
the property transferred over the adjusted basis of such 
property in the hands of the transferor.
Transfers of property in satisfaction of a pecuniary bequest
      The conference agreement follows H.R. 8 and the Senate 
amendment.
Transfer of property subject to a liability
      The conference agreement follows H.R. 8 and the Senate 
amendment.
Income tax exclusion for the gain on the sale of a principal residence
      The conference agreement follows H.R. 8 and the Senate 
amendment, with a modification. Under the conference agreement, 
the income tax exclusion for the gain on the sale of a 
principal residence applies to property sold by a trust that 
was a qualified revocable trust under section 645 of the Code 
immediately prior to the decedent's death. The decedent's 
period of occupancy of the property as a principal residence 
can be added to an heir's subsequent ownership and occupancy in 
determining whether the property was owned and occupied for two 
years as a principal residence, regardless of whether the 
residence was owned by such trust during the decedent's 
occupancy.
Excise tax on non-exempt trusts
      The conference agreement follows H.R. 8 and the Senate 
amendment.
      Effective date.--The estate and gift rate reductions, 
increases in the estate tax unified credit exemption equivalent 
amounts and generation-skipping transfer tax exemption amount, 
and reductions in and repeal of the state death tax credit are 
phased-in over time, beginning with estates of decedents dying 
and gifts and generation-skipping transfers after December 31, 
2001. The repeal of the qualified family-owned business 
deduction is effective for estates of decedents dying after 
December 31, 2003.
      The estate and generation-skipping transfer taxes are 
repealed, and the carryover basis regime takes effect for 
estates of decedents dying and generation-skipping transfers 
after December 31, 2009. The provisions relating to recognition 
of gain on transfers by the estate of a U.S. person (i.e., at 
death) to nonresidents who are not U.S. citizens is effective 
for transfers made after December 31, 2009.
      The top gift tax rate will be the top individual income 
tax rate as provided in the bill, and transfers to trusts 
generally will be treated as a taxable gift unless the trust is 
treated as wholly owned by the donor or the donor's spouse, 
effective for gifts made after December 31, 2009.
      An estate tax on distributions made from a qualified 
domestic trust before the date of the death of the surviving 
spouse will no longer apply for distributions made after 
December 31, 2020. An estate tax on the value of property 
remaining in a qualified domestic trust on the date of death of 
the surviving spouse will no longer apply after December 31, 
2009.

B. Expand Estate Tax Rule for Conservation Easements (Sec. 501 of H.R. 
    8, Sec. 551 of the Senate Amendment, and Sec. 2031 of the Code)

                              Present Law

In general
      An executor can elect to exclude from the taxable estate 
40 percent of the value of any land subject to a qualified 
conservation easement, up to a maximum exclusion of $100,000 in 
1998, $200,000 in 1999, $300,000 in 2000, $400,000 in 2001, and 
$500,000 in 2002 and thereafter (sec. 2031(c)). The exclusion 
percentage is reduced by 2 percentage points for each 
percentage point (or fraction thereof) by which the value of 
the qualified conservation easement is less than 30 percent of 
the value of the land (determined without regard to the value 
of such easement and reduced by the value of any retained 
development right).
      A qualified conservation easement is one that meets the 
following requirements: (1) the land is located within 25 miles 
of a metropolitan area (as defined by the Office of Management 
and Budget) or a national park or wilderness area, or within 10 
miles of an Urban National Forest (as designated by the Forest 
Service of the U.S. Department of Agriculture); (2) the land 
has been owned by the decedent or a member of the decedent's 
family at all times during the three-year period ending on the 
date of the decedent's death; and (3) a qualified conservation 
contribution (within the meaning of sec. 170(h)) of a qualified 
real property interest (as generally defined in sec. 
170(h)(2)(C)) was granted by the decedent or a member of his or 
her family. For purposes of the provision, preservation of a 
historically important land area or a certified historic 
structure does not qualify as a conservation purpose.
      In order to qualify for the exclusion, a qualifying 
easement must have been granted by the decedent, a member of 
the decedent's family, the executor of the decedent's estate, 
or the trustee of a trust holding the land, no later than the 
date of the election. To the extent that the value of such land 
is excluded from the taxable estate, the basis of such land 
acquired at death is a carryover basis (i.e., the basis is not 
stepped-up to its fair market value at death). Property 
financed with acquisition indebtedness is eligible for this 
provision only to the extent of the net equity in the property.
Retained development rights
      The exclusion for land subject to a conservation easement 
does not apply to any development right retained by the donor 
in the conveyance of the conservation easement. An example of 
such a development right would be the right to extract minerals 
from the land. If such development rights exist, then the value 
of the conservation easement must be reduced by the value of 
any retained development right.
      If the donor or holders of the development rights agree 
in writing to extinguish the development rights in the land, 
then the value of the easement need not be reduced by the 
development rights. In such case, those persons with an 
interest in the land must execute the agreement no later than 
the earlier of (1) two years after the date of the decedent's 
death or (2) the date of the sale of such land subject to the 
conservation easement. If such agreement is not entered into 
within this time, then those with an interest in the land are 
personally liable for an additional tax, which is the amount of 
tax which would have been due on the retained development 
rights subject to the termination agreement.

                               House Bill

      No provision. However, H.R. 8, as passed by the House 
expands the availability of qualified conservation easements by 
modifying the distance requirements. Under the bill, the 
distance within which the land must be situated from a 
metropolitan area, national park, or wilderness area is 
increased from 25 to 50 miles, and the distance from which the 
land must be situated from an Urban National Forest is 
increased from 10 to 25 miles. The bill also clarifies that the 
date for determining easement compliance is the date on which 
the donation was made.
      Effective date.--The provisions are effective for estates 
of decedents dying after December 31, 2000.

                            Senate Amendment

      The Senate amendment expands availability of qualified 
conservation easements by eliminating the requirement that the 
land be located within a certain distance from a metropolitan 
area, national park, wilderness area, or Urban National Forest. 
Thus, under the Senate amendment, a qualified conservation 
easement may be claimed with respect to any land that is 
located in the United States or its possessions. The Senate 
amendment also clarifies that the date for determining easement 
compliance is the date on which the donation was made.
      Effective date.--The provisions are effective for estates 
of decedents dying after December 31, 2000.

                          Conference Agreement

      The conference agreement follows the Senate amendment.

            C. Modify Generation-Skipping Transfer Tax Rules

1. Deemed allocation of the generation-skipping transfer tax exemption 
        to lifetime transfers to trusts that are not direct skips (sec. 
        601 of H.R. 8, sec. 561 of the Senate amendment, and sec. 2632 
        of the Code)

                              Present Law

      A generation-skipping transfer tax generally is imposed 
on transfers, either directly or through a trust or similar 
arrangement, to a ``skip person'' (i.e., a beneficiary in a 
generation more than one generation below that of the 
transferor). Transfers subject to the generation-skipping 
transfer tax include direct skips, taxable terminations, and 
taxable distributions. An exemption of $1 million (indexed 
beginning in 1999; the inflation-adjusted amount for 2001 is 
$1,060,000) is provided for each person making generation-
skipping transfers. The exemption can be allocated by a 
transferor (or his or her executor) to transferred property.
      A direct skip is any transfer subject to estate or gift 
tax of an interest in property to a skip person. A skip person 
may be a natural person or certain trusts. All persons assigned 
to the second or more remote generation below the transferor 
are skip persons (e.g., grandchildren and great-grandchildren). 
Trusts are skip persons if (1) all interests in the trust are 
held by skip persons, or (2) no person holds an interest in the 
trust and at no time after the transfer may a distribution 
(including distributions and terminations) be made to a non-
skip person.
      A taxable termination is a termination (by death, lapse 
of time, release of power, or otherwise) of an interest in 
property held in trust unless, immediately after such 
termination, a non-skip person has an interest in the property, 
or unless at no time after the termination may a distribution 
(including a distribution upon termination) be made from the 
trust to a skip person. A taxable distribution is a 
distribution from a trust to a skip person (other than a 
taxable termination or direct skip).
      The tax rate on generation-skipping transfers is a flat 
rate of tax equal to the maximum estate and gift tax rate in 
effect at the time of the transfer (55 percent under present 
law) multiplied by the ``inclusion ratio.'' The inclusion ratio 
with respect to any property transferred in a generation-
skipping transfer indicates the amount of ``generation-skipping 
transfer tax exemption'' allocated to a trust. The allocation 
of generation-skipping transfer tax exemption reduces the 55-
percent tax rate on a generation-skipping transfer.
      If an individual makes a direct skip during his or her 
lifetime, any unused generation-skipping transfer tax exemption 
is automatically allocated to a direct skip to the extent 
necessary to make the inclusion ratio for such property equal 
to zero. An individual can elect out of the automatic 
allocation for lifetime direct skips.
      For lifetime transfers made to a trust that are not 
direct skips, the transferor must allocate generation-skipping 
transfer tax exemption--the allocation is not automatic. If 
generation-skipping transfer tax exemption is allocated on a 
timely-filed gift tax return, then the portion of the trust 
which is exempt from generation-skipping transfer tax is based 
on the value of the property at the time of the transfer. If, 
however, the allocation is not made on a timely-filed gift tax 
return, then the portion of the trust which is exempt from 
generation-skipping transfer tax is based on the value of the 
property at the time the allocation of generation-skipping 
transfer tax exemption was made.
      Treas. Reg. sec. 26.2632-1(d) further provides that any 
unused generation-skipping transfer tax exemption, which has 
not been allocated to transfers made during an individual's 
life, is automatically allocated on the due date for filing the 
decedent's estate tax return. Unused generation-skipping 
transfer tax exemption is allocated pro rata on the basis of 
the value of the property as finally determined for estate tax 
purposes, first to direct skips treated as occurring at the 
transferor's death. The balance, if any, of unused generation-
skipping transfer tax exemption is allocated pro rata, on the 
basis of the estate tax value of the nonexempt portion of the 
trust property (or in the case of trusts that are not included 
in the gross estate, on the basis of the date of death value of 
the trust) to trusts with respect to which a taxable 
termination may occur or from which a taxable distribution may 
be made.

                               House Bill

      No provision. However, H.R. 8, as passed by the house 
provides that generation-skipping transfer tax exemption will 
be automatically allocated to transfers made during life that 
are ``indirect skips.'' An indirect skip is any transfer of 
property (that is not a direct skip) subject to the gift tax 
that is made to a generation-skipping transfer trust.
      A generation-skipping transfer trust is defined as a 
trust that could have a generation-skipping transfer with 
respect to the transferor (e.g., a taxable termination or 
taxable distribution), unless:
            The trust instrument provides that more than 25 
        percent of the trust corpus must be distributed to or 
        may be withdrawn by one or more individuals who are 
        non-skip persons (a) before the date that the 
        individual attains age 46, (b) on or before one or more 
        dates specified in the trust instrument that will occur 
        before the date that such individual attains age 46, or 
        (c) upon the occurrence of an event that, in accordance 
        with regulations prescribed by the Treasury Secretary, 
        may reasonably be expected to occur before the date 
        that such individual attains age 46;
            The trust instrument provides that more than 25 
        percent of the trust corpus must be distributed to or 
        may be withdrawn by one or more individuals who are 
        non-skip persons and who are living on the date of 
        death of another person identified in the instrument 
        (by name or by class) who is more than 10 years older 
        than such individuals;
            The trust instrument provides that, if one or more 
        individuals who are non-skip persons die on or before a 
        date or event described in clause (1) or (2), more than 
        25 percent of the trust corpus either must be 
        distributed to the estate or estates of one or more of 
        such individuals or is subject to a general power of 
        appointment exercisable by one or more of such 
        individuals;
            The trust is a trust any portion of which would be 
        included in the gross estate of a non-skip person 
        (other than the transferor) if such person died 
        immediately after the transfer;
            The trust is a charitable lead annuity trust or a 
        charitable remainder annuity trust or a charitable 
        unitrust; or
            The trust is a trust with respect to which a 
        deduction was allowed under section 2522 for the amount 
        of an interest in the form of the right to receive 
        annual payments of a fixed percentage of the net fair 
        market value of the trust property (determined yearly) 
        and which is required to pay principal to a non-skip 
        person if such person is alive when the yearly payments 
        for which the deduction was allowed terminate.
      If any individual makes an indirect skip during the 
individual's lifetime, then any unused portion of such 
individual's generation-skipping transfer tax exemption is 
allocated to the property transferred to the extent necessary 
to produce the lowest possible inclusion ratio for such 
property.
      An individual can elect not to have the automatic 
allocation rules apply to an indirect skip, and such elections 
will be deemed timely if filed on a timely-filed gift tax 
return for the calendar year in which the transfer was made or 
deemed to have been made or on such later date or dates as may 
be prescribed by the Treasury Secretary. An individual can 
elect not to have the automatic allocation rules apply to any 
or all transfers made by such individual to a particular trust 
and can elect to treat any trust as a generation-skipping 
transfer trust with respect to any or all transfers made by the 
individual to such trust, and such election can be made on a 
timely-filed gift tax return for the calendar year for which 
the election is to become effective.
      Effective date.--The provision applies to transfers 
subject to estate or gift tax made after December 31, 2000, and 
to estate tax inclusion periods ending after December 31, 2000.

                            Senate Amendment

      The Senate amendment is the same as the provision in H.R. 
8.

                          Conference Agreement

      The conference agreement follows H.R. 8 and the Senate 
amendment.
2. Retroactive allocation of the generation-skipping transfer tax 
        exemption (sec. 601 of H.R. 8, sec. 561 of the Senate 
        amendment, and sec. 2632 of the Code)

                              Present Law

      A taxable termination is a termination (by death, lapse 
of time, release of power, or otherwise) of an interest in 
property held in trust unless, immediately after such 
termination, a non-skip person has an interest in the property, 
or unless at no time after the termination may a distribution 
(including a distribution upon termination) be made from the 
trust to a skip person. A taxable distribution is a 
distribution from a trust to a skip person (other than a 
taxable termination or direct skip). If a transferor allocates 
generation-skipping transfer tax exemption to a trust prior to 
the taxable termination or taxable distribution, generation-
skipping transfer tax may be avoided.
      A transferor likely will not allocate generation-skipping 
transfer tax exemption to a trust that the transferor expects 
will benefit only non-skip persons. However, if a taxable 
termination occurs because, for example, the transferor's child 
unexpectedly dies such that the trust terminates in favor of 
the transferor's grandchild, and generation-skipping transfer 
tax exemption had not been allocated to the trust, then 
generation-skipping transfer tax would be due even if the 
transferor had unused generation-skipping transfer tax 
exemption.

                               House Bill

      No provision. However, H.R. 8, as passed by the House, 
provided that generation-skipping transfer tax exemption can be 
allocated retroactively when there is an unnatural order of 
death. If a lineal descendant of the transferor predeceases the 
transferor, then the transferor can allocate any unused 
generation-skipping transfer exemption to any previous transfer 
or transfers to the trust on a chronological basis. The 
provision allows a transferor to retroactively allocate 
generation-skipping transfer exemption to a trust where a 
beneficiary (a) is a non-skip person, (b) is a lineal 
descendant of the transferor's grandparent or a grandparent of 
the transferor's spouse, (c) is a generation younger than the 
generation of the transferor, and (d) dies before the 
transferor. Exemption is allocated under this rule 
retroactively, and the applicable fraction and inclusion ratio 
would be determined based on the value of the property on the 
date that the property was transferred to trust.
      Effective date.--The provision applies to deaths of non-
skip persons occurring after December 31, 2000.

                            Senate Amendment

      The Senate amendment is the same as the provision in H.R. 
8.

                          Conference Agreement

      The conference agreement follows H.R. 8 and the Senate 
amendment.
3. Severing of trusts holding property having an inclusion ratio of 
        greater than zero (sec. 602 of H.R. 8, sec. 562 of the Senate 
        amendment, and sec. 2642 of the Code)

                              Present Law

      A generation-skipping transfer tax generally is imposed 
on transfers, either directly or through a trust or similar 
arrangement, to a ``skip person'' (i.e., a beneficiary in a 
generation more than one generation below that of the 
transferor). Transfers subject to the generation-skipping 
transfer tax include direct skips, taxable terminations, and 
taxable distributions. An exemption of $1 million (indexed 
beginning in 1999; the inflation-adjusted amount for 2001 is 
$1,060,000) is provided for each person making generation-
skipping transfers. The exemption can be allocated by a 
transferor (or his or her executor) to transferred property.
      If the value of transferred property exceeds the amount 
of the generation-skipping transfer tax exemption allocated to 
that property, then the generation-skipping transfer tax 
generally is determined by multiplying a flat tax rate equal to 
the highest estate tax rate (which is currently 55 percent) by 
the ``inclusion ratio'' and the value of the taxable property 
at the time of the taxable event. The ``inclusion ratio'' is 
the number one minus the ``applicable fraction.'' The 
applicable fraction is a fraction calculated by dividing the 
amount of the generation-skipping transfer tax exemption 
allocated to the property by the value of the property.
      Under Treas. Reg. 26.2654-1(b), a trust may be severed 
into two or more trusts (e.g., one with an inclusion ratio of 
zero and one with an inclusion ratio of one) only if (1) the 
trust is severed according to a direction in the governing 
instrument or (2) the trust is severed pursuant to the 
trustee's discretionary powers, but only if certain other 
conditions are satisfied (e.g., the severance occurs or a 
reformation proceeding begins before the estate tax return is 
due). Under current Treasury regulations, however, a trustee 
cannot establish inclusion ratios of zero and one by severing a 
trust that is subject to the generation-skipping transfer tax 
after the trust has been created.

                               House Bill

      No provision. However, H.R. 8, as passed by the House, 
provides that a trust can be severed in a ``qualified 
severance.'' A qualified severance is defined as the division 
of a single trust and the creation of two or more trusts if (1) 
the single trust was divided on a fractional basis, and (2) the 
terms of the new trusts, in the aggregate, provide for the same 
succession of interests of beneficiaries as are provided in the 
original trust. If a trust has an inclusion ratio of greater 
than zero and less than one, a severance is a qualified 
severance only if the single trust is divided into two trusts, 
one of which receives a fractional share of the total value of 
all trust assets equal to the applicable fraction of the single 
trust immediately before the severance. In such case, the trust 
receiving such fractional share shall have an inclusion ratio 
of zero and the other trust shall have an inclusion ratio of 
one. Under the provision, a trustee may elect to sever a trust 
in a qualified severance at any time.
      Effective date.--The provision is effective for 
severances of trusts occurring after December 31, 2000.

                            Senate Amendment

      The Senate amendment is the same as the provision in H.R. 
8.

                          Conference Agreement

      The conference agreement follows the provision in H.R. 8 
and the Senate amendment.
4. Modification of certain valuation rules (sec. 603 of H.R. 8, sec. 
        563 of the Senate amendment, and sec. 2642 of the Code)

                              Present Law

      Under present law, the inclusion ratio is determined 
using gift tax values for allocations of generation-skipping 
transfer tax exemption made on timely filed gift tax returns. 
The inclusion ratio generally is determined using estate tax 
values for allocations of generation-skipping transfer tax 
exemption made to transfers at death. Treas. Reg. 26.2642-5(b) 
provides that, with respect to taxable terminations and taxable 
distributions, the inclusion ratio becomes final on the later 
of the period of assessment with respect to the first transfer 
using the inclusion ratio or the period for assessing the 
estate tax with respect to the transferor's estate.

                               House Bill

      No provision. However, H.R. 8, as passed by the House, 
provides that in connection with timely and automatic 
allocations of generation-skipping transfer tax exemption, the 
value of the property for purposes of determining the inclusion 
ratio shall be its finally determined gift tax value or estate 
tax value depending on the circumstances of the transfer. In 
the case of a generation-skipping transfer tax exemption 
allocation deemed to be made at the conclusion of an estate tax 
inclusion period, the value for purposes of determining the 
inclusion ratio shall be its value at that time.
      Effective date.--The provision is effective for transfers 
subject to estate or gift tax made after December 31, 2000.

                            Senate Amendment

      The Senate amendment is the same as the provision in H.R. 
8.

                          Conference Agreement

      The conference agreement follows H.R. 8 and the Senate 
amendment.
5. Relief from late elections (sec. 604 of H.R. 8, sec. 564 of the 
        Senate amendment, and sec. 2642 of the Code)

                              Present Law

      Under present law, an election to allocate generation-
skipping transfer tax exemption to a specific transfer may be 
made at any time up to the time for filing the transferor's 
estate tax return. If an allocation is made on a gift tax 
return filed timely with respect to the transfer to trust, then 
the value on the date of transfer to the trust is used for 
determining generation-skipping transfer tax exemption 
allocation. However, if the allocation relating to a specific 
transfer is not made on a timely-filed gift tax return, then 
the value on the date of allocation must be used. There is no 
statutory provision allowing relief for an inadvertent failure 
to make an election on a timely-filed gift tax return to 
allocate generation-skipping transfer tax exemption.

                               House Bill

      No provision. However, H.R. 8, as passed by the House, 
provides that the Treasury Secretary is authorized and directed 
to grant extensions of time to make the election to allocate 
generation-skipping transfer tax exemption and to grant 
exceptions to the time requirement, without regard to whether 
any period of limitations has expired. If such relief is 
granted, then the gift tax or estate tax value of the transfer 
to trust would be used for determining generation-skipping 
transfer tax exemption allocation.
      In determining whether to grant relief for late 
elections, the Treasury Secretary is directed to consider all 
relevant circumstances, including evidence of intent contained 
in the trust instrument or instrument of transfer and such 
other factors as the Treasury Secretary deems relevant. For 
purposes of determining whether to grant relief, the time for 
making the allocation (or election) is treated as if not 
expressly prescribed by statute.
      Effective date.--The provision applies to requests 
pending on, or filed after, December 31, 2000. No inference is 
intended with respect to the availability of relief from late 
elections prior to the effective date of the provision.

                            Senate Amendment

      The Senate amendment is the same as the provision in H.R. 
8.

                          Conference Agreement

      The conference agreement follows the provision in H.R. 8 
and the Senate amendment.
6. Substantial compliance (sec. 604 of the House bill, sec. 564 of the 
        Senate amendment, and sec. 2642 of the Code)

                              Present Law

      Under present law, there is no statutory rule which 
provides that substantial compliance with the statutory and 
regulatory requirements for allocating generation-skipping 
transfer tax exemption will suffice to establish that 
generation-skipping transfer tax exemption was allocated to a 
particular transfer or trust.

                               House Bill

      No provision. However, H.R. 8, as passed by the House, 
provides that substantial compliance with the statutory and 
regulatory requirements for allocating generation-skipping 
transfer tax exemption will suffice to establish that 
generation-skipping transfer tax exemption was allocated to a 
particular transfer or a particular trust. If a taxpayer 
demonstrates substantial compliance, then so much of the 
transferor's unused generation-skipping transfer tax exemption 
will be allocated to the extent it produces the lowest possible 
inclusion ratio. In determining whether there has been 
substantial compliance, all relevant circumstances will be 
considered, including evidence of intent contained in the trust 
instrument or instrument of transfer and such other factors as 
the Treasury Secretary deems appropriate.
      Effective date.--The provision applies to transfers 
subject to estate or gift tax made after December 31, 2000. No 
inference is intended with respect to the availability of a 
rule of substantial compliance prior to the effective date of 
the provision.

                            Senate Amendment

      The Senate amendment is the same as the provision in H.R. 
8.

                          Conference Agreement

      The conference agreement follows H.R. 8 and the Senate 
amendment.

D. Expand and Modify Availability of Installment Payment of Estate Tax 
 for Closely-Held Businesses (Sec. 701 of H.R. 8, Secs. 571 and 572 of 
            the Senate amendment, and Sec. 6166 of the Code)

                              PRESENT LAW

      Under present law, the estate tax generally is due within 
nine months of a decedent's death. However, an executor 
generally may elect to pay estate tax attributable to an 
interest in a closely-held business in two or more installments 
(but no more than 10). An estate is eligible for payment of 
estate tax in installments if the value of the decedent's 
interest in a closely-held business exceeds 35 percent of the 
decedent's adjusted gross estate (i.e., the gross estate less 
certain deductions). If the election is made, the estate may 
defer payment of principal and pay only interest for the first 
five years, followed by up to 10 annual installments of 
principal and interest. This provision effectively extends the 
time for paying estate tax by 14 years from the original due 
date of the estate tax.\54\ A special two-percent interest rate 
applies to the amount of deferred estate tax attributable to 
the first $1 million (adjusted annually for inflation occurring 
after 1998; the inflation-adjusted amount for 2001 is 
$1,060,000) in taxable value of a closely-held business. The 
interest rate applicable to the amount of estate tax 
attributable to the taxable value of the closely-held business 
in excess of $1 million is equal to 45 percent of the rate 
applicable to underpayments of tax under section 6621 (i.e., 45 
percent of the Federal short-term rate plus 3 percentage 
points). Interest paid on deferred estate taxes is not 
deductible for estate or income tax purposes.
---------------------------------------------------------------------------
    \54\ For example, assume estate tax is due in 2001. If interest 
only is paid each year for the first five years (2001 through 2005), 
and if 10 installments of both principal and interest are paid for the 
10 years thereafter (2006 through 2015), then payment of estate tax 
would be extended by 14 years from the original due date of 2001.
---------------------------------------------------------------------------
      For purposes of these rules, an interest in a closely-
held business is: (1) an interest as a proprietor in a sole 
proprietorship, (2) an interest as a partner in a partnership 
carrying on a trade or business if 20 percent or more of the 
total capital interest of such partnership is included in the 
decedent's gross estate or the partnership had 15 or fewer 
partners, and (3) stock in a corporation carrying on a trade or 
business if 20 percent or more of the value of the voting stock 
of the corporation is included in the decedent's gross estate 
or such corporation had 15 or fewer shareholders. The decedent 
may own the interest directly or, in certain cases, ownership 
may be indirect, through a holding company. If ownership is 
through a holding company, the stock must be non-readily 
tradable. If stock in a holding company is treated as business 
company stock for purposes of the installment payment 
provisions, the five-year deferral for principal and the 2-
percent interest rate do not apply. The value of any interest 
in a closely-held business does not include the value of that 
portion of such interest attributable to passive assets held by 
such business.

                               HOUSE BILL

      No provision. However, H.R. 8, as passed by the House, 
expands the definition of a closely-held business for purposes 
of installment payment of estate tax. The bill increases from 
15 to 45 the number of partners in a partnership and 
shareholders in a corporation that is considered a closely-held 
business in which a decedent held an interest, and thus will 
qualify the estate for installment payment of estate tax.
      Effective date.--The provision is effective for decedents 
dying after December 31, 2001.

                            SENATE AMENDMENT

      The Senate amendment expands availability of the 
installment payment provisions by providing that an estate of a 
decedent with an interest in a qualifying lending and financing 
business is eligible for installment payment of the estate tax. 
The bill also provides that an estate with an interest in a 
qualifying lending and financing business that claims 
installment payment of estate tax must make installment 
payments of estate tax (which will include both principal and 
interest) relating to the interest in a qualifying lending and 
financing business over five years.
      The Senate amendment also clarifies that the installment 
payment provisions require that only the stock of holding 
companies, not that of operating subsidiaries, must be non-
readily tradable in order to qualify for installment payment of 
the estate tax. The bill also provides that an estate with a 
qualifying property interest held through holding companies 
that claims installment payment of estate tax must make all 
installment payments of estate tax (which will include both 
principal and interest) relating to a qualifying property 
interest held through holding companies over five years.
      Effective date.--The provision is effective for decedents 
dying after December 31, 2001.

                          CONFERENCE AGREEMENT

      The conference agreement includes the provision in H.R. 8 
and the provisions in the Senate amendment.
      No inference is intended as to whether one or more of the 
specified activities of a qualified lending and financing 
business would be a trade or business eligible for installment 
payment of estate tax under present law.

   VI. PENSION AND INDIVIDUAL RETIREMENT ARRANGEMENT PROVISIONS \55\
---------------------------------------------------------------------------

    \55\ The provisions of the bill as passed by the House did not 
contain provisions relating to pensions and individual retirement 
arrangements. Provisions described under the House bill refer to the 
provisions of H.R. 10, the ``Comprehensive Retirement Security and 
Pension Reform Act of 2001,'' as passed by the House.
---------------------------------------------------------------------------

A. Individual Retirement Arrangements (``IRAs'') (Sec. 101 of the House 
  bill, Secs. 601-603 of the Senate amendment and Secs. 219, 408, and 
                           408A of the Code)

                              PRESENT LAW

In general
      There are two general types of individual retirement 
arrangements (``IRAs'') under present law: traditional IRAs, to 
which both deductible and nondeductible contributions may be 
made, and Roth IRAs. The Federal income tax rules regarding 
each type of IRA (and IRA contribution) differ.
Traditional IRAs
      Under present law, an individual may make deductible 
contributions to an IRA up to the lesser of $2,000 or the 
individual's compensation if neither the individual nor the 
individual's spouse is an active participant in an employer-
sponsored retirement plan. In the case of a married couple, 
deductible IRA contributions of up to $2,000 can be made for 
each spouse (including, for example, a homemaker who does not 
work outside the home), if the combined compensation of both 
spouses is at least equal to the contributed amount. If the 
individual (or the individual's spouse) is an active 
participant in an employer-sponsored retirement plan, the 
$2,000 deduction limit is phased out for taxpayers with 
adjusted gross income (``AGI'') over certain levels for the 
taxable year.
      The AGI phase-out limits for taxpayers who are active 
participants in employer-sponsored plans are as follows.

Single Taxpayers

        Taxable years beginning in:                      Phase-out range
2001....................................................  $33,000-43,000
2002....................................................   34,000-44,000
2003....................................................   40,000-50,000
2004....................................................   45,000-55,000
2005 and thereafter.....................................   50,000-60,000

Joint Returns

        Taxable years beginning in:                      Phase-out range
2001....................................................  $53,000-63,000
2002....................................................   54,000-64,000
2003....................................................   60,000-70,000
2004....................................................   65,000-75,000
2005....................................................   70,000-80,000
2006....................................................   75,000-85,000
2007 and thereafter.....................................  80,000-100,000

      The AGI phase-out range for married taxpayers filing a 
separate return is $0 to $10,000.
      If the individual is not an active participant in an 
employer-sponsored retirement plan, but the individual's spouse 
is, the $2,000 deduction limit is phased out for taxpayers with 
AGI between $150,000 and $160,000.
      To the extent an individual cannot or does not make 
deductible contributions to an IRA or contributions to a Roth 
IRA, the individual may make nondeductible contributions to a 
traditional IRA.
      Amounts held in a traditional IRA are includible in 
income when withdrawn (except to the extent the withdrawal is a 
return of nondeductible contributions). Includible amounts 
withdrawn prior to attainment of age 59\1/2\ are subject to an 
additional 10-percent early withdrawal tax, unless the 
withdrawal is due to death or disability, is made in the form 
of certain periodic payments, is used to pay medical expenses 
in excess of 7.5 percent of AGI, is used to purchase health 
insurance of an unemployed individual, is used for education 
expenses, or is used for first-time homebuyer expenses of up to 
$10,000.
Roth IRAs
      Individuals with AGI below certain levels may make 
nondeductible contributions to a Roth IRA. The maximum annual 
contribution that may be made to a Roth IRA is the lesser of 
$2,000 or the individual's compensation for the year. The 
contribution limit is reduced to the extent an individual makes 
contributions to any other IRA for the same taxable year. As 
under the rules relating to IRAs generally, a contribution of 
up to $2,000 for each spouse may be made to a Roth IRA provided 
the combined compensation of the spouses is at least equal to 
the contributed amount. The maximum annual contribution that 
can be made to a Roth IRA is phased out for single individuals 
with AGI between $95,000 and $110,000 and for joint filers with 
AGI between $150,000 and $160,000.
      Taxpayers with modified AGI of $100,000 or less generally 
may convert a traditional IRA into a Roth IRA. The amount 
converted is includible in income as if a withdrawal had been 
made, except that the 10-percent early withdrawal tax does not 
apply and, if the conversion occurred in 1998, the income 
inclusion may be spread ratably over four years. Married 
taxpayers who file separate returns cannot convert a 
traditional IRA into a Roth IRA.
      Amounts held in a Roth IRA that are withdrawn as a 
qualified distribution are not includible in income, or subject 
to the additional 10-percent tax on early withdrawals. A 
qualified distribution is a distribution that (1) is made after 
the five-taxable year period beginning with the first taxable 
year for which the individual made a contribution to a Roth 
IRA, and (2) which is made after attainment of age 59\1/2\, on 
account of death or disability, or is made for first-time 
homebuyer expenses of up to $10,000.
      Distributions from a Roth IRA that are not qualified 
distributions are includible in income to the extent 
attributable to earnings, and subject to the 10-percent early 
withdrawal tax (unless an exception applies).\56\ The same 
exceptions to the early withdrawal tax that apply to IRAs apply 
to Roth IRAs.
---------------------------------------------------------------------------
    \56\ Early distribution of converted amounts may also accelerate 
income inclusion of converted amounts that are taxable under the four-
year rule applicable to 1998 conversions.
---------------------------------------------------------------------------
Taxation of charitable contributions
      Generally, a taxpayer who itemizes deductions may deduct 
cash contributions to charity, as well as the fair market value 
of contributions of property. The amount of the deduction 
otherwise allowable for the taxable year with respect to a 
charitable contribution may be reduced, depending on the type 
of property contributed, the type of charitable organization to 
which the property is contributed, and the income of the 
taxpayer.
      For donations of cash by individuals, total deductible 
contributions to public charities may not exceed 50 percent of 
a taxpayer's adjusted gross income (``AGI'') for a taxable 
year. To the extent a taxpayer has not exceeded the 50-percent 
limitation, contributions of cash to private foundations and 
certain other nonprofit organizations and contributions of 
capital gain property to public charities generally may be 
deducted up to 30 percent of the taxpayer's AGI. If a taxpayer 
makes a contribution in one year that exceeds the applicable 
50-percent or 30-percent limitation, the excess amount of the 
contribution may be carried over and deducted during the next 
five taxable years.
      In addition to the percentage limitations imposed 
specifically on charitable contributions, present law imposes a 
reduction on most itemized deductions, including charitable 
contribution deductions, for taxpayers with adjusted gross 
income in excess of a threshold amount, which is adjusted 
annually for inflation. The threshold amount for 2001 is 
$132,950 ($66,475 for married individuals filing separate 
returns). For those deductions that are subject to the limit, 
the total amount of itemized deductions is reduced by three 
percent of AGI over the threshold amount, but not by more than 
80 percent of itemized deductions subject to the limit. The 
effect of this reduction may be to limit a taxpayer's ability 
to deduct some of his or her charitable contributions.

                               House Bill

Increase in annual contribution limits
      The House bill increases the maximum annual dollar 
contribution limit for IRA contributions from $2,000 to $3,000 
in 2002, $4,000 in 2003, and $5,000 in 2004. The limit is 
indexed in $500 increments in 2005 and thereafter.
Additional catch-up contributions
      The House bill accelerates the increase of the IRA 
maximum contribution limit for individuals who have attained 
age 50 before the end of the taxable year. The maximum dollar 
contribution limit (before application of the AGI phase-out 
limits) for such an individual is increased to $5,000 in 2002 
and 2003. In 2004 and thereafter, the general limit applies to 
all individuals.
Deemed IRAs under qualified plans
      No provision.
Tax-free IRA withdrawals for charitable purposes
      No provision.
      Effective date.--The provision is effective for taxable 
years beginning after December 31, 2001.

                            Senate Amendment

Increase in annual contribution limits
      The Senate amendment increases the maximum annual dollar 
contribution limit for IRA contributions from $2,000 to $2,500 
for 2002 through 2005, $3,000 for 2006 and 2007, $3,500 for 
2008 and 2009, $4,000 for 2010, and $5,000 for 2011. After 
2011, the limit is adjusted annually for inflation in $500 
increments.
Additional catch-up contributions
      The Senate amendment provides that individuals who have 
attained age 50 may make additional catch-up IRA contributions. 
The otherwise maximum contribution limit (before application of 
the AGI phase-out limits) for an individual who has attained 
age 50 before the end of the taxable year is increased by $500 
for 2002 through 2005, $1,000 for 2006 through 2009, $1,500 for 
2010, and $2,000 for 2011 and thereafter.
Deemed IRAs under employer plans
      The Senate amendment provides that, if an eligible 
retirement plan permits employees to make voluntary employee 
contributions to a separate account or annuity that (1) is 
establishedunder the plan, and (2) meets the requirements 
applicable to either traditional IRAs or Roth IRAs, then the separate 
account or annuity is deemed a traditional IRA or a Roth IRA, as 
applicable, for all purposes of the Code. For example, the reporting 
requirements applicable to IRAs apply. The deemed IRA, and 
contributions thereto, are not subject to the Code rules pertaining to 
the eligible retirement plan. In addition, the deemed IRA, and 
contributions thereto, are not taken into account in applying such 
rules to any other contributions under the plan. The deemed IRA, and 
contributions thereto, are subject to the exclusive benefit and 
fiduciary rules of ERISA to the extent otherwise applicable to the 
plan, and are not subject to the ERISA reporting and disclosure, 
participation, vesting, funding, and enforcement requirements 
applicable to the eligible retirement plan.\57\ An eligible retirement 
plan is a qualified plan (sec. 401(a)), tax-sheltered annuity (sec. 
403(b)), or a governmental section 457 plan.
---------------------------------------------------------------------------
    \57\ The Senate amendment does not specify the treatment of deemed 
IRAs for purposes other than the Code and ERISA.
---------------------------------------------------------------------------
Tax-free IRA withdrawals for charitable purposes
      The Senate amendment provides an exclusion from gross 
income for qualified charitable distributions from an IRA: (1) 
to a charitable organization (as described in sec. 170(c)) to 
which deductible contributions may be made; (2) to a charitable 
remainder annuity trust or charitable remainder unitrust; (3) 
to a pooled income fund (as defined in sec. 642(c)(5)); or (4) 
for the issuance of a charitable gift annuity. The exclusion 
applies with respect to distributions described in (2), (3), or 
(4) only if no person holds an income interest in the trust, 
fund, or annuity attributable to such distributions other than 
the IRA owner, his or her spouse, or a charitable organization.
      In determining the character of distributions from a 
charitable remainder annuity trust or a charitable remainder 
unitrust to which a qualified charitable distribution from an 
IRA is made, the charitable remainder trust is required to 
treat as ordinary income the portion of the distribution from 
the IRA to the trust which would have been includible in income 
but for the Senate amendment, and as corpus any remaining 
portion of the distribution. Similarly, in determining the 
amount includible in gross income by reason of a payment from a 
charitable gift annuity purchased with a qualified charitable 
distribution from an IRA, the taxpayer is not permitted to 
treat the portion of the distribution from the IRA that would 
have been taxable but for the Senate amendment and that is used 
to purchase the annuity as an investment in the annuity 
contract.
      A qualified charitable distribution is any distribution 
from an IRA that is made after age 70\1/2\, that qualifies as a 
charitable contribution (within the meaning of sec. 170(c)), 
and that is made directly to the charitable organization or to 
a charitable remainder annuity trust, charitable remainder 
unitrust, pooled income fund, or charitable gift annuity (as 
described above).\58\ A taxpayer is not permitted to claim a 
charitable contribution deduction for amounts transferred from 
his or her IRA to a charity or to a trust, fund, or annuity 
that, because of the Senate amendment, are excluded from the 
taxpayer's income. Conversely, if the amounts transferred are 
otherwise nontaxable, e.g., a qualified distribution from a 
Roth IRA, the regularly applicable deduction rules apply.
---------------------------------------------------------------------------
    \58\ It is intended that, in the case of transfer to a trust, fund, 
or annuity, the full amount distributed from an IRA will meet the 
definition of a qualified charitable distribution if the charitable 
organization's interest in the distribution would qualify as a 
charitable contribution under section 170.
---------------------------------------------------------------------------
      Effective date.--The Senate amendment is generally 
effective for taxable years beginning after December 31, 2001. 
The provision relating to deemed IRAs under employer plans is 
effective for plan years beginning after December 31, 2002. The 
provision relating to tax-free IRA withdrawals for charitable 
purposes is effective for taxable years beginning after 
December 31, 2009.

                          Conference Agreement

Increase in annual contribution limits
      The conference agreement increases the maximum annual 
dollar contribution limit for IRA contributions from $2,000 to 
$3,000 for 2002 through 2004, $4,000 for 2005 through 2007, and 
$5,000 for 2008. After 2008, the limit is adjusted annually for 
inflation in $500 increments.
Additional catch-up contributions
      The conference agreement provides that individuals who 
have attained age 50 may make additional catch-up IRA 
contributions. The otherwise maximum contribution limit (before 
application of the AGI phase-out limits) for an individual who 
has attained age 50 before the end of the taxable year is 
increased by $500 for 2002 through 2005, and $1,000 for 2006 
and thereafter.
Deemed IRAs under employer plans
      The conference agreement follows the Senate amendment.
Tax-free IRA withdrawals for charitable purposes
      The conference agreement does not include the Senate 
amendment.
      Effective date.--The conference agreement is generally 
effective for taxable years beginning after December 31, 2001. 
The provision relating to deemed IRAs under employer plans is 
effective for plan years beginning after December 31, 2002.

                         B. Pension Provisions

1. Expanding Coverage
            (a) Increase in benefit and contribution limits (secs. 201 
                    and 209 of the House bill, sec. 611 of the Senate 
                    amendment, and secs. 401(a)(17), 401(c)(2), 402(g), 
                    408(p), 415 and 457 of the Code)

                              present law

In general
      Present law imposes limits on contributions and benefits 
under qualified plans (sec. 415), the amount of compensation 
that may be taken into account under a plan for determining 
benefits (sec. 401(a)(17)), the amount of elective deferrals 
that an individual may make to a salary reduction plan or tax 
sheltered annuity (sec. 402(g)), and deferrals under an 
eligible deferred compensation plan of a tax-exempt 
organization or a State or local government (sec. 457).
Limitations on contributions and benefits
      Under present law, the limits on contributions and 
benefits under qualified plans are based on the type of plan. 
Under a defined contribution plan, the qualification rules 
limit the annual additions to the plan with respect to each 
plan participant to the lesser of (1) 25 percent of 
compensation or (2) $35,000 (for 2001). Annual additions are 
the sum of employer contributions, employee contributions, and 
forfeitures with respect to an individual under all defined 
contribution plans of the same employer. The $35,000 limit is 
indexed for cost-of-living adjustments in $5,000 increments.
      Under a defined benefit plan, the maximum annual benefit 
payable at retirement is generally the lesser of (1) 100 
percent of average compensation, or (2) $140,000 (for 2001). 
The dollar limit is adjusted for cost-of-living increases in 
$5,000 increments.
      Under present law, in general, the dollar limit on annual 
benefits is reduced if benefits under the plan begin before the 
social security retirement age (currently, age 65) and 
increased if benefits begin after social security retirement 
age.
Compensation limitation
      Under present law, the annual compensation of each 
participant that may be taken into account for purposes of 
determining contributions and benefits under a plan, applying 
the deduction rules, and for nondiscrimination testing purposes 
is limited to $170,000 (for 2001). The compensation limit is 
indexed for cost-of-living adjustments in $10,000 increments.
      In general, contributions to qualified plans and IRAs are 
based on compensation. For a self-employed individual, 
compensation generally means net earnings subject to self-
employment taxes (``SECA taxes''). Members of certain religious 
faiths may elect to be exempt from SECA taxes on religious 
grounds. Because the net earnings of such individuals are not 
subject to SECA taxes, these individuals are considered to have 
no compensation on which to base contributions to a retirement 
plan. Under an exception to this rule, net earnings of such 
individuals are treated as compensation for purposes of making 
contributions to an IRA.
Elective deferral limitations
      Under present law, under certain salary reduction 
arrangements, an employee may elect to have the employer make 
payments as contributions to a plan on behalf of the employee, 
or to the employee directly in cash. Contributions made at the 
election of the employee are called elective deferrals.
      The maximum annual amount of elective deferrals that an 
individual may make to a qualified cash or deferred arrangement 
(a ``section 401(k) plan''), a tax-sheltered annuity (``section 
403(b) annuity'') or a salary reduction simplified employee 
pension plan (``SEP'') is $10,500 (for 2001). The maximum 
annual amount of elective deferrals that an individual may make 
to a SIMPLE plan is $6,500 (for 2001). These limits are indexed 
for inflation in $500 increments.
Section 457 plans
      The maximum annual deferral under a deferred compensation 
plan of a State or local government or a tax-exempt 
organization (a ``section 457 plan'') is the lesser of (1) 
$8,500 (for 2001) or (2) 33\1/3\ percent of compensation. The 
$8,500 dollar limit is increased for inflation in $500 
increments. Under a special catch-up rule, the section 457 plan 
may provide that, for one or more of the participant's last 
three years before retirement, the otherwise applicable limit 
is increased to the lesser of (1) $15,000 or (2) the sum of the 
otherwise applicable limit for the year plus the amount by 
which the limit applicable in preceding years of participation 
exceeded the deferrals for that year.

                               house bill

Limits on contributions and benefits
      The House bill increases the $35,000 limit on annual 
additions to a defined contribution plan to $40,000. This 
amount is indexed in $1,000 increments.\59\
---------------------------------------------------------------------------
    \59\ The 25 percent of compensation limitation is increased to 100 
percent of compensation under another provision of the House bill.
---------------------------------------------------------------------------
      The House bill increases the $140,000 annual benefit 
limit under a defined benefit plan to $160,000. The dollar 
limit is reduced for benefit commencement before age 62 and 
increased for benefit commencement after age 65.\60\ In 
adopting rules regarding the application of the increase in the 
defined benefit plan limits under the House bill, it is 
intended that the Secretary will apply rules similar to those 
adopted in Notice 99-44 regarding benefit increases due to the 
repeal of the combined plan limit under former section 415(e). 
Thus, for example, a defined benefit plan could provide for 
benefit increases to reflect the provisions of the House bill 
for a current or former employee who has commenced benefits 
under the plan prior to the effective date of the bill if the 
employee or former employee has an accrued benefit under the 
plan (other than an accrued benefit resulting from a benefit 
increase solely as a result of the increases in the section 415 
limits under the bill). As under the notice, the maximum amount 
of permitted increase is generally the amount that could have 
been provided had the provisions of the House bill been in 
effect at the time of the commencement of benefit. In no case 
may benefits reflect increases that could not be paid prior to 
the effective date because of the limits in effect under 
present law. In addition, in no case may plan amendments 
providing increased benefits under the relevant provision of 
the House bill be effective prior to the effective date of the 
House bill.
---------------------------------------------------------------------------
    \60\ Another provision of the House bill modifies the defined 
benefit pension plan limits for multiemployer plans.
---------------------------------------------------------------------------
Compensation limitation
      The House bill increases the limit on compensation that 
may be taken into account under a plan to $200,000. This amount 
is indexed in $5,000 increments. The House bill also amends the 
definition of compensation for purposes of all qualified plans 
and IRAs (including SIMPLE arrangements) to include an 
individual's net earnings that would be subject to SECA taxes 
but for the fact that the individual is covered by a religious 
exemption.
Elective deferral limitations
      The House bill increases the dollar limit on annual 
elective deferrals under section 401(k) plans, section 403(b) 
annuities and salary reduction SEPs to $11,000 in 2002. In 2003 
and thereafter, the limits are increased in $1,000 annual 
increments until the limits reach $15,000 in 2006, with 
indexing in $500 increments thereafter. The House bill 
increases the maximum annual elective deferrals that may be 
made to a SIMPLE plan to $7,000 in 2002. In 2003 and 
thereafter, the SIMPLE plan deferral limit is increased in 
$1,000 annual increments until the limit reaches $10,000 in 
2005. Beginning after 2005, the $10,000 dollar limit is indexed 
in $500 increments.
Section 457 plans
      The House bill increases the dollar limit on deferrals 
under a section 457 plan to conform to the elective deferral 
limitation. Thus, the limit is $11,000 in 2002, and is 
increased in $1,000 annual increments thereafter until the 
limit reaches $15,000 in 2006. The limit is indexed thereafter 
in $500 increments. The limit is twice the otherwise applicable 
dollar limit in the three years prior to retirement.\61\
---------------------------------------------------------------------------
    \61\ Another provision of the House bill increases the 33\1/3\ 
percentage of compensation limit to 100 percent.
---------------------------------------------------------------------------
      Effective date.--The House bill is effective for years 
beginning after December 31, 2001.

                            senate amendment

Limits on contributions and benefits
      The Senate amendment provides faster annual adjusting for 
inflation of the $35,000 limit on annual additions to a defined 
contribution plan. Under the Senate amendment this limit amount 
is adjusted annually for inflation in $1,000 increments.\62\
---------------------------------------------------------------------------
    \62\ The 25 percent of compensation limitation is increased to 100 
percent of compensation under another provision of the Senate 
amendment.
---------------------------------------------------------------------------
      The Senate amendment increases the $140,000 annual 
benefit limit under a defined benefit plan to $150,000 for 2002 
through 2004 and to $160,000 for 2005 and thereafter. The 
dollar limit is reduced for benefit commencement before age 62 
and increased for benefit commencement after age 65.
Compensation limitation
      The Senate amendment increases the limit on compensation 
that may be taken into account under a plan to $180,000 for 
2002, $190,000 for 2003, and $200,000 for 2004 and 2005. After 
2005, this amount is adjusted annually for inflation in $5,000 
increments.
Elective deferral limitations
      In 2002, the Senate amendment increases the dollar limit 
on annual elective deferrals under section 401(k) plans, 
section 403(b) annuities, and salary reduction SEPs to $11,000. 
In 2003 and thereafter, the limits increase in $500 annual 
increments until the limits reach $15,000 in 2010, with annual 
adjustments for inflation in $500 increments thereafter. The 
Senate amendment increases the maximum annual elective 
deferrals that may be made to a SIMPLE plan to $7,000 for 2002 
and 2003, $8,000 for 2004 and 2005, $9,000 for 2006 and 2007, 
and $10,000 for 2008. After 2008, the $10,000 dollar limit is 
adjusted annually for inflation in $500 increments.
Section 457 plans
      The dollar limit on deferrals under a section 457 plan is 
increased to $9,000 in 2002, and is increased in $500 annual 
increments thereafter until the limit reaches $11,000 in 2006. 
Beginning in 2007, the limit is increased in $1,000 annual 
increments until it reaches $15,000 in 2010. After 2010, the 
limit is adjusted annually for inflation thereafter in $500 
increments. The limit is twice the otherwise applicable dollar 
limit in the three years prior to retirement.\63\
---------------------------------------------------------------------------
    \63\ Another provision increases the 33\1/3\ percentage of 
compensation limit to 100 percent.
---------------------------------------------------------------------------

                             effective date

      The Senate amendment is effective for years beginning 
after December 31, 2001.

                          conference agreement

Limits on contributions and benefits
      The conference agreement follows the House bill.
Compensation limitation
      The conference agreement follows the House bill.
Elective deferral limitations
      The conference agreement follows the House bill.
Section 457 plans
      The conference agreement follows the House bill.
      Effective date.--The conference agreement generally is 
effective for years beginning after December 31, 2001. The 
provisions relating to defined benefit plans are effective for 
years ending after December 31, 2001.
            (b) Plan loans for S corporation shareholders, partners, 
                    and sole proprietors (sec. 202 of the House bill, 
                    sec. 612 of the Senate amendment, and sec. 4975 of 
                    the Code)

                              present law

      The Internal Revenue Code prohibits certain transactions 
(``prohibited transactions'') between a qualified plan and a 
disqualified person in order to prevent persons with a close 
relationship to the qualified plan from using that relationship 
to the detriment of plan participants and beneficiaries.\64\ 
Certain types of transactions are exempted from the prohibited 
transaction rules, including loans from the plan to plan 
participants, if certain requirements are satisfied. In 
addition, the Secretary of Labor can grant an administrative 
exemption from the prohibited transaction rules if the 
Secretary finds the exemption is administratively feasible, in 
the interest of the plan and plan participants and 
beneficiaries, and protective of the rights of participants and 
beneficiaries of the plan. Pursuant to this exemption process, 
the Secretary of Labor grants exemptions both with respect to 
specific transactions and classes of transactions.
---------------------------------------------------------------------------
    \64\ Title I of the Employee Retirement Income Security Act of 
1974, as amended (``ERISA''), also contains prohibited transaction 
rules. The Code and ERISA provisions are substantially similar, 
although not identical.
---------------------------------------------------------------------------
      The statutory exemptions to the prohibited transaction 
rules do not apply to certain transactions in which the plan 
makes a loan to an owner-employee.\65\ Loans to participants 
other than owner-employees are permitted if loans are available 
to all participants on a reasonably equivalent basis, are not 
made available to highly compensated employees in an amount 
greater than made available to other employees, are made in 
accordance with specific provisions in the plan, bear a 
reasonable rate of interest, and are adequately secured. In 
addition, the Code places limits on the amount of loans and 
repayment terms.
---------------------------------------------------------------------------
    \65\ Certain transactions involving a plan and S corporation 
shareholders are permitted.
---------------------------------------------------------------------------
      For purposes of the prohibited transaction rules, an 
owner-employee means (1) a sole proprietor, (2) a partner who 
owns more than 10 percent of either the capital interest or the 
profits interest in the partnership, (3) an employee or officer 
of a Subchapter S corporation who owns more than five percent 
of the outstanding stock of the corporation, and (4) the owner 
of an individual retirement arrangement (``IRA''). The term 
owner-employee also includes certain family members of an 
owner-employee and certain corporations owned by an owner-
employee.
      Under the Internal Revenue Code, a two-tier excise tax is 
imposed on disqualified persons who engage in a prohibited 
transaction. The first level tax is equal to 15 percent of the 
amount involved in the transaction. The second level tax is 
imposed if the prohibited transaction is not corrected within a 
certain period, and is equal to 100 percent of the amount 
involved.

                               house bill

      The House bill generally eliminates the special present-
law rules relating to plan loans made to an owner-employee 
(other than the owner of an IRA). Thus, the general statutory 
exemption applies to such transactions. Present law continues 
to apply with respect to IRAs.
      Effective date.--The House bill is effective with respect 
to years beginning after December 31, 2001.

                            Senate Amendment

      The Senate amendment is the same as the House bill.

                          Conference Agreement

      The conference agreement follows the House bill and the 
Senate amendment. The conferees intend that the Secretary of 
the Treasury and the Secretary of Labor will waive any penalty 
or excise tax in situations where a loan made prior to the 
effective date of the provision was exempt when initially made 
(treating any refinancing as a new loan) and the loan would 
have been exempt throughout the period of the loan if the 
provision had been in effect during the period of the loan.
            (c) Modification of top-heavy rules (sec. 203 of the House 
                    bill, sec. 613 of the Senate amendment, and sec. 
                    416 of the Code)

                              Present Law

In general
      Under present law, additional qualification requirements 
apply to plans that primarily benefit an employer's key 
employees (``top-heavy plans''). These additional requirements 
provide (1) more rapid vesting for plan participants who are 
nonkey employees and (2) minimum nonintegrated employer 
contributions or benefits for plan participants who are non-key 
employees.
Definition of top-heavy plan
      A defined benefit plan is a top-heavy plan if more than 
60 percent of the cumulative accrued benefits under the plan 
are for key employees. A defined contribution plan is top heavy 
if the sum of the account balances of key employees is more 
than 60 percent of the total account balances under the plan. 
For each plan year, the determination of top-heavy status 
generally is made as of the last day of the preceding plan year 
(``the determination date'').
      For purposes of determining whether a plan is a top-heavy 
plan, benefits derived both from employer and employee 
contributions, including employee elective contributions, are 
taken into account. In addition, the accrued benefit of a 
participant in a defined benefit plan and the account balance 
of a participant in a defined contribution plan includes any 
amount distributed within the five-year period ending on the 
determination date.
      An individual's accrued benefit or account balance is not 
taken into account in determining whether a plan is top-heavy 
if the individual has not performed services for the employer 
during the five-year period ending on the determination date.
      In some cases, two or more plans of a single employer 
must be aggregated for purposes of determining whether the 
group of plans is top-heavy. The following plans must be 
aggregated: (1) plans which cover a key employee (including 
collectively bargained plans); and (2) any plan upon which a 
plan covering a key employee depends for purposes of satisfying 
the Code's nondiscrimination rules. The employer may be 
required to include terminated plans in the required 
aggregation group. In some circumstances, an employer may elect 
to aggregate plans for purposes of determining whether they are 
top heavy.
      SIMPLE plans are not subject to the top-heavy rules.
Definition of key employee
      A key employee is an employee who, during the plan year 
that ends on the determination date or any of the four 
preceding plan years, is (1) an officer earning over one-half 
of the defined benefit plan dollar limitation of section 415 
($70,000 for 2001), (2) a five-percent owner of the employer, 
(3) a one-percent owner of the employer earning over $150,000, 
or (4) one of the 10 employees earning more than the defined 
contribution plan dollar limit ($35,000 for 2001) with the 
largest ownership interests in the employer. A family ownership 
attribution rule applies to the determination of one-percent 
owner status, five-percent owner status, and largest ownership 
interest. Under this attribution rule, an individual is treated 
as owning stock owned by the individual's spouse, children, 
grandchildren, or parents.
Minimum benefit for non-key employees
      A minimum benefit generally must be provided to all non-
key employees in a top-heavy plan. In general, a top-heavy 
defined benefit plan must provide a minimum benefit equal to 
the lesser of (1) two percent of compensation multiplied by the 
employee's years of service, or (2) 20 percent of compensation. 
A top-heavy defined contribution plan must provide a minimum 
annual contribution equal to the lesser of (1) three percent of 
compensation, or (2) the percentage of compensation at which 
contributions were made for key employees (including employee 
elective contributions made by key employees and employer 
matching contributions).
      For purposes of the minimum benefit rules, only benefits 
derived from employer contributions (other than amounts 
employees have elected to defer) to the plan are taken into 
account, and an employee's social security benefits are 
disregarded (i.e., the minimum benefit is nonintegrated). 
Employer matching contributions may be used to satisfy the 
minimum contribution requirement; however, in such a case the 
contributions are not treated as matching contributions for 
purposes of applying the special nondiscrimination requirements 
applicable to employee elective contributions and matching 
contributions under sections 401(k) and (m). Thus, such 
contributions would have to meet the general nondiscrimination 
test of section 401(a)(4).\66\
---------------------------------------------------------------------------
    \66\ Treas. Reg. sec. 1.416-1 Q&A M-19.
---------------------------------------------------------------------------
Top-heavy vesting
      Benefits under a top-heavy plan must vest at least as 
rapidly as under one of the following schedules: (1) three-year 
cliff vesting, which provides for 100 percent vesting after 
three years of service; and (2) two-six year graduated vesting, 
which provides for 20 percent vesting after two years of 
service, and 20 percent more each year thereafter so that a 
participant is fully vested after six years of service.\67\
---------------------------------------------------------------------------
    \67\ Benefits under a plan that is not top heavy must vest at least 
as rapidly as under one of the following schedules: (1) five-year cliff 
vesting; and (2) three-seven year graded vesting, which provides for 20 
percent vesting after three years and 20 percent more each year 
thereafter so that a participant is fully vested after seven years of 
service.
---------------------------------------------------------------------------
Qualified cash or deferred arrangements
      Under a qualified cash or deferred arrangement (a 
``section 401(k) plan''), an employee may elect to have the 
employer make payments as contributions to a qualified plan on 
behalf of the employee, or to the employee directly in cash. 
Contributions made at the election of the employee are called 
elective deferrals. A special nondiscrimination test applies to 
elective deferrals under cash or deferred arrangements, which 
compares the elective deferrals of highly compensated employees 
with elective deferrals of nonhighly compensated employees. 
(This test is called the actual deferral percentage test or the 
``ADP'' test). Employer matching contributionsunder qualified 
defined contribution plans are also subject to a similar 
nondiscrimination test. (This test is called the actual contribution 
percentage test or the ``ACP'' test.)
      Under a design-based safe harbor, a cash or deferred 
arrangement is deemed to satisfy the ADP test if the plan 
satisfies one of two contribution requirements and satisfies a 
notice requirement. A plan satisfies the contribution 
requirement under the safe harbor rule for qualified cash or 
deferred arrangements if the employer either (1) satisfies a 
matching contribution requirement or (2) makes a nonelective 
contribution to a defined contribution plan of at least three 
percent of an employee's compensation on behalf of each 
nonhighly compensated employee who is eligible to participate 
in the arrangement without regard to the permitted disparity 
rules (sec. 401(1)). A plan satisfies the matching contribution 
requirement if, under the arrangement: (1) the employer makes a 
matching contribution on behalf of each nonhighly compensated 
employee that is equal to (a) 100 percent of the employee's 
elective deferrals up to three percent of compensation and (b) 
50 percent of the employee's elective deferrals from three to 
five percent of compensation; and (2), the rate of match with 
respect to any elective contribution for highly compensated 
employees is not greater than the rate of match for nonhighly 
compensated employees. Matching contributions that satisfy the 
design-based safe harbor for cash or deferred arrangements are 
deemed to satisfy the ACP test. Certain additional matching 
contributions are also deemed to satisfy the ACP test.

                               House Bill

Definition of top-heavy plan
      The House bill provides that a plan consisting of a cash-
or-deferred arrangement that satisfies the design-based safe 
harbor for such plans and matching contributions that satisfy 
the safe harbor rule for such contributions is not a top-heavy 
plan. Matching or nonelective contributions provided under such 
a plan may be taken into account in satisfying the minimum 
contribution requirements applicable to top-heavy plans.\68\
---------------------------------------------------------------------------
    \68\ This provision is not intended to preclude the use of 
nonelective contributions that are used to satisfy the safe harbor 
rules from being used to satisfy other qualified retirement plan 
nondiscrimination rules, including those involving cross-testing.
---------------------------------------------------------------------------
      In determining whether a plan is top-heavy, distributions 
during the year ending on the date the top-heavy determination 
is being made are taken into account. The present-law five-year 
rule applies with respect to in-service distributions. 
Similarly, the House bill provides that an individual's accrued 
benefit or account balance is not taken into account if the 
individual has not performed services for the employer during 
the one-year period ending on the date the top-heavy 
determination is being made.
Definition of key employee
      The House bill (1) provides that an employee is not 
considered a key employee by reason of officer status unless 
the employee earns more than $150,000 and (2) repeals the top-
10 owner key employee category. The House bill repeals the 
four-year lookback rule for determining key employee status and 
provides that an employee is a key employee only if he or she 
is a key employee during the preceding plan year.
      Thus, under the House bill, an employee is considered a 
key employee if, during the prior year, the employee was (1) an 
officer with compensation in excess of $150,000, (2) a five-
percent owner, or (3) a one-percent owner with compensation in 
excess of $150,000. The present-law limits on the number of 
officers treated as key employees under (1) continue to apply.
      The family ownership attribution rule no longer applies 
in determining whether an individual is a five-percent owner of 
the employer for purposes of the top-heavy rules only. The 
family ownership attribution rule continues to apply to other 
provisions that cross reference the top-heavy rules, such as 
the definition of highly compensated employee and the 
definition of one-percent owner under the top-heavy rules.
Minimum benefit for nonkey employees
      Under the House bill, matching contributions are taken 
into account in determining whether the minimum benefit 
requirement has been satisfied.\69\
---------------------------------------------------------------------------
    \69\ Thus, this provision overrides the provision in Treasury 
regulations that, if matching contributions are used to satisfy the 
minimum benefit requirement, then they are not treated as matching 
contributions for purposes of the section 401(m) nondiscrimination 
rules.
---------------------------------------------------------------------------
      The House bill provides that, in determining the minimum 
benefit required under a defined benefit plan, a year of 
service does not include any year in which no key employee or 
former key employee benefits under the plan (as determined 
under sec. 410).
      Effective date.--The House bill is effective for years 
beginning after December 31, 2001.

                            Senate Amendment

      The Senate amendment is the same as the House bill, with 
the following modifications.
      Under the Senate amendment, an employee is considered a 
key employee if, during the prior year, the employee was (1) an 
officer with compensation in excess of $85,000 (for 2001), (2) 
a five-percent owner, or (3) a one-percent owner with 
compensation in excess of $150,000. The present-law limits on 
the number of officers treated as key employees under (1) 
continue to apply. An employee who was not an employee in the 
preceding plan year, or who was an employee only for part of 
the year, is treated as a key employee if it can be reasonably 
anticipated that the employee will meet the definition of a key 
employee for the current plan year.
      Under the Senate amendment, the family ownership 
attribution rule continues to apply in determining whether an 
individual is a five-percent owner of the employer for purposes 
of thetop-heavy rules. In addition, the Senate amendment does 
not provide that a plan consisting of a cash-or-deferred arrangement 
that satisfies the design-based safe harbor for such plans and matching 
contributions that satisfy the safe harbor rule for such contributions 
is not a top-heavy plan.
      Effective date.--The Senate amendment is effective for 
years beginning after December 31, 2001.

                          Conference Agreement

      The conference agreement follows the House bill, with the 
following modifications.
      Under the conference agreement, an employee is considered 
a key employee if, during the prior year, the employee was (1) 
an officer with compensation in excess of $130,000 (adjusted 
for inflation in $5,000 increments), (2) a five-percent owner, 
or (3) a one-percent owner with compensation in excess of 
$150,000. The present-law limits on the number of officers 
treated as key employees under (1) continue to apply.
      Under the conference agreement, the family ownership 
attribution rule continues to apply in determining whether an 
individual is a five-percent owner of the employer for purposes 
of the top-heavy rules.
      Effective date.--The conference agreement is effective 
for years beginning after December 31, 2001.
            (d) Elective deferrals not taken into account for purposes 
                    of deduction limits (sec. 204 of the House bill, 
                    sec. 614 of the Senate amendment, and sec. 404 of 
                    the Code)

                              Present Law

      Employer contributions to one or more qualified 
retirement plans are deductible subject to certain limits. In 
general, the deduction limit depends on the kind of plan.
      In the case of a defined benefit pension plan or a money 
purchase pension plan, the employer generally may deduct the 
amount necessary to satisfy the minimum funding cost of the 
plan for the year. If a defined benefit pension plan has more 
than 100 participants, the maximum amount deductible is at 
least equal to the plan's unfunded current liabilities.
      In the case of a profit-sharing or stock bonus plan, the 
employer generally may deduct an amount equal to 15 percent of 
compensation of the employees covered by the plan for the year.
      If an employer sponsors both a defined benefit pension 
plan and a defined contribution plan that covers some of the 
same employees (or a money purchase pension plan and another 
kind of defined contribution plan), the total deduction for all 
plans for a plan year generally is limited to the greater of 
(1) 25 percent of compensation or (2) the contribution 
necessary to meet the minimum funding requirements of the 
defined benefit pension plan for the year (or the amount of the 
plan's unfunded current liabilities, in the case of a plan with 
more than 100 participants).
      For purposes of the deduction limits, employee elective 
deferral contributions to a section 401(k) plan are treated as 
employer contributions and, thus, are subject to the generally 
applicable deduction limits.
      Subject to certain exceptions, nondeductible 
contributions are subject to a 10-percent excise tax.

                               House Bill

      Under the House bill, elective deferral contributions are 
not subject to the deduction limits, and the application of a 
deduction limitation to any other employer contribution to a 
qualified retirement plan does not take into account elective 
deferral contributions.
      Effective date.--The House bill is effective for years 
beginning after December 31, 2001.

                            Senate Amendment

      The Senate amendment is the same as the House bill, with 
the following modification.
      Under the Senate amendment, the applicable percentage of 
elective deferral contributions is not subject to the deduction 
limits, and the application of a deduction limitation to any 
other employer contribution to a qualified retirement plan does 
not take into account the applicable percentage of elective 
deferral contributions. The applicable percentage is 25 percent 
for 2002 through 2010, and 100 percent for 2011 and thereafter.

                          Conference Agreement

      The conference agreement follows the House bill.
            (e) Repeal of coordination requirements for deferred 
                    compensation plans of state and local governments 
                    and tax-exempt organizations (sec. 205 of the House 
                    bill, sec. 615 of the Senate amendment, and sec. 
                    457 of the Code)

                              Present Law

      Compensation deferred under an eligible deferred 
compensation plan of a tax-exempt or State and local government 
employer (a ``section 457 plan'') is not includible in gross 
income until paid or made available. In general, the maximum 
permitted annual deferral under such a plan is the lesser of 
(1) $8,500 (in 2001) or (2) 33\1/3\ percent of compensation. 
The $8,500 limit is increased for inflation in $500 increments. 
Under a special catch-up rule, a section 457 plan may provide 
that, for one or more of the participant's last three years 
before retirement, the otherwise applicable limit is increased 
to the lesser of (1) $15,000 or (2) the sum of the otherwise 
applicable limit for the year plus the amount by which the 
limit applicable in preceding years of participation exceeded 
the deferrals for that year.
      The $8,500 limit (as modified under the catch-up rule), 
applies to all deferrals under all section 457 plans in which 
the individual participates. In addition, in applying the 
$8,500 limit, contributions under a tax-sheltered annuity 
(``section 403(b) annuity''), elective deferrals under a 
qualified cash or deferred arrangement (``section 401(k) 
plan''), salary reduction contributions under a simplified 
employee pension plan (``SEP''), and contributions under a 
SIMPLE plan are taken into account. Further, the amount 
deferred under a section 457 plan is taken into account in 
applying a special catch-up rule for section 403(b) annuities.

                               House Bill

      The House bill repeals the rules coordinating the section 
457 dollar limit with contributions under other types of 
plans.\70\
---------------------------------------------------------------------------
    \70\ The limits on deferrals under a section 457 plan are modified 
under other provisions of the House bill.
---------------------------------------------------------------------------
      Effective date.--The House bill is effective for years 
beginning after December 31, 2001.

                            Senate Amendment

      The Senate amendment is the same as the House bill.

                          Conference Agreement

      The conference agreement follows the House bill and the 
Senate amendment.
            (f) Eliminate IRS user fees for certain determination 
                    letter requests regarding employer plans (sec. 206 
                    of the House bill and sec. 621 of the Senate 
                    amendment)

                              Present Law

      An employer that maintains a retirement plan for the 
benefit of its employees may request from the IRS a 
determination as to whether the form of the plan satisfies the 
requirements applicable to tax-qualified plans (sec. 401(a)). 
In order to obtain from the IRS a determination letter on the 
qualified status of the plan, the employer must pay a user fee. 
The Secretary determines the user fee applicable for various 
types of requests, subject to statutory minimum requirements 
for average fees based on the category of the request. The user 
fee may range from $125 to $1,250, depending upon the scope of 
the request and the type and format of the plan.\71\
---------------------------------------------------------------------------
    \71\ Authorization for the user fees was originally enacted in 
section 10511 of the Revenue Act of 1987 (Pub. L. No. 100-203, December 
22, 1987). The authorization was extended through September 30, 2003, 
by Public Law Number 104-117 (An Act to provide that members of the 
Armed Forces performing services for the peacekeeping efforts in Bosnia 
and Herzegovina, Croatia, and Macedonia shall be entitled to tax 
benefits in the same manner as if such services were performed in a 
combat zone, and for other purposes (March 20, 1996)).
---------------------------------------------------------------------------
      Present law provides that plans that do not meet the 
qualification requirements will be treated as meeting such 
requirements if appropriate retroactive plan amendments are 
made during the remedial amendment period. In general, the 
remedial amendment period ends on the due date for the 
employer's tax return (including extensions) for the taxable 
year in which the event giving rise to the disqualifying 
provision occurred (e.g., a plan amendment or a change in the 
law). The Secretary may provide for general extensions of the 
remedial amendment period or for extensions in certain cases. 
For example, the remedial amendment period with respect to 
amendments relating to the qualification requirements affected 
by the General Agreements on Tariffs and Trade, the Uniformed 
Services Employment and Reemployment Rights Act of 1994, the 
Small Business Job Protection Act of 1996, the Taxpayer Relief 
Act of 1997, and the Internal Revenue Service Restructuring and 
Reform Act of 1998 generally ends the last day of the first 
plan year beginning on or after January 1, 2001.\72\
---------------------------------------------------------------------------
    \72\ Rev. Proc. 2000-27, 2000-26 I.R.B. 1272.
---------------------------------------------------------------------------

                               House Bill

      A small employer (100 or fewer employees) is not required 
to pay a user fee for a determination letter request with 
respect to the qualified status of a retirement plan that the 
employer maintains if the request is made before the later of 
(1) the last day of the fifth plan year of the plan or (2) the 
end of any applicable remedial amendment period with respect to 
the plan that begins before the end of the fifth plan year of 
the plan. In addition, determination letter requests for which 
user fees are not required under the House bill are not taken 
into account in determining average user fees. The House bill 
applies only to requests by employers for determination letters 
concerning the qualified retirement plans they maintain. 
Therefore, a sponsor of a prototype plan is required to pay a 
user fee for a request for a notification letter, opinion 
letter, or similar ruling. A small employer that adopts a 
prototype plan, however, is not required to pay a user fee for 
a determination letter request with respect to the employer's 
plan.
      Effective date.--The House bill is effective for 
determination letter requests made after December 31, 2001.

                            Senate Amendment

      The Senate amendment is the same as the House bill, with 
the following modifications. An eligible employer is not 
required to pay a user fee for a ruling letter, opinion letter, 
determination letter, or similar request with respect to the 
qualified status of a new retirement plan that the employer 
maintains and with respect to which the employer has not 
previously made a request. An employer is eligible under the 
Senate amendment if (1) the employer has no more than 100 
employees, (2) the employer has at least one nonhighly 
compensated employee who is participating in the plan, and (3) 
during the three-taxable year period immediately preceding the 
taxable year in which the request is made, neither the employer 
nor a related employer established or maintained a qualified 
plan with respect to which contributions were made or benefits 
were accrued for substantially the same employees covered under 
the plan with respect to which the request is made.

                          Conference Agreement

      The conference agreement follows the House bill, with the 
following modification. An employer is eligible under the 
conference agreement if the employer has no more than 100 
employees and has at least one nonhighly compensated employee 
who is participating in the plan.
            (g) Deduction limits (sec. 207 of the House bill, sec. 616 
                    of the Senate amendment, and sec. 404 of the Code)

                              Present Law

      Employer contributions to one or more qualified 
retirement plans are deductible subject to certain limits. In 
general, the deduction limit depends on the kind of plan. 
Subject to certain exceptions, nondeductible contributions are 
subject to a 10-percent excise tax.
      In the case of a defined benefit pension plan or a money 
purchase pension plan, the employer generally may deduct the 
amount necessary to satisfy the minimum funding cost of the 
plan for the year. If a defined benefit pension plan has more 
than 100 participants, the maximum amount deductible is at 
least equal to the plan's unfunded current liabilities.
      In some cases, the amount of deductible contributions is 
limited by compensation. In the case of a profit-sharing or 
stock bonus plan, the employer generally may deduct an amount 
equal to 15 percent of compensation of the employees covered by 
the plan for the year.
      If an employer sponsors both a defined benefit pension 
plan and a defined contribution plan that covers some of the 
same employees (or a money purchase pension plan and another 
kind of defined contribution plan), the total deduction for all 
plans for a plan year generally is limited to the greater of 
(1) 25 percent of compensation or (2) the contribution 
necessary to meet the minimum funding requirements of the 
defined benefit pension plan for the year (or the amount of the 
plan's unfunded current liabilities, in the case of a plan with 
more than 100 participants).
      In the case of an employee stock ownership plan 
(``ESOP''), principal payments on a loan used to acquire 
qualifying employer securities are deductible up to 25 percent 
of compensation.
      For purposes of the deduction limits, employee elective 
deferral contributions to a qualified cash or deferred 
arrangement (``section 401(k) plan'') are treated as employer 
contributions and, thus, are subject to the generally 
applicable deduction limits.\73\
---------------------------------------------------------------------------
    \73\ Another provision of the House bill provides that elective 
deferrals are not subject to the deduction limits.
---------------------------------------------------------------------------
      For purposes of the deduction limits, compensation means 
the compensation otherwise paid or accrued during the taxable 
year to the beneficiaries under the plan, and the beneficiaries 
under a profit-sharing or stock bonus plan are the employees 
who benefit under the plan with respect to the employer's 
contribution.\74\ An employee who is eligible to make elective 
deferrals under a section 401(k) plan is treated as benefitting 
under the arrangement even if the employee elects not to 
defer.\75\
---------------------------------------------------------------------------
    \74\ Rev. Rul. 65-295, 1965-2 C.B. 148.
    \75\ Treas. Reg. sec. 1.410(b)-3.
---------------------------------------------------------------------------
      For purposes of the deduction rules, compensation 
generally includes only taxable compensation, and thus does not 
include salary reduction amounts, such as elective deferrals 
under a section 401(k) plan or a tax-sheltered annuity 
(``section 403(b) annuity''), elective contributions under a 
deferred compensation plan of a tax-exempt organization or a 
State or local government (``section 457 plan''), and salary 
reduction contributions under a section 125 cafeteria plan. For 
purposes of the contribution limits under section 415, 
compensation does include such salary reduction amounts.

                               House Bill

      Under the House bill, the definition of compensation for 
purposes of the deduction rules includes salary reduction 
amounts treated as compensation under section 415. In addition, 
the annual limitation on the amount of deductible contributions 
to a profit-sharing or stock bonus plan is increased from 15 
percent to 20 percent of compensation of the employees covered 
by the plan for the year.
      Effective date.--The House bill is effective for years 
beginning after December 31, 2001.

                            Senate Amendment

      Under the Senate amendment, the definition of 
compensation for purposes of the deduction rules includes 
salary reduction amounts treated as compensation under section 
415. In addition, the annual limitation on the amount of 
deductible contributions to a profit-sharing or stock bonus 
plan is increased from 15 percent to 25 percent of compensation 
of the employees covered by the plan for the year. Also, except 
to the extent provided in regulations, a money purchase pension 
plan is treated like a profit-sharing or stock bonus plan for 
purposes of the deduction rules.
      Effective date.--The Senate amendment is effective for 
years beginning after December 31, 2001.

                          Conference Agreement

      The conference agreement follows the Senate amendment.
            (h) Option to treat elective deferrals as after-tax 
                    contributions (sec. 208 of the bill, sec. 617 of 
                    the Senate amendment, and new sec. 402A of the 
                    Code)

                              Present Law

      A qualified cash or deferred arrangement (``section 
401(k) plan'') or a tax-sheltered annuity (``section 403(b) 
annuity'') may permit a participant to elect to have the 
employer make payments as contributions to the plan or to the 
participant directly in cash. Contributions made to the plan at 
the election of a participant are elective deferrals. Elective 
deferrals must be nonforfeitable and are subject to an annual 
dollar limitation (sec. 402(g)) and distribution restrictions. 
In addition, elective deferrals under a section 401(k) plan are 
subject to special nondiscrimination rules. Elective deferrals 
(and earnings attributable thereto) are not includible in a 
participant's gross income until distributed from the plan.
      Elective deferrals for a taxable year that exceed the 
annual dollar limitation (``excess deferrals'') are includible 
in gross income for the taxable year. If an employee makes 
elective deferrals under a plan (or plans) of a single employer 
that exceed the annual dollar limitation (``excess 
deferrals''), then the plan may provide for the distribution of 
the excess deferrals, with earnings thereon. If the excess 
deferrals are made to more than one plan of unrelated 
employers, then the plan may permit the individual to allocate 
excess deferrals among the various plans, no later than the 
March 1 (April 15 under the applicable regulations) following 
the end of the taxable year. If excess deferrals are 
distributed not later than April 15 following the end of the 
taxable year, along with earnings attributable to the excess 
deferrals, then the excess deferrals are not again includible 
in income when distributed. The earnings are includible in 
income in the year distributed. If excess deferrals (and income 
thereon) are not distributed by the applicable April 15, then 
the excess deferrals (and income thereon) are includible in 
income when received by the participant. Thus, excess deferrals 
that are not distributed by the applicable April 15th are 
taxable both in the taxable year when the deferral was made and 
in the year the participant receives a distribution of the 
excess deferral.
      Individuals with adjusted gross income below certain 
levels generally may make nondeductible contributions to a Roth 
IRA and may convert a deductible or nondeductible IRA into a 
Roth IRA. Amounts held in a Roth IRA that are withdrawn as a 
qualified distribution are not includible in income, nor 
subject to the additional 10-percent tax on early withdrawals. 
A qualified distribution is a distribution that (1) is made 
after the five-taxable year period beginning with the first 
taxable year for which the individual made a contribution to a 
Roth IRA, and (2) is made after attainment of age 59\1/2\, is 
made on account of death or disability, or is a qualified 
special purpose distribution (i.e., for first-time homebuyer 
expenses of up to $10,000). A distribution from a Roth IRA that 
is not a qualified distribution is includible in income to the 
extent attributable to earnings, and is subject to the 10-
percent tax on early withdrawals (unless an exception 
applies).\76\
---------------------------------------------------------------------------
    \76\ Early distributions of converted amounts may also accelerate 
income inclusion of converted amounts that are taxable under the four-
year rule applicable to 1998 conversions.
---------------------------------------------------------------------------

                               House Bill

      A section 401(k) plan or a section 403(b) annuity is 
permitted to include a ``qualified plus contribution program'' 
that permits a participant to elect to have all or a portion of 
the participant's elective deferrals under the plan treated as 
designated plus contributions. Designated plus contributions 
are elective deferrals that the participant designates (at such 
time and in such manner as the Secretary may prescribe) \77\ as 
not excludable from the participant's gross income.
---------------------------------------------------------------------------
    \77\ It is intended that the Secretary will generally not permit 
retroactive designations of elective deferrals as designated plus 
contributions.
---------------------------------------------------------------------------
      The annual dollar limitation on a participant's 
designated plus contributions is the section 402(g) annual 
limitation on elective deferrals, reduced by the participant's 
elective deferrals that the participant does not designate as 
designated plus contributions. Designated plus contributions 
are treated as any other elective deferral for purposes of 
nonforfeitability requirements and distribution 
restrictions.\78\ Under a section 401(k) plan, designated plus 
contributions also are treated as any other elective deferral 
for purposes of the special nondiscrimination requirements.\79\
---------------------------------------------------------------------------
    \78\ Similarly, designated plus contributions to a section 403(b) 
annuity are treated the same as other salary reduction contributions to 
the annuity (except that designated plus contributions are includible 
in income).
    \79\ It is intended that the Secretary provide ordering rules 
regarding the return of excess contributions under the special 
nondiscrimination rules (pursuant to sec. 401(k)(8)) in the event a 
participant makes both regular elective deferrals and designated plus 
contributions. It is intended that such rules will generally permit a 
plan to allow participants to designate which contributions are 
returned first or to permit the plan to specify which contributions are 
returned first. It is also intended that the Secretary will provide 
ordering rules to determine the extent to which a distribution consists 
of excess Roth contributions.
---------------------------------------------------------------------------
      The plan is required to establish a separate account, and 
maintain separate recordkeeping, for a participant's designated 
plus contributions (and earnings allocable thereto). A 
qualified distribution from a participant's designated plus 
contributions account is not includible in the participant's 
gross income. A qualified distribution is a distribution that 
is made after the end of a specified nonexclusion period and 
that is (1) made on or after the date on which the participant 
attains age 59\1/2\, (2) made to a beneficiary (or to the 
estate of the participant) on or after the death of the 
participant, or (3) attributable to the participant's being 
disabled.\80\ The nonexclusion period is the five-year-taxable 
period beginning with the earlier of (1) the first taxable year 
for which the participant made a designated plus contribution 
to any designated plus contribution account established for the 
participant under the plan, or (2) if the participant has made 
a rollover contribution to the designated plus contribution 
account that is the source of the distribution from a 
designated plus contribution account established for the 
participant under another plan, the first taxable year for 
which the participant made a designated plus contribution to 
the previously established account.
---------------------------------------------------------------------------
    \80\ A qualified special purpose distribution, as defined under the 
rules relating to Roth IRAs, does not qualify as a tax-free 
distribution from a designated plus contributions account.
---------------------------------------------------------------------------
      A distribution from a designated plus contributions 
account that is a corrective distribution of an elective 
deferral (and income allocable thereto) that exceeds the 
section 402(g) annual limit on elective deferrals or a 
corrective distribution of an excess contribution under the 
special nondiscrimination rules (pursuant to sec. 401(k)(8) 
(and income allocable thereto) is not a qualified distribution. 
In addition, the treatment of excess designated plus 
contributions is similar to the treatment of excess deferrals 
attributable to non-designated plus contributions. If excess 
designated plus contributions (including earnings thereon) are 
distributed no later than the April 15th following the taxable 
year, then the designated plus contributions is not includible 
in gross income as a result of the distribution, because such 
contributions are includible in gross income when made. 
Earnings on such excess designated plus contributions are 
treated the same as earnings on excess deferrals distributed no 
later than April 15th, i.e., they are includible in income when 
distributed. If excess designated plus contributions are not 
distributed no later than the applicable April 15th, then such 
contributions (and earnings thereon) are taxable when 
distributed. Thus, as is the case with excess elective 
deferrals that are not distributed by the applicable April 
15th, the contributions are includible in income in the year 
when made and again when distributed from the plan. Earnings on 
such contributions are taxable when received.
      A participant is permitted to roll over a distribution 
from a designated plus contributions account only to another 
designated plus contributions account or a Roth IRA of the 
participant.
      The Secretary of the Treasury is directed to require the 
plan administrator of each section 401(k) plan or section 
403(b) annuity that permits participants to make designated 
plus contributions to make such returns and reports regarding 
designated plus contributions to the Secretary, plan 
participants and beneficiaries, and other persons that the 
Secretary may designate.
      Effective date.--The House bill is effective for taxable 
years beginning after December 31, 2001.

                            Senate Amendment

      The Senate amendment is the same as the House bill, 
except that the Senate amendment refers to designated plus 
contributions as ``Roth contributions.''
      Effective date.--The Senate amendment is effective for 
taxable years beginning after December 31, 2003.

                          Conference Agreement

      The conference agreement follows the Senate amendment, 
with a modification of the effective date.
      Effective date.--The conference agreement is effective 
for taxable years beginning after December 31, 2005.
            (i) Certain nonresident aliens excluded in applying minimum 
                    coverage requirements (sec. 210 of the House bill, 
                    sec. 622 of the Senate amendment, and secs. 
                    410(b)(3) and 861(a)(3) of the Code)

                              Present Law

      Under the minimum coverage requirements (sec. 410(b)), a 
qualified plan must benefit a minimum number of the employer's 
nonhighly compensated employees. In applying the minimum 
coverage requirements, employees who are nonresident aliens are 
disregarded if they have no earned income from sources within 
the United States (``U.S. source income'').
      Generally, compensation for services performed in the 
United States is treated as U.S. source income. Under a special 
rule, compensation is not treated as U.S. source income if the 
compensation is paid for labor or services performed by a 
nonresident alien in connection with the individual's temporary 
presence in the United States as a regular member of the crew 
of a foreign vessel engaged in transportation between the 
United States and a foreign country or a possession of the 
United States. However, this special rule does not apply for 
purposes of qualified retirement plans (including the minimum 
coverage and nondiscrimination requirements applicable to such 
plans), employer-provided group-term life insurance, or 
employer-provided accident and health plans. As a result, such 
compensation is treated as U.S. source income for purposes of 
such plans, including the application of the qualified 
retirement plan minimum coverage and nondiscrimination 
requirements. As a result, such nonresident aliens must be 
taken into account in determining whether the plan satisfies 
the minimum coverage requirements.

                               House Bill

      For purposes of the application of the minimum coverage 
requirements (sec. 410(b)), compensation is not treated as U.S. 
source income if the compensation is paid for labor or services 
performed by a nonresident alien in connection with the 
individual's temporary presence in the United States as a 
regular member of the crew of a foreign vessel engaged in 
transportation between the United States and a foreign country 
or a possession of the United States. As a result, such 
nonresident aliens are excluded from consideration in the 
application of the minimum coverage requirements.
      Effective date.--The House bill is effective with respect 
to plan years beginning after December 31, 2001.

                            Senate Amendment

      Under the Senate amendment, the special rule relating to 
compensation paid for labor or services performed by a 
nonresident alien in connection with the individual's temporary 
presence in the United States as a regular member of the crew 
of a foreign vessel engaged in transportation between the 
United States and a foreign country or a possession of the 
United States compensation is extended in order to apply for 
purposes of qualified retirement plans, employer-provided 
group-term life insurance, and employer-provided accident and 
health plans. Therefore, such compensation is not treated as 
U.S. source income for any purpose under such plans, including 
the application of the qualified retirement plan minimum 
coverage and nondiscrimination requirements.
      Effective date.--The Senate amendment is effective with 
respect to plan years beginning after December 31, 2001.

                          Conference Agreement

      The conference agreement follows the Senate amendment.
            (j) Nonrefundable credit to certain individuals for 
                    elective deferrals and IRA contributions (sec. 618 
                    of the Senate amendment and new sec. 25B of the 
                    Code)

                              Present Law

      Present law provides favorable tax treatment for a 
variety of retirement savings vehicles, including employer-
sponsored retirement plans and individual retirement 
arrangements (``IRAs'').
      Several different types of tax-favored employer-sponsored 
retirement plans exist, such as section 401(a) qualified plans 
(including plans with a section 401(k) qualified cash-or-
deferred arrangement), section 403(a) qualified annuity plans, 
section 403(b) annuities, section 408(k) simplified employee 
pensions (``SEPs''), section 408(p) SIMPLE retirement accounts, 
and section 457(b) eligible deferred compensation plans. In 
general, an employer and, in certain cases, employees, 
contribute to the plan. Taxation of the contributions and 
earnings thereon is generally deferred until benefits are 
distributed from the plan to participants or their 
beneficiaries.\81\ Contributions and benefits under tax-favored 
employer-sponsored retirement plans are subject to specific 
limitations.
---------------------------------------------------------------------------
    \81\ In the case of after-tax employee contributions, only earnings 
are taxed upon withdrawal.
---------------------------------------------------------------------------
      Coverage and nondiscrimination rules also generally apply 
to tax-favored employer-sponsored retirement plans to ensure 
that plans do not disproportionately cover higher-paid 
employees and that benefits provided to moderate- and lower-
paid employees are generally proportional to those provided to 
higher-paid employees.
      IRAs include both traditional IRAs and Roth IRAs. In 
general, an individual makes contributions to an IRA, and 
investment earnings on those contributions accumulate on a tax-
deferred basis. Total annual IRA contributions per individual 
are limited to $2,000 (or the compensation of the individual or 
the individual's spouse, if smaller). Contributions to a 
traditional IRA may be deducted from gross income if an 
individual's adjusted gross income (``AGI'') is below certain 
levels or the individual is not an active participant in 
certain employer-sponsored retirement plans. Contributions to a 
Roth IRA are not deductible from gross income, regardless of 
adjusted gross income. A distribution from a traditional IRA is 
includible in the individual's gross income except to the 
extent of individual contributions made on a nondeductible 
basis. A qualified distribution from a Roth IRA is excludable 
from gross income.
      Taxable distributions made from employer retirement plans 
and IRAs before the employee or individual has reached age 
59\1/2\ are subject to a 10-percent additional tax, unless an 
exception applies.

                               House Bill

      No provision.

                            Senate Amendment

      The Senate amendment provides a temporary nonrefundable 
tax credit for contributions made by eligible taxpayers to a 
qualified plan. The maximum annual contribution eligible for 
the credit is $2,000. The credit rate depends on the adjusted 
gross income (``AGI'') of the taxpayer. Only joint returns with 
AGI of $50,000 or less, head of household returns of $37,500 or 
less, and single returns of $25,000 or less are eligible for 
the credit. The AGI limits applicable to single taxpayers apply 
to married taxpayers filing separate returns. The credit is in 
addition to any deduction or exclusion that would otherwise 
apply with respect to the contribution. The credit offsets 
minimum tax liability as well as regular tax liability. The 
credit is available to individuals who are 18 or over, other 
than individuals who are full-time students or claimed as a 
dependent on another taxpayer's return.
      The credit is available with respect to elective 
contributions to a section 401(k) plan, section 403(b) annuity, 
or eligible deferred compensation arrangement of a State or 
local government (a ``sec. 457 plan''), SIMPLE, or SEP, 
contributions to a traditional or Roth IRA, and voluntary 
after-tax employee contributions to a qualified retirement 
plan. The present-law rules governing such contributions 
continue to apply.
      The amount of any contribution eligible for the credit is 
reduced by taxable distributions received by the taxpayer and 
his or her spouse from any savings arrangement described above 
or any other qualified retirement plan during the taxable year 
for which the credit is claimed, the two taxable years prior to 
the year the credit is claimed, and during the period after the 
end of the taxable year and prior to the due date for filing 
the taxpayer's return for the year. In the case of a 
distribution from a Roth IRA, this rule applies to any such 
distributions, whether or not taxable.
      The credit rates based on AGI are as follows.

------------------------------------------------------------------------
                         Heads of
   Joint filers         households       All other filers    Credit rate
------------------------------------------------------------------------
        $0-$30,000          $0-$22,500          $0-$15,000    50 percent
   $30,000-$32,500     $22,500-$24,375     $15,000-$16,250    20 percent
   $32,500-$50,000     $24,375-$37,500     $16,250-$25,000    10 percent
      Over $50,000        Over $37,500        Over $25,000     0 percent
------------------------------------------------------------------------

      The Senate amendment directs the Secretary of the 
Treasury to report annually to the Senate Finance Committee and 
the House Committee on Ways and Means regarding the number of 
individuals who claim the credit.
      Effective date.--The Senate amendment is effective for 
taxable years beginning after December 31, 2001, and before 
January 1, 2007.

                          Conference Agreement

      The conference agreement follows the Senate amendment.
            (k) Small business tax credit for qualified retirement plan 
                    contributions (sec. 619 of the Senate amendment and 
                    new sec. 45E of the Code)

                              Present Law

      The timing of an employer's deduction for compensation 
paid to an employee generally corresponds to the employee's 
recognition of the compensation. However, an employer that 
contributes to a qualified retirement plan is entitled to a 
deduction (within certain limits) for the employer's 
contribution to the plan on behalf of an employee even though 
the employee does not recognize income with respect to the 
contribution until the amount is distributed to the employee.

                               House Bill

      No provision.

                            Senate Amendment

      The Senate amendment provides a nonrefundable income tax 
credit for small employers equal to 50 percent of certain 
qualifying employer contributions made to qualified retirement 
plans on behalf of nonhighly compensated employees. The credit 
is not available with respect to contributions to a SIMPLE IRA 
or SEP. For purposes of the Senate amendment, a small employer 
means an employer with no more than 20 employees who received 
at least $5,000 of earnings in the preceding year. A nonhighly 
compensated employee is defined as an employee who neither (1) 
was a five-percent owner of the employer at any time during the 
current year or the preceding year, or (2) for the preceding 
year, had compensation in excess of $80,000 (adjusted annually 
for inflation, this amount is $85,000 for 2001).\82\ The credit 
is available for the first three plan years of the plan.\83\
---------------------------------------------------------------------------
    \82\ The top paid group election, which under present law permits 
an employer to classify an employee as a nonhighly compensated employee 
if the employee had compensation in excess of $80,000 (adjusted 
annually for inflation) during the preceding year but was not among the 
top 20 percent of employees of the employer when ranked on the basis of 
compensation paid to employees during the preceding year, is not taken 
into account in determining nonhighly compensated employees for 
purposes of the Senate amendment.
    \83\ The credit only applies if the employer has not had another 
qualified retirement plan in the prior three taxable years with respect 
to which contributions or accruals were made for substantially the same 
employees. It is intended that a plan will be for substantially the 
same employees if half or more of the employees for whom contributions 
or accruals are made under the new plan are employees for whom 
contributions or accruals were made under a prior plan.
---------------------------------------------------------------------------
      The Senate amendment requires a small employer to make 
nonelective contributions equal to at least one percent of 
compensation to qualify for the credit. The credit applies to 
both qualifying nonelective employer contributions and 
qualifying employer matching contributions, but only up to a 
total of three percent of the nonhighly compensated employee's 
compensation. The credit is available for 50 percent of 
qualifying benefit accruals under a nonintegrated defined 
benefit plan if the benefits are equivalent, as defined in 
regulations, to a three-percent nonelective contribution to a 
defined contribution plan.
      To qualify for the credit, the nonelective and matching 
contributions to a defined contribution plan and the benefit 
accruals under a defined benefit plan are required to vest at 
least as rapidly as under either a three-year cliff vesting 
schedule or a graded schedule that provides 20-percent vesting 
per year for the first five years. In order to qualify for the 
credit, contributions to plans other than pension plans must be 
subject to the same distribution restrictions that apply to 
qualified nonelective employer contributions to a section 
401(k) plan, i.e., distribution only upon separation from 
service, death, disability, attainment of age 59\1/2\, plan 
termination without a successor plan, or acquisition of a 
subsidiary or substantially all the assets of a trade or 
business that employs the participant.\84\ Qualifying 
contributions to pension plans are subject to the distribution 
restrictions applicable to such plans.
---------------------------------------------------------------------------
    \84\ The rules relating to distribution upon separation from 
service are modified under another provision of the Senate amendment.
---------------------------------------------------------------------------
      A defined contribution plan to which the small employer 
makes the qualifying contributions (and any plan aggregated 
with that plan for nondiscrimination testing purposes) is 
required to allocate any nonelective employer contributions 
proportionally to participants' compensation from the employer 
(or on a flat-dollar basis) and, accordingly, without the use 
of permitted disparity or cross-testing. An equivalent 
requirement must be met with respect to a defined benefit plan.
      Forfeited nonvested qualifying contributions or accruals 
for which the credit was claimed generally result in recapture 
of the credit at a rate of 35 percent. However, recapture does 
not apply to the extent that forfeitures of contributions are 
reallocated to nonhighly compensated employees or applied to 
future contributions on behalf of nonhighly compensated 
employees. The Secretary of the Treasury is authorized to issue 
administrative guidance, including de minimis rules, to 
simplify or facilitate claiming and recapturing the credit.
      The credit is a general business credit.\85\ The 50 
percent of qualifying contributions that are effectively offset 
by the tax credit are not deductible; the other 50 percent of 
the qualifying contributions (and other contributions) are 
deductible to the extent permitted under present law.
---------------------------------------------------------------------------
    \85\ The credit cannot be carried back to years before the 
effective date.
---------------------------------------------------------------------------
      Effective date.--The Senate amendment is effective with 
respect to contributions paid or incurred in taxable years 
beginning after December 31, 2002.

                          Conference Agreement

      The conference agreement does not include the Senate 
amendment.
            (l) Small business tax credit for new retirement plan 
                    expenses (sec. 620 of the Senate amendment and new 
                    sec. 45E of the Code)

                              present law

      The costs incurred by an employer related to the 
establishment and maintenance of a retirement plan (e.g., 
payroll system changes, investment vehicle set-up fees, 
consulting fees) generally are deductible by the employer as 
ordinary and necessary expenses in carrying on a trade or 
business.

                               house bill

      No provision.

                            senate amendment

      The Senate amendment provides a nonrefundable income tax 
credit for 50 percent of the administrative and retirement-
education expenses for any small business that adopts a new 
qualified defined benefit or defined contribution plan 
(including a section 401(k) plan), SIMPLE plan, or simplified 
employee pension (``SEP''). The credit applies to 50 percent of 
the first $1,000 in administrative and retirement-education 
expenses for the plan for each of the first three years of the 
plan.
      The credit is available to an employer that did not 
employ, in the preceding year, more than 100 employees with 
compensation in excess of $5,000. In order for an employer to 
be eligible for the credit, the plan must cover at least one 
nonhighly compensated employee. In addition, if the credit is 
for the cost of a payroll deduction IRA arrangement, the 
arrangement must be made available to all employees of the 
employer who have worked with the employer for at least three 
months.
      The credit is a general business credit.\86\ The 50 
percent of qualifying expenses that are effectively offset by 
the tax credit are not deductible; the other 50 percent of the 
qualifying expenses (and other expenses) are deductible to the 
extent permitted under present law.
---------------------------------------------------------------------------
    \86\ The credit cannot be carried back to years before the 
effective date.
---------------------------------------------------------------------------
      Effective date.--The Senate amendment is effective with 
respect to costs paid or incurred in taxable years beginning 
after December 31, 2001, with respect to plans established 
after such date.

                          conference agreement

      The conference agreement follows the Senate amendment.
2. Enhancing Fairness for Women
            (a) Additional salary reduction catch-up contributions 
                    (sec. 301 of the House bill, sec. 631 of the Senate 
                    amendment, and sec. 414 of the Code)

                              present law

Elective deferral limitations
      Under present law, under certain salary reduction 
arrangements, an employee may elect to have the employer make 
payments as contributions to a plan on behalf of the employee, 
or to the employee directly in cash. Contributions made at the 
election of the employee are called elective deferrals.
      The maximum annual amount of elective deferrals that an 
individual may make to a qualified cash or deferred arrangement 
(a ``401(k) plan''), a tax-sheltered annuity (``section 403(b) 
annuity'') or a salary reduction simplified employee pension 
plan (``SEP'') is $10,500 (for 2001). The maximum annual amount 
of elective deferrals that an individual may make to a SIMPLE 
plan is $6,500 (for 2001). These limits are indexed for 
inflation in $500 increments.
Section 457 plans
      The maximum annual deferral under a deferred compensation 
plan of a State or local government or a tax-exempt 
organization (a ``section 457 plan'') is the lesser of (1) 
$8,500 (for 2001) or (2) 33\1/3\ percent of compensation. The 
$8,500 dollar limit is increased for inflation in $500 
increments. Under a special catch-up rule, the section 457 plan 
may provide that, for one or more of the participant's last 
three years before retirement, the otherwise applicable limit 
is increased to the lesser of (1) $15,000 or (2) the sum of the 
otherwise applicable limit for the year plus the amount by 
which the limit applicable in preceding years of participation 
exceeded the deferrals for that year.

                               house bill

      The House bill provides that the otherwise applicable 
dollar limit on elective deferrals under a section 401(k) plan, 
section 403(b) annuity, SEP, or SIMPLE, or deferrals under a 
section 457 plan are increased for individuals who have 
attained age 50 by the end of the year.\87\ Additional 
contributions are permitted by an individual who has attained 
age 50 before the end of the plan year and with respect to whom 
no other elective deferrals may otherwise be made to the plan 
for the year because of the application of any limitation of 
the Code (e.g., the annual limit on elective deferrals) or of 
the plan. Under the House bill, the additional amount of 
elective contributions that are permitted to be made by an 
eligible individual participating in such a plan is the lesser 
of (1) $5,000, or (2) the participant's compensation for the 
year reduced by any other elective deferrals of the participant 
for the year. This $5,000 amount is indexed for inflation in 
$500 increments in 2007 and thereafter.\88\
---------------------------------------------------------------------------
    \87\ Another provision of the House bill increases the dollar limit 
on elective deferrals under such arrangements.
    \88\ In the case of a section 457 plans, this catch-up rule does 
not apply during the participant's last three years before retirement 
(in those years, the regularly applicable dollar limit is doubled).
---------------------------------------------------------------------------
      Catch-up contributions made under the House bill are not 
subject to any other contribution limits and are not taken into 
account in applying other contribution limits. Such 
contributions are subject to applicable nondiscrimination 
rules. Although catch-up contributions are subject to 
applicable nondiscrimination rules, a plan does not fail to 
meet the applicable nondiscrimination requirements under 
section 401(a)(4) with respect to benefits, rights, and 
features if the plan allows all eligible individuals 
participating in the plan to make the same election with 
respect to catch-up contributions. For purposes of this rule, 
all plans of related employers are treated as a single plan.
      An employer is permitted to make matching contributions 
with respect to catch-up contributions. Any such matching 
contributions are subject to the normally applicable rules.
      Effective date.--The House bill is effective for taxable 
years beginning after December 31, 2001.

                            senate amendment

      The Senate amendment provides that the otherwise 
applicable dollar limit on elective deferrals under a section 
401(k) plan, section 403(b) annuity, SEP, or SIMPLE, or 
deferrals under a section 457 plan is increased for individuals 
who have attained age 50 by the end of the year.\89\ Additional 
contributions could be made by an individual who has attained 
age 50 before the end of the plan year and with respect to whom 
no other elective deferrals may otherwise be made to the plan 
for the year because of the application of any limitation of 
the Code (e.g., the annual limit on elective deferrals) or of 
the plan. Under the Senate amendment, the additional amount of 
elective contributions that could be made by an eligible 
individual participating in such a plan is the lesser of (1) 
the applicable dollar amount or (2) the participant's 
compensation for the year reduced by any other elective 
deferrals of the participant for the year.\90\ The applicable 
dollar amount is $500 for 2002 through 2004, $1,000 for 2005 
and 2006, $2,000 for 2007, $3,000 for 2008, $4,000 for 2009, 
and $7,500 for 2010 and thereafter.
---------------------------------------------------------------------------
    \89\ Another provision of the Senate amendment increases the dollar 
limit on elective deferrals under such arrangements.
    \90\ In the case of a section 457 plan, this catch-up rule does not 
apply during the participant's last three years before retirement (in 
those years, the regularly applicable dollar limit is doubled).
---------------------------------------------------------------------------
      Catch-up contributions made under the Senate amendment 
are not subject to any other contribution limits and are not 
taken into account in applying other contribution limits. In 
addition, such contributions are not subject to applicable 
nondiscrimination rules.\91\
---------------------------------------------------------------------------
    \91\ Another provision increases the dollar limit on elective 
deferrals under such arrangements.
---------------------------------------------------------------------------
      An employer is permitted to make matching contributions 
with respect to catch-up contributions. Any such matching 
contributions are subject to the normally applicable rules.
      The following examples illustrate the application of the 
Senate amendment, after the catch-up is fully phased-in.
      Example 1: Employee A is a highly compensated employee 
who is over 50 and who participates in a section 401(k) plan 
sponsored by A's employer. The maximum annual deferral limit 
(without regard to the provision) is $15,000. After application 
of the special nondiscrimination rules applicable to section 
401(k) plans, the maximum elective deferral A may make for the 
year is $8,000. Under the provision, A is able to make 
additional catch-up salary reduction contributions of $7,500.
      Example 2: Employee B, who is over 50, is a participant 
in a section 401(k) plan. B's compensation for the year is 
$30,000. The maximum annual deferral limit (without regard to 
the provision) is $15,000. Under the terms of the plan, the 
maximum permitted deferral is 10 percent of compensation or, in 
B's case, $3,000. Under the provision, B can contribute up to 
$10,500 for the year ($3,000 under the normal operation of the 
plan, and an additional $7,500 under the provision).
      Effective date.--The Senate amendment is effective for 
taxable years beginning after December 31, 2001.

                          conference agreement

      The conference agreement provides that the otherwise 
applicable dollar limit on elective deferrals under a section 
401(k) plan, section 403(b) annuity, SEP, or SIMPLE, or 
deferrals under a section 457 plan is increased for individuals 
who have attained age 50 by the end of the year.\92\ The catch-
up contribution provision does not apply to after-tax employee 
contributions. Additional contributions may be made by an 
individual who has attained age 50 before the end of the plan 
year and with respect to whom no other elective deferrals may 
otherwise be made to the plan for the year because of the 
application of any limitation of the Code (e.g., the annual 
limit on elective deferrals) or of the plan. Under the 
conference agreement, the additional amount of elective 
contributions that may be made by an eligible individual 
participating in such a plan is the lesser of (1) the 
applicable dollar amount or (2) the participant's compensation 
for the year reduced by any other elective deferrals of the 
participant for the year.\93\ The applicable dollar amount 
under a section 401(k) plan, section 403(b) annuity, SEP, or 
section 457 plan is $1,000 for 2002, $2,000 for 2003, $3,000 
for 2004, $4,000 for 2005, and $5,000 for 2006 and thereafter. 
The applicable dollar amount under a SIMPLE is $500 for 2002, 
$1,000 for 2003, $1,500 for 2004, $2,000 for 2005, and $2,500 
for 2006 and thereafter. The $5,000 and $2,500 amounts are 
adjusted for inflation in $500 increments in 2007 and 
thereafter.\94\
---------------------------------------------------------------------------
    \92\ Another provision of the conference agreement increases the 
dollar limit on elective deferrals under such arrangements.
    \93\ In the case of a section 457 plan, this catch-up rule does not 
apply during the participant's last three years before retirement (in 
those years, the regularly applicable dollar limit is doubled).
    \94\ In the case of a section 457 plans, this catch-up rule does 
not apply during the participant's last three years before retirement 
(in those years, the regularly applicable dollar limit is doubled).
---------------------------------------------------------------------------
      Catch-up contributions made under the conference 
agreement are not subject to any other contribution limits and 
are not taken into account in applying other contribution 
limits. In addition, such contributions are not subject to 
applicable nondiscrimination rules. However, a plan fails to 
meet the applicable nondiscrimination requirements under 
section 401(a)(4) with respect to benefits, rights, and 
features unless the plan allows all eligible individuals 
participating in the plan to make the same election with 
respect to catch-up contributions. For purposes of this rule, 
all plans of related employers are treated as a single plan.
      An employer is permitted to make matching contributions 
with respect to catch-up contributions. Any such matching 
contributions are subject to the normally applicable rules.
      The following examples illustrate the application of the 
conference agreement, after the catch-up is fully phased-in.
      Example 1: Employee A is a highly compensated employee 
who is over 50 and who participates in a section 401(k) plan 
sponsored by A's employer. The maximum annual deferral limit 
(without regard to the provision) is $15,000. After application 
of the special nondiscrimination rules applicable to section 
401(k) plans, the maximum elective deferral A may make for the 
year is $8,000. Under the provision, A is able to make 
additional catch-up salary reduction contributions of $5,000.
      Example 2: Employee B, who is over 50, is a participant 
in a section 401(k) plan. B's compensation for the year is 
$30,000. The maximum annual deferral limit (without regard to 
the provision) is $15,000. Under the terms of the plan, the 
maximum permitted deferral is 10 percent of compensation or, in 
B's case, $3,000. Under the provision, B can contribute up to 
$8,000 for the year ($3,000 under the normal operation of the 
plan, and an additional $5,000 under the provision).
      Effective date.--The Senate amendment is effective for 
taxable years beginning after December 31, 2001.
            (b) Equitable treatment for contributions of employees to 
                    defined contribution plans (sec. 302 of the House 
                    bill, sec. 632 of the Senate amendment, and secs. 
                    403(b), 415, and 457 of the Code)

                              Present Law

      Present law imposes limits on the contributions that may 
be made to tax-favored retirement plans.
Defined contribution plans
      In the case of a tax-qualified defined contribution plan, 
the limit on annual additions that can be made to the plan on 
behalf of an employee is the lesser of $35,000 (for 2001) or 25 
percent of the employee's compensation (sec. 415(c)). Annual 
additions include employer contributions, including 
contributions made at the election of the employee (i.e., 
employee elective deferrals), after-tax employee contributions, 
and any forfeitures allocated to the employee. For this 
purpose, compensation means taxable compensation of the 
employee, plus elective deferrals, and similar salary reduction 
contributions. A separate limit applies to benefits under a 
defined benefit plan.
      For years before January 1, 2000, an overall limit 
applied if an employee was a participant in both a defined 
contribution plan and a defined benefit plan of the same 
employer.
Tax-sheltered annuities
      In the case of a tax-sheltered annuity (a ``section 
403(b) annuity''), the annual contribution generally cannot 
exceed the lesser of the exclusion allowance or the section 
415(c) defined contribution limit. The exclusion allowance for 
a year is equal to 20 percent of the employee's includible 
compensation, multiplied by the employee's years of service, 
minus excludable contributions for prior years under qualified 
plans, tax-sheltered annuities or section 457 plans of the 
employer.
      In addition to this general rule, employees of nonprofit 
educational institutions, hospitals, home health service 
agencies, health and welfare service agencies, and churches may 
elect application of one of several special rules that increase 
the amount of the otherwise permitted contributions. The 
election of a special rule is irrevocable; an employee may not 
elect to have more than one special rule apply.
      Under one special rule, in the year the employee 
separates from service, the employee may elect to contribute up 
to the exclusion allowance, without regard to the 25 percent of 
compensation limit under section 415. Under this rule, the 
exclusion allowance is determined by taking into account no 
more than 10 years of service.
      Under a second special rule, the employee may contribute 
up to the lesser of: (1) the exclusion allowance; (2) 25 
percent of the participant's includible compensation; or (3) 
$15,000.
      Under a third special rule, the employee may elect to 
contribute up to the section 415(c) limit, without regard to 
the exclusion allowance. If this option is elected, then 
contributions to other plans of the employer are also taken 
into account in applying the limit.
      For purposes of determining the contribution limits 
applicable to section 403(b) annuities, includible compensation 
means the amount of compensation received from the employer for 
the most recent period which may be counted as a year of 
service under the exclusion allowance. In addition, includible 
compensation includes elective deferrals and similar salary 
reduction amounts.
      Treasury regulations include provisions regarding 
application of the exclusion allowance in cases where the 
employee participates in a section 403(b) annuity and a defined 
benefit plan. The Taxpayer Relief Act of 1997 directed the 
Secretary of the Treasury to revise these regulations, 
effective for years beginning after December 31, 1999, to 
reflect the repeal of the overall limit on contributions and 
benefits.
Section 457 plans
      Compensation deferred under an eligible deferred 
compensation plan of a tax-exempt or State and local 
governmental employer (a ``section 457 plan'') is not 
includible in gross income until paid or made available. In 
general, the maximum permitted annual deferral under such a 
plan is the lesser of (1) $8,500 (in 2001) or (2) 33\1/3\ 
percent of compensation. The $8,500 limit is increased for 
inflation in $500 increments.

                               House Bill

Increase in defined contribution plan limit
      The House bill increases the 25 percent of compensation 
limitation on annual additions under a defined contribution 
plan \95\ to 100 percent.\96\
---------------------------------------------------------------------------
    \95\ Another provision of the House bill increases the defined 
contribution plan dollar limit.
    \96\ The House bill preserves the present-law deduction rules for 
money purchase pension plans. Thus, for purposes of such rules, the 
limitation on the amount the employer generally may deduct is an amount 
equal to 25 percent of compensation of the employees covered by the 
plan for the year.
---------------------------------------------------------------------------
Conforming limits on tax-sheltered annuities
      The House bill repeals the exclusion allowance applicable 
to contributions to tax-sheltered annuities. Thus, such 
annuities are subject to the limits applicable to tax-qualified 
plans.
      The House bill also directs the Secretary of the Treasury 
to revise the regulations relating to the exclusion allowance 
under section 403(b)(2) to render void the requirement 
thatcontributions to a defined benefit plan be treated as previously 
excluded amounts for purposes of the exclusion allowance. For taxable 
years beginning after December 31, 1999, the regulatory provisions 
regarding the exclusion allowance are to be applied as if the 
requirement that contributions to a defined benefit plan be treated as 
previously excluded amounts for purposes of the exclusion allowance 
were void.
Section 457 plans
      The House bill increases the 33\1/3\ percent of 
compensation limitation on deferrals under a section 457 plan 
to 100 percent of compensation.
      Effective date.--The House bill generally is effective 
for years beginning after December 31, 2001. The provision 
regarding the regulations under section 403(b)(2) is effective 
on the date of enactment.

                            Senate Amendment

      The Senate amendment is the same as the House bill, with 
the following modifications.
      The Senate amendment increases the 25 percent of 
compensation limitation on annual additions under a defined 
contribution plan to 50 percent for 2002 through 2010, and 100 
percent for 2011 and thereafter.\97\ The Senate amendment 
increases the 33\1/3\ percent of compensation limitation on 
deferrals under a section 457 plan to 50 percent for 2002 
through 2010, and 100 percent for 2011 and thereafter.
---------------------------------------------------------------------------
    \97\ Another provision of the Senate amendment increases the 
defined contribution plan dollar limit.
---------------------------------------------------------------------------
      With respect to the direction to the Secretary of the 
Treasury to revise the regulations relating to the exclusion 
allowance under section 403(b)(2) to render void the 
requirement that contributions to a defined benefit plan be 
treated as previously excluded amounts for purposes of the 
exclusion allowance, the regulatory provisions regarding the 
exclusion allowance are to be applied as if the requirement 
that contributions to a defined benefit plan be treated as 
previously excluded amounts for purposes of the exclusion 
allowance were void for taxable years beginning after December 
31, 2000.
      Effective date.--The Senate amendment generally is 
effective for years beginning after December 31, 2001. The 
provision regarding the regulations under section 403(b)(2) is 
effective on the date of enactment. The provision regarding the 
repeal of the exclusion allowance applicable to tax-sheltered 
annuities is effective for years beginning after December 31, 
2010.

                          Conference Agreement

      The conference agreement follows the House bill, with the 
following modifications.
      With respect to the increase in the defined contribution 
plan limit, the conferees intend that the Secretary of the 
Treasury will use the Secretary's existing authority to address 
situations where qualified nonelective contributions are 
targeted to certain participants with lower compensation in 
order to increase the average deferral percentage of nonhighly 
compensated employees.
      For taxable years beginning after December 31, 1999, a 
plan may disregard the requirement that contributions to a 
defined benefit plan be treated as previously excluded amounts 
for purposes of the exclusion allowance.
            (c) Faster vesting of employer matching contributions (sec. 
                    303 of the House bill, sec. 633 of the Senate 
                    amendment, and sec. 411 of the Code)

                              Present Law

      Under present law, a plan is not a qualified plan unless 
a participant's employer-provided benefit vests at least as 
rapidly as under one of two alternative minimum vesting 
schedules. A plan satisfies the first schedule if a participant 
acquires a nonforfeitable right to 100 percent of the 
participant's accrued benefit derived from employer 
contributions upon the completion of five years of service. A 
plan satisfies the second schedule if a participant has a 
nonforfeitable right to at least 20 percent of the 
participant's accrued benefit derived from employer 
contributions after three years of service, 40 percent after 
four years of service, 60 percent after five years of service, 
80 percent after six years of service, and 100 percent after 
seven years of service.\98\
---------------------------------------------------------------------------
    \98\ The minimum vesting requirements are also contained in Title I 
of ERISA.
---------------------------------------------------------------------------

                               House Bill

      The House bill applies faster vesting schedules to 
employer matching contributions. Under the House bill, employer 
matching contributions are required to vest at least as rapidly 
as under one of the following two alternative minimum vesting 
schedules. A plan satisfies the first schedule if a participant 
acquires a nonforfeitable right to 100 percent of employer 
matching contributions upon the completion of three years of 
service. A plan satisfies the second schedule if a participant 
has a nonforfeitable right to 20 percent of employer matching 
contributions for each year of service beginning with the 
participant's second year of service and ending with 100 
percent after six years of service.
      Effective date.--The House bill is effective for 
contributions for plan years beginning after December 31, 2001, 
with a delayed effective date for plans maintained pursuant to 
a collective bargaining agreement. The House bill does not 
apply to any employee until the employee has an hour of service 
after the effective date. In applying the new vesting schedule, 
service before the effective date is taken into account.

                            Senate Amendment

      The Senate amendment is the same as the House bill.

                          Conference Agreement

      The conference agreement follows the House bill and the 
Senate amendment.
            (d) Modifications to minimum distribution rules (sec. 304 
                    of the House bill, sec. 634 of the Senate 
                    amendment, and sec. 401(a)(9) of the Code)

                              Present Law

In general
      Minimum distribution rules apply to all types of tax-
favored retirement vehicles, including qualified plans, 
individual retirement arrangements (``IRAs''), tax-sheltered 
annuities (``section 403(b) annuities''), and eligible deferred 
compensation plans of tax-exempt and State and local government 
employers (``section 457 plans''). In general, under these 
rules, distribution of minimum benefits must begin no later 
than the required beginning date. Minimum distribution rules 
also apply to benefits payable with respect to a plan 
participant who has died. Failure to comply with the minimum 
distribution rules results in an excise tax imposed on the 
individual plan participant equal to 50 percent of the required 
minimum distribution not distributed for the year. The excise 
tax may be waived if the individual establishes to the 
satisfaction of the Commissioner that the shortfall in the 
amount distributed was due to reasonable error and reasonable 
steps are being taken to remedy the shortfall. Under certain 
circumstances following the death of a participant, the excise 
tax is automatically waived under proposed Treasury 
regulations.
Distributions prior to the death of the individual
      In the case of distributions prior to the death of the 
plan participant, the minimum distribution rules are satisfied 
if either (1) the participant's entire interest in the plan is 
distributed by the required beginning date, or (2) the 
participant's interest in the plan is to be distributed (in 
accordance with regulations), beginning not later than the 
required beginning date, over a permissible period. The 
permissible periods are (1) the life of the participant, (2) 
the lives of the participant and a designated beneficiary, (3) 
the life expectancy of the participant, or (4) the joint life 
and last survivor expectancy of the participant and a 
designated beneficiary. In calculating minimum required 
distributions, life expectancies of the participant and the 
participant's spouse may be recomputed annually.
      In the case of qualified plans, tax-sheltered annuities, 
and section 457 plans, the required beginning date is the April 
1 of the calendar year following the later of (1) the calendar 
year in which the employee attains age 70\1/2\ or (2) the 
calendar year in which the employee retires. However, in the 
case of a five-percent owner of the employer, distributions are 
required to begin no later than the April 1 of the calendar 
year following the year in which the five-percent owner attains 
age 70\1/2\. If commencement of benefits is delayed beyond age 
70\1/2\ from a defined benefit plan, then the accrued benefit 
of the employee must be actuarially increased to take into 
account the period after age 70\1/2\ in which the employee was 
not receiving benefits under the plan.\99\ In the case of 
distributions from an IRA other than a Roth IRA, the required 
beginning date is the April 1 of the calendar year following 
the calendar year in which the IRA owner attains age 70\1/2\. 
The pre-death minimum distribution rules do not apply to Roth 
IRAs.
---------------------------------------------------------------------------
    \99\ State and local government plans and church plans are not 
required to actuarially increase benefits that begin after age 70\1/2\.
---------------------------------------------------------------------------
      In general, under the proposed Treasury regulations, in 
order to satisfy the minimum distribution rules, annuity 
payments under a defined benefit plan must be paid in periodic 
payments made at intervals not longer than one year over a 
permissible period, and must be nonincreasing, or increase only 
as a result of the following: (1) cost-of-living adjustments; 
(2) cash refunds of employee contributions; (3) benefit 
increases under the plan; or (4) an adjustment due to death of 
the employee's beneficiary. In the case of a defined 
contribution plan, the minimum required distribution is 
determined by dividing the employee's benefit by an amount from 
the uniform table provided in the proposed regulations.
Distributions after the death of the plan participant
      The minimum distribution rules also apply to 
distributions to beneficiaries of deceased participants. In 
general, if the participant dies after minimum distributions 
have begun, the remaining interest must be distributed at least 
as rapidly as under the minimum distribution method being used 
as of the date of death. If the participant dies before minimum 
distributions have begun, then the entire remaining interest 
must generally be distributed within five years of the 
participant's death. The five-year rule does not apply if 
distributions begin within one year of the participant's death 
and are payable over the life of a designated beneficiary or 
over the life expectancy of a designated beneficiary. A 
surviving spouse beneficiary is not required to begin 
distribution until the date the deceased participant would have 
attained age 70\1/2\.

                               House Bill

Modification of post-death distribution rules
      The House bill applies the present-law rules applicable 
if the participant dies before distribution of minimum benefits 
has begun to all post-death distributions. Thus, in general, if 
the employee dies before his or her entire interest has been 
distributed, distribution of the remaining interest is required 
to be made within five years of the date of death, or begin 
within one year of the date of death and paid over the life or 
life expectancy of a designated beneficiary. In the case of a 
surviving spouse, distributions are not required to begin until 
April 1 of the calendar year following the calendar year in 
which the surviving spouse attains age 70\1/2\. The House bill 
includes a transition rule with respect to the provision 
providing that the required beginning date in the case of a 
surviving spouse is no earlier than the April 1 of the calendar 
year following the calendar year in which the surviving spouse 
attains age 70\1/2\. In the case of an individual who died 
before the date of enactment and prior to his or her required 
beginning date and whose beneficiary is the surviving spouse, 
minimum distributions to the surviving spouse are not required 
to begin earlier than the date distributions would have been 
required to begin under present law.
Reduction in excise tax
      The House bill reduces the excise tax on failures to 
satisfy the minimum distribution rules to 10 percent of the 
amount that was required to be distributed but was not 
distributed.
Treasury regulations
      The Treasury is directed to revise the life expectancy 
tables under the applicable regulations to reflect current life 
expectancy.
      Effective date.--In general, the House bill is effective 
for years beginning after December 31, 2001.

                            Senate Amendment

      The Senate amendment is the same as the House bill, with 
the following modification. The Senate amendment does not 
modify the excise tax on failures to satisfy the minimum 
distribution rules.

                          Conference Agreement

      The conference agreement directs the Treasury to revise 
the life expectancy tables under the applicable regulations to 
reflect current life expectancy.
      Effective date.--The conference agreement is effective on 
the date of enactment.
            (e) Clarification of tax treatment of division of section 
                    457 plan benefits upon divorce (sec. 305 of the 
                    House bill, sec. 635 of the Senate amendment, and 
                    secs. 414(p) and 457 of the Code)

                              Present Law

      Under present law, benefits provided under a qualified 
retirement plan for a participant may not be assigned or 
alienated to creditors of the participant, except in very 
limited circumstances. One exception to the prohibition on 
assignment or alienation rule is a qualified domestic relations 
order (``QDRO''). A QDRO is a domestic relations order that 
creates or recognizes a right of an alternate payee to any plan 
benefit payable with respect to a participant, and that meets 
certain procedural requirements.
      Under present law, a distribution from a governmental 
plan or a church plan is treated as made pursuant to a QDRO if 
it is made pursuant to a domestic relations order that creates 
or recognizes a right of an alternate payee to any plan benefit 
payable with respect to a participant. Such distributions are 
not required to meet the procedural requirements that apply 
with respect to distributions from qualified plans.
      Under present law, amounts distributed from a qualified 
plan generally are taxable to the participant in the year of 
distribution. However, if amounts are distributed to the spouse 
(or former spouse) of the participant by reason of a QDRO, the 
benefits are taxable to the spouse (or former spouse). Amounts 
distributed pursuant to a QDRO to an alternate payee other than 
the spouse (or former spouse) are taxable to the plan 
participant.
      Section 457 of the Internal Revenue Code provides rules 
for deferral of compensation by an individual participating in 
an eligible deferred compensation plan (``section 457 plan'') 
of a tax-exempt or State and local government employer. The 
QDRO rules do not apply to section 457 plans.

                               House Bill

      The House bill applies the taxation rules for qualified 
plan distributions pursuant to a QDRO to distributions made 
pursuant to a domestic relations order from a section 457 plan. 
In addition, a section 457 plan does not violate the 
restrictions on distributions from such plans due to payments 
to an alternate payee under a QDRO. The special rule applicable 
to governmental plans and church plans applies for purposes of 
determining whether a distribution is pursuant to a QDRO.
      Effective date.--The House bill is effective for 
transfers, distributions, and payments made after December 31, 
2001.

                            Senate Amendment

      The Senate amendment is the same as the House bill, with 
a modification of the effective date.
      Effective date.--The provision of the Senate amendment 
relating to tax treatment of distributions made pursuant to a 
domestic relations order from a section 457 plan is effective 
for transfers, distributions, and payments made after December 
31, 2001. The provisions of the Senate amendment relating to 
the waiver of restrictions on distributions and the application 
of the special rule for determining whether a distribution is 
pursuant to a QDRO are effective on January 1, 2002, except 
that in the case of a domestic relations order entered before 
January 1, 2002, the plan administrator (1) is required to 
treat such order as a QDRO if the administrator is paying 
benefits pursuant to such order on January 1, 2002, and (2) is 
permitted to treat any other such order entered before January 
1, 2002, as a QDRO even if such order does not meet the 
relevant requirements of the provision.

                          Conference Agreement

      The conference agreement follows the House bill.
            (f) Provisions relating to hardship withdrawals (sec. 306 
                    of the House bill, sec. 636 of the Senate 
                    amendment, and sec. 401(k) and 402 of the Code)

                              Present Law

      Elective deferrals under a qualified cash or deferred 
arrangement (a ``section 401(k) plan'') may not be 
distributable prior to the occurrence of one or more specified 
events. Oneevent upon which distribution is permitted is the 
financial hardship of the employee. Applicable Treasury regulations 
\100\ provide that a distribution is made on account of hardship only 
if the distribution is made on account of an immediate and heavy 
financial need of the employee and is necessary to satisfy the heavy 
need.
---------------------------------------------------------------------------
    \100\ Treas. Reg. sec. 1.401(k)-1.
---------------------------------------------------------------------------
      The Treasury regulations provide a safe harbor under 
which a distribution may be deemed necessary to satisfy an 
immediate and heavy financial need. One requirement of this 
safe harbor is that the employee be prohibited from making 
elective contributions and employee contributions to the plan 
and all other plans maintained by the employer for at least 12 
months after receipt of the hardship distribution.
      Under present law, hardship withdrawals of elective 
deferrals from a qualified cash or deferred arrangement (or 
403(b) annuity) are not eligible rollover distributions. Other 
types of hardship distributions, e.g., employer matching 
contributions distributed on account of hardship, are eligible 
rollover distributions. Different withholding rules apply to 
distributions that are eligible rollover distributions and to 
distributions that are not eligible rollover distributions. 
Eligible rollover distributions that are not directly rolled 
over are subject to withholding at a flat rate of 20-percent. 
Distributions that are not eligible rollover distributions are 
subject to elective withholding. Periodic distributions are 
subject to withholding as if the distribution were wages; 
nonperiodic distributions are subject to withholding at a rate 
of 10 percent. In either case, the individual may elect not to 
have withholding apply.

                               House Bill

      The Secretary of the Treasury is directed to revise the 
applicable regulations to reduce from 12 months to six months 
the period during which an employee must be prohibited from 
making elective contributions and employee contributions in 
order for a distribution to be deemed necessary to satisfy an 
immediate and heavy financial need. The revised regulations are 
to be effective for years beginning after December 31, 2001.
      In addition, any distribution made upon hardship of an 
employee is not an eligible rollover distribution. Thus, such 
distributions may not be rolled over, and are subject to the 
withholding rules applicable to distributions that are not 
eligible rollover distributions. The House bill does not modify 
the rules under which hardship distributions may be made. For 
example, as under present law, hardship distributions of 
qualified employer matching contributions are only permitted 
under the rules applicable to elective deferrals.
      The House bill is intended to clarify that all assets 
distributed as a hardship withdrawal, including assets 
attributable to employee elective deferrals and those 
attributable to employer matching or nonelective contributions, 
are ineligible for rollover. This rule is intended to apply to 
all hardship distributions from any tax qualified plan, 
including those made pursuant to standards set forth in section 
401(k)(2)(B)(i)(IV) (which are applicable to section 401(k) 
plans and section 403(b) annuities) and to those treated as 
hardship distributions under any profit-sharing plan (whether 
or not in accordance with the standards set forth in section 
401(k)(2)(B)(i)(IV)). For this purpose, a distribution that 
could be made either under the hardship provisions of a plan or 
under other provisions of the plan (such as provisions 
permitting in-service withdrawal of assets attributable to 
employer matching or nonelective contributions after a fixed 
period of years) could be treated as made upon hardship of the 
employee if the plan treats it that way. For example, if a plan 
makes an in-service distribution that consists of assets 
attributable to both elective deferrals (in circumstances where 
those assets could be distributed only upon hardship) and 
employer matching or nonelective contributions (which could be 
distributed in nonhardship circumstances under the plan), the 
plan is permitted to treat the distribution in its entirety as 
made upon hardship of the employee.
      Effective date.--The provision of the House bill 
directing the Secretary to revise the rules relating to safe 
harbor hardship distributions is effective on the date of 
enactment. The provision that hardship distributions are not 
eligible rollover distributions is effective for distributions 
made after December 31, 2001. The Secretary has the authority 
to issue transitional guidance with respect to the provision 
that hardship distributions are not eligible rollover 
distributions to provide sufficient time for plans to implement 
the new rule.

                            Senate Amendment

      The Senate amendment is the same as the House bill.

                          Conference Agreement

      The conference agreement follows the House bill and the 
Senate amendment.
            (g) Pension coverage for domestic and similar workers (sec. 
                    307 of the House bill, sec. 637 of the Senate 
                    amendment, and sec. 4972(c)(6) of the Code)

                              Present Law

      Under present law, within limits, employers may make 
deductible contributions to qualified retirement plans for 
employees. Subject to certain exceptions, a 10-percent excise 
tax applies to nondeductible contributions to such plans.
      Employers of household workers may establish a pension 
plan for their employees. Contributions to such plans are not 
deductible because they are not made in connection with a trade 
or business of the employer.

                               House Bill

      The 10-percent excise tax on nondeductible contributions 
does not apply to contributions to a SIMPLE plan or a SIMPLE 
IRA that are nondeductible solely because the contributions are 
not a trade or business expense under section 162 because they 
are not made in connection with a trade or business of the 
employer. Thus, for example, employers of household workers are 
able to make contributions to such plans without imposition of 
the excise tax. As under present law, the contributions are not 
deductible. The present-law rules applicable to such plans, 
e.g., contribution limits and nondiscrimination rules, continue 
to apply. The House bill does not apply with respect to 
contributions on behalf of the individual and members of his or 
her family.
      No inference is intended with respect to the application 
of the excise tax under present law to contributions that are 
not deductible because they are not made in connection with a 
trade or business of the employer.
      As under present law, a plan covering domestic workers is 
not qualified unless the coverage rules are satisfied by 
aggregating all employees of family members taken into account 
under the attribution rules in section 414(c), but disregarding 
employees employed by a controlled group of corporations or a 
trade or business.
      It is intended that the House bill is restricted to 
contributions made by employers of household workers with 
respect to whom all applicable employment taxes have been and 
are being paid.
      Effective date.--The House bill is effective for taxable 
years beginning after December 31, 2001.

                            Senate Amendment

      The Senate amendment is the same as the House bill, with 
the following modification. The legislative history of the 
Senate amendment does not include a statement of intention that 
the Senate amendment is restricted to contributions made by 
employers of household workers with respect to whom all 
applicable employment taxes have been and are being paid.

                          Conference Agreement

      The conference agreement follows the House bill.
3. Increasing Portability for Participants
            (a) Rollovers of retirement plan and IRA distributions 
                    (secs. 401-403 and 409 of the House bill, secs. 
                    641-643 and 649 of the Senate amendment, and secs. 
                    401, 402, 403(b), 408, 457, and 3405 of the Code)

                              Present Law

In general
      Present law permits the rollover of funds from a tax-
favored retirement plan to another tax-favored retirement plan. 
The rules that apply depend on the type of plan involved. 
Similarly, the rules regarding the tax treatment of amounts 
that are not rolled over depend on the type of plan involved.
Distributions from qualified plans
      Under present law, an ``eligible rollover distribution'' 
from a tax-qualified employer-sponsored retirement plan may be 
rolled over tax free to a traditional individual retirement 
arrangement (``IRA'') \101\ or another qualified plan.\102\ An 
``eligible rollover distribution'' means any distribution to an 
employee of all or any portion of the balance to the credit of 
the employee in a qualified plan, except the term does not 
include (1) any distribution which is one of a series of 
substantially equal periodic payments made (a) for the life (or 
life expectancy) of the employee or the joint lives (or joint 
life expectancies) of the employee and the employee's 
designated beneficiary, or (b) for a specified period of 10 
years or more, (2) any distribution to the extent such 
distribution is required under the minimum distribution rules, 
and (3) certain hardship distributions. The maximum amount that 
can be rolled over is the amount of the distribution includible 
in income, i.e., after-tax employee contributions cannot be 
rolled over. Qualified plans are not required to accept 
rollovers.
---------------------------------------------------------------------------
    \101\ A ``traditional'' IRA refers to IRAs other than Roth IRAs or 
SIMPLE IRAs. All references to IRAs refer only to traditional IRAs.
    \102\ An eligible rollover distribution may either be rolled over 
by the distributee within 60 days of the date of the distribution or, 
as described below, directly rolled over by the distributing plan.
---------------------------------------------------------------------------
Distributions from tax-sheltered annuities
      Eligible rollover distributions from a tax-sheltered 
annuity (``section 403(b) annuity'') may be rolled over into an 
IRA or another section 403(b) annuity. Distributions from a 
section 403(b) annuity cannot be rolled over into a tax-
qualified plan. Section 403(b) annuities are not required to 
accept rollovers.
IRA distributions
      Distributions from a traditional IRA, other than minimum 
required distributions, can be rolled over into another IRA. In 
general, distributions from an IRA cannot be rolled over into a 
qualified plan or section 403(b) annuity. An exception to this 
rule applies in the case of so-called ``conduit IRAs.'' Under 
the conduit IRA rule, amounts can be rolled from a qualified 
plan into an IRA and then subsequently rolled back to another 
qualified plan if the amounts in the IRA are attributable 
solely to rollovers from a qualified plan. Similarly, an amount 
may be rolled over from a section 403(b) annuity to an IRA and 
subsequently rolled back into a section 403(b) annuity if the 
amounts in the IRA are attributable solely to rollovers from a 
section 403(b) annuity.
Distributions from section 457 plans
      A ``section 457 plan'' is an eligible deferred 
compensation plan of a State or local government or tax-exempt 
employer that meets certain requirements. In some cases, 
different rules apply under section 457 to governmental plans 
and plans of tax-exempt employers. For example, governmental 
section 457 plans are like qualified plans in that plan assets 
are required to be held in a trust for the exclusive benefit of 
plan participants and beneficiaries. In contrast, benefits 
under a section 457 plan of a tax-exempt employer are unfunded, 
like nonqualified deferred compensation plans of private 
employers.
      Section 457 benefits can be transferred to another 
section 457 plan. Distributions from a section 457 plan cannot 
be rolled over to another section 457 plan, a qualified plan, a 
section 403(b) annuity, or an IRA.
Rollovers by surviving spouses
      A surviving spouse that receives an eligible rollover 
distribution may roll over the distribution into an IRA, but 
not a qualified plan or section 403(b) annuity.
Direct rollovers and withholding requirements
      Qualified plans and section 403(b) annuities are required 
to provide that a plan participant has the right to elect that 
an eligible rollover distribution be directly rolled over to 
another eligible retirement plan. If the plan participant does 
not elect the direct rollover option, then withholding is 
required on the distribution at a 20-percent rate.\103\
---------------------------------------------------------------------------
    \103\ Distributions from qualified plans and section 403(b) 
annuities that are not eligible rollover distributions are subject to 
elective withholding. Periodic distributions are subject to withholding 
as if the distribution were wages; nonperiodic distributions are 
subject to withholding at a rate of 10 percent. In either case, the 
individual may elect not to have withholding apply.
---------------------------------------------------------------------------
Notice of eligible rollover distribution
      The plan administrator of a qualified plan or a section 
403(b) annuity is required to provide a written explanation of 
rollover rules to individuals who receive a distribution 
eligible for rollover. In general, the notice is to be provided 
within a reasonable period of time before making the 
distribution and is to include an explanation of (1) the 
provisions under which the individual may have the distribution 
directly rolled over to another eligible retirement plan, (2) 
the provision that requires withholding if the distribution is 
not directly rolled over, (3) the provision under which the 
distribution may be rolled over within 60 days of receipt, and 
(4) if applicable, certain other rules that may apply to the 
distribution. The Treasury Department has provided more 
specific guidance regarding timing and content of the notice.
Taxation of distributions
      As is the case with the rollover rules, different rules 
regarding taxation of benefits apply to different types of tax-
favored arrangements. In general, distributions from a 
qualified plan, section 403(b) annuity, or IRA are includible 
in income in the year received. In certain cases, distributions 
from qualified plans are eligible for capital gains treatment 
and averaging. These rules do not apply to distributions from 
another type of plan. Distributions from a qualified plan, IRA, 
and section 403(b) annuity generally are subject to an 
additional 10-percent early withdrawal tax if made before age 
59\1/2\. There are a number of exceptions to the early 
withdrawal tax. Some of the exceptions apply to all three types 
of plans, and others apply only to certain types of plans. For 
example, the 10-percent early withdrawal tax does not apply to 
IRA distributions for educational expenses, but does apply to 
similar distributions from qualified plans and section 403(b) 
annuities. Benefits under a section 457 plan are generally 
includible in income when paid or made available. The 10-
percent early withdrawal tax does not apply to section 457 
plans.

                               House Bill

In general
      The House bill provides that eligible rollover 
distributions from qualified retirement plans, section 403(b) 
annuities, and governmental section 457 plans generally could 
be rolled over to any of such plans or arrangements.\104\ 
Similarly, distributions from an IRA generally are permitted to 
be rolled over into a qualified plan, section 403(b) annuity, 
or governmental section 457 plan. The direct rollover and 
withholding rules are extended to distributions from a 
governmental section 457 plan, and such plans are required to 
provide the written notification regarding eligible rollover 
distributions.\105\ The rollover notice (with respect to all 
plans) is required to include a description of the provisions 
under which distributions from the plan to which the 
distribution is rolled over may be subject to restrictions and 
tax consequences different than those applicable to 
distributions from the distributing plan. Qualified plans, 
section 403(b) annuities, and section 457 plans would not be 
required to accept rollovers.
---------------------------------------------------------------------------
    \104\ Hardship distributions from governmental section 457 plans 
would be considered eligible rollover distributions.
    \105\ The elective withholding rules applicable to distributions 
from qualified plans and section 403(b) annuities that are not eligible 
rollover distributions are also extended to distributions from 
governmental section 457 plans. Thus, periodic distributions from 
governmental section 457 plans that are not eligible rollover 
distributions are subject to withholding as if the distribution were 
wages and nonperiodic distributions from such plans that are not 
eligible rollover distributions are subject to withholding at a 10-
percent rate. In either case, the individual may elect not to have 
withholding apply.
---------------------------------------------------------------------------
      Some special rules apply in certain cases. A distribution 
from a qualified plan is not eligible for capital gains or 
averaging treatment if there was a rollover to the plan that 
would not have been permitted under present law. Thus, in order 
to preserve capital gains and averaging treatment for a 
qualified plan distribution that is rolled over, the rollover 
would have to be made to a ``conduit IRA'' as under present 
law, and then rolled back into a qualified plan. Amounts 
distributed from a section 457 plan are subject to the early 
withdrawal tax to the extent the distribution consists of 
amounts attributable to rollovers from another type of plan. 
Section 457 plans are required to separately account for such 
amounts.
Rollover of after-tax contributions
      The House bill provides that employee after-tax 
contributions may be rolled over into another qualified plan or 
a traditional IRA. In the case of a rollover from a qualified 
plan to another qualified plan, the rollover is permitted to be 
accomplished only through a direct rollover. In addition, a 
qualified plan is not permitted to accept rollovers of after-
tax contributions unless the plan provides separate accounting 
for such contributions (and earnings thereon). After-tax 
contributions (including nondeductible contributions to an IRA) 
are not permitted to be rolled over from an IRA into a 
qualified plan, tax-sheltered annuity, or section 457 plan.
      In the case of a distribution from a traditional IRA that 
is rolled over into an eligible rollover plan that is not an 
IRA, the distribution is attributed first to amounts other than 
after-tax contributions.
Expansion of spousal rollovers
      The House bill provides that surviving spouses may roll 
over distributions to a qualified plan, section 403(b) annuity, 
or governmental section 457 plan in which the surviving spouse 
participates.
Treasury regulations
      The Secretary is directed to prescribe rules necessary to 
carry out the House bill. Such rules may include, for example, 
reporting requirements and mechanisms to address mistakes 
relating to rollovers. It is anticipated that the IRS will 
develop forms to assist individuals who roll over after-tax 
contributions to an IRA in keeping track of such contributions. 
Such forms could, for example, expand Form 8606--Nondeductible 
IRAs, to include information regarding after-tax contributions.
      Effective date.--The House bill is effective for 
distributions made after December 31, 2001. It is intended that 
the Secretary will revise the safe harbor rollover notice that 
plans may use to satisfy the rollover requirements. No penalty 
is imposed on a plan for a failure to provide the information 
required under the House bill with respect to any distribution 
made before the date that is 90 days after the date the 
Secretary issues a new safe harbor rollover notice, if the plan 
administrator makes a reasonable attempt to comply with such 
notice requirement. For example, the House bill requires that 
the rollover notice include a description of the provisions 
under which distributions from the eligible retirement plan 
receiving the distribution may be subject to restrictions and 
tax consequences which are different from those applicable to 
distributions from the plan making the distribution. A plan is 
treated as making a reasonable good faith effort to comply with 
this requirement if the notice states that distributions from 
the plan to which the rollover is made may be subject to 
different restrictions and tax consequences than those that 
apply to distributions from the plan from which the rollover is 
made.

                            senate Amendment

      The Senate amendment is the same as the House bill, with 
the following modification. The Senate amendment does not 
include a provision for relief from the imposition of a penalty 
for failure to provide the information required under the 
Senate amendment.

                          Conference Agreement

      The conference agreement follows the House bill, with the 
following modification. Hardship distributions from 
governmental section 457 plans are not considered eligible 
rollover distributions.
            (b) Waiver of 60-day rule (sec. 404 of the House bill, sec. 
                    644 of the Senate amendment, and secs. 402 and 408 
                    of the Code)

                              Present Law

      Under present law, amounts received from an IRA or 
qualified plan may be rolled over tax free if the rollover is 
made within 60 days of the date of the distribution. The 
Secretary does not have the authority to waive the 60-day 
requirement, except during military service in a combat zone or 
by reason of a Presidentially declared disaster. The Secretary 
has issued regulations postponing the 60-day rule in such 
cases.

                               House Bill

      The House bill provides that the Secretary may waive the 
60-day rollover period if the failure to waive such requirement 
would be against equity or good conscience, including cases of 
casualty, disaster, or other events beyond the reasonable 
control of the individual subject to such requirement. For 
example, the Secretary may issue guidance that includes 
objective standards for a waiver of the 60-day rollover period, 
such as waiving the rule due to military service in a combat 
zone or during a Presidentially declared disaster (both of 
which are provided for under present law), or for a period 
during which the participant has received payment in the form 
of a check, but has not cashed the check, or for errors 
committed by a financial institution.
      Effective date.--The House bill applies to distributions 
made after December 31, 2001.

                            Senate Amendment

      The Senate amendment is the same as the House bill.

                          Conference Agreement

      The conference agreement provides that the Secretary may 
waive the 60-day rollover period if the failure to waive such 
requirement would be against equity or good conscience, 
including cases of casualty, disaster, or other events beyond 
the reasonable control of the individual subject to such 
requirement. For example, the Secretary may issue guidance that 
includes objective standards for a waiver of the 60-day 
rollover period, such as waiving the rule due to military 
service in a combat zone or during a Presidentially declared 
disaster (both of which are provided for under present law), or 
for a period during which the participant has received payment 
in the form of a check, but has not cashed the check, or for 
errors committed by a financial institution, or in cases of 
inability to complete a rollover due to death, disability, 
hospitalization, incarceration, restrictions imposed by a 
foreign country, or postal error.
      Effective date.--The conference agreement applies to 
distributions made after December 31, 2001.
            (c) Treatment of forms of distribution (sec. 405 of the 
                    House bill, sec. 645 of the Senate amendment, and 
                    sec. 411(d)(6) of the Code)

                              Present Law

      An amendment of a qualified retirement plan may not 
decrease the accrued benefit of a plan participant. An 
amendment is treated as reducing an accrued benefit if, with 
respect to benefits accrued before the amendment is adopted, 
the amendment has the effect of either (1) eliminating or 
reducing an early retirement benefit or a retirement-type 
subsidy, or (2) except as provided by Treasury regulations, 
eliminating an optional form of benefit (sec. 411(d)(6)).\106\
---------------------------------------------------------------------------
    \106\ A similar provision is contained in Title I of ERISA.
---------------------------------------------------------------------------
      Under regulations recently issued by the Secretary,\107\ 
this prohibition against the elimination of an optional form of 
benefit does not apply in the case of (1) a defined 
contribution plan that offers a lump sum at the same time as 
the form being eliminated if the participant receives at least 
90 days' advance notice of the elimination, or (2) a voluntary 
transfer between defined contribution plans, subject to the 
requirements that a transfer from a money purchase pension 
plan, an ESOP, or a section 401(k) plan must be to a plan of 
the same type and that the transfer be made in connection with 
certain corporate mergers, acquisitions, or similar 
transactions or changes in employment status.
---------------------------------------------------------------------------
    \107\ Treas. Reg. sec. 1.411(d)-4, Q&A-2(e) and Q&A-(3)(b).
---------------------------------------------------------------------------

                               House Bill

      A defined contribution plan to which benefits are 
transferred will not be treated as reducing a participant's or 
beneficiary's accrued benefit even though it does not provide 
all of the forms of distribution previously available under the 
transferor plan if (1) the plan receives from another defined 
contribution plan a direct transfer of the participant's or 
beneficiary's benefit accrued under the transferor plan, or the 
plan results from a merger or other transaction that has the 
effect of a direct transfer (including consolidations of 
benefits attributable to different employers within a multiple 
employer plan), (2) the terms of both the transferor plan and 
the transferee plan authorize the transfer, (3) the transfer 
occurs pursuant to a voluntary election by the participant or 
beneficiary that is made after the participant or beneficiary 
received a notice describing the consequences of making the 
election, and (4) the transferee plan allows the participant or 
beneficiary to receive distribution of his or her benefit under 
the transferee plan in the form of a single sum distribution. 
The House bill does not modify the rules relating to survivor 
annuities under section 417. Thus, as under present law, a plan 
that is a transferee of a plan subject to the joint and 
survivor rules is also subject to those rules.
      Except to the extent provided by the Secretary of the 
Treasury in regulations, a defined contribution plan is not 
treated as reducing a participant's accrued benefit if (1) a 
plan amendment eliminates a form of distribution previously 
available under the plan, (2) a single sum distribution is 
available to the participant at the same time or times as the 
form of distribution eliminated by the amendment, and (3) the 
single sum distribution is based on the same or greater portion 
of the participant's accrued benefit as the form of 
distribution eliminated by the amendment.
      Furthermore, the House bill directs the Secretary of the 
Treasury to provide by regulations that the prohibitions 
against eliminating or reducing an early retirement benefit, a 
retirement-type subsidy, or an optional form of benefit do not 
apply to plan amendments that eliminate or reduce early 
retirement benefits, retirement-type subsidies, and optional 
forms of benefit that create significant burdens and 
complexities for a plan and its participants, but only if such 
an amendment does not adversely affect the rights of any 
participant in more than a de minimis manner.
      It is intended that the factors to be considered in 
determining whether an amendment has more than a de minimis 
adverse effect on any participant will include (1) all of the 
participant's early retirement benefits, retirement-type 
subsidies, and optional forms of benefits that are reduced or 
eliminated by the amendment, (2) the extent to which early 
retirement benefits, retirement-type subsidies, and optional 
forms of benefit in effect with respect to a participant after 
the amendment effective date provide rights that are comparable 
to the rights that are reduced or eliminated by the plan 
amendment, (3) the number of years before the participant 
attains normal retirement age under the plan (or early 
retirement age, as applicable), (4) the size of the 
participant's benefit that is affected by the plan amendment, 
in relation to the amount of the participant's compensation, 
and (5) the number of years before the plan amendment is 
effective.
      This provision of the House bill does not affect the 
rules relating to involuntary cash outs (sec. 411(a)(11)) or 
survivor annuity requirements (sec. 417). Accordingly, if a 
participant is entitled to protections of the joint and 
survivor rules, those protections may not be eliminated. The 
intent of the provision authorizing regulations is solely to 
permit the elimination of early retirement benefits, 
retirement-type subsidies, or optional forms of benefit that 
have no more than a de minimis effect on any participant but 
create disproportionate burdens and complexities for a plan and 
its participants.
      For example, assume the following. Employer A acquires 
employer B and merges B's defined benefit plan into A's defined 
benefit plan. The defined benefit plan maintained by B before 
the merger provides an early retirement subsidy for individuals 
age 55 with a specified number of years of service. E1 and E2 
are were employees of B and who transfer to A in connection 
with the merger. E1 is 25 years old and has compensation of 
$40,000. The present value of E1's early retirement subsidy 
under B's plan is $75. E2 is 50 years old and also has 
compensation of $40,000. The present value of E2's early 
retirement subsidy under B's plan is $10,000.
      Assume that A's plan has an early retirement subsidy for 
individuals who have attained age 50 with a specified number of 
years of service, but the subsidy is not the same as under B's 
plan. Under A's plan, the present value of E2's early 
retirement subsidy is $9,850. Maintenance of both subsidies 
after the plan merger would create burdens for the plan and 
complexities for the plan and its participants.
      Treasury regulations could permit E1's early retirement 
subsidy under B's plan to be eliminated entirely (i.e., even if 
A's plan did not have an early retirement subsidy). Taking into 
account all relevant factors, including the value of the 
benefit, E1's compensation, and the number of years until E1 
would be eligible to receive the subsidy, the subsidy is de 
minimis. Treasury regulations could permit E2's early 
retirement subsidy under B's plan to be eliminated as to be 
replaced by the subsidy under A's plan, because the difference 
in the subsidies is de minimis. However, A's subsidy could not 
be entirely eliminated.
      The Secretary is directed to issue, not later than 
December 31, 2003, final regulations under section 411(d)(6), 
including regulations required under the House bill.
      Effective date.--The House bill is effective for years 
beginning after December 31, 2001, except that the direction to 
the Secretary is effective on the date of enactment.

                            senate amendment

      A defined contribution plan to which benefits are 
transferred is not treated as reducing a participant's or 
beneficiary's accrued benefit even though it does not provide 
all of the forms of distribution previously available under the 
transferor plan if (1) the plan receives from another defined 
contribution plan a direct transfer of the participant's or 
beneficiary's benefit accrued under the transferor plan, or the 
plan results from a merger or other transaction that has the 
effect of a direct transfer (including consolidations of 
benefits attributable to different employers within a multiple 
employer plan), (2) the terms of both the transferor plan and 
the transferee plan authorize the transfer, (3) the transfer 
occurs pursuant to a voluntary election by the participant or 
beneficiary that is made after the participant or beneficiary 
received a notice describing the consequences of making the 
election, and (4) the transferee plan allows the participant or 
beneficiary to receive distribution of his or her benefit under 
the transferee plan in the form of a single sum distribution.
      Furthermore, the Senate amendment directs the Secretary 
of the Treasury to provide by regulations that the prohibitions 
against eliminating or reducing an early retirement benefit, a 
retirement-type subsidy, or an optional form of benefit do not 
apply to plan amendments that eliminate or reduce early 
retirement benefits, retirement-type subsidies, and optional 
forms of benefit that create significant burdens and 
complexities for a plan and its participants, but only if such 
an amendment does not adversely affect the rights of any 
participant in more than a de minimis manner.
      It is intended that the factors to be considered in 
determining whether an amendment has more than a de minimis 
adverse effect on any participant will include (1) all of the 
participant's early retirement benefits, retirement-type 
subsidies, and optional forms of benefits that are reduced or 
eliminated by the amendment, (2) the extent to which early 
retirement benefits, retirement-type subsidies, and optional 
forms of benefit in effect with respect to a participant after 
the amendment effective date provide rights that are comparable 
to the rights that are reduced or eliminated by the plan 
amendment, (3) the number of years before the participant 
attains normal retirement age under the plan (or early 
retirement age, as applicable), (4) the size of the 
participant's benefit that is affected by the plan amendment, 
in relation to the amount of the participant's compensation, 
and (5) the number of years before the plan amendment is 
effective.
      The Secretary is directed to issue, not later than 
December 31, 2002, final regulations under section 411(d)(6), 
including regulations required under the Senate amendment.
      Effective date.--The provision is effective for years 
beginning after December 31, 2001, except that the direction to 
the Secretary is effective on the date of enactment.

                          conference agreement

      The conference agreement follows the House bill.
            (d) Rationalization of restrictions on distributions (sec. 
                    406 of the House bill, sec. 646 of the Senate 
                    amendment, and secs. 401(k), 403(b), and 457 of the 
                    Code)

                              Present Law

      Elective deferrals under a qualified cash or deferred 
arrangement (``section 401(k) plan''), tax-sheltered annuity 
(``section 403(b) annuity''), or an eligible deferred 
compensation plan of a tax-exempt organization or State or 
local government (``section 457 plan''), may not be 
distributable prior to the occurrence of one or more specified 
events. These permissible distributable events include 
``separation from service.''
      A separation from service occurs only upon a 
participant's death, retirement, resignation or discharge, and 
not when the employee continues on the same job for a different 
employer as a result of the liquidation, merger, consolidation 
or other similar corporate transaction. A severance from 
employment occurs when a participant ceases to be employed by 
the employer that maintains the plan. Under a so-called ``same 
desk rule,'' a participant's severance from employment does not 
necessarily result in a separation from service.\108\
---------------------------------------------------------------------------
    \108\ Rev. Rul. 79-336, 1979-2 C.B. 187.
---------------------------------------------------------------------------
      In addition to separation from service and other events, 
a section 401(k) plan that is maintained by a corporation may 
permit distributions to certain employees who experience a 
severance from employment with the corporation that maintains 
the plan but do not experience a separation from service 
because the employees continue on the same job for a different 
employer as a result of a corporate transaction. If the 
corporation disposes of substantially all of the assets used by 
the corporation in a trade or business, a distributable event 
occurs with respect to the accounts of the employees who 
continue employment with the corporation that acquires the 
assets. If the corporation disposes of its interest in a 
subsidiary, a distributable event occurs with respect to the 
accounts of the employees who continue employment with the 
subsidiary. Under a recent IRS ruling, a person is generally 
deemed to have separated from service if that person is 
transferred to another employer in connection with a sale of 
less than substantially all the assets of a trade or 
business.\109\
---------------------------------------------------------------------------
    \109\ Rev. Rul. 2000-27, 2000-21 I.R.B. 1016.
---------------------------------------------------------------------------

                               house bill

      The House bill modifies the distribution restrictions 
applicable to section 401(k) plans, section 403(b) annuities, 
and section 457 plans to provide that distribution may occur 
upon severance from employment rather than separation from 
service. In addition, the provisions for distribution from a 
section 401(k) plan based upon a corporation's disposition of 
its assets or a subsidiary are repealed; this special rule is 
no longer necessary under the House bill.
      Effective date.--The House bill is effective for 
distributions after December 31, 2001, regardless of when the 
severance of employment occurred.

                            senate amendment

      The Senate amendment is the same as the House bill.

                          conference agreement

      The conference agreement follows the House bill and the 
Senate amendment.
      The conferees intend that a plan may provide that certain 
specified types of severance from employment do not constitute 
distributable events. For example, a plan could provide that a 
severance from employment is not a distributable event if it 
would not have constituted a ``separation from service'' under 
the law in effect prior to a specified date. Also, if a plan 
describes distributable events by reference to section 
401(k)(2), the plan may be amended to restrict distributable 
events to fewer than all events that constitute a severance 
from employment. Thus, for example, if a plan sponsor had 
employees who experienced a severance from employment in the 
past that the ``same desk rule'' prevented from being treated 
as a distributable event, the plan sponsor would have the 
option of providing in the plan that such severance from 
employment would, or would not, be treated as a distributable 
event under the plan.
      The conferees intend that, as under current law, if there 
is a transfer of plan assets and liabilities relating to any 
portion of an employee's benefit under a plan of the employee's 
former employer to a plan being maintained or created by the 
employee's new employer (other than a rollover or elective 
transfer), then that employee has not experienced a severance 
from employment with the employer maintaining the plan that 
covers the employee.
            (e) Purchase of service credit under governmental pension 
                    plans (sec. 407 of the House bill, sec. 647 of the 
                    Senate amendment, and secs. 403(b) and 457 of the 
                    Code)

                              present law

      A qualified retirement plan maintained by a State or 
local government employer may provide that a participant may 
make after-tax employee contributions in order to purchase 
permissive service credit, subject to certain limits (sec. 
415). Permissive service credit means credit for a period of 
service recognized by the governmental plan only if the 
employee voluntarily contributes to the plan an amount (as 
determined by the plan) that does not exceed the amount 
necessary to fund the benefit attributable to the period of 
service and that is in addition to the regular employee 
contributions, if any, under the plan.
      In the case of any repayment of contributions and 
earnings to a governmental plan with respect to an amount 
previously refunded upon a forfeiture of service credit under 
the plan (or another plan maintained by a State or local 
government employer within the same State), any such repayment 
is not taken into account for purposes of the section 415 
limits on contributions and benefits. Also, service credit 
obtained as a result of such a repayment is not considered 
permissive service credit for purposes of the section 415 
limits.
      A participant may not use a rollover or direct transfer 
of benefits from a tax-sheltered annuity (``section 403(b) 
annuity'') or an eligible deferred compensation plan of a tax-
exempt organization or a State or local government (``section 
457 plan'') to purchase permissive service credits or repay 
contributions and earnings with respect to a forfeiture of 
service credit.

                               house bill

      A participant in a State or local governmental plan is 
not required to include in gross income a direct trustee-to-
trustee transfer to a governmental defined benefit plan from a 
section 403(b) annuity or a section 457 plan if the transferred 
amount is used (1) to purchase permissive service credits under 
the plan, or (2) to repay contributions and earnings with 
respect to an amount previously refunded under a forfeiture of 
service credit under the plan (or another plan maintained by a 
State or local government employer within the same State).
      Effective date.--The House bill is effective for 
transfers after December 31, 2001.

                            senate amendment

      The Senate amendment is the same as the House bill.

                          conference agreement

      The conference agreement follows the House bill and the 
Senate amendment.
            (f) Employers may disregard rollovers for purposes of cash-
                    out rules (sec. 408 of the House bill, sec. 648 of 
                    the Senate amendment, and sec. 411(a)(11) of the 
                    Code)

                              present law

      If a qualified retirement plan participant ceases to be 
employed by the employer that maintains the plan, the plan may 
distribute the participant's nonforfeitable accrued benefit 
without the consent of the participant and, if applicable, the 
participant's spouse, if the present value of the benefit does 
not exceed $5,000. If such an involuntary distribution occurs 
and the participant subsequently returns to employment covered 
by the plan, then service taken into account in computing 
benefits payable under the plan after the return need not 
include service with respect to which a benefit was 
involuntarily distributed unless the employee repays the 
benefit.\110\
---------------------------------------------------------------------------
    \110\ A similar provision is contained in Title I of ERISA.
---------------------------------------------------------------------------
      Generally, a participant may roll over an involuntary 
distribution from a qualified plan to an IRA or to another 
qualified plan.\111\
---------------------------------------------------------------------------
    \111\ Other provisions expand the kinds of plans to which benefits 
may be rolled over.
---------------------------------------------------------------------------

                               house bill

      For purposes of the cash-out rule, a plan is permitted to 
provide that the present value of a participant's 
nonforfeitable accrued benefit is determined without regard to 
the portion of such benefit that is attributable to rollover 
contributions (and any earnings allocable thereto).
      Effective date.--The House bill is effective for 
distributions after December 31, 2001.

                            senate amendment

      The Senate amendment is the same as the House bill.

                          conference agreement

      The conference agreement follows the House bill and the 
Senate amendment.
            (g) Minimum distribution and inclusion requirements for 
                    section 457 plans (sec. 409 of the House bill, sec. 
                    649 of the Senate amendment, and sec. 457 of the 
                    Code)

                              present law

      A ``section 457 plan'' is an eligible deferred 
compensation plan of a State or local government or tax-exempt 
employer that meets certain requirements. For example, amounts 
deferred under a section 457 plan cannot exceed certain limits. 
Amounts deferred under a section 457 plan are generally 
includible in income when paid or made available. Amounts 
deferred under a plan of deferred compensation of a State or 
local government or tax-exempt employer that does not meet the 
requirements of section 457 are includible in income when the 
amounts are not subject to a substantial risk of forfeiture, 
regardless of whether the amounts have been paid or made 
available.\112\
---------------------------------------------------------------------------
    \112\ This rule of inclusion does not apply to amounts deferred 
under a tax-qualified retirement plan or similar plans.
---------------------------------------------------------------------------
      Section 457 plans are subject to the minimum distribution 
rules applicable to tax-qualified pension plans. In addition, 
such plans are subject to additional minimum distribution rules 
(sec. 457(d)(2)(B)).

                               house bill

      The House bill provides that amounts deferred under a 
section 457 plan of a State or local government are includible 
in income when paid. The House bill also repeals the special 
minimum distribution rules applicable to section 457 plans. 
Thus, such plans are subject to the minimum distribution rules 
applicable to qualified plans.
      Effective date.--The House bill is effective for 
distributions after December 31, 2001.

                            senate amendment

      The Senate amendment is the same as the House bill, with 
the following modification.
      The Senate amendment also modifies the transition rule 
adopted in the 1986 Act relating to deferred compensation plans 
of tax-exempt employers. Under the Senate amendment, the 
transition rule applies to agreements providing cost-of-living 
adjustments to amounts that otherwise satisfy the requirements 
of the transition rule. The grandfather does not apply to the 
extent that the annual amount provided under such an agreement 
exceeds the annual grandfathered amount multiplied by the 
cumulative increase in the Consumer Price Index (as published 
by the Department of Labor).
      Effective date.--The Senate amendment is generally 
effective for distributions after December 31, 2001. The 
provision relating to plans of tax-exempt organizations is 
effective for taxable years ending after the date of enactment 
for cost-of-living increases after September 1993.

                          conference agreement

      The conference agreement follows the House bill.
4. Strengthening Pension Security and Enforcement
            (a) Phase in repeal of 160 percent of current liability 
                    funding limit; deduction for contributions to fund 
                    termination liability (secs. 501-502 of the House 
                    bill, secs. 651-652 of the Senate amendment, and 
                    secs. 404(a)(1), 412(c)(7), and 4972(c) of the 
                    Code)

                              Present Law

      Under present law, defined benefit pension plans are 
subject to minimum funding requirements designed to ensure that 
pension plans have sufficient assets to pay benefits. A defined 
benefit pension plan is funded using one of a number of 
acceptable actuarial cost methods.
      No contribution is required under the minimum funding 
rules in excess of the full funding limit. The full funding 
limit is generally defined as the excess, if any, of (1) the 
lesser of (a) the accrued liability under the plan (including 
normal cost) or (b) 160 percent of the plan's current 
liability, over (2) the value of the plan's assets (sec. 
412(c)(7)).\113\ In general, current liability is all 
liabilities to plan participants and beneficiaries accrued to 
date, whereas the accrued liability full funding limit is based 
on projected benefits. The current liability full funding limit 
is scheduled to increase as follows: 165 percent for plan years 
beginning in 2003 and 2004, and 170 percent for plan years 
beginning in 2005 and thereafter.\114\ In no event is a plan's 
full funding limit less than 90 percent of the plan's current 
liability over the value of the plan's assets.
---------------------------------------------------------------------------
    \113\ The minimum funding requirements, including the full funding 
limit, are also contained in title I of ERISA.
    \114\ As originally enacted in the Pension Protection Act of 1997, 
the current liability full funding limit was 150 percent of current 
liability. The Taxpayer Relief Act of 1997 increased the current 
liability full funding limit to 155 percent in 1999 and 2000, 160 
percent in 2001 and 2002, and adopted the scheduled increases described 
in the text.
---------------------------------------------------------------------------
      An employer sponsoring a defined benefit pension plan 
generally may deduct amounts contributed to satisfy the minimum 
funding standard for the plan year. Contributions in excess of 
the full funding limit generally are not deductible. Under a 
special rule, an employer that sponsors a defined benefit 
pension plan (other than a multiemployer plan) which has more 
than 100 participants for the plan year may deduct amounts 
contributed of up to 100 percent of the plan's unfunded current 
liability.

                               house bill

Current liability full funding limit
      The House bill gradually increases and then repeals the 
current liability full funding limit. Under the bill, the 
current liability full funding limit is 165 percent of current 
liability for plan years beginning in 2002, and 170 percent for 
plan years beginning in 2003. The current liability full 
funding limit is repealed for plan years beginning in 2004 and 
thereafter. Thus, in 2004 and thereafter, the full funding 
limit is the excess, if any, of (1) the accrued liability under 
the plan (including normal cost), over (2) the value of the 
plan's assets.
Deduction for contributions to fund termination liability
      The special rule allowing a deduction for unfunded 
current liability generally is extended to all defined benefit 
pension plans, i.e., the House bill applies to multiemployer 
plans and plans with 100 or fewer participants. The special 
rule does not apply to plans not covered by the PBGC 
termination insurance program.\115\
---------------------------------------------------------------------------
    \115\ The PBGC termination insurance program does not cover plans 
of professional service employers that have fewer than 25 participants.
---------------------------------------------------------------------------
      The House bill also modifies the rule by providing that 
the deduction is for up to 100 percent of unfunded termination 
liability, determined as if the plan terminated at the end of 
the plan year. In the case of a plan with less than 100 
participants for the plan year, termination liability does not 
include the liability attributable to benefit increases for 
highly compensated employees resulting from a plan amendment 
which was made or became effective, whichever is later, within 
the last two years.
General Accounting Office study
      In connection with the Committee's desire to strengthen 
pension security, the Committee directs the General Accounting 
Office to conduct a study examining the extent to which certain 
present-law rules create obstacles or disincentives for 
taxpayers experiencing financial hardships to make current and 
future contributions to underfunded defined benefit pension 
plans. The Committee is concerned that, as a result of not 
obtaining a current or carryback deduction for pension 
contributions, taxpayers experiencing financial hardships will 
be subject to higher after-tax costs of maintaining pension 
funding levels. In the study, the General Accounting Office is 
to consider whether pension funding would be enhanced if 
section 172(f), which since 1998 has permitted only listed 
items to be carried back, were modified to list deductions for 
payments to defined benefit pension plans as an item for which 
10-year specified loss carrybacks may be available. This study 
is to be submitted to the Committee on Ways and Means of the 
House of Representatives and the Committee on Finance of the 
Senate not later than one year after the date of enactment.
      Effective date.--The House bill is effective for plan 
years beginning after December 31, 2001.

                            senate amendment

Current liability full funding limit
      The Senate amendment gradually increases and then repeals 
the current liability full funding limit. Under the Senate 
amendment, the current liability full funding limit is 160 
percent of current liability for plan years beginning in 2002, 
165 percent for plan years beginning in 2003, and 170 percent 
for plan years beginning in 2004. The current liability full 
funding limit is repealed for plan years beginning in 2005 and 
thereafter. Thus, in 2005 and thereafter, the full funding 
limit is the excess, if any, of (1) the accrued liability under 
the plan (including normal cost), over (2) the value of the 
plan's assets.
Deduction for contributions to fund termination liability
      The special rule allowing a deduction for unfunded 
current liability generally is extended to all defined benefit 
pension plans, i.e., the Senate amendment applies to 
multiemployer plans and plans with 100 or fewer participants. 
The special rule does not apply to plans not covered by the 
PBGC termination insurance program.\116\
---------------------------------------------------------------------------
    \116\ The PBGC termination insurance program does not cover plans 
of professional service employers that have fewer than 25 participants.
---------------------------------------------------------------------------
      The Senate amendment also modifies the rule by providing 
that the deduction is for up to 100 percent of unfunded 
termination liability, determined as if the plan terminated at 
the end of the plan year. In the case of a plan with less than 
100 participants for the plan year, termination liability does 
not include the liability attributable to benefit increases for 
highly compensated employees resulting from a plan amendment 
which was made or became effective, whichever is later, within 
the last two years.
      Effective date.--The Senate amendment is effective for 
plan years beginning after December 31, 2001.

                          conference agreement

      The conference agreement follows the Senate amendment, 
with modifications.
      The conference agreement gradually increases and then 
repeals the current liability full funding limit. Under the 
conference agreement, the current liability full funding limit 
is 165 percent of current liability for plan years beginning in 
2002, and 170 percent for plan years beginning in 2003. The 
current liability full funding limit is repealed for plan years 
beginning in 2004 and thereafter. Thus, in 2004 and thereafter, 
the full funding limit is the excess, if any, of (1) the 
accrued liability under the plan (including normal cost), over 
(2) the value of the plan's assets.
      With respect to the special rule allowing a deduction for 
unfunded current liability, the modification of the rule to 
provide that the deduction is for up to 100 percent of unfunded 
termination liability is applicable only for a plan that 
terminates within the plan year.
            (b) Excise tax relief for sound pension funding (sec. 503 
                    of the House bill, sec. 653 of the Senate 
                    amendment, and sec. 4972 of the Code)

                              present law

      Under present law, defined benefit pension plans are 
subject to minimum funding requirements designed to ensure that 
pension plans have sufficient assets to pay benefits. A defined 
benefit pension plan is funded using one of a number of 
acceptable actuarial cost methods.
      No contribution is required under the minimum funding 
rules in excess of the full funding limit. The full funding 
limit is generally defined as the excess, if any, of (1) the 
lesser of (a) the accrued liability under the plan (including 
normal cost) or (b) 160 percent of the plan's current 
liability, over (2) the value of the plan's assets (sec. 
412(c)(7)). In general, current liability is all liabilities to 
plan participants and beneficiaries accrued to date, whereas 
the accrued liability full funding limit is based on projected 
benefits. The current liability full funding limit is scheduled 
to increase as follows: 165 percent for plan years beginning in 
2003 and 2004, and 170 percent for plan years beginning in 2005 
and thereafter.\117\ In no event is a plan's full funding limit 
less than 90 percent of the plan's current liability over the 
value of the plan's assets.
---------------------------------------------------------------------------
    \117\ As originally enacted in the Pension Protection Act of 1997, 
the current liability full funding limit was 150 percent of current 
liability. The Taxpayer Relief Act of 1997 increased the current 
liability full funding limit to 155 percent in 1999 and 2000, 160 
percent in 2001 and 2002, and adopted the scheduled increases described 
in the text. Another provision would gradually increase and then repeal 
the current liability full funding limit.
---------------------------------------------------------------------------
      An employer sponsoring a defined benefit pension plan 
generally may deduct amounts contributed to satisfy the minimum 
funding standard for the plan year. Contributions in excess of 
the full funding limit generally are not deductible. Under a 
special rule, an employer that sponsors a defined benefit 
pension plan (other than a multiemployer plan) which has more 
than 100 participants for the plan year may deduct amounts 
contributed of up to 100 percent of the plan's unfunded current 
liability.
      Present law also provides that contributions to defined 
contribution plans are deductible, subject to certain 
limitations.
      Subject to certain exceptions, an employer that makes 
nondeductible contributions to a plan is subject to an excise 
tax equal to 10 percent of the amount of the nondeductible 
contributions for the year. The 10-percent excise tax does not 
apply to contributions to certain terminating defined benefit 
plans. The 10-percent excise tax also does not apply to 
contributions of up to six percent of compensation to a defined 
contribution plan for employer matching and employee elective 
deferrals.

                               House Bill

      In determining the amount of nondeductible contributions, 
the employer is permitted to elect not to take into account 
contributions to a defined benefit pension plan except to the 
extent they exceed the accrued liability full funding limit. 
Thus, if an employer elects, contributions in excess of the 
current liability full funding limit are not subject to the 
excise tax on nondeductible contributions. An employer making 
such an election for a year is not permitted to take advantage 
of the present-law exceptions for certain terminating plans and 
certain contributions to defined contribution plans. The House 
bill applies to terminated plans as well as ongoing plans.
      Effective date.--The House bill is effective for years 
beginning after December 31, 2001.

                            Senate Amendment

      The Senate amendment is the same as the House bill.

                          Conference Agreement

      The conference agreement follows the House bill and the 
Senate amendment.
            (c) Notice of significant reduction in plan benefit 
                    accruals (sec. 504 of the House bill, sec. 659 of 
                    the Senate amendment, and new sec. 4980f of the 
                    Code)

                              Present Law

      Section 204(h) of Title I of ERISA provides that a 
defined benefit pension plan or a money purchase pension plan 
may not be amended so as to provide for a significant reduction 
in the rate of future benefit accrual, unless, after adoption 
of the plan amendment and not less than 15 days before the 
effective date of the plan amendment, the plan administrator 
provides a written notice (``section 204(h) notice''), setting 
forth the plan amendment (or a summary of the amendment written 
in a manner calculated to be understood by the average plan 
participant) and its effective date. The plan administrator 
must provide the section 204(h) notice to each plan 
participant, each alternate payee under an applicable qualified 
domestic relations order (``QDRO''), and each employee 
organization representing participants in the plan. The 
applicable Treasury regulations \118\ provide, however, that a 
plan administrator need not provide the section 204(h) notice 
to any participant or alternate payee whose rate of future 
benefit accrual is reasonably expected not to be reduced by the 
amendment, nor to an employee organization that does not 
represent a participant to whom the section 204(h) notice must 
be provided. In addition, the regulations provide that the rate 
of future benefit accrual is determined without regard to 
optional forms of benefit, early retirement benefits, 
retirement-type subsidiaries, ancillary benefits, and certain 
other rights and features.
---------------------------------------------------------------------------
    \118\ Treas. Reg. sec. 1.411(d)-6.
---------------------------------------------------------------------------
      A covered amendment generally will not become effective 
with respect to any participants and alternate payees whose 
rate of future benefit accrual is reasonably expected to be 
reduced by the amendment but who do not receive a section 
204(h) notice. An amendment will become effective with respect 
to all participants and alternate payees to whom the section 
204(h) notice was required to be provided if the plan 
administrator (1) has made a good faith effort to comply with 
the section 204(h) notice requirements, (2) has provided a 
section 204(h) notice to each employee organization that 
represents any participant to whom a section 204(h) notice was 
required to be provided, (3) has failed to provide a section 
204(h) notice to no more than a de minimis percentage of 
participants and alternate payees to whom a section 204(h) 
notice was required to be provided, and (4) promptly upon 
discovering the oversight, provides a section 204(h) notice to 
each omitted participant and alternate payee.
      The Internal Revenue Code does not require any notice 
concerning a plan amendment that provides for a significant 
reduction in the rate of future benefit accrual.

                               House Bill

      The House bill adds to the Internal Revenue Code a 
requirement that the plan administrator of a defined benefit 
pension plan or a money purchase pension plan furnish a written 
notice concerning a plan amendment that provides for a 
significant reduction in the rate of future benefit accrual, 
including any elimination or reduction of an early retirement 
benefit or retirement-type subsidy. The plan administrator is 
required to provide in this notice, in a manner calculated to 
be understood by the average plan participant, sufficient 
information (as defined in Treasury regulations) to allow 
participants to understand the effect of the amendment.
      The notice requirement does not apply to governmental 
plans or church plans with respect to which an election to have 
the qualified plan participation, vesting, and funding rules 
apply has not been made (sec. 410(d)). The House bill 
authorizes the Secretary of the Treasury to provide a 
simplified notice requirement or an exemption from the notice 
requirement for planswith less than 100 participants and to 
allow any notice required under the House bill to be provided by using 
new technologies. The House bill also authorizes the Secretary to 
provide a simplified notice requirement or an exemption from the notice 
requirement if participants are given the option to choose between 
benefits under the new plan formula and the old plan formula. In such 
cases, the House bill will have no effect on the fiduciary rules 
applicable to pension plans that may require appropriate disclosure to 
participants, even if no disclosure is required under the House bill.
      The plan administrator is required to provide this notice 
to each affected participant, each affected alternate payee, 
and each employee organization representing affected 
participants. For purposes of the House bill, an affected 
participant or alternate payee is a participant or alternate 
payee whose rate of future benefit accrual may reasonably be 
expected to be significantly reduced by the plan amendment.
      Except to the extent provided by Treasury regulations, 
the plan administrator is required to provide the notice within 
a reasonable time before the effective date of the plan 
amendment. The House bill permits a plan administrator to 
provide any notice required under the House bill to a person 
designated in writing by the individual to whom it would 
otherwise be provided.
      The House bill imposes on a plan administrator that fails 
to comply with the notice requirement an excise tax equal to 
$100 per day per omitted participant and alternate payee. No 
excise tax is imposed during any period during which any person 
subject to liability for the tax did not know that the failure 
existed and exercised reasonable diligence to meet the notice 
requirement. In addition, no excise tax is imposed on any 
failure if any person subject to liability for the tax 
exercised reasonable diligence to meet the notice requirement 
and such person provides the required notice during the 30-day 
period beginning on the first date such person knew, or 
exercising reasonable diligence would have known, that the 
failure existed. Also, if the person subject to liability for 
the excise tax exercised reasonable diligence to meet the 
notice requirement, the total excise tax imposed during a 
taxable year of the employer will not exceed $500,000. 
Furthermore, in the case of a failure due to reasonable cause 
and not to willful neglect, the Secretary of the Treasury is 
authorized to waive the excise tax to the extent that the 
payment of the tax would be excessive relative to the failure 
involved.
      It is intended under the House bill that the Secretary 
issue the necessary regulations with respect to disclosure 
within 90 days of enactment. It is also intended that such 
guidance may be relatively detailed because of the need to 
provide for alternative disclosures rather than a single 
disclosure methodology that may not fit all situations, and the 
need to consider the complex actuarial calculations and 
assumptions involved in providing necessary disclosures.
      In addition, the House bill directs the Secretary of the 
Treasury to prepare a report on the effects of conversions of 
traditional defined benefit plans to cash balance or hybrid 
formula plans. Such study is to examine the effect of such 
conversions on longer service participants, including the 
incidence and effects of ``wear away'' provisions under which 
participants earn no additional benefits for a period of time 
after the conversion. The Secretary is directed to submit such 
report, together with recommendations thereon, to the Committee 
on Ways and Means and the Committee on Education and the 
Workforce of the House of Representatives and the Committee on 
Finance and the Committee on Health, Education, Labor, and 
Pensions of the Senate as soon as practicable, but not later 
than 60 days after the date of enactment.
      Effective date.--The House bill is effective for plan 
amendments taking effect on or after the date of enactment. The 
period for providing any notice required under the House bill 
will not end before the last day of the three-month period 
following the date of enactment. Prior to the issuance of 
Treasury regulations, a plan is treated as meeting the 
requirements of the House bill if the plan makes a good faith 
effort to comply with such requirements. The notice requirement 
under the House bill does not apply to any plan amendment 
taking effect on or after the date of enactment if, before 
April 25, 2001, notice is provided to participants and 
beneficiaries adversely affected by the plan amendment (or 
their representatives) that is reasonably expected to notify 
them of the nature and effective date of the plan amendment.

                            Senate Amendment

      The Senate amendment adds to the Internal Revenue Code a 
requirement that the plan administrator of a defined benefit 
pension plan furnish a written notice concerning a plan 
amendment that provides for a significant reduction in the rate 
of future benefit accrual, including any elimination or 
reduction of an early retirement benefit or retirement-type 
subsidy.\119\ The notice is required to set forth: (1) a 
summary of the plan amendment and the effective date of the 
amendment; (2) a statement that the amendment is expected to 
significantly reduce the rate of future benefit accrual; (3) a 
description of the classes of employees reasonably expected to 
be affected by the reduction in the rate of future benefit 
accrual; (4) examples illustrating the plan changes for these 
classes of employees; (5) in the event of an amendment that 
results in the significant restructuring of the plan benefit 
formula, as determined under regulations prescribed by the 
Secretary (a ``significant restructuring amendment''), a notice 
that the plan administrator will provide, generally no later 
than 15 days prior to the effective date of the amendment, a 
``benefit estimation tool kit'' (described below) that will 
enable employees who have completed at least one year of 
participation to personalize the illustrative examples; and (6) 
notice of each affected participant's right to request, and of 
the procedures for requesting, an annual benefit statement as 
provided under present law. The plan administrator is required 
to provide the notice not less than 45 days before the 
effective date of the plan amendment.
---------------------------------------------------------------------------
    \119\ The provision also modifies the present-law notice 
requirement contained in section 204(h) of Title I of ERISA to provide 
that an applicable pension plan may not be amended to provide for a 
significant reduction in the rate of future benefit accrual in the 
event of a failure by the plan administrator to exercise due diligence 
in meeting a notice requirement similar to the notice requirement that 
the provision adds to the Internal Revenue Code. In addition, the 
provision expands the current ERISA notice requirement regarding 
significant reductions in normal retirement benefit accrual rates to 
early retirement benefits and retirement-type subsidies.
---------------------------------------------------------------------------
      The notice requirement does not apply to governmental 
plans or church plans with respect to which an election to have 
the qualified plan participation, vesting, and funding rules 
apply has not been made (sec. 410(d)).
      The plan administrator is required to provide this 
generalized notice to each affected participant and each 
affected alternate payee. For purposes of the Senate amendment, 
an affected participant or alternate payee is a participant or 
alternate payee to whom the significant reduction in the rate 
of future benefit accrual is reasonably expected to apply.
      As noted above, the Senate amendment requires the plan 
administrator to provide a benefit estimation tool kit, no 
later than 15 days prior to the amendment effective date, to a 
participant for whom the amendment may reasonably be expected 
to produce a significant reduction in the rate of future 
benefit accrual if the amendment is a significant restructuring 
amendment. The plan administrator is not required to provide 
this benefit estimation tool kit to any participant who has 
less than one year of participation in the plan.
      The benefit estimation tool kit is designed to enable 
participants to estimate benefits under the old and new plan 
provisions. The Senate amendment permits the tool kit to be in 
the form of software (for use at home, at a workplace kiosk, or 
on a company intranet), worksheets, or calculation 
instructions, or other formats to be determined by the 
Secretary of the Treasury. The tool kit is required to include 
any necessary actuarial assumptions and formulas and to permit 
the participant to estimate both a single life annuity at 
appropriate ages and, when available, a lump sum distribution. 
The tool kit is required to disclose the interest rate used to 
compute a lump sum distribution and whether the value of early 
retirement benefits is included in the lump sum distribution.
      The Senate amendment requires the benefit estimation tool 
kit to accommodate employee-provided variables with respect to 
age, years of service, retirement age, covered compensation, 
and interest rate (when variable rates apply). The tool kit is 
required to permit employees to recalculate estimated benefits 
by changing the values of these variables. The Senate amendment 
does not require the tool kit to accommodate employee variables 
with respect to qualified domestic relations orders, factors 
that result in unusual patterns of credited service (such as 
extended time away from the job), special benefit formulas for 
unusual situations, offsets from other plans, and forms of 
annuity distributions.
      In the case of a significant restructuring amendment that 
occurs in connection with a business disposition or acquisition 
transaction and within one year following the date of the 
transaction, the Senate amendment requires the plan 
administrator to provide the benefit estimation tool kit prior 
to the date that is 12 months after the date on which the 
generalized notice of the amendment is given to the affected 
participants.
      The Senate amendment permits a plan administrator to 
provide any notice required under the Senate amendment to a 
person designated in writing by the individual to whom it would 
otherwise be provided. In addition, the Senate amendment 
authorizes the Secretary of the Treasury to allow any notice 
required under the Senate amendment to be provided by using new 
technologies, provided that at least one option for providing 
notice is not dependent upon new technologies.
      The Senate amendment imposes on a plan administrator that 
fails to comply with the notice requirement an excise tax equal 
to $100 per day per omitted participant and alternate payee. No 
excise tax is imposed during any period during which any person 
subject to liability for the tax did not know that the failure 
existed and exercised reasonable diligence to meet the notice 
requirement. In addition, no excise tax is imposed on any 
failure if any person subject to liability for the tax 
exercised reasonable diligence to meet the notice requirement 
and such person provides the required notice during the 30-day 
period beginning on the first date such person knew, or 
exercising reasonable diligence would have known, that the 
failure existed. Also, if the person subject to liability for 
the excise tax exercised reasonable diligence to meet the 
notice requirement, the total excise tax imposed during a 
taxable year of the employer will not exceed $500,000. 
Furthermore, in the case of a failure due to reasonable cause 
and not to willful neglect, the Secretary of the Treasury is 
authorized to waive the excise tax to the extent that the 
payment of the tax is excessive relative to the failure 
involved.
      The Senate amendment directs the Secretary of the 
Treasury to issue, not later than one year after the date of 
enactment, regulations with respect to early retirement 
benefits or retirement-type subsidies, the determination of a 
significant restructuring amendment, and the examples that are 
required under the generalized notice and the benefit 
estimation tool kit.
      In addition, the Senate amendment directs the Secretary 
of the Treasury to prepare a report on the effects of 
significant restructurings of plan benefit formulas of 
traditional defined benefit plans. Such study is to examine the 
effect of such restructurings on longer service participants, 
including the incidence and effects of ``wear away'' provisions 
under which participants earn no additional benefits for a 
period of time after the restructuring. The Secretary is 
directed to submit such report, together with recommendations 
thereon, to the Committee on Ways and Means and the Committee 
on Education and the Workforce of the House of Representatives 
and the Committee on Finance and the Committee on Health, 
Education, Labor, and Pensions of the Senate as soon as 
practicable, but not later than one year after the date of 
enactment.
      Effective date.--The Senate amendment is effective for 
plan amendments taking effect on or after the date of 
enactment. The period for providing any notice required under 
the Senate amendment will not end before the last day of the 
three-month period following the date of enactment. Prior to 
the issuance of Treasury regulations, a plan is treated as 
meeting the requirements of the Senate amendment if the plan 
makes a good faith effort to comply with such requirements.

                          Conference Agreement

      The conference agreement follows the House bill, with the 
following modifications. The conference agreement also modifies 
the present-law notice requirement contained in section 204(h) 
of Title I of ERISA to provide that an applicable pension plan 
may not be amended to provide for a significant reduction in 
the rate of future benefit accrual in the event of an egregious 
failure by the plan administrator to comply with a notice 
requirement similar to the notice requirement that the 
conference agreement adds to the Internal Revenue Code. In 
addition, the conference agreement expands the current ERISA 
notice requirement regarding significant reductions in normal 
retirement benefit accrual rates to early retirement benefits 
and retirement-type subsidies.
            (d) Modifications to section 415 limits for multiemployer 
                    plans (sec. 505 of the House bill, sec. 654 of the 
                    Senate amendment, and sec. 415 of the Code)

                              Present Law

      Under present law, limits apply to contributions and 
benefits under qualified plans (sec. 415). The limits on 
contributions and benefits under qualified plans are based on 
the type of plan.
      Under a defined benefit plan, the maximum annual benefit 
payable at retirement is generally the lesser of (1) 100 
percent of average compensation for the highest three years, or 
(2) $140,000 (for 2001). The dollar limit is adjusted for cost-
of-living increases in $5,000 increments. The dollar limit is 
reduced in the case of retirement before the social security 
retirement age and increases in the case of retirement after 
the social security retirement age.
      A special rule applies to governmental defined benefit 
plans. In the case of such plans, the defined benefit dollar 
limit is reduced in the case of retirement before age 62 and 
increased in the case of retirement after age 65. In addition, 
there is a floor on early retirement benefits. Pursuant to this 
floor, the minimum benefit payable at age 55 is $75,000.
      In the case of a defined contribution plan, the limit on 
annual is additions if the lesser of (1) 25 percent of 
compensation \120\ or (2) $35,000 (for 2001).
---------------------------------------------------------------------------
    \120\ Another provision of the House bill increases this limit to 
100 percent of compensation.
---------------------------------------------------------------------------
      In applying the limits on contributions and benefits, 
plans of the same employer are aggregated. That is, all defined 
benefit plans of the same employer are treated as a single 
plan, and all defined contribution plans of the same employer 
are treated as a single plan. Under Treasury regulations, 
multiemployer plans are not aggregated with other multiemployer 
plans. However, if an employer maintains both a plan that is 
not a multiemployer plan and a multiemployer plan, the plan 
that is not a multiemployer plan is aggregated with the 
multiemployer plan to the extent that benefits provided under 
the multiemployer plan are provided with respect to a common 
participant.\121\
---------------------------------------------------------------------------
    \121\ Treas. Reg. sec. 1.415-8(e).
---------------------------------------------------------------------------

                               House Bill

      Under the House bill, the 100 percent of compensation 
defined benefit plan limit does not apply to multiemployer 
plans. With respect to aggregation of multiemployer plans with 
other plans, the House bill provides that multiemployer plans 
are not aggregated with single-employer defined benefit plans 
maintained by an employer contributing to the multiemployer 
plan for purposes of applying the 100 percent of compensation 
limit to such single-employer plan.
      Effective date.--The House bill is effective for years 
beginning after December 31, 2001.

                            Senate Amendment

      The Senate amendment is the same as the House bill with 
respect to the waiver of the 100 percent of compensation limit.
      With respect to aggregation of multiemployer plans with 
other plans, multiemployer plans are not aggregated with any 
other plan maintained by the same employer, except for purposes 
of applying the dollar limitation on defined plans and the 
limits on annual additions to a plan that is not a 
multiemployer plan.

                          Conference Agreement

      The conference agreement follows the House bill.
            (e) Investment of employee contributions in 401(k) plans 
                    (sec. 506 of the House bill, sec. 655 of the Senate 
                    amendment, and sec. 1524(b) of the Taxpayer Relief 
                    Act of 1997)

                              Present Law

      The Employee Retirement Income Security Act of 1974, as 
amended (``ERISA'') prohibits certain employee benefit plans 
from acquiring securities or real property of the employer who 
sponsors the plan if, after the acquisition, the fair market 
value of such securities and property exceeds 10 percent of the 
fair market value of plan assets. The 10-percent limitation 
does not apply to any ``eligible individual account plans'' 
that specifically authorize such investments. Generally, 
eligible individual account plans are defined contribution 
plans, including plans containing a cash or deferred 
arrangement (``401(k) plans'').
      The term ``eligible individual account plan'' does not 
include the portion of a plan that consists of elective 
deferrals (and earnings on the elective deferrals) made under 
section 401(k) if elective deferrals equal to more than one 
percent of any employee's eligible compensation are required to 
be invested in employer securities and employer real property. 
Eligible compensation is compensation that is eligible to be 
deferred under the plan. The portion of the plan that consists 
of elective deferrals (and earnings thereon) is still treated 
as an individual account plan, and the 10-percent limitation 
does not apply, as long as elective deferrals (and earnings 
thereon) are not required to be invested in employer securities 
or employer real property.
      The rule excluding elective deferrals (and earnings 
thereon) from the definition of individual account plan does 
not apply if individual account plans are a small part of the 
employer's retirement plans. In particular, that rule does not 
apply to an individual account plan for a plan year if the 
value of the assets of all individual account plans maintained 
by the employer do not exceed 10 percent of the value of the 
assets of all pension plans maintained by the employer 
(determined as of the last day of the preceding plan year). 
Multiemployer plans are not taken into account in determining 
whether the value of the assets of all individual account plans 
maintained by the employer exceed 10 percent of the value of 
the assets of all pension plans maintained by the employer. The 
rule excluding elective deferrals (and earnings thereon)from 
the definition of individual account plan does not apply to an employee 
stock ownership plan as defined in section 4975(e)(7) of the Internal 
Revenue Code.
      The rule excluding elective deferrals (and earnings 
thereon) from the definition of individual account plan applies 
to elective deferrals for plan years beginning after December 
31, 1998 (and earnings thereon). It does not apply with respect 
to earnings on elective deferrals for plan years beginning 
before January 1, 1999.

                               House Bill

      The House bill modifies the effective date of the rule 
excluding certain elective deferrals (and earnings thereon) 
from the definition of individual account plan by providing 
that the rule does not apply to any elective deferral used to 
acquire an interest in the income or gain from employer 
securities or employer real property acquired (1) before 
January 1, 1999, or (2) after such date pursuant to a written 
contract which was binding on such date and at all times 
thereafter.
      Effective date.--The House bill is effective as if 
included in the section of the Taxpayer Relief Act of 1997 that 
contained the rule excluding certain elective deferrals (and 
earnings thereon).

                            Senate Amendment

      The Senate amendment is the same as the House bill.

                          Conference Agreement

      The conference agreement follows the House bill and the 
Senate amendment.
            (f) Periodic pension benefit statements (sec. 507 of the 
                    House bill and sec. 105(a) of ERISA)

                              Present Law

      Title I of ERISA provides that a pension plan 
administrator must furnish a benefit statement to any 
participant or beneficiary who makes a written request for such 
a statement. This statement must indicate, on the basis of the 
latest available information, (1) the participant's or 
beneficiary's total accrued benefit, and (2) the participant's 
or beneficiary's vested accrued benefit or the earliest date on 
which the accrued benefit will become vested. A participant or 
beneficiary is not entitled to receive more than one benefit 
statement during any 12-month period. The plan administrator 
must furnish the benefit statement no later than 60 days after 
receipt of the request or, if later, 120 days after the close 
of the immediately preceding plan year.
      In addition, the plan administrator must furnish a 
benefit statement to each participant whose employment 
terminates or who has a one-year break in service. For purposes 
of this benefit statement requirement, a ``one-year break in 
service'' is a calendar year, plan year, or other 12-month 
period designated by the plan during which the participant does 
not complete more than 500 hours of service for the employer. A 
participant is not entitled to receive more than one benefit 
statement with respect to consecutive breaks in service. The 
plan administrator must provide a benefit statement required 
upon termination of employment or a break in service no later 
than 180 days after the end of the plan year in which the 
termination of employment or break in service occurs.

                               House Bill

      A plan administrator of a defined contribution plan 
generally is required to furnish a benefit statement to each 
participant at least once annually and to a beneficiary upon 
written request.
      In addition to providing a benefit statement to a 
participant or beneficiary upon written request, the plan 
administrator of a defined benefit plan generally is required 
either (1) to furnish a benefit statement at least once every 
three years to each participant who has a vested accrued 
benefit and who is employed by the employer at the time the 
plan administrator furnishes the benefit statements to 
participants, or (2) to annually furnish written, electronic, 
telephonic, or other appropriate notice to each participant of 
the availability of and the manner in which the participant may 
obtain the benefit statement.
      The plan administrator is required to write the benefit 
statement in a manner calculated to be understood by the 
average plan participant and is permitted to furnish the 
statement in written, electronic, telephonic, or other 
appropriate form.
      The Secretary of Labor is authorized to provide that 
years in which no employee or former employee benefits under a 
plan need not be taken into account in determining the 
applicable three-year period.
      In addition, the Secretary of Labor is directed to 
develop a model benefit statement, written in a manner 
calculated to be understood by the average plan participant, 
that may be used by plan administrators in complying with the 
requirements of section 105 of ERISA. The use of the model 
statement is optional. It is intended that the model statement 
include items such as the amount of nonforfeitable accrued 
benefits as of the statement date that are payable at normal 
retirement age under the plan, the amount of accrued benefits 
that are forfeitable but that may become nonforfeitable under 
the terms of the plan, information on how to contact the Social 
Security Administration to obtain a participant's personal 
earnings and benefit estimate statement, and other information 
that may be important to understanding benefits earned under 
the plan. Statements provided by electronic forms of 
communications shall be provided consistent with Department of 
Labor and Department of Treasury regulations.
      Effective date.--The provision is effective for plan 
years beginning after December 31, 2002.

                            Senate Amendment

      No provision.

                          Conference Agreement

      The conference agreement does not include the House bill.
            (g) Prohibited allocations of stock in an S corporation 
                    ESOP (sec. 508 of the House bill, sec. 656 of the 
                    Senate amendment, and secs. 409 and 4979a of the 
                    Code)

                              Present Law

      The Small Business Job Protection Act of 1996 allowed 
qualified retirement plan trusts described in section 401(a) to 
own stock in an S corporation. That Act treated the plan's 
share of the S corporation's income (and gain on the 
disposition of the stock) as includible in full in the trust's 
unrelated business taxable income (``UBTI'').
      The Tax Relief Act of 1997 repealed the provision 
treating items of income or loss of an S corporation as UBTI in 
the case of an employee stock ownership plan (``ESOP''). Thus, 
the income of an S corporation allocable to an ESOP is not 
subject to current taxation.
      Present law provides a deferral of income on the sales of 
certain employer securities to an ESOP (sec. 1042). A 50-
percent excise tax is imposed on certain prohibited allocations 
of securities acquired by an ESOP in a transaction to which 
section 1042 applies. In addition, such allocations are 
currently includible in the gross income of the individual 
receiving the prohibited allocation.

                               House Bill

In general
      Under the House bill, if there is a nonallocation year 
with respect to an ESOP maintained by an S corporation: (1) the 
amount allocated in a prohibited allocation to an individual 
who is a disqualified person is treated as distributed to such 
individual (i.e., the value of the prohibited allocation is 
includible in the gross income of the individual receiving the 
prohibited allocation); (2) an excise tax is imposed on the S 
corporation equal to 50 percent of the amount involved in a 
prohibited allocation; and (3) an excise tax is imposed on the 
S corporation with respect to any synthetic equity owned by a 
disqualified person.\122\
---------------------------------------------------------------------------
    \122\ The plan is not disqualified merely because an excise tax is 
imposed under the provision.
---------------------------------------------------------------------------
      It is intended that the House bill will limit the 
establishment of ESOPs by S corporations to those that provide 
broad-based employee coverage and that benefit rank-and-file 
employees as well as highly compensated employees and 
historical owners.
Definition of nonallocation year
      A nonallocation year means any plan year of an ESOP 
holding shares in an S corporation if, at any time during the 
plan year, disqualified persons own at least 50 percent of the 
number of outstanding shares of the S corporation.
      A person is a disqualified person if the person is either 
(1) a member of a ``deemed 20-percent shareholder group'' or 
(2) a ``deemed 10-percent shareholder.'' A person is a member 
of a ``deemed 20-percent shareholder group'' if the aggregate 
number of deemed-owned shares of the person and his or her 
family members is at least 20 percent of the number of deemed-
owned shares of stock in the S corporation.\123\ A person is a 
deemed 10-percent shareholder if the person is not a member of 
a deemed 20-percent shareholder group and the number of the 
person's deemed-owned shares is at least 10 percent of the 
number of deemed-owned shares of stock of the corporation.
---------------------------------------------------------------------------
    \123\ A family member of a member of a ``deemed 20-percent 
shareholder group'' with deemed owned shares is also treated as a 
disqualified person.
---------------------------------------------------------------------------
      In general, ``deemed-owned shares'' means: (1) stock 
allocated to the account of an individual under the ESOP, and 
(2) an individual's share of unallocated stock held by the 
ESOP. An individual's share of unallocated stock held by an 
ESOP is determined in the same manner as the most recent 
allocation of stock under the terms of the plan.
      For purposes of determining whether there is a 
nonallocation year, ownership of stock generally is attributed 
under the rules of section 318,\124\ except that: (1) the 
family attribution rules are modified to include certain other 
family members, as described below, (2) option attribution does 
not apply (but instead special rules relating to synthetic 
equity described below apply), and (3) ``deemed-owned shares'' 
held by the ESOP are treated as held by the individual with 
respect to whom they are deemed owned.
---------------------------------------------------------------------------
    \124\ These attribution rules also apply to stock treated as owned 
by reason of the ownership of synthetic equity.
---------------------------------------------------------------------------
      Under the House bill, family members of an individual 
include (1) the spouse \125\ of the individual, (2) an ancestor 
or lineal descendant of the individual or his or her spouse, 
(3) a sibling of the individual (or the individual's spouse) 
and any lineal descendant of the brother or sister, and (4) the 
spouse of any person described in (2) or (3).
---------------------------------------------------------------------------
    \125\ As under section 318, an individual's spouse is not treated 
as a member of the individual's family if the spouses are legally 
separated.
---------------------------------------------------------------------------
      The House bill contains special rules applicable to 
synthetic equity interests. Except to the extent provided in 
regulations, the stock on which a synthetic equity interest is 
based are treated as outstanding stock of the S corporation and 
as deemed-owned shares of the person holding the synthetic 
equity interest if such treatment will result in the treatment 
of any person as a disqualified person or the treatment of any 
year as a nonallocation year. Thus, for example, disqualified 
persons for a year include those individuals who are 
disqualified persons under thegeneral rule (i.e., treating only 
those shares held by the ESOP as deemed-owned shares) and those 
individuals who are disqualified individuals if synthetic equity 
interests are treated as deemed-owned shares.
      ``Synthetic equity'' means any stock option, warrant, 
restricted stock, deferred issuance stock right, or similar 
interest that gives the holder the right to acquire or receive 
stock of the S corporation in the future. Except to the extent 
provided in regulations, synthetic equity also includes a stock 
appreciation right, phantom stock unit, or similar right to a 
future cash payment based on the value of such stock or 
appreciation in such value.\126\
---------------------------------------------------------------------------
    \126\ The provisions relating to synthetic equity do not modify the 
rules relating to S corporations, e.g., the circumstances in which 
options or similar interests are treated as creating a second class of 
stock.
---------------------------------------------------------------------------
      Ownership of synthetic equity is attributed in the same 
manner as stock is attributed under the House bill (as 
described above). In addition, ownership of synthetic equity is 
attributed under the rules of section 318(a)(2) and (3) in the 
same manner as stock.
Definition of prohibited allocation
      An ESOP of an S corporation is required to provide that 
no portion of the assets of the plan attributable to (or 
allocable in lieu of) S corporation stock may, during a 
nonallocation year, accrue (or be allocated directly or 
indirectly under any qualified plan of the S corporation) for 
the benefit of a disqualified person. A ``prohibited 
allocation'' refers to violations of this provision. A 
prohibited allocation occurs, for example, if income on S 
corporation stock held by an ESOP is allocated to the account 
of an individual who is a disqualified person.
Application of excise tax
      In the case of a prohibited allocation, the S corporation 
is liable for an excise tax equal to 50 percent of the amount 
of the allocation. For example, if S corporation stock is 
allocated in a prohibited allocation, the excise tax is equal 
to 50 percent of the fair market value of such stock.
      A special rule applies in the case of the first 
nonallocation year, regardless of whether there is a prohibited 
allocation. In that year, the excise tax also applies to the 
fair market value of the deemed-owned shares of any 
disqualified person held by the ESOP, even though those shares 
are not allocated to the disqualified person in that year.
      As mentioned above, the S corporation also is liable for 
an excise tax with respect to any synthetic equity interest 
owned by any disqualified person in a nonallocation year. The 
excise tax is 50 percent of the value of the shares on which 
synthetic equity is based.
Treasury regulations
      The Treasury Department is given the authority to 
prescribe such regulations as may be necessary to carry out the 
purposes of the House bill.
      Effective date.--The House bill generally is effective 
with respect to plan years beginning after December 31, 2004. 
In the case of an ESOP established after March 14, 2001, or an 
ESOP established on or before such date if the employer 
maintaining the plan was not an S corporation on such date, the 
House bill is effective with respect to plan years ending after 
March 14, 2001.

                            Senate Amendment

      The Senate amendment is the same as the House bill, with 
a modification of the effective date.
      Effective date.--The Senate amendment generally is 
effective with respect to plan years beginning after December 
31, 2002. In the case of an ESOP established after July 11, 
2000, or an ESOP established on or before such date if the 
employer maintaining the plan was not an S corporation on such 
date, the Senate amendment is effective with respect to plan 
years ending after July 11, 2000.

                          Conference Agreement

      The conference agreement follows the House bill. The 
conference agreement authorizes the Secretary to determine, by 
regulation or other guidance of general applicability, that a 
nonallocation year occurs in any case in which the principal 
purpose of the ownership structure of an S corporation 
constitutes, in substance, an avoidance or evasion of the 
prohibited allocation rules. For example, this might apply if 
more than 10 independent businesses are combined in an S 
corporation owned by an ESOP in order to take advantage of the 
income tax treatment of S corporations owned by an ESOP.
            (h) Automatic rollovers of certain mandatory distributions 
                    (sec. 657 of the Senate amendment and secs. 
                    401(a)(31) and 402(f)(1) of the Code and sec. 
                    404(c) of ERISA)

                              Present Law

      If a qualified retirement plan participant ceases to be 
employed by the employer that maintains the plan, the plan may 
distribute the participant's nonforfeitable accrued benefit 
without the consent of the participant and, if applicable, the 
participant's spouse, if the present value of the benefit does 
not exceed $5,000. If such an involuntary distribution occurs 
and the participant subsequently returns to employment covered 
by the plan, then service taken into account in computing 
benefits payable under the plan after the return need not 
include service with respect to which a benefit was 
involuntarily distributed unless the employee repays the 
benefit.
      Generally, a participant may roll over an involuntary 
distribution from a qualified plan to an IRA or to another 
qualified plan. Before making a distribution that is eligible 
for rollover, a plan administrator must provide the participant 
with a written explanation of the ability to have the 
distribution rolled over directly to an IRA or another 
qualified plan and the related tax consequences.

                               House Bill

      No provision.

                            Senate Amendment

      The Senate amendment makes a direct rollover the default 
option for involuntary distributions that exceed $1,000 and 
that are eligible rollover distributions from qualified 
retirement plans. The distribution must be rolled over 
automatically to a designated IRA, unless the participant 
affirmatively elects to have the distribution transferred to a 
different IRA or a qualified plan or to receive it directly.
      The written explanation provided by the plan 
administrator is required to explain that an automatic direct 
rollover will be made unless the participant elects otherwise. 
The plan administrator is also required to notify the 
participant in writing (as part of the general written 
explanation or separately) that the distribution may be 
transferred without cost to another IRA.
      The Senate amendment amends the fiduciary rules of ERISA 
so that, in the case of an automatic direct rollover, the 
participant is treated as exercising control over the assets in 
the IRA upon the earlier of (1) the rollover of any portion of 
the assets to another IRA, or (2) one year after the automatic 
rollover.
      The Senate amendment directs the Secretary of Labor to 
issue safe harbors under which the designation of an 
institution and investment of funds in accordance with the 
Senate amendment are deemed to satisfy the requirements of 
section 404(a) of ERISA. In addition, the Senate amendment 
authorizes and directs the Secretary of the Treasury and the 
Secretary of Labor to give consideration to providing special 
relief with respect to the use of low-cost individual 
retirement plans for purposes of the provision and for other 
uses that promote the preservation of tax-qualified retirement 
assets for retirement income purposes.
      Effective date.--The Senate amendment applies to 
distributions that occur after the Department of Labor has 
adopted final regulations implementing the Senate amendment.

                          Conference Agreement

      The conference agreement follows the Senate amendment, 
with modifications. The conference agreement directs the 
Secretary of Labor to adopt final regulations implementing the 
conference agreement not later than three years after the date 
of enactment.
            (i) Clarification of treatment of contributions to a 
                    multiemployer plan (sec. 658 of the bill)

                              Present Law

      Employer contributions to one or more qualified 
retirement plans are deductible subject to certain limits. In 
general, contributions are deductible for the taxable year of 
the employer in which the contributions are made. Under a 
special rule, an employer may be deemed to have made a 
contribution on the last day of the preceding taxable year if 
the contribution is on account of the preceding taxable year 
and is made not later than the time prescribed by law for 
filing the employer's income tax return for that taxable year 
(including extensions).\127\
---------------------------------------------------------------------------
    \127\ Section 404(a)(6).
---------------------------------------------------------------------------
      A change in method of accounting includes a change in the 
overall plan of accounting for gross income or deductions or a 
change in the treatment of any material item used in such 
overall plan. A material item is any item that involves the 
proper time for the inclusion of the item in income or taking 
of a deduction.\128\ A change in method of accounting does not 
include correction of mathematical or posting errors, or errors 
in the computation of tax liability. Also, a change in method 
of accounting does not include adjustment of any item of income 
or deduction that does not involve the proper time for the 
inclusion of the item of income or the taking of a deduction. A 
change in method of accounting also does not include a change 
in treatment resulting from a change in underlying facts.
---------------------------------------------------------------------------
    \128\ Treas. Reg. sec. 1.446-1(e)(2)(ii)(a).
---------------------------------------------------------------------------

                               House Bill

      No provision.

                            Senate Amendment

      The Senate amendment clarifies that a determination of 
whether contributions to multiemployer pension plans are on 
account of a prior year under section 404(a)(6) is not a method 
of accounting. Thus, any taxpayer that begins to deduct 
contributions to multiemployer plans as provided in section 
404(a)(6) has not changed its method of accounting and is not 
subject to an adjustment under section 481. The Senate 
amendment is intended to respect, not disturb, the effect of 
the statute of limitations. The Senate amendment is not 
intended to permit, as of the end of the taxable year, 
aggregate deductions for contributions to a qualified plan in 
excess of the amounts actually contributed or deemed 
contributed to the plan by the taxpayer. The Secretary of the 
Treasury is authorized to promulgate regulations to clarify 
that, in the aggregate, no taxpayer will be permitted 
deductions in excess of amounts actually contributed to 
multiemployer plans, taking into account the provisions of 
section 404(a)(6).
      No inference is intended regarding whether the 
determination of whether a contribution to a multiemployer 
pension plan on account of a prior year under section 404(a)(6) 
is a method of accounting prior to the effective date of the 
provision.
      Effective date.--The Senate amendment is effective after 
the date of enactment.

                          Conference Agreement

      The conference agreement follows the Senate amendment.
5. Reducing regulatory burdens
            (a) Modification of timing of plan valuations (sec. 601 of 
                    the House bill, sec. 661 of the Senate amendment, 
                    and sec. 412 of the Code)

                              Present Law

      Under present law, plan valuations are generally required 
annually for plans subject to the minimum funding rules. Under 
proposed Treasury regulations, except as provided by the 
Commissioner, the valuation must be as of a date within the 
plan year to which the valuation refers or within the month 
prior to the beginning of that year.\129\
---------------------------------------------------------------------------
    \129\ Prop. Treas. Reg. sec. 1.412(c)(9)-1(b)(1).
---------------------------------------------------------------------------

                               House Bill

      The House bill incorporates into the statute the proposed 
regulation regarding the date of valuations. The House bill 
also provides, as an exception to this general rule, that the 
valuation date with respect to a plan year may be any date 
within the immediately preceding plan year if, as of such date, 
plan assets are not less than 125 percent of the plan's current 
liability. Information determined as of such date is required 
to be adjusted actuarially, in accordance with Treasury 
regulations, to reflect significant differences in plan 
participants. An election to use a prior plan year valuation 
date, once made, may only be revoked with the consent of the 
Secretary.
      Effective date.--The House bill is effective for plan 
years beginning after December 31, 2001.

                            Senate Amendment

      The Senate amendment is the same as the House bill.

                          Conference Agreement

      The conference agreement incorporates into the statute 
the proposed regulation regarding the date of valuations. The 
conference agreement also provides, as an exception to this 
general rule, that the valuation date with respect to a plan 
year may be any date within the immediately preceding plan year 
if, as of such date, plan assets are not less than 100 percent 
of the plan's current liability. Information determined as of 
such date is required to be adjusted actuarially, in accordance 
with Treasury regulations, to reflect significant differences 
in plan participants. A change in funding method to take 
advantage of the exception to the general rule may not be made 
unless, as of such date, plan assets are not less than 125 
percent of the plan's current liability. The Secretary is 
directed to automatically approve changes in funding method to 
use a prior year valuation date if the change is within the 
first three years that the plan is eligible to make the change.
            (b) ESOP dividends may be reinvested without loss of 
                    dividend deduction (sec. 602 of the House bill, 
                    sec. 662 of the Senate amendment, and sec. 404 of 
                    the Code)

                              Present Law

      An employer is entitled to deduct certain dividends paid 
in cash during the employer's taxable year with respect to 
stock of the employer that is held by an employee stock 
ownership plan (``ESOP''). The deduction is allowed with 
respect to dividends that, in accordance with plan provisions, 
are (1) paid in cash directly to the plan participants or their 
beneficiaries, (2) paid to the plan and subsequently 
distributed to the participants or beneficiaries in cash no 
later than 90 days after the close of the plan year in which 
the dividends are paid to the plan, or (3) used to make 
payments on loans (including payments of interest as well as 
principal) that were used to acquire the employer securities 
(whether or not allocated to participants) with respect to 
which the dividend is paid.
      The Secretary may disallow the deduction for any ESOP 
dividend if he determines that the dividend constitutes, in 
substance, an evasion of taxation (sec. 404(k)(5)).

                               House Bill

      In addition to the deductions permitted under present law 
for dividends paid with respect to employer securities that are 
held by an ESOP, an employer is entitled to deduct dividends 
that, at the election of plan participants or their 
beneficiaries, are (1) payable in cash directly to plan 
participants or beneficiaries, (2) paid to the plan and 
subsequently distributed to the participants or beneficiaries 
in cash no later than 90 days after the close of the plan year 
in which the dividends are paid to the plan, or (3) paid to the 
plan and reinvested in qualifying employer securities.
      The House bill permits the Secretary to disallow the 
deduction for any ESOP dividend if the Secretary determines 
that the dividend constitutes, in substance, the avoidance or 
evasion of taxation.
      Effective date.--The House bill is effective for taxable 
years beginning after December 31, 2001.

                            Senate Amendment

      In addition to the deductions permitted under present law 
for dividends paid with respect to employer securities that are 
held by an ESOP, an employer is entitled to deduct the 
applicable percentage of dividends that, at the election of 
plan participants or their beneficiaries, are (1) payable in 
cash directly to plan participants or beneficiaries, (2) paid 
to the plan and subsequently distributed to the participants or 
beneficiaries in cash no later than 90 days after the close of 
the plan year in which the dividends are paid to the plan, or 
(3) paid to the plan and reinvested in qualifying employer 
securities. The applicable percentage is 25 percent for 2002 
through 2004, 50 percent for 2005 through 2007, 75 percent for 
2008 through 2010 and 100 percent for 2011 and thereafter.

                          Conference Agreement

      The conference agreement follows the House bill. The 
provision of the conference agreement that authorizes the 
Secretary to disallow the deduction for any ESOP dividend if 
the Secretary determines that the dividend constitutes, in 
substance, the avoidance or evasion of taxation includes 
authority to disallow a deduction of unreasonable dividends. 
For purposes of the section 404(k)(2)(A)(iii) reinvested 
dividends, a dividend paid on common stock that is primarily 
and regularly traded on an established securities market would 
be reasonable. In addition, for this purpose in the case of 
employers with no common stock (determined on a controlled 
group basis) that is primarily and regularly traded on an 
established securities market, the reasonableness of a dividend 
is determined by comparing the dividend rate on stock held by 
the ESOP with the dividend rate for common stock of comparable 
corporations whose stock is primarily and regularly traded on 
an established securities market. Whether a corporation is 
comparable is determined by comparing relevant corporate 
characteristics such as industry, corporate size, earnings, 
debt-equity structure and dividend history.
            (c) Repeal transition rule relating to certain highly 
                    compensated employees (sec. 603 of the House bill, 
                    sec. 663 of the Senate amendment, and sec. 
                    1114(c)(4) of the Tax Reform Act of 1986)

                              Present Law

      Under present law, for purposes of the rules relating to 
qualified plans, a highly compensated employee is generally 
defined as an employee \130\ who (1) was a five-percent owner 
of the employer at any time during the year or the preceding 
year or (2) either (a) had compensation for the preceding year 
in excess of $85,000 (for 2001) or (b) at the election of the 
employer, had compensation in excess of $85,000 for the 
preceding year and was in the top 20 percent of employees by 
compensation for such year.
---------------------------------------------------------------------------
    \130\ An employee includes a self-employed individual.
---------------------------------------------------------------------------
      Under a rule enacted in the Tax Reform Act of 1986, a 
special definition of highly compensated employee applies for 
purposes of the nondiscrimination rules relating to qualified 
cash or deferred arrangements (``section 401(k) plans'') and 
matching contributions. This special definition applies to an 
employer incorporated on December 15, 1924, that meets certain 
specific requirements.

                               House Bill

      The House bill repeals the special definition of highly 
compensated employee under the Tax Reform Act of 1986. Thus, 
the present-law definition applies.
      Effective date.--The House bill is effective for plan 
years beginning after December 31, 2001.

                            Senate Amendment

      The Senate amendment is the same as the House bill.

                          Conference Agreement

      The conference agreement follows the House bill and the 
Senate amendment.
            (d) Employees of tax-exempt entities (sec. 604 of the House 
                    bill and sec. 664 of the Senate amendment)

                              Present Law

      The Tax Reform Act of 1986 provided that nongovernmental 
tax-exempt employers were not permitted to maintain a qualified 
cash or deferred arrangement (``section 401(k) plan''). This 
prohibition was repealed, effective for years beginning after 
December 31, 1996, by the Small Business Job Protection Act of 
1996.
      Treasury regulations provide that, in applying the 
nondiscrimination rules to a section 401(k) plan (or a section 
401(m) plan that is provided under the same general arrangement 
as the section 401(k) plan), the employer may treat as 
excludable those employees of a tax-exempt entity who could not 
participate in the arrangement due to the prohibition on 
maintenance of a section 401(k) plan by such entities. Such 
employees may be disregarded only if more than 95 percent of 
the employees who could participate in the section 401(k) plan 
benefit under the plan for the plan year.\131\
---------------------------------------------------------------------------
    \131\ Treas. Reg. sec. 1.410(b)-6(g).
---------------------------------------------------------------------------
      Tax-exempt charitable organizations may maintain a tax-
sheltered annuity (a ``section 403(b) annuity'') that allows 
employees to make salary reduction contributions.

                               House Bill

      The Treasury Department is directed to revise its 
regulations under section 410(b) to provide that employees of a 
tax-exempt charitable organization who are eligible to make 
salary reduction contributions under a section 403(b) annuity 
may be treated as excludable employees for purposes of testing 
a section 401(k) plan, or a section 401(m) plan that is 
provided under the same general arrangement as the section 
401(k) plan of the employer if (1) no employee of such tax-
exempt entity is eligible to participate in the section 401(k) 
or 401(m) plan and (2) at least 95 percent of the employees who 
are not employees of the charitable employer are eligible to 
participate in such section 401(k) plan or section 401(m) plan.
      The revised regulations are to be effective for years 
beginning after December 31, 1996.
      Effective date.--The House bill is effective on the date 
of enactment.

                            Senate Amendment

      The Senate amendment is the same as the House bill.

                          Conference Agreement

      The conference agreement follows the House bill and the 
Senate amendment.
            (e) Treatment of employer-provided retirement advice (sec. 
                    605 of the House bill, sec. 665 of the Senate 
                    amendment, and sec. 132 of the Code)

                              Present Law

      Under present law, certain employer-provided fringe 
benefits are excludable from gross income (sec. 132) and wages 
for employment tax purposes. These excludable fringe benefits 
include working condition fringe benefits and de minimis 
fringes. In general, a working condition fringe benefit is any 
property or services provided by an employer to an employee to 
the extent that, if the employee paid for such property or 
services, such payment would be allowable as a deduction as a 
business expense. A de minimis fringe benefit is any property 
or services provided by the employer the value of which, after 
taking into account the frequency with which similar fringes 
are provided, is so small as to make accounting for it 
unreasonable or administratively impracticable.
      In addition, if certain requirements are satisfied, up to 
$5,250 annually of employer-provided educational assistance is 
excludable from gross income (sec. 127) and wages. This 
exclusion expires with respect to courses beginning after 
December 31, 2001.\132\ Education not excludable under section 
127 may be excludable as a working condition fringe.
---------------------------------------------------------------------------
    \132\ The exclusion does not apply with respect to graduate-level 
courses.
---------------------------------------------------------------------------
      There is no specific exclusion under present law for 
employer-provided retirement planning services. However, such 
services may be excludable as employer-provided educational 
assistance or a fringe benefit.

                               House Bill

      Qualified retirement planning services provided to an 
employee and his or her spouse by an employer maintaining a 
qualified plan are excludable from income and wages. The 
exclusion does not apply with respect to highly compensated 
employees unless the services are available on substantially 
the same terms to each member of the group of employees 
normally provided education and information regarding the 
employer's qualified plan. ``Qualified retirement planning 
services'' are retirement planning advice and information. The 
exclusion is not limited to information regarding the qualified 
plan, and, thus, for example, applies to advice and information 
regarding retirement income planning for an individual and his 
or her spouse and how the employer's plan fits into the 
individual's overall retirement income plan. On the other hand, 
the exclusion does not apply to services that may be related to 
retirement planning, such as tax preparation, accounting, legal 
or brokerage services.
      It is intended that the House bill will clarify the 
treatment of retirement advice provided in a nondiscriminatory 
manner. It is intended that the Secretary, in determining the 
application of the exclusion to highly compensated employees, 
may permit employers to take into consideration employee 
circumstances other than compensation and position in providing 
advice to classifications of employees. Thus, for example, the 
Secretary may permit employers to limit certain advice to 
individuals nearing retirement age under the plan.
      Effective date.--The House bill is effective with respect 
to years beginning after December 31, 2001.

                            Senate Amendment

      The Senate amendment is the same as the House bill.

                          Conference Agreement

      The conference agreement follows the House bill and the 
Senate amendment.
            (f) Reporting simplification (sec. 606 of the House bill 
                    and sec. 666 of the Senate amendment)

                              Present Law

      A plan administrator of a pension, annuity, stock bonus, 
profit-sharing or other funded plan of deferred compensation 
generally must file with the Secretary of the Treasury an 
annual return for each plan year containing certain information 
with respect to the qualification, financial condition, and 
operation of the plan. Title I of ERISA also may require the 
plan administrator to file annual reports concerning the plan 
with the Department of Labor and the Pension Benefit Guaranty 
Corporation (``PBGC''). The plan administrator must use the 
Form 5500 series as the format for the required annual 
return.\133\ The Form 5500 series annual return/report, which 
consists of a primary form and various schedules, includes the 
information required to be filed with all three agencies. The 
plan administrator satisfies the reporting requirement with 
respect to each agency by filing the Form 5500 series annual 
return/report with the Department of Labor, which forwards the 
form to the Internal Revenue Service and the PBGC.
---------------------------------------------------------------------------
    \133\ Treas. Reg. sec. 301.6058-1(a).
---------------------------------------------------------------------------
      The Form 5500 series consists of two different forms: 
Form 5500 and Form 5500-EZ. Form 5500 is the more comprehensive 
of the forms and requires the most detailed financial 
information. A plan administrator generally may file Form 5500-
EZ, which consists of only one page, if (1) the only 
participants in the plan are the sole owner of a business that 
maintains the plan (and such owner's spouse), or partners in a 
partnership that maintains the plan (and such partners' 
spouses), (2) the plan is not aggregated with another plan in 
order to satisfy the minimum coverage requirements of section 
410(b), (3) the employer is not a member of a related group of 
employers, and (4) the employer does not receive the services 
of leased employees. If the plan satisfies the eligibility 
requirements for Form 5500-EZ and the total value of the 
planassets as of the end of the plan year and all prior plan years 
beginning on or after January 1, 1994, does not exceed $100,000, the 
plan administrator is not required to file a return.
      With respect to a plan that does not satisfy the 
eligibility requirements for Form 5500-EZ, the characteristics 
and the size of the plan determine the amount of detailed 
financial information that the plan administrator must provide 
on Form 5500. If the plan has more than 100 participants at the 
beginning of the plan year, the plan administrator generally 
must provide more information.

                               House Bill

      The Secretary of the Treasury is directed to modify the 
annual return filing requirements with respect to plans that 
satisfy the eligibility requirements for Form 5500-EZ to 
provide that if the total value of the plan assets of such a 
plan as of the end of the plan year and all prior plan years 
beginning on or after January 1, 1994, does not exceed 
$250,000, the plan administrator is not required to file a 
return. In addition, the House bill directs the Secretary of 
the Treasury and the Secretary of Labor to provide simplified 
reporting requirements for certain plans with fewer than 25 
employees.
      Effective date.--The House bill is effective on January 
1, 2002.

                            Senate Amendment

      The Senate amendment is the same as the House bill, with 
the following modification. The Senate amendment does not 
include the direction to the Secretary of the Treasury and the 
Secretary of Labor to provide simplified reporting requirements 
for certain plans with fewer than 25 employees.

                          Conference Agreement

      The conference agreement does not include the House bill 
or the Senate amendment.
            (g) Improvement to Employee Plans Compliance Resolution 
                    System (sec. 607 of the House bill and sec. 667 of 
                    the Senate amendment)

                              Present Law

      A retirement plan that is intended to be a tax-qualified 
plan provides retirement benefits on a tax-favored basis if the 
plan satisfies all of the requirements of section 401(a). 
Similarly, an annuity that is intended to be a tax-sheltered 
annuity provides retirement benefits on a tax-favored basis if 
the program satisfies all of the requirements of section 
403(b). Failure to satisfy all of the applicable requirements 
of section 401(a) or section 403(b) may disqualify a plan or 
annuity for the intended tax-favored treatment.
      The Internal Revenue Service (``IRS'') has established 
the Employee Plans Compliance Resolution System (``EPCRS''), 
which is a comprehensive system of correction programs for 
sponsors of retirement plans and annuities that are intended, 
but have failed, to satisfy the requirements of section 401(a), 
section 403(a), or section 403(b), as applicable.\134\ EPCRS 
permits employers to correct compliance failures and continue 
to provide their employees with retirement benefits on a tax-
favored basis.
---------------------------------------------------------------------------
    \134\ Rev. Proc. 2001-17, 2001-7 I.R.B. 589.
---------------------------------------------------------------------------
      The IRS has designed EPCRS to (1) encourage operational 
and formal compliance, (2) promote voluntary and timely 
correction of compliance failures, (3) provide sanctions for 
compliance failures identified on audit that are reasonable in 
light of the nature, extent, and severity of the violation, (4) 
provide consistent and uniform administration of the correction 
programs, and (5) permit employers to rely on the availability 
of EPCRS in taking corrective actions to maintain the tax-
favored status of their retirement plans and annuities.
      The basic elements of the programs that comprise EPCRS 
are self-correction, voluntary correction with IRS approval, 
and correction on audit. The Self-Correction Program (``SCP'') 
generally permits a plan sponsor that has established 
compliance practices to correct certain insignificant failures 
at any time (including during an audit), and certain 
significant failures within a two-year period, without payment 
of any fee or sanction. The Voluntary Correction Program 
(``VCP'') program permits an employer, at any time before an 
audit, to pay a limited fee and receive IRS approval of a 
correction. For a failure that is discovered on audit and 
corrected, the Audit Closing Agreement Program (``Audit CAP'') 
provides for a sanction that bears a reasonable relationship to 
the nature, extent, and severity of the failure and that takes 
into account the extent to which correction occurred before 
audit.
      The IRS has expressed its intent that EPCRS will be 
updated and improved periodically in light of experience and 
comments from those who use it.

                               House Bill

      The Secretary of the Treasury is directed to continue to 
update and improve EPCRS, giving special attention to (1) 
increasing the awareness and knowledge of small employers 
concerning the availability and use of EPCRS, (2) taking into 
account special concerns and circumstances that small employers 
face with respect to compliance and correction of compliance 
failures, (3) extending the duration of the self-correction 
period under SCP for significant compliance failures, (4) 
expanding the availability to correct insignificant compliance 
failures under SCP during audit, and (5) assuring that any tax, 
penalty, or sanction that is imposed by reason of a compliance 
failure is not excessive and bears a reasonable relationship to 
the nature, extent, and severity of the failure.
      Effective date.--The House bill is effective on the date 
of enactment.

                            Senate Amendment

      The Senate amendment is the same as the House bill.

                          conference agreement

      The conference agreement does not include the House bill 
or the Senate amendment.
            (h) Repeal of the multiple use test (sec. 608 of the House 
                    bill, sec. 668 of the Senate amendment, and sec. 
                    401(m) of the Code)

                              Present Law

      Elective deferrals under a qualified cash or deferred 
arrangement (``section 401(k) plan'') are subject to a special 
annual nondiscrimination test (``ADP test''). The ADP test 
compares the actual deferral percentages (``ADPs'') of the 
highly compensated employee group and the nonhighly compensated 
employee group. The ADP for each group generally is the average 
of the deferral percentages separately calculated for the 
employees in the group who are eligible to make elective 
deferrals for all or a portion of the relevant plan year. Each 
eligible employee's deferral percentage generally is the 
employee's elective deferrals for the year divided by the 
employee's compensation for the year.
      The plan generally satisfies the ADP test if the ADP of 
the highly compensated employee group for the current plan year 
is either (1) not more than 125 percent of the ADP of the 
nonhighly compensated employee group for the prior plan year, 
or (2) not more than 200 percent of the ADP of the nonhighly 
compensated employee group for the prior plan year and not more 
than two percentage points greater than the ADP of the 
nonhighly compensated employee group for the prior plan year.
      Employer matching contributions and after-tax employee 
contributions under a defined contribution plan also are 
subject to a special annual nondiscrimination test (``ACP 
test''). The ACP test compares the actual deferral percentages 
(``ACPs'') of the highly compensated employee group and the 
nonhighly compensated employee group. The ACP for each group 
generally is the average of the contribution percentages 
separately calculated for the employees in the group who are 
eligible to make after-tax employee contributions or who are 
eligible for an allocation of matching contributions for all or 
a portion of the relevant plan year. Each eligible employee's 
contribution percentage generally is the employee's aggregate 
after-tax employee contributions and matching contributions for 
the year divided by the employee's compensation for the year.
      The plan generally satisfies the ACP test if the ACP of 
the highly compensated employee group for the current plan year 
is either (1) not more than 125 percent of the ACP of the 
nonhighly compensated employee group for the prior plan year, 
or (2) not more than 200 percent of the ACP of the nonhighly 
compensated employee group for the prior plan year and not more 
than two percentage points greater than the ACP of the 
nonhighly compensated employee group for the prior plan year.
      For any year in which (1) at least one highly compensated 
employee is eligible to participate in an employer's plan or 
plans that are subject to both the ADP test and the ACP test, 
(2) the plan subject to the ADP test satisfies the ADP test but 
the ADP of the highly compensated employee group exceeds 125 
percent of the ADP of the nonhighly compensated employee group, 
and (3) the plan subject to the ACP test satisfies the ACP test 
but the ACP of the highly compensated employee group exceeds 
125 percent of the ACP of the nonhighly compensated employee 
group, an additional special nondiscrimination test (``multiple 
use test'') applies to the elective deferrals, employer 
matching contributions, and after-tax employee contributions. 
The plan or plans generally satisfy the multiple use test if 
the sum of the ADP and the ACP of the highly compensated 
employee group does not exceed the greater of (1) the sum of 
(A) 1.25 times the greater of the ADP or the ACP of the 
nonhighly compensated employee group, and (B) two percentage 
points plus (but not more than two times) the lesser of the ADP 
or the ACP of the nonhighly compensated employee group, or (2) 
the sum of (A) 1.25 times the lesser of the ADP or the ACP of 
the nonhighly compensated employee group, and (B) two 
percentage points plus (but not more than two times) the 
greater of the ADP or the ACP of the nonhighly compensated 
employee group.

                               house bill

      The House bill repeals the multiple use test.
      Effective date.--The House bill is effective for years 
beginning after December 31, 2001.

                            senate amendment

      The Senate amendment is the same as the House bill.

                          conference agreement

      The conference agreement follows the House bill and the 
Senate amendment.
            (i) Flexibility in nondiscrimination, coverage, and line of 
                    business rules (sec. 609 of the House bill, sec. 
                    669 of the Senate amendment, and secs. 401(a)(4), 
                    410(b), and 414(r) of the Code)

                              Present Law

      A plan is not a qualified retirement plan if the 
contributions or benefits provided under the plan discriminate 
in favor of highly compensated employees (sec. 401(a)(4)). The 
applicable Treasury regulations set forth the exclusive rules 
for determining whether a plan satisfies the nondiscrimination 
requirement. These regulations state that the form of the plan 
and the effect of the plan in operation determine whether the 
plan is nondiscriminatory and that intent is irrelevant.
      Similarly, a plan is not a qualified retirement plan if 
the plan does not benefit a minimum number of employees (sec. 
410(b)). A plan satisfies this minimum coverage requirement if 
and only if it satisfies one of the tests specified in the 
applicable Treasury regulations. If an employer is treated as 
operating separate lines of business, the employer may apply 
the minimum coverage requirements to a plan separately with 
respect to the employees in each separate line of business 
(sec. 414(r)). Under a so-called ``gateway'' requirement, 
however, the plan must benefit a classification of employees 
that does not discriminate in favor of highly compensated 
employees in order for the employer to apply the minimum 
coverage requirements separately forthe employees in each 
separate line of business. A plan satisfies this gateway requirement 
only if it satisfies one of the tests specified in the applicable 
Treasury regulations.

                               house bill

      The Secretary of the Treasury is directed to modify, on 
or before December 31, 2003, the existing regulations issued 
under section 414(r) in order to expand (to the extent that the 
Secretary may determine to be appropriate) the ability of a 
plan to demonstrate compliance with the line of business 
requirements based upon the facts and circumstances surrounding 
the design and operation of the plan, even though the plan is 
unable to satisfy the mechanical tests currently used to 
determine compliance.
      The Secretary of the Treasury is directed to provide by 
regulation applicable to years beginning after December 31, 
2003, that a plan is deemed to satisfy the nondiscrimination 
requirements of section 401(a)(4) if the plan satisfies the 
pre-1994 facts and circumstances test, satisfies the conditions 
prescribed by the Secretary to appropriately limit the 
availability of such test, and is submitted to the Secretary 
for a determination of whether it satisfies such test (to the 
extent provided by the Secretary).
      Similarly, a plan complies with the minimum coverage 
requirement of section 410(b) if the plan satisfies the pre-
1989 coverage rules, is submitted to the Secretary for a 
determination of whether it satisfies the pre-1989 coverage 
rules (to the extent provided by the Secretary), and satisfies 
conditions prescribed by the Secretary by regulation that 
appropriately limit the availability of the pre-1989 coverage 
rules.
      Effective date.--The provision of the House bill relating 
to the line of business requirements under section 414(r) is 
effective on the date of enactment. The provision relating to 
the nondiscrimination requirements under section 401(a)(4) is 
effective on the date of enactment, except that any condition 
of availability prescribed by the Secretary is not effective 
before the first year beginning not less than 120 days after 
the date on which such condition is prescribed. The provision 
relating to the minimum coverage requirements under section 
410(b) is effective for years beginning after December 31, 
2003, except that any condition of availability prescribed by 
the Secretary by regulation does not apply before the first 
year beginning not less than 120 days after the date on which 
such condition is prescribed.

                            senate amendment

      The Senate amendment is the same as the House bill, with 
the following modification. The Senate amendment provides that 
the regulations required with respect to the nondiscrimination 
requirements of section 401(a)(4) are to be applicable to plan 
years beginning after December 31, 2001, and that the 
regulations required with respect to the line of business 
requirements of section 414(r) are to be issued by December 31, 
2001.

                          conference agreement

      The conference agreement does not include the House bill 
or the Senate amendment.
            (j) Extension to all governmental plans of moratorium on 
                    application of certain nondiscrimination rules 
                    applicable to state and local government plans 
                    (sec. 610 of the House bill, sec. 670 of the Senate 
                    amendment, sec. 1505 of the Taxpayer Relief Act of 
                    1997, and secs. 401(a) and 401(k) of the Code)

                              present law

      A qualified retirement plan maintained by a State or 
local government is exempt from the rules concerning 
nondiscrimination (sec. 401(a)(4)) and minimum participation 
(sec. 401(a)(26)). All other governmental plans are not exempt 
from the nondiscrimination and minimum participation rules.

                               house bill

      The House bill exempts all governmental plans (as defined 
in sec. 414(d)) from the nondiscrimination and minimum 
participation rules.
      Effective date.--The House bill is effective for plan 
years beginning after December 31, 2001.

                            senate amendment

      The Senate amendment is the same as the House bill.

                          conference agreement

      The conference agreement does not include the House bill 
or the Senate amendment.
            (k) Notice and consent period regarding distributions (sec. 
                    611 of the House bill and sec. 417 of the Code)

                              present law

      Notice and consent requirements apply to certain 
distributions from qualified retirement plans. These 
requirements relate to the content and timing of information 
that a plan must provide to a participant prior to a 
distribution, and to whether the plan must obtain the 
participant's consent to the distribution. The nature and 
extent of the notice and consent requirements applicable to a 
distribution depend upon the value of the participant's vested 
accrued benefit and whether the joint and survivor annuity 
requirements (sec. 417) apply to the participant.\135\
---------------------------------------------------------------------------
    \135\ Similar provisions are contained in Title I of ERISA.
---------------------------------------------------------------------------
      If the present value of the participant's vested accrued 
benefit exceeds $5,000, the plan may not distribute the 
participant's benefit without the written consent of the 
participant. The participant's consent to a distribution is not 
valid unless the participant has received from the plan a 
notice that contains a written explanation of (1) the material 
features and the relative values of the optional forms of 
benefit available under the plan, (2) the participant's right, 
if any, to have the distribution directly transferred to 
another retirement plan or IRA, and (3) the rules concerning 
the taxation of a distribution. If the joint and survivor 
annuity requirements apply to the participant, this notice also 
must contain a written explanation of (1) the terms and 
conditions of the qualified joint and survivor annuity 
(``QJSA''), (2) the participant's right to make, and the effect 
of, an election to waive the QJSA, (3) the rights of the 
participant's spouse with respect to a participant's waiver of 
the QJSA, and (4) the right to make, and the effect of, a 
revocation of a waiver of the QJSA. The plan generally must 
provide this notice to the participant no less than 30 and no 
more than 90 days before the date distribution commences.
      If the participant's vested accrued benefit does not 
exceed $5,000, the terms of the plan may provide for 
distribution without the participant's consent. The plan 
generally is required, however, to provide to the participant a 
notice that contains a written explanation of (1) the 
participant's right, if any, to have the distribution directly 
transferred to another retirement plan or IRA, and (2) the 
rules concerning the taxation of a distribution. The plan 
generally must provide this notice to the participant no less 
than 30 and no more than 90 days before the date distribution 
commences.

                               house bill

      A qualified retirement plan is required to provide the 
applicable distribution notice no less than 30 days and no more 
than 180 days before the date distribution commences. The 
Secretary of the Treasury is directed to modify the applicable 
regulations to reflect the extension of the notice period to 
180 days and to provide that the description of a participant's 
right, if any, to defer receipt of a distribution shall also 
describe the consequences of failing to defer such receipt.
      Effective date.--The House bill is effective for years 
beginning after December 31, 2001.

                            senate amendment

      No provision.

                          conference agreement

      The conference agreement does not include the House bill.
            (l) Annual report dissemination (sec. 612 of the House bill 
                    and sec. 104(b)(3) of ERISA)

                              present law

      Title I of ERISA generally requires the plan 
administrator of each employee pension benefit plan and each 
employee welfare benefit plan to file an annual report 
concerning the plan with the Secretary of Labor within seven 
months after the end of the plan year. Within nine months after 
the end of the plan year, the plan administrator generally must 
furnish to each participant and to each beneficiary receiving 
benefits under the plan a summary of the annual report filed 
with the Secretary of Labor for the plan year.

                               house bill

      The requirement that a plan administrator furnish a 
summary annual report is satisfied if the report is made 
reasonably available through electronic means or other new 
technology. The interpretation of the House bill is to be 
consistent with the regulations of the Department of Labor and 
the Department of the Treasury.
      Effective date.--The House bill is effective for reports 
for years beginning after December 31, 2000.

                            senate amendment

      No provision.

                          conference agreement

      The conference agreement does not include the House bill.
            (m) Modifications to the SAVER Act (sec. 613 of the House 
                    bill and sec. 517 of ERISA)

                              present law

      The Savings Are Vital to Everyone's Retirement 
(``SAVER'') Act initiated a public-private partnership to 
educate American workers about retirement savings and directed 
the Department of Labor to maintain an ongoing program of 
public information and outreach. The Act also convened a 
National Summit on Retirement Savings held June 4-5, 1998, and 
to be held again in 2001 and 2005, co-hosted by the President 
and the bipartisan Congressional leadership. The National 
Summit brings together experts in the fields of employee 
benefits and retirement savings, key leaders of government, and 
interested parties from the private sector and general public. 
The delegates are selected by the Congressional leadership and 
the President. The National Summit is a public-private 
partnership, receiving substantial funding from private sector 
contributions. The goals of the National Summits are to: (1) 
advance the public's knowledge and understanding of retirement 
savings and facilitate the development of a broad-based, public 
education program; (2) identify the barriers which hinder 
workers from setting aside adequate savings for retirement and 
impede employers, especially small employers, from assisting 
their workers in accumulating retirement savings; and (3) 
develop specific recommendations for legislative, executive, 
and private sector actions to promote retirement income savings 
among American workers.

                               house bill

      The House bill clarifies that future National Summits on 
Retirement Savings are to be held in the month of September in 
2001 and 2005, and adds an additional National Summit in 2009. 
To facilitate the administration of future National Summits, 
the Department of Labor is given authority to enter into 
cooperative agreements (pursuant to the Federal Grant and 
Cooperative Agreement Act of 1977) with its 1999 summit 
partner, the American Savings Education Council.
      Six new statutory delegates are added to future National 
Summits: the Chairman and Ranking Member of the House Ways and 
Means Committee, the Senate Finance Committee, and the 
Subcommittee on Employer-Employee Relations of the House 
Committee on Education and the Workforce. Further, the 
President, in consultation with the Congressional leadership, 
may appoint up to three percent of the delegates (not to exceed 
10) from a list of nominees provided by the private sector 
partner in Summit administration. The provision also clarifies 
that new delegates are to be appointed for each future National 
Summit (as was the intent of the original legislation) and sets 
deadlines for their appointment.
      The provision also sets deadlines for the Department of 
Labor to publish the Summit agenda, gives the Department of 
Labor limited reception and representation authority, and 
mandates that the Department of Labor consult with the 
Congressional leadership in drafting the post-Summit report.
      Effective date.--The provision is effective on the date 
of enactment.

                            senate amendment

      No provision.

                          conference agreement

      The conference agreement does not include the House bill.
6. Other ERISA provisions
            (a) Extension of PBGC missing participants program (sec. 
                    701 of the House bill, sec. 681 of the Senate 
                    amendment, and secs. 206(f) and 4050 of ERISA)

                              present law

      The plan administrator of a defined benefit pension plan 
that is subject to Title IV of ERISA, is maintained by a single 
employer, and terminates under a standard termination is 
required to distribute the assets of the plan. With respect to 
a participant whom the plan administrator of a single employer 
plan cannot locate after a diligent search, the plan 
administrator satisfies the distribution requirement only by 
purchasing irrevocable commitments from an insurer to provide 
all benefit liabilities under the plan or transferring the 
participant's designated benefit to the Pension Benefit 
Guaranty Corporation (``PBGC''), which holds the benefit of the 
missing participant as trustee until the PBGC locates the 
missing participant and distributes the benefit.
      The PBGC missing participant program is not available to 
multiemployer plans or defined contribution plans and other 
plans not covered by Title IV of ERISA.

                               house bill

      The PBGC is directed to prescribe for terminating 
multiemployer plans rules similar to the present-law missing 
participant rules applicable to terminating single-employer 
plans that are subject to Title IV of ERISA.
      In addition, plan administrators of certain types of 
plans not subject to the PBGC termination insurance program 
under present law are permitted, but not required, to elect to 
transfer missing participants' benefits to the PBGC upon plan 
termination. Specifically, the House bill extends the missing 
participants program to defined contribution plans, defined 
benefit plans that have no more than 25 active participants and 
are maintained by professional service employers, and the 
portion of defined benefit plans that provide benefits based 
upon the separate accounts of participants and therefore are 
treated as defined contribution plans under ERISA.
      Effective date.--The House bill is effective for 
distributions from terminating plans that occur after the PBGC 
has adopted final regulations implementing the House bill.

                            senate amendment

      The Senate amendment is the same as the House bill.

                          conference agreement

      The conference agreement does not include the House bill 
or the Senate amendment.
            (b) Reduce PBGC premiums for small and new plans (secs. 
                    702-703 of the House bill, secs. 682-683 of the 
                    Senate amendment, and sec. 4006 of ERISA)

                              present law

      Under present law, the Pension Benefit Guaranty 
Corporation (``PBGC'') provides insurance protection for 
participants and beneficiaries under certain defined benefit 
pension plans by guaranteeing certain basic benefits under the 
plan in the event the plan is terminated with insufficient 
assets to pay benefits promised under the plan. The guaranteed 
benefits are funded in part by premium payments from employers 
who sponsor defined benefit plans. The amount of the required 
annual PBGC premium for a single-employer plan is generally a 
flat rate premium of $19 per participant and an additional 
variable-rate premium based on a charge of $9 per $1,000 of 
unfunded vested benefits. Unfunded vested benefits under a plan 
generally means (1) the unfunded current liability for vested 
benefits under the plan, over (2) the value of the plan's 
assets, reduced by any credit balance in the funding standard 
account. No variable-rate premium is imposed for a year if 
contributions to the plan were at least equal to the full 
funding limit.
      The PBGC guarantee is phased in ratably in the case of 
plans that have been in effect for less than five years, and 
with respect to benefit increases from a plan amendment that 
was in effect for less than five years before termination of 
the plan.

                               house bill

Reduced flat-rate premiums for new plans of small employers
      Under the House bill, for the first five plan years of a 
new single-employer plan of a small employer, the flat-rate 
PBGC premium is $5 per plan participant.
      A small employer is a contributing sponsor that, on the 
first day of the plan year, has 100 or fewer employees. For 
this purpose, all employees of the members of the controlled 
group of the contributing sponsor are taken into account. In 
the case of a plan to which more than one unrelated 
contributing sponsor contributes, employees of all contributing 
sponsors (and their controlled group members) are taken into 
account in determining whether the plan is a plan of a small 
employer.
      A new plan means a defined benefit plan maintained by a 
contributing sponsor if, during the 36-month period ending on 
the date of adoption of the plan, such contributing sponsor (or 
controlled group member or a predecessor of either) has not 
established or maintained a plan subject to PBGC coverage with 
respect to which benefits were accrued for substantially the 
same employees as are in the new plan.
Reduced variable-rate PBGC premium for new plans
      The House bill provides that the variable-rate premium is 
phased in for new defined benefit plans over a six-year period 
starting with the plan's first plan year. The amount of the 
variable-rate premium is a percentage of the variable premium 
otherwise due, as follows: zero percent of the otherwise 
applicable variable-rate premium in the first plan year; 20 
percent in the second plan year; 40 percent in the third plan 
year; 60 percent in the fourth plan year; 80 percent in the 
fifth plan year; and 100 percent in the sixth plan year (and 
thereafter).
      A new defined benefit plan is defined as described above 
under the flat-rate premium provision of the House bill 
relating to new small employer plans.
Reduced variable-rate PBGC premium for small plans
      In the case of a plan of a small employer, the variable-
rate premium is no more than $5 multiplied by the number of 
plan participants in the plan at the end of the preceding plan 
year. For purposes of the House bill, a small employer is a 
contributing sponsor that, on the first day of the plan year, 
has 25 or fewer employees. For this purpose, all employees of 
the members of the controlled group of the contributing sponsor 
are taken into account. In the case of a plan to which more 
than one unrelated contributing sponsor contributes, employees 
of all contributing sponsors (and their controlled group 
members) are taken into account in determining whether the plan 
is a plan of a small employer.
      Effective date.--The reduction of the flat-rate premium 
for new plans of small employers and the reduction of the 
variable-rate premium for new plans is effective with respect 
to plansestablished after December 31, 2001. The reduction of 
the variable-rate premium for small plans is effective with respect to 
plan years beginning after December 31, 2001.

                            senate amendment

      The Senate amendment is the same as the House bill.

                          conference agreement

      The conference agreement does not include the House bill 
or the Senate amendment.
            (c) Authorization for PBGC to pay interest on premium 
                    overpayment refunds (sec. 704 of the House bill, 
                    sec. 684 of the Senate amendment, and sec. 4007(b) 
                    of ERISA)

                              present law

      The PBGC charges interest on underpayments of premiums, 
but is not authorized to pay interest on overpayments.

                               House bill

      The House bill allows the PBGC to pay interest on 
overpayments made by premium payors. Interest paid on 
overpayments is calculated at the same rate and in the same 
manner as interest is charged on premium underpayments.
      Effective date.--The House bill is effective with respect 
to interest accruing for periods beginning not earlier than the 
date of enactment.

                            senate amendment

      The Senate amendment is the same as the House bill.

                          Conference Agreement

      The conference agreement does not include the House bill 
or the Senate amendment.
            (d) Rules for substantial owner benefits in terminated 
                    plans (sec. 705 of the House bill, sec. 685 of the 
                    Senate amendment, and secs. 4021, 4022, 4043 and 
                    4044 of ERISA)

                              present law

      Under present law, the Pension Benefit Guaranty 
Corporation (``PBGC'') provides participants and beneficiaries 
in a defined benefit pension plan with certain minimal 
guarantees as to the receipt of benefits under the plan in case 
of plan termination. The employer sponsoring the defined 
benefit pension plan is required to pay premiums to the PBGC to 
provide insurance for the guaranteed benefits. In general, the 
PBGC will guarantee all basic benefits which are payable in 
periodic installments for the life (or lives) of the 
participant and his or her beneficiaries and are non-
forfeitable at the time of plan termination. The amount of the 
guaranteed benefit is subject to certain limitations. One 
limitation is that the plan (or an amendment to the plan which 
increases benefits) must be in effect for 60 months before 
termination for the PBGC to guarantee the full amount of basic 
benefits for a plan participant, other than a substantial 
owner. In the case of a substantial owner, the guaranteed basic 
benefit is phased in over 30 years beginning with participation 
in the plan. A substantial owner is one who owns, directly or 
indirectly, more than 10 percent of the voting stock of a 
corporation or all the stock of a corporation. Special rules 
restricting the amount of benefit guaranteed and the allocation 
of assets also apply to substantial owners.

                               house bill

      The House bill provides that the 60-month phase-in of 
guaranteed benefits applies to a substantial owner with less 
than 50 percent ownership interest. For a substantial owner 
with a 50 percent or more ownership interest (``majority 
owner''), the phase-in occurs over a 10-year period and depends 
on the number of years the plan has been in effect. The 
majority owner's guaranteed benefit is limited so that it could 
not be more than the amount phased in over 60 months for other 
participants. The rules regarding allocation of assets applies 
to substantial owners, other than majority owners, in the same 
manner as other participants.
      Effective date.--The House bill is effective for plan 
terminations with respect to which notices of intent to 
terminate are provided, or for which proceedings for 
termination are instituted by the PBGC, after December 31, 
2001.

                            senate amendment

      The Senate amendment is the same as the House bill.

                          conference agreement

      The conference agreement does not include the House bill 
or the Senate amendment.
            (e) Civil penalties for breach of fiduciary responsibility 
                    (sec. 706 of the House bill and sec. 502 of ERISA)

                              present law

      Present law requires the Secretary of Labor to assess a 
civil penalty against (1) a fiduciary who breaches a fiduciary 
responsibility under, or commits a violation of, part 4 of 
Title I of ERISA, or (2) any other person who knowingly 
participates in such a breach or violation. The penalty is 
equal to 20 percent of the ``applicable recovery amount'' that 
is paid pursuant to a settlement agreement with the Secretary 
of Labor or that a court orders to be paid in a judicial 
proceeding brought by the Secretary of Labor to enforce ERISA's 
fiduciary responsibility provisions. The Secretary of Labor may 
waive or reduce the penalty only if the Secretary finds in 
writing that either (1) the fiduciary or other person acted 
reasonably and in good faith, or (2) it is reasonable to expect 
that the fiduciary or other person cannot restore all the 
losses without severe financial hardship unless the waiver or 
reduction is granted.

                               house bill

      The House bill makes the assessment of the penalty 
discretionary with the Secretary of Labor, rather than 
mandatory. This change will allow the Secretary to refrain from 
imposing the penalty in certain cases as well as to assess a 
penalty of less than 20 percent of the applicable recovery 
amount. The requirement of a settlement agreement is also 
eliminated. The applicable recovery amount is any amount 
recovered by a plan or by a participant or beneficiary more 
than 30 days after the fiduciary's or other person's receipt of 
a written notice of the violation from the Department of Labor 
(``DOL''). Payments made after the 30-day grace period, whether 
they are made pursuant to a settlement agreement, or simply to 
discourage the DOL from bringing a legal action, are subject to 
the penalty, as are amounts recovered pursuant to a court 
order. ERISA section 502(l) is also amended to clarify that the 
term ``applicable recovery amount'' includes payments by third 
parties that are made on behalf of the relevant fiduciary or 
other persons liable for the amount that is recovered, 
including those who did not actually pay. These changes prevent 
avoidance of the penalty by having an unrelated third party pay 
the recovery amount.
      Effective date.--The House bill applies to any breach of 
fiduciary responsibility or other violation of part 4 of Title 
I of ERISA occurring on or after the date of enactment. The 
change with respect to ``applicable recovery amount'' includes 
a transition rule whereby a breach or other violation occurring 
before the date of enactment which continues past the 180th day 
from enactment (and which may have been discontinued during 
that period) is treated as having occurred after the date of 
enactment (to avoid having to make a complex determination 
regarding how much of the applicable recovery amount for such 
continuing violations should be attributed to the post-
enactment part of the violation).

                            senate amendment

      No provision.

                          conference agreement

      The conference agreement does not include the House bill.
            (f) Benefit suspension notice (sec. 707 of the House bill 
                    and sec. 203 of ERISA)

                              present law

      Under present law (ERISA sec. 203(a)(3)(B)), a plan will 
not fail to satisfy the vesting requirements with respect to a 
participant by reason of suspending payment of the 
participant's benefits while such participant is employed. 
Under the applicable Department of Labor (``DOL'') regulations, 
such a suspension is only permissible if the plan notifies the 
participant during the first calendar month or payroll period 
in which the plan withholds benefit payments. Such notice must 
provide certain information and must also include a copy of the 
plan's provisions relating to the suspension of payments.
      In the case of a plan that does not pay benefits to 
active participants upon attainment of normal retirement age, 
the employer must monitor plan participants to determine when 
any participant who is still employed attains normal retirement 
age. In order to suspend payment of such a participant's 
benefits, generally a plan must, as noted above, promptly 
provide the participant with a suspension notice.

                               house bill

      The House bill directs the Secretary of Labor to revise 
the regulations relating to the benefit suspension notice to 
generally permit the information currently required to be set 
forth in a suspension notice to be included in the summary plan 
description. The House bill also directs the Secretary of Labor 
to eliminate the requirement that the notice include a copy of 
relevant plan provisions. However, individuals reentering the 
workforce to resume work with a former employer after they have 
begun to receive benefits will still receive the notification 
of the suspension of benefits (and a copy of the plan's 
provisions relating to suspension of payments). In addition, if 
a reduced rate of future benefit accruals will apply to a 
returning employee (as of his or her first date of 
participation in the plan after returning to work) who has 
begun to receive benefits, the notice must include a statement 
that the rate of future benefit accruals will be reduced.
      Effective date.--The House bill applies to plan years 
beginning after December 31, 2001.

                            senate amendment

      No provision.

                          conference agreement

      The conference agreement does not include the House bill.
            (g) Studies (sec. 708 of the House bill)

                              present law

      No provision.

                               house bill

Study on small employer group plans
      The House bill directs the Secretary of Labor, in 
consultation with the Secretary of the Treasury, to conduct a 
study to determine (1) the most appropriate form(s) of pension 
plans that would be simple to create and easy to maintain by 
multiple small employers, while providing ready portability of 
benefits for all participants and beneficiaries, (2) how such 
arrangements could be established by employer or employee 
associations, (3) how such arrangements could provide for 
employees to contribute independent of employer sponsorship, 
and (4) appropriate methods and strategies for making such 
pension plan coverage more widely available to American 
workers.
      The Secretary of Labor is to consider the adequacy and 
availability of existing pension plans and the extent to which 
existing models may be modified to be more accessible to 
bothemployees and employers. The Secretary of Labor is to issue a 
report within 18 months, including recommendations for one or more 
model plans or arrangements as described above which may serve as the 
basis for appropriate administrative or legislative action.
Study on pension coverage
      The House bill also directs the Secretary of Labor to 
report to the Committee on Education and the Workforce of the 
House of Representatives and the Committee on Health, 
Education, Labor and Pensions of the Senate regarding the 
effect of the bill on pension coverage, including: the extent 
of pension plan coverage for low and middle-income workers, the 
levels of pension plan benefits generally, the quality of 
pension plan coverage generally, worker's access to and 
participation in pension plans, and retirement security. This 
report is required to be submitted no later than five years 
after the date of enactment.
      Effective date.--The House bill is effective on the date 
of enactment.

                            senate amendment

      No provision.

                          conference agreement

      The conference agreement does not include the House bill.
7. Miscellaneous provisions
            (a) Tax treatment of electing Alaska Native Settlement 
                    Trusts (section 691 of the Senate amendment and new 
                    sections 646 and 6039H of the Code, modifying Code 
                    sections including 1(e), 301, 641, 651, 661, and 
                    6034A))

                              Present Law

      An Alaska Native Corporation (``ANC'') may establish a 
Settlement Trust (``Trust'') under section 39 of the Alaska 
Native Claims Settlement Act (``ANCSA'') \136\ and transfer 
money or other property to such Trust for the benefit of 
beneficiaries who constitute all or a class of the shareholders 
of the ANC, to promote the health, education and welfare of the 
beneficiaries and preserve the heritage and culture of Alaska 
Natives.
---------------------------------------------------------------------------
    \136\ 43 U.S.C. 1601 et seq. A settlement Trust is subject to 
certain limitations under ANCSA, including that it may not operate a 
business. 43 U.S.C. 1629e(b).
---------------------------------------------------------------------------
      With certain exceptions, once an ANC has made a 
conveyance to a Trust, the assets conveyed shall not be subject 
to attachment, distraint, or sale or execution of judgment, 
except with respect to the lawful debts and obligations of the 
Trust.
      The Internal Revenue Service (``IRS'') has indicated that 
contributions to a Trust constitute distributions to the 
beneficiary-shareholders at the time of the contribution and 
are treated as dividends to the extent of earnings and profits 
as provided under section 301 of the Code.\137\ Also, a Trust 
and its beneficiaries are generally taxed subject to applicable 
trust rules.\138\
---------------------------------------------------------------------------
    \137\ See, e.g., PLR 9824014; PLR 9433021; PLR 9329026 and PLR 
9326019.
    \138\ See Subchapter J of the Code (secs. 641 et. seq.); Treas. 
Reg. Sec. 301.7701-4.
---------------------------------------------------------------------------
      Under general rules regarding the classification of 
entities, an entity that is taxed as a trust may not engage in 
business activity and must meet certain other 
requirements.\139\ Under certain circumstances, a trust can be 
treated as a ``grantor'' trust rather than being taxed as a 
trust; and its income can be taxed directly to the person or 
persons considered the owner of the trust.\140\
---------------------------------------------------------------------------
    \139\ Treas. Reg. Sec. 301.7701-4.
    \140\ Sec. 671 et. seq.
---------------------------------------------------------------------------

                               house bill

      No provision.

                            senate amendment

      The Senate amendment allows an election under which 
special rules will apply in determining the income tax 
treatment of an electing Trust and of its beneficiaries. An 
electing Trust will pay tax on its income at the lowest rate 
specified for ordinary income of an individual (or 
corresponding lower capital gains rate). The provision also 
specifies the treatment of distributions by an electing Trust 
to beneficiaries, the reporting requirements associated with 
such an election, and the consequences of disqualification for 
these benefits due to the allowance of certain impermissible 
dispositions of Trust interests, or of ANC stock.
      Under the provision, a trust that is a Trust established 
by an Alaska Native Corporation under section 39 of ANCSA may 
make an election for its first taxable year ending after the 
date of enactment of the provision to be subject to the rules 
of the provision rather than otherwise applicable income tax 
rules. If the election is in effect, no amount will be included 
in the gross income of a beneficiary of such Trust by reason of 
a contribution to the Trust.\141\ In addition, ordinary income 
of the electing Trust, whether accumulated or distributed, will 
be taxed only to the Trust (and not to beneficiaries) at the 
lowest individual tax rate for ordinary income. Capital gains 
of the electing Trust will similarly be taxed to the Trust at 
the capital gains rate applicable to individuals subject to 
such lowest rate. These rates will apply, rather than the 
higher rates generally applicable to trusts or to higher tax 
bracket beneficiaries. The election is made on a one-time basis 
only. The benefits of the election will terminate, however, and 
other special rules will apply, if the electing Trust or the 
sponsoring ANC fail to satisfy the restrictions on 
transferability of Trust beneficial interests or of ANC stock.
---------------------------------------------------------------------------
    \141\ If the ANC transfers appreciated property to the Trust, 
section 311(b) of the Code will apply to the ANC, as under present law, 
so that the ANC will recognize gain as if it had sold the property for 
fair market value. The Trust takes the property with a fair market 
value basis, pursuant to section 301(d) of the Code.
---------------------------------------------------------------------------
      The treatment to beneficiaries of amounts distributed by 
an electing Trust depends upon the amount of the distribution. 
Solely for purposes of determining what amount has been 
distributed and thus which treatment applies under these rules, 
the amount of any distribution of property is the fair market 
value of the property at the time of the distribution.\142\
---------------------------------------------------------------------------
    \142\ Section 661 of the Code, which provides a deduction to the 
trust for certain distributions, does not apply to an electing Trust 
under the provision unless the election is terminated by 
disqualification. Similarly, the inclusion provisions of section 662 of 
the Code, relating to amounts to be included in income of 
beneficiaries, also do not apply to a qualified electing Trust.
---------------------------------------------------------------------------
      Amounts distributed by an electing Trust during any 
taxable year are excludable from the gross income of the 
recipient beneficiary to the extent of (1) the taxable income 
of the Trust for the taxable year and all prior taxable years 
for which an election was in effect (decreased by any income 
tax paid by the Trust with respect to the income) plus (2) any 
amounts excluded from gross income of the Trust under section 
103 for those periods.\143\
---------------------------------------------------------------------------
    \143\ In the case of any such excludable distribution that involves 
a distribution of property other than cash, the basis of such property 
in the hands of the recipient beneficiary will generally be the 
adjusted basis of the property in the hands of the Trust, unless the 
Trust makes an election to pay tax, in which case the basis in the 
hands of the beneficiary would be the fair market value of the 
property. See Code sections 643(e) and 643(e)(3).
---------------------------------------------------------------------------
      If distributions to beneficiaries exceed the excludable 
amounts described above, then such excess distributions are 
reported and taxed to beneficiaries as if distributed by the 
ANC in the year of the distribution by the electing Trust to 
the extent the ANC then has current or accumulated earnings and 
profits, and are treated as dividends to beneficiaries.\144\ 
Additional distributions in excess of the current or 
accumulated earnings and profits of the ANC are treated by the 
beneficiaries as distributions by the Trust in excess of the 
distributable net income of the Trust for such year.\145\
---------------------------------------------------------------------------
    \144\ The treatment of such amounts distributed by an electing 
Trust as a dividend applies even if all or any part of the 
contributions by an ANC to a Trust would not have been dividends at the 
time of the contribution under present law; for example, because the 
ANC had no current or accumulated earnings and profits, or because the 
contribution was made from Alaska Native Fund amounts that may not have 
been taxable. See 43 U.S.C. 1605.
    \145\ Such distributions would not be taxable to the beneficiaries. 
In the case of any such nontaxable distribution that involves a 
distribution of property other than cash, the basis of such property in 
the hands of the recipient beneficiary will generally be the adjusted 
basis of the property in the hands of the Trust, unless the Trust makes 
an election to pay tax, in which case the basis in the hands of the 
beneficiary will be the fair market value of the property. See Code 
sections 643(e) and 643(e)(3).
---------------------------------------------------------------------------
      The fiduciary of an electing Trust must report to the 
IRS, with the Trust tax return, the amount of distributions to 
each beneficiary, and the tax treatment to the beneficiary of 
such distributions under the provision (either as exempt from 
tax to the beneficiary, or as a distribution deemed made by the 
ANC). The electing Trust must also furnish such information to 
the ANC. In the case of distributions that are treated as if 
made by the ANC, the ANC must then report such amounts to the 
beneficiaries and must indicate whether they are dividends or 
not, in accordance with the earnings and profits of the ANC. 
The reporting thus required by an electing Trust will be in 
lieu of, and will satisfy, the reporting requirements of 
section 6034A (and such other reporting requirements as the 
Secretary of the Treasury may deem appropriate).
      The earnings and profits of an ANC will not be reduced by 
the amount of its contributions to an electing Trust at the 
time of the contributions. However, the ANC earnings and 
profits will be reduced as and when distributions are 
thereafter made by the electing Trust that are taxed to 
beneficiaries under the provision as dividends from the ANC to 
the Trust beneficiaries.
      If in any taxable year the beneficial interests in the 
electing Trust may be disposed of to a person in a manner that 
would not be permitted under ANCSA if the interests were 
Settlement Common Stock (generally, to a person other than an 
Alaska Native),\146\ then the special provisions applicable to 
electing Trusts, including the favorable ordinary income tax 
rate and corresponding lower capital gains tax rate, cease to 
apply as of the beginning of such taxable year. The 
distributable net income of the Trust is increased up to the 
amount of current and accumulated earnings and profits of the 
ANC as of the end of that year, but such increase shall not 
exceed the fair market value of the assets of the Trust as of 
the date the beneficial interests of the Trust became 
disposable.\147\ Thereafter, the Trust and its beneficiaries 
are generally subject to the rules of subchapter J and to the 
generally applicable trust income tax rates. Thus, the increase 
in distributable net income will result in the Trust being 
taxed at regular trust rates to the extent the recomputed 
distributable net income is not distributed to beneficiaries; 
and beneficiaries will be taxed to the extent there are 
distributions. Normal reporting rules applicable to trusts and 
their beneficiaries will apply. The basis of any property 
distributed to beneficiaries will also be determined under 
normal trust rules. The same rules apply if any stock of the 
ANC may be disposed of to a person in a manner that would not 
be permitted under ANCSA if the stock were Settlement Common 
Stock and the ANC makes a transfer to the Trust.
---------------------------------------------------------------------------
    \146\ Under ANSCA, Settlement Common Stock is subject to 
restrictions on transferability, generally limiting transfers. However, 
if changes are made to permit transfers of stock that would not be 
permitted for Settlement Common Stock, then the Settlement Common Stock 
is cancelled and Replacement Common Stock is issued. See 43 U.S.C. 
1602(p), 1606(h) and 1629c.
    \147\ To the extent the earnings and profits of the ANC increase 
distributable net income of the Trust under this provision, the ANC 
will have a corresponding adjustment reducing its earnings and profits.
---------------------------------------------------------------------------
      The provision contains a special loss disallowance rule 
that reduces any loss that would otherwise be recognized by a 
shareholder upon the disposition of a share of stock of a 
sponsoring ANC by a ``per share loss adjustment factor''. This 
factor reflects the aggregate of all contributions to an 
electing Trust sponsored by such ANC made on or after the first 
day the trust is treated as an electing Trust, expressed on a 
per share basis and determined as of the day of each such 
contribution.
      The special loss disallowance rule is intended to prevent 
the allowance of noneconomic losses if the ANC stock owned by 
beneficiaries ever becomes transferable in any type of 
transaction that could cause the recognition of taxable gain or 
loss, (including a redemption by the ANC) where the basis of 
the stock in the hands of the beneficiary (or in the hands of 
any transferee of a beneficiary) fails to reflect the allocable 
reduction in corporate value attributable to amounts 
transferred by the ANC into the Trust.
      Effective date.--The provision is effective for taxable 
years of Trusts, their beneficiaries, and sponsoring Alaska 
Native Corporations ending after the date of enactment, and to 
contributions made to electing Trusts during such year and 
thereafter.

                          Conference Agreement

      The conference agreement follows the Senate amendment.
      The conferees wish to state certain technical 
clarifications of the description of the Senate amendment, 
which also apply under the conference agreement.
      Under the Senate amendment and the conference agreement, 
a Trust that makes the election remains subject to the 
generally applicable requirements for classification and 
taxation as a trust, in order to obtain the benefits of the 
provision.
      Under the Senate amendment and the conference agreement, 
the per share loss adjustment factor for stock of an ANC is the 
aggregate of all contributions to all electing Trusts sponsored 
by such ANC made on or after the first day each such Trust is 
treated as an electing Trust expressed on a per share basis and 
determined as of the day of each such contribution.
      Under the Senate amendment and the conference agreement, 
the restrictions on transfer of stock or beneficial interests 
under the provision are those that would apply to Settlement 
Common Stock under section 7(h) of ANSCA \148\ (whether or not 
the interest or stock in question is in fact Settlement Common 
Stock). To the extent section 7(h) of ANSCA permits certain 
transfers of Settlement Common stock on death or in other 
special circumstances, those are also permitted under the 
provision. Also, the mere transferability of ANC stock in 
manner that would not be permitted for Settlement Common Stock 
(but without such transferability of any Trust interests) will 
not destroy the beneficial treatment of an existing electing 
Trust unless and until the ANC thereafter makes a transfer to 
the Trust.
---------------------------------------------------------------------------
    \148\ 43 U.S.C. 1606(h).
---------------------------------------------------------------------------
      Under the Senate amendment and the conference agreement, 
the surrender of an interest in an ANC or an electing Trust in 
order to accomplish the whole or partial redemption of the 
interest of a shareholder or beneficiary in such ANC or Trust, 
or to accomplish the whole or partial liquidation of such ANC 
or Trust, is deemed to be a transfer permitted by section 7(h) 
of ANSCA for purposes of the provision.
      The conferees also wish to clarify the effect of the 
general sunset rule of the legislation on this provision. The 
general sunset is effective for taxable years beginning after 
December 31, 2010. For such taxable years, the tax consequences 
of any election previously made under this provision, and any 
right to make a future election, shall be terminated. Thus, for 
taxable years beginning after December 31, 2010, any electing 
Trust then in existence, its beneficiaries, and the sponsoring 
ANC shall be taxed under the provisions of law in effect 
immediately prior to the enactment of this provision.
8. Provisions relating to plan amendments (sec. 801 of the House bill)

                              Present Law

      Plan amendments to reflect amendments to the law 
generally must be made by the time prescribed by law for filing 
the income tax return of the employer for the employer's 
taxable year in which the change in law occurs.

                               House Bill

      The House bill permits certain plan amendments made 
pursuant to the changes made by the bill (or regulations issued 
under the provisions of the House bill) to be retroactively 
effective. If the plan amendment meets the requirements of the 
bill, then the plan is treated as being operated in accordance 
with its terms and the amendment does not violate the 
prohibition of reductions of accrued benefits. In order for 
this treatment to apply, the plan amendment must be made on or 
before the last day of the first plan year beginning on or 
after January 1, 2004 (January 1, 2006, in the case of a 
governmental plan). If the amendment is required to be made to 
retain qualified status as a result of the changes in the bill 
(or regulations) the amendment must be made retroactively 
effective as of the date on which the change became effective 
with respect to the plan and the plan must be operated in 
compliance until the amendment is made. Amendments that are not 
required to retain qualified status but that are made pursuant 
to the changes made by the bill (or applicable regulations) may 
be made retroactive as of the first day the plan was operated 
in accordance with the amendment.
      A plan amendment is not considered to be pursuant to the 
bill (or applicable regulations) if it has an effective date 
before the effective date of the provision of the House bill 
(or regulations) to which it relates. Similarly, the House bill 
does not provide relief from section 411(d)(6) for periods 
prior to the effective date of the relevant provision of the 
House bill (or regulations) or the plan amendment.
      The Secretary is authorized to provide exceptions to the 
relief from the prohibition on reductions in accrued benefits. 
It is intended that the Secretary will not permit inappropriate 
reductions in contributions or benefits that are not directly 
related to the provisions of the House bill. For example, it is 
intended that a plan that incorporates the section 415 limits 
by reference could be retroactively amended to impose the 
section 415 limits in effect before the bill. On the other 
hand, suppose a plan that incorporates the section 401(a)(17) 
limit on compensation by reference provides for an employer 
contribution of three percent of compensation. It is expected 
that the Secretary will provide that the plan could not be 
amended retroactively to reduce the contribution percentage for 
those participants not affected by the section 401(a)(17) 
limit, even though the reduction will result in the same dollar 
level of contributions for some participants because of the 
increase in compensation taken into account under the plan. As 
another example, suppose that under present law a plan is top-
heavy and therefore a minimum benefit is required under the 
plan, and that under the provisions of the House bill, the plan 
would not be considered to be top heavy. It is expected that 
the Secretary will generally permit plans to be retroactively 
amended to reflect the new top-heavy provisions of the House 
bill.
      Effective date.--The House bill is effective on the date 
of enactment.

                            Senate Amendment

      No provision.

                          Conference Agreement

      The conference agreement does not include the House bill.

                      VII. ALTERNATIVE MINIMUM TAX

A. Individual Alternative Minimum Tax Relief (Sec. 3(c) of H.R. 6, Sec. 
          701 of the Senate amendment and Sec. 55 of the Code)

                              Present Law

      Present law imposes an alternative minimum tax (``AMT'') 
on individuals to the extent that the tentative minimum tax 
exceeds the regular tax. An individual's tentative minimum tax 
generally is an amount equal to the sum of (1) 26 percent of 
the first $175,000 ($87,500 in the case of a married individual 
filing a separate return) of alternative minimum taxable income 
(``AMTI'') in excess of an exemption amount and (2) 28 percent 
of the remaining AMTI. AMTI is the individual's taxable income 
adjusted to take account of specified preferences and 
adjustments.
      The AMT exemption amounts are: (1) $45,000 in the case of 
married individuals filing a joint return and surviving 
spouses; (2) $33,750 in the case of other unmarried 
individuals; and (3) $22,500 in the case of married individuals 
filing a separate return, estates and trusts. The exemption 
amounts are phased out by an amount equal to 25 percent of the 
amount by which the individual's AMTI exceeds (1) $150,000 in 
the case of married individuals filing a joint return and 
surviving spouses, (2) $112,500 in the case of other unmarried 
individuals, and (3) $75,000 in the case of married individuals 
filing separate returns or an estate or a trust. The exemption 
amounts, the threshold phase-out amounts, and rate brackets are 
not indexed for inflation.

                               House Bill

      No provision.
      However, H.R. 6, as passed by the House, increases the 
AMT exemption amount for married couples filing a joint return 
and surviving spouses by $1,000 in 2005, by an additional $500 
in 2006, and by an additional $500 every even-numbered year 
thereafter. The exemption amount for married individuals filing 
a separate return is one-half the exemption amount for a 
married couple filing a joint return.
      Effective date.--The provision applies to taxable years 
beginning after December 31, 2004.

                            Senate Amendment

      The Senate amendment increases the AMT exemption amount 
for married couples filing a joint return and surviving spouses 
by $4,000. The AMT exemption amounts for other individuals 
(i.e., unmarried individuals and married individuals filing a 
separate return) are increased by $2,000.
      Effective date.--The provision applies to taxable years 
beginning after December 31, 2000, and before January 1, 2007.

                          Conference Agreement

      The conference agreement increases the AMT exemption 
amount for married couples filing a joint return and surviving 
spouses by $4,000. The AMT exemption amounts for other 
individuals (i.e., unmarried individuals and married 
individuals filing a separate return) are increased by $2,000.
      Effective date.--The provision applies to taxable years 
beginning after December 31, 2000, and beginning before January 
1, 2005.

                         VIII. OTHER PROVISIONS

A. Modification to Corporate Estimated Tax Requirements (Secs. 801 and 
                      815 of the Senate Amendment)

                              Present Law

      In general, corporations are required to make quarterly 
estimated tax payments of their income tax liability (section 
6655). For a corporation whose taxable year is a calendar year, 
these estimated tax payments must be made by April 15, June 15, 
September 15, and December 15.

                               House Bill

      No provision.

                            Senate Amendment

      With respect to corporate estimated tax payments due on 
September 17, 2001,\149\ 30 percent is required to be paid by 
September 17, 2001, and 70 percent is required to be paid by 
October 1, 2001. With respect to corporate estimated tax 
payments due on September 15, 2004, 80 percent is required to 
be paid by September 15, 2004, and 20 percent is required to be 
paid by October 1, 2004.
---------------------------------------------------------------------------
    \149\ September 15, 2001 will be a Saturday. Under present law, 
payments required to be made on a Saturday must be made no later than 
the next banking day.
---------------------------------------------------------------------------
      With respect to corporate estimated tax payments due in 
July, August, or September 2011, the payment must be 170 
percent of the amount otherwise required to be paid under the 
corporate estimated tax rules.
      Effective date.--The provision is effective on the date 
of enactment.

                          Conference Agreement

      The conference agreement follows the Senate amendment 
with respect to corporate estimated tax payments due on 
September 15, 2004. With respect to corporate estimated tax 
payments due on September 17, 2001, 100 percent is not due 
until October 1, 2001. The conference agreement does not 
include the provision affecting corporate estimated tax 
payments due in 2011.

  B. Authority To Postpone Certain Tax-Related Deadlines by Reason of 
Presidentially Declared Disaster (Sec. 802 of the Senate Amendment and 
                        Sec. 7508A of the Code)

                              Present Law

      The Secretary of the Treasury may specify that certain 
deadlines are postponed for a period of up to 90 days in the 
case of a taxpayer determined to be affected by a 
Presidentially declared disaster.\150\ The deadlines that may 
be postponed are the same as are postponed by reason of service 
in a combat zone. If the Secretary extends the period of time 
for filing income tax returns and for paying income tax, the 
Secretary must abate related interest for that same period of 
time.\151\
---------------------------------------------------------------------------
    \150\ Section 7508A.
    \151\ Section 6404(h).
---------------------------------------------------------------------------

                               House Bill

      No provision.

                            Senate Amendment

      The Senate amendment directs the Secretary to create in 
the IRS a Permanent Disaster Response Team, which, in 
coordination with the Federal Emergency Management Agency, is 
to assist taxpayers in clarifying and resolving tax matters 
associated with a Presidentially declared disaster. One of the 
duties of the Disaster Response Team is to postpone certain 
tax-related deadlines for up to 120 days in appropriate cases 
for taxpayers determined to be affected by a Presidentially 
declared disaster.
      It is anticipated that the Disaster Response Team would 
be staffed by IRS employees with relevant knowledge and 
experience. It is anticipated that the Disaster Response Team 
would staff a toll-free number dedicated to responding to 
taxpayers affected by a Presidentially declared disaster and 
provide relevant information via the IRS website.
      Effective date.--The provision is effective on the date 
of enactment.

                          Conference Agreement

      The conference agreement expands the period of time with 
respect to which the Secretary may postpone certain deadlines 
from 90 days to 120 days. The conference agreement does not 
include the provision of the Senate amendment that provides for 
a Permanent Disaster Response Team.

 C. Income Tax Treatment of Certain Restitution Payments to Holocaust 
               Victims (Sec. 803 of the Senate amendment)

                              present law

      Under the Code, gross income means ``income from whatever 
source derived'' except for certain items specifically exempt 
or excluded by statute (sec. 61). There is no explicit 
statutory exception from gross income provided for amounts 
received by Holocaust victims or their heirs.

                               house bill

      No provision.

                            senate amendment

      The Senate amendment provides that excludable restitution 
payments made to an eligible individual (or the individual's 
heirs or estate) are: (1) excluded from gross income; and (2) 
not taken into account for any provision of the Code which 
takes into account excludable gross income in computing 
adjusted gross income (e.g., taxation of Social Security 
benefits).
      The basis of any property received by an eligible 
individual (or the individual's heirs or estate) that is 
excluded under this provision is the fair market value of such 
property at the time of receipt by the eligible individual (or 
the individual's heirs or estate).
      The Senate amendment provides that any excludible 
restitution payment is disregarded in determining eligibility 
for, and the amount of benefits and services to be provided 
under, any Federal or federally assisted program which provides 
benefit or service based, in whole or in part, on need. Under 
the Senate amendment, no officer, agency, or instrumentality of 
any government may attempt to recover the value of excessive 
benefits or services provided under such a program before 
January 1, 2000, by reason of failure to take account of 
excludable restitution payments received before that date. 
Similarly, the Senate amendment requires a good faith effort to 
notify any eligible individual who may have been denied such 
benefits or services of their potential eligibility for such 
benefits or services. The Senate amendment also provides 
coordination between this bill and Public Law 103-286, which 
also disregarded certain restitution payments in determining 
eligibility for, and the amount of certain needs-based benefits 
and services.
      Eligible restitution payments are any payment or 
distribution made to an eligible individual (or the 
individual's heirs or estate) which: (1) is payable by reason 
of the individual's status as an eligible individual (including 
any amount payable by any foreign country, the United States, 
or any foreign or domestic entity or fund established by any 
such country or entity, any amount payable as a result of a 
final resolution of legal action, and any amount payable under 
a law providing for payments or restitution of property); (2) 
constitutes the direct or indirect return of, or compensation 
or reparation for, assets stolen or hidden, or otherwise lost 
to, the individual before, during, or immediately after World 
War II by reason of the individual's status as an eligible 
individual (including any proceeds of insurance under policies 
issued on eligible individuals by European insurance companies 
immediately before and during World War II); or (3) interest 
payable as part of any payment or distribution described in (1) 
or (2), above. An eligible individual is a person who was 
persecuted for racial or religious reasons by Nazi Germany, or 
any other Axis regime, or any other Nazi-controlled or Nazi-
allied country.
      Effective date.--The provision is effective for any 
amounts received on or after January 1, 2000. No inference is 
intended with respect to the income tax treatment of any amount 
received before January 1, 2000.

                          conference agreement

      The conference agreement follows the Senate amendment, 
with three changes. First, the definition of eligible 
individuals is expanded to also include individuals persecuted 
on the basis of physical or mental disability or sexual 
orientation. Second, interest earned by enumerated escrow or 
settlement funds are also excluded from tax. Third, the 
provision disregarding excludible restitution in determining 
eligibility for and the benefit calculation of certain Federal 
or Federally assisted programs is deleted.

D. Treatment of Survivor Annuity Payments with Respect to Public Safety 
              Officers (Sec. 804 of the Senate amendment)

                              present law

      The Taxpayer Relief Act of 1997 provided that an amount 
paid as a survivor annuity on account of the death of a public 
safety officer who is killed in the line of duty is excludable 
from income to the extent the survivor annuity is attributable 
to the officer's service as a law enforcement officer. The 
survivor annuity must be provided under a governmental plan to 
the surviving spouse (or former spouse) of the public safety 
officer or to a child of the officer.
      The provision does not apply with respect to the death of 
a public safety officer if it is determined by the appropriate 
supervising authority that (1) the death was caused by the 
intentional misconduct of the officer or by the officer's 
intention to bring about the death, (2) the officer was 
voluntarily intoxicated at the time of death, (3) the officer 
was performing his or her duties in a grossly negligent manner 
at the time of death, or (4) the actions of the individual to 
whom payment is to be made were a substantial contributing 
factor to the death of the officer.
      For purposes of the exclusion, ``public safety officer'' 
is defined as in section 1204 of the Omnibus Crime Control and 
Safe Streets Act of 1968 (as amended). Under that Act, a public 
safety officer is an: (1) individual serving a public agency 
(with or without compensation) as a law enforcement officer, 
firefighter, rescue squad member, or ambulance crew member; (2) 
employee of the Federal Emergency Management Agency (FEMA) 
performing hazardous duties with respect to a Federally 
declared disaster area; and (3) employee of a State, local, or 
tribal emergency agency who is performing hazardous duties in 
cooperation with FEMA in a Federally declared disaster area.
      The provision applies to amounts received in taxable 
years beginning after December 31, 1996, with respect to 
individuals dying after that date.

                               house bill

      No provision. However, H.R. 1727, the ``Fallen Hero 
Survivor Benefit Fairness Act of 2001,'' as passed by the 
House, extends the present-law treatment of survivor annuities 
with respect to public safety officers killed in the line of 
duty with respect to individuals dying on or before December 
31, 1996.
      Effective date.--The provision is effective with respect 
to payments received after December 31, 2001.

                            senate amendment

      The Senate amendment provision is the same as H.R. 1727.
      Effective date.--The provision is effective with respect 
to payments received after December 31, 2000.

                          conference agreement

      The conference agreement does not include the provisions 
of H.R. 1727 or the Senate amendment provision.

         E. Circuit Breaker (Sec. 805 of the Senate Amendment)

                              present law

      The Congressional Budget Act of 1974 contains numerous 
rules enforcing the scope of items permitted to be considered 
under the budget reconciliation process.

                               house bill

      No provision.

                            senate amendment

      The Senate amendment provides that, in any fiscal year 
beginning with fiscal year 2004, if the level of debt held by 
the public at the end of that fiscal year (as projected by the 
Office of Management and Budget sequestration update report on 
August 20th preceding the beginning of that fiscal year) would 
exceed the level of debt held by the public for that fiscal 
year set forth in the concurrent resolution on the budget for 
fiscal year 2002, any Member of Congress may move to proceed to 
a bill that would make changes in law to reduce discretionary 
spending and direct pending (except for changes in Social 
Security, Medicare and COLA's) and increase revenues in a 
manner that would reduce the debt held by the public for the 
fiscal year to a level not exceeding the level provided in that 
concurrent resolution for that fiscal year.
      A bill considered pursuant to this provision would be 
considered as provided in section 310(e) of the Congressional 
Budget Act.
      The Senate amendment provides that it shall not be in 
order in the Senate to consider any bill, joint resolution, 
motion, amendment, or conference report pursuant to the 
provision that contains any provisions other than those 
enumerated in sections 310(a)(1) and 310(a)(2) of the 
Congressional Budget Act. This point of order may be waived or 
suspended in the Senate only by the affirmative vote of three-
fifths of the Members. An affirmative vote of three-fifths of 
the Members shall be required in the Senate to sustain an 
appeal of the ruling of the Chair on a point of order raised 
pursuant to the provision.
      Effective date.--The provision is effective on the date 
of enactment.

                          conference agreement

      The conference agreement does not include the Senate 
amendment provision.

    F. Acceleration of Health Insurance Deduction for Self-Employed 
Individuals (Secs. 806 and 807 of the Senate Amendment and Sec. 162(l) 
                              of the Code)

                              present law

      Under present law, the individual income tax treatment of 
health insurance expenses depends on the individual's 
circumstances. Self-employed individuals may deduct a portion 
of health insurance expenses for the individual and his or her 
spouse and dependents. The deductible percentage of health 
insurance expenses of a self-employed individual is 60 percent 
in 2001, 70 percent in 2002, and 100 percent in 2003 and 
thereafter. The deduction for health insurance expenses of 
self-employed individuals is not available for any month in 
which the individual is eligible to participate in a subsidized 
health plan maintained by the employer of the individual or the 
individual's spouse. The self-employed health deduction also 
applies to qualified long-term care insurance premiums treated 
as medical care for purposes of the itemized deduction for 
medical expenses, described below.
      Employees can exclude from income 100 percent of 
employer-provided health insurance.
      Individuals who itemize deductions may deduct their 
health insurance expenses only to the extent that the total 
medical expenses of the individual exceed 7.5 percent of 
adjusted gross income (sec. 213). Subject to certain dollar 
limitations, premiums for qualified long-term care insurance 
are treated as medical expenses for purposes of the itemized 
deduction for medical expenses (sec. 213). The amount of 
qualified long-term care insurance premiums that may be taken 
into account for 2001 is as follows: $230 in the case of an 
individual 40 years old or less; $430 in the case of an 
individual who is over 40 but not more than 50; $860 in the 
case of an individual who is more than 50 but not more than 60; 
$2,290 in the case of an individual who is more than 60 but not 
more than 70; and $2,860 in the case of an individual who is 
more than 70. These dollar limits are indexed for inflation.

                               house bill

      No provision.

                            Senate Amendment

      The Senate amendment increases the deduction for health 
insurance expenses (and qualified long-term care insurance 
expenses) of self-employed individuals to 100 percent beginning 
in 2002. The Senate amendment also provides that the deduction 
is not available for any month in which the self-employed 
individual participates in (rather than is eligible for) a 
subsidized health plan maintained by ay employer of the 
individual or his or her spouse.
      Effective date.--The provision is effective for taxable 
years beginning after December 31, 2001.

                          conference agreement

      The conference agreement does not include the Senate 
amendment provision.

G. Enhanced Deduction for Charitable Contribution of Literary, Musical, 
 and Artistic Compositions (Sec. 808 of the Senate Amendment and Sec. 
                            170 of the Code)

                              present law

      In the case of a charitable contribution of inventory or 
other ordinary-income or short-term capital gain property, the 
amount of the deduction is limited to the taxpayer's basis in 
the property. In the case of a charitable contribution of 
tangible personal property, the deduction is limited to the 
taxpayer's basis in such property if the use by the recipient 
charitable organization is unrelated to the organization's tax-
exempt purpose. In cases involving contributions to a private 
foundation (other than certain private operating foundations), 
the amount of the deduction is limited to the taxpayer's basis 
in the property.
      Under present law, charitable contributions of literary, 
musical, and artistic compositions are considered ordinary 
income property and a taxpayer's deduction of such property is 
limited to the taxpayer's basis (typically, cost) in the 
property. To be eligible for the deduction, the contribution 
must be of an undivided portion of the donor's entire interest 
in the property. For purposes of the charitable income tax 
deduction, the copyright and the work in which the copyright is 
embodied are not treated as separate property interests. 
Accordingly, if a donor owns a work of art and the copyright to 
the work of art, a gift of the artwork without the copyright or 
the copyright without the artwork will constitute a gift of a 
``partial interest'' and will not qualify for the income tax 
charitable deduction.

                               house bill

      No provision.

                            senate amendment

      The Senate amendment provides that a deduction for 
qualified artistic charitable contributions is the fair market 
value of the property contributed at the time of the 
contribution. The Senate amendment defines a qualified artistic 
charitable contribution to mean a charitable contribution of 
any literary, musical, artistic, or scholarly composition, or 
similar property, or the copyright thereon (or both). The 
tangible property and the copyright on such property are 
treated as separate interests in the property for purposes of 
the ``partial interest'' rule. Contributions of letters, 
memoranda, or similar property that are written, prepared, or 
produced by or for an individual in his or her capacity as an 
officer or employee of any person (including a government 
agency or instrumentality) do not qualify for fair market value 
deduction unless the contributed property is entirely personal.
      Under the Senate amendment, the increase in the deduction 
that results from the provision cannot exceed the amount of 
adjusted gross income of the donor for the taxable year from 
the sale or use of property created by the donor that is of the 
same type as the donated property, and from teaching, 
lecturing, performing, or similar activities with respect to 
such property. The fair market value deduction cannot be 
carried over and deducted in other taxable years.
      A contribution is required to meet several requirements 
in order to qualify for the fair market value deduction. First, 
the contributed property must have been created by the personal 
efforts of the donor at least 18 months prior to the date of 
contribution. Second, the donor must obtain a qualified 
appraisal of the contributed property, a copy of which must be 
attached to the donor's income tax return for the taxable year 
in which such contribution is made. Third, the contribution 
must be made to a public charity or to certain limited types of 
private foundations. Finally, the use of donated property by 
the recipient organization must be related to the 
organization's charitable purpose or function, and the donor 
must receive a written statement from the organization 
verifying such use.
      Effective date.--The deduction for qualified artistic 
charitable contributions applies to contributions made after 
the date of enactment.

                          conference agreement

      The conference agreement does not include the Senate 
amendment provision.

 H. Estate Tax Recapture From Cash Rents of Specially-Valued Property 
                   (Sec. 809 of the Senate Amendment)

                              present law

      Under the special-use valuation rules of section 2032A, 
the executor may elect to value certain ``qualified real 
property'' used in farming or another qualifying trade or 
business at its current use rather than its highest and best 
use. If, after the special-use valuation election is made, the 
heir who acquired the real property ceases to use it in its 
qualified use within 10 years (15 years for individuals dying 
before 1982) of the decedent's death, an additional estate tax 
is imposed in order to ``recapture'' the benefit of the 
special-use valuation. Section 2032A is effective for estates 
of decedents dying after December 31, 1976.
      Under prior law, some courts had held that cash rental of 
property for which special-use valuation was claimed was not a 
qualified use under the rules, because the heirs no longer bore 
the financial risk of working the property, thus triggering the 
additional estate tax.\152\
---------------------------------------------------------------------------
    \152\ See Martin v. Commissioner, 783 F.2d 81 (7th Cir. 1986) (cash 
lease to unrelated party not qualified use); Williamson v. 
Commissioner, 93 T.C. 242 (1989), aff'd. 974 F.2d 1525 (9th Cir. 1992) 
(cash lease to family member not a qualified use); Fisher v. 
Commissioner, T.C. Memo. 1993-139 (cash lease to family member not a 
qualified use); cf. Minter v. U.S., 19 F.3d 426 (8th Cir. 1994) (cash 
lease to family's farming corporation is qualified use); Estate of 
Gavin v. U.S., 103 F.3d 802 (8th Cir. 1997) (heir's option to pay cash 
rent or 50 percent crop share is qualified use).
---------------------------------------------------------------------------
      With respect to a decedent's surviving spouse, a special 
rule provides that the surviving spouse will not be treated as 
failing to use the property in a qualified use solely because 
the spouse rents the property to a member of the spouse's 
family on a net cash basis. Members of an individual's family 
include (1) the individual's spouse, (2) the individual's 
ancestors, (3) lineal descendants of the individual, of the 
individual's spouse, or of the individual's parents, and (4) 
the spouses of any such lineal descendants.
      Section 504(c) of the Tax Reform Act of 1997 expanded the 
class of heirs eligible to lease property for which special-use 
valuation was claimed without causing the qualified use of such 
property to cease for purposes of imposition of the additional 
estate tax. Section 2032A(c)(7)(E) provides that the net cash 
lease of property (for which special-use valuation was claimed) 
by a lineal descendant of the decedent to a member of such 
lineal descendant's family does not cause the qualified use of 
the property to cease for purposes of imposition of the 
additional estate tax. The amendment made under the Tax Reform 
Act of 1997 applies to leases entered into after December 31, 
1976.
      In Technical Advice Memorandum 9843001, the IRS 
determined that the retroactive effective date in the changes 
made by the Tax Reform Act of 1997 did not constitute a waiver 
of the period of limitations otherwise applicable on a 
taxpayer's claim. Accordingly, the IRS determined that a 
taxpayer's claim for refund of recapture tax paid on account of 
the cessation of a qualified use was barred under the generally 
applicable statute of limitations on refund claims.

                               house bill

      No provision.

                            Senate Amendment

      The Senate amendment provides that, if on the date of 
enactment or at any time within one year after the date of 
enactment, a claim for refund or credit of any overpayment of 
tax resulting from the application of net cash lease provisions 
for spouses and lineal descendants (Sec. 2032A(c)(7)(E)) is 
barred by operation of law or rule of law, then the refund or 
credit of such overpayment shall, nonetheless, be allowed if a 
claim therefore is filed before the date that is one year after 
the date of enactment.
      Effective date.--This provision is effective for refund 
claims filed prior to the date that is one year after the date 
of enactment.

                          conference agreement

      The conference agreement follows the Senate amendment.

I. Extension of Research and Experimentation Tax Credit and New Vaccine 
Research Credit (Secs. 810 and 811 of the Senate Amendment and Sec. 41 
                     and New Sec. 45G of the Code)

                              present law

      Section 41 provides for a research tax credit equal to 20 
percent of the amount by which a taxpayer's qualified research 
expenditures for a taxable year exceeded its base amount for 
that year. The research tax credit generally applies to amounts 
paid or incurred before July 1, 2004.
      Except for certain university basic research payments 
made by corporations, the research tax credit applies only to 
the extent that the taxpayer's qualified research expenditures 
for the current taxable year exceed its base amount. The base 
amount for the current year generally is computed by 
multiplying the taxpayer's ``fixed-base percentage'' by the 
average amount of the taxpayer's gross receipts for the four 
preceding years. If a taxpayer both incurred qualified research 
expenditures and had gross receipts during each of at least 
three years from 1984 through 1988, then its ``fixed-base 
percentage'' is the ratio that its total qualified research 
expenditures for the 1984-1988 period bears to its total gross 
receipts for that period (subject to a maximum ratio of 0.16). 
All other taxpayers (so-called ``start-up firms'') are assigned 
a fixed-base percentage of 3.0 percent.
      Taxpayers are allowed to elect an alternative incremental 
research credit regime. If a taxpayer elects to be subject to 
this alternative regime, the taxpayer is assigned a three-
tiered fixed-base percentage (that is lower than the fixed-base 
percentage otherwise applicable under present law) and the 
credit rate likewise is reduced. Under the alternative credit 
regime, a credit rate of 2.65 percent applies to the extent 
that a taxpayer's current-year research expenses exceed a base 
amount computed by using a fixed-base percentage of 1.0 percent 
(i.e., the base amount equals 1.0 percent of the taxpayer's 
average gross receipts for the four preceding years) but do not 
exceed a base amount computed by using a fixed-base percentage 
of 1.5 percent. A credit rate of 3.2 percent applies to the 
extent that a taxpayer's current-year research expenses exceed 
a base amount computed by using a fixed-base percentage of 1.5 
percent but do not exceed a base amount computed by using a 
fixed-base percentage of 2.0 percent. A credit rate of 3.75 
percent applies to the extent that a taxpayer's current-year 
research expenses exceed a base amount computed by using a 
fixed-base percentage of 2.0 percent. An election to be subject 
to this alternative incremental credit regime may be made for 
any taxable year beginning after June 30, 1996, and such an 
election applies to that taxable year and all subsequent years 
(in the event that the credit subsequently is extended by 
Congress) unless revoked with the consent of the Secretary of 
the Treasury.

                               House Bill

      No provision.

                            senate amendment

      The Senate amendment would make the research credit 
permanent.
      The Senate amendment also would increase the credit rates 
under the alternative incremental credit from 2.65 percent to 
3.0 percent, from 3.2 percent to 4.0 percent, and from 3.75 
percent to 5.0 percent.
      In addition, the Senate amendment would provide a new 
research credit with respect to certain qualified vaccine and 
microbiocide research. The amendment would provide a credit 
equal to 30 percent of qualifying vaccine research expenses 
undertaken to develop vaccines and microbicides for malaria, 
tuberculosis, HIV, or any infectious disease (of a single 
etiology) which, according to the World Health Organization, 
causes over one million human deaths annually.\153\ Qualifying 
expenses would include 100 percent of in-house research 
expenses and 100 percent of contract research expenses. In-
house research expenses and contract research expenses would be 
defined as in present-law sec. 41. Qualifying vaccine research 
expenses would not include expenses for research incurred 
outside the United States, other than in the case of expenses 
for human clinical testing. No credit may be claimed for pre-
clinical expenses unless a research plan has been filed with 
the Secretary of the Treasury.
---------------------------------------------------------------------------
    \153\ The credit for vaccine research expenses would be coordinated 
with the credit for research under present-law sec. 41 and any 
deduction otherwise allowed with respect to qualifying vaccine research 
expenses would be reduced by the amount of the credit claimed for 
vaccine research expenses.
---------------------------------------------------------------------------
      Effective date.--The provision generally would be 
effective on the date of enactment. The increase in credit 
rates under the alternative incremental credit and the new 
credit for qualifying vaccine research expenses would be 
effective for taxable years ending after the date of enactment.

                          conference agreement

      The conference agreement does not include the Senate 
amendment.

 J. Acceleration of Round II Empowerment Zone Wage Credit (Sec. 812 of 
            the Senate Amendment and Sec. 1396 of the Code)

                              present law

      The Omnibus Budget Reconciliation Act of 1993 (``OBRA 
1993'') authorized the designation of nine empowerment zones 
(``Round I empowerment zones'') to provide tax incentives for 
businesses to locate within targeted areas designated by the 
Secretaries of Housing and Urban Development and Agriculture. 
The Taxpayer Relief Act of 1997 (``1997 Act'') authorized the 
designation of two additional Round I urban empowerment zones. 
Among other incentives, Round I empowerment zones qualify for a 
20-percent wage credit for the first $15,000 of wages paid to a 
zone resident who works in the empowerment zone.
      The 1997 Act also authorized the designation of 20 
additional empowerment zones (``Round II empowerment zones''), 
of which 15 are located in urban areas and five are located in 
rural areas. The 1997 Act did not authorize a wage credit for 
businesses located in the Round II empowerment zones. The 
Community Renewal Tax Relief Act of 2000, however, extended the 
20-percent wage credit to Round II empowerment zones for wages 
paid or incurred after December 31, 2001.\154\
---------------------------------------------------------------------------
    \154\ H.R. 5662, sec. 113 (2000) (enacted by Pub. L. No. 106-554); 
sec. 1396(b). Among other changes, the Community Renewal Tax Relief Act 
of 2000 extended all empowerment zone designations through December 31, 
2009, and provided that the wage credit rate remains at 20 percent for 
all empowerment zones (rather than being phased down) through December 
31, 2009.
---------------------------------------------------------------------------

                               house bill

      No provision.

                            senate amendment

      The Senate amendment accelerates the availability of the 
wage credit for Round II empowerment zones to the earlier of 
July 1, 2001, or the date of enactment of the bill.
      Effective date.--For wages paid or incurred after the 
earlier of July 1, 2001 or date of enactment.

                          conference agreement

      The conference agreement does not contain the Senate 
amendment.

 K. Treatment of Certain Hospital Support Organizations in Determining 
Acquisition Indebtedness (Sec. 813 of the Senate Amendment and Sec. 514 
                              of the Code)

                              present law

      In general, income of a tax-exempt organization that is 
produced by debt-financed property is treated as unrelated 
business income in proportion to the acquisition indebtedness 
on the income-producing property. Acquisition indebtedness 
generally means the amount of unpaid indebtedness incurred by 
an organization to acquire or improve the property and 
indebtedness that would not have been incurred but for the 
acquisition or improvement of the property. However, under an 
exception, acquisition indebtedness does not include 
indebtedness incurred by certain qualified organizations to 
acquire or improve real property. Qualified organizations 
include pension trusts, educational institutions, and title-
holding companies.

                               house bill

      No provision.

                            senate amendment

      The Senate amendment expands the exception to the 
definition of acquisition indebtedness in the case of a 
qualified hospital support organization. The exception applies 
to eligible indebtedness (or the qualified refinancing thereof) 
of the qualified hospital support organization.
      A qualified hospital support organization is a supporting 
organization (under Code section 509(a)(3)) of a hospital that 
is an academic health center (under Code section 119(d)(4)(B)). 
The assets of the supporting organization must also meet 
certain requirements. First, more than half of the value of its 
assets at any time since its organization (1) must have been 
acquired, directly or indirectly, by gift or devise, and (2) 
must consist of real property. In addition, the fair market 
value of the organization's real estate acquired by gift or 
devise must exceed 10 percent of the fair market value of all 
investment assets held by the organization immediately prior to 
the time that the eligible indebtedness is incurred. These 
requirements must be met each time eligible indebtedness is 
incurred or a qualified refinancing thereof occurs.
      Eligible indebtedness means indebtedness secured by real 
property acquired by gift or devise, the proceeds of which are 
used exclusively to acquire a leasehold interest in or to 
improve the property. A qualified refinancing of eligible 
indebtedness occurs if the refinancing does not exceed the 
amount of refinanced eligible indebtedness immediately before 
the refinancing.
      Effective date.--The Senate amendment applies to 
indebtedness incurred after December 31, 2003.

                          conference agreement

      The conference agreement does not include the Senate 
amendment provision.

 L. Modify Rules Governing Tax-Exempt Bonds for Certain Private Water 
 Facilities (Sec. 814 of the Senate Amendment and Sec. 142 of the Code)

                              present law

      Interest on State or local government bonds is tax-exempt 
when the proceeds of the bonds are used to finance activities 
carried out by or paid for by those governmental units. 
Interest on bonds issued by State or local governments acting 
as conduit borrowers for private businesses is taxable unless a 
specific exception is included in the Code. One such exemption 
allows tax-exempt bonds to be issued to finance privately owned 
and operated facilities for the furnishing of water. Such 
facilities must be operated in a manner similar to municipal 
water facilities in that service must be offered to the general 
public, and rates must be regulated. Tax-exempt private 
activity bonds for water facilities may be issued to finance 
arsenic and other pollutant treatment facilities.
      Issuance of private activity tax-exempt bonds for water 
facilities is subject to aggregate annual State volume 
limitations that apply to most private activity bonds. 
Similarly, like most other private activity bonds, interest on 
these bonds is a preference item for purposes of the 
alternative minimum tax.

                               house bill

      No provision.

                            senate amendment

      The Senate amendment provides that private activity bonds 
for facilities to remediate arsenic levels in water (as opposed 
to such bonds to finance private water treatment facilities 
generally) are not subject to the State volume limits and the 
interest on the bonds is not a preference item for the 
alternative minimum tax. A bond is treated as for arsenic 
remediation if at least 95 percent of the proceeds are used for 
facilities to comply with the 10 parts per billion standard 
recommended by the National Academy of Sciences. The provision 
does not affect governmental bonds for municipal water 
facilities.
      Effective date.--The provision is effective for bonds 
issued after the date of enactment.

                          conference agreement

      The conference agreement does not include the Senate 
amendment provision.

M. Combined Employment Tax Reporting (Sec. 816 of the Senate Amendment 
                    and Sec. 6103(d)(5) of the Code)

                              present law

      The Internal Revenue Code prohibits disclosure of tax 
returns and return information, except to the extent 
specifically authorized by the Internal Revenue Code (sec. 
6103). Unauthorized disclosure is a felony punishable by a fine 
not exceeding $5,000 or imprisonment of not more than five 
years, or both (sec. 7213). An action for civil damages also 
may be brought for unauthorized disclosure (sec. 7431). No tax 
information may be furnished by the Internal Revenue Service 
(``IRS'') to another agency unless the other agency establishes 
procedures satisfactory to the IRS for safeguarding the tax 
information it receives (sec. 6103(p)).
      The Taxpayer Relief Act of 1997 authorized a 
demonstration project to assess the feasibility and 
desirability of expanding combined reporting. The demonstration 
project was: (1) limited to State of Montana, (2) limited to 
employment taxes, (3) limited to taxpayer identity (name, 
address, taxpayer identifying number) and the signature of the 
taxpayer and (4) limited to a period of five years. After 
August 5, 2002, the demonstration project will expire.
      To implement that demonstration project, the Taxpayer 
Relief Act of 1997 amended the Code to authorize the IRS to 
disclose the name, address, taxpayer identifying number, and 
signature of the taxpayer, which is common to both the State 
and Federal portions of the combined form. The Code permits the 
IRS to disclose these common data items to the State and not 
have it subject to the redisclosure restrictions, safeguards, 
or criminal penalty provisions.\155\ Essentially, the State is 
allowed to use this information as if the State directly 
received this information from the taxpayer.
---------------------------------------------------------------------------
    \155\ Sec. 6103(d)(5). The following restrictions and requirements 
do not apply: (1) the prohibition on disclosure of returns or return 
information by State officers and employees (sec. 6103(a)(2); (2) the 
Federal penalties for unauthorized disclosure and inspection of returns 
and return information (secs. 7213 and 7213A) and (3) the requirement 
that the State establish safeguards regarding the information obtained 
from the IRS (sec. 6103(p)(4)).
---------------------------------------------------------------------------

                               house bill

      No provision.

                            senate amendment

      The Senate amendment makes the IRS disclosure authority 
permanent and expands the authorized recipients to include any 
State agency, body, or commission, for the purpose of carrying 
out a combined Federal and State employment tax reporting 
program approved by the Secretary. The statutory waiver of the 
redisclosure restrictions, safeguards, and criminal penalty 
provisions continues to apply. Further, the items authorized 
for disclosure continue to be limited to the name, address, 
taxpayer identification number, and signature of the taxpayer.
      Effective date.--The Senate amendment is effective on the 
date of enactment.

                          conference agreement

      The conference agreement does not contain the Senate 
amendment.

 N. Reporting Requirements of State and Local Political Organizations 
 (Secs. 901-904 of the Senate Amendment and Secs. 527 and 6012 of the 
                                 Code)

                              present law

In general
      Under present law, section 527 provides a limited tax-
exempt status to ``political organizations,'' meaning a party, 
committee, association, fund, account, or other organization 
(whether or not incorporated) organized and operated primarily 
for the purpose of directly or indirectly accepting 
contributions or making expenditures (or both) for an ``exempt 
function.'' These organizations are generally exempt from 
Federal income tax on contributions they receive, but are 
subject to tax on their net investment income and certain other 
income at the highest corporate income tax rate (``political 
organization taxable income''). Donors are exempt from gift tax 
on their contributions to such organizations. For purposes of 
section 527, the term ``exempt function'' means: the function 
of influencing or attempting to influence the selection, 
nomination, election, or appointment of any individual to any 
Federal, State, or local public office or office in a political 
organization, or the election of Presidential or Vice-
Presidential electors, whether or not such individual or 
electors are selected, nominated, elected, or appointed. Thus, 
by definition, the purpose of a section 527 organization is to 
accept contributions or make expenditures for political 
campaign (and similar) activities.
Notice of section 527 organization
      An organization is not treated as a section 527 
organization unless it has given notice to the Secretary of the 
Treasury, electronically and in writing, that it is a section 
527 organization. The notice is not required (1) of any person 
required to report as a political committee under the Federal 
Election Campaign Act of 1971, (2) by organizations that 
reasonably anticipate that their annual gross receipts will 
always be less than $25,000, and (3) organizations described in 
section 501(c). All other organizations, including State and 
local candidate committees, are required to file the notice.
      The notice is required to be transmitted no later than 24 
hours after the date on which the organization is organized. 
The notice is required to include the following information: 
(1) the name and address of the organization and its electronic 
mailing address, (2) the purpose of the organization, (3) the 
names and addresses of the organization's officers, highly 
compensated employees, contact person, custodian of records, 
and members of the organization's Board of Directors, (4) the 
name and address of, and relationship to, any related entities, 
and (5) such other information as the Secretary may require.
      The notice of status as a section 527 organization is 
required to be disclosed to the public by the IRS and by the 
organization. In addition, the Secretary of the Treasury is 
required to make publicly available on the Internet and at the 
offices of the IRS a list of all political organizations that 
file a notice with the Secretary under section 527 and the 
name, address, electronic mailing address, custodian of 
records, and contact person for such organization. The IRS is 
required to make this information available within 5 business 
days after the Secretary of the Treasury receives a notice from 
a section 527 organization.
      An organization that fails to file the notice is not 
treated as a section 527 organization and its exempt function 
income is taken into account in determining taxable income.
Disclosure by political organizations of expenditures and contributors
      A political organization that accepts a contribution or 
makes an expenditure for an exempt function during any calendar 
year is required to file with the Secretary of the Treasury 
certain reports. The following reports are required: either (1) 
in the case of a calendar year in which a regularly scheduled 
election is held, quarterly reports, a pre-election report, and 
a post-general election report and, in the case of any other 
calendar year, a report covering January 1 to June 30 and July 
1 to December 31, or (2) monthly reports for the calendar year, 
except that, in lieu of the reports due for November and 
December of any year in which a regularly scheduled general 
election is held, a pre-general election report, a post-general 
election report, and a year end report are to be filed.
      The reports are required to include the following 
information: (1) the amount of each expenditure made to a 
person if the aggregate amount of expenditures to such person 
during the calendar year equals or exceeds $500 and the name 
and address of the person (in the case of an individual, 
including the occupation and name of the employer of the 
individual); and (2) the name and address (in the case of an 
individual, including the occupation and name of employer of 
such individual) of all contributors that contributed an 
aggregate amount of $200 or more to the organization during the 
calendar year and the amount of the contribution.
      The disclosure requirements do not apply (1) to any 
person required to report as a political committee under the 
Federal Election Campaign Act of 1971, (2) to any State or 
local committee of a political party or political committee of 
a State or local candidate, (3) to any organization that 
reasonably anticipates that it will not have gross receipts of 
$25,000 or more for any taxable year, (4) to any organization 
described in section 501(c), or (5) with respect to any 
expenditure that is an independent expenditure (as defined in 
section 301 of the Federal Election Campaign Act of 1971).
      For purposes of the disclosure requirements, the term 
``election'' means (1) a general, special, primary, or runoff 
election for a Federal office, (2) a convention or caucus of a 
political party that has authority to nominate a candidate for 
Federal office, (3) a primary election held for the selection 
of delegates to a national nominating convention of a political 
party, or (4) a primary election held for the expression of a 
preference for the nomination of individuals for election to 
the office of President.
      The IRS is required to make available to the public any 
report filed by a political organization. In addition, the 
organization is required to make any such report available to 
the public. A penalty is imposed for failure to file a report 
or provide required information in the report.
Return requirements for section 527 organizations
      Under present law, a section 527 organization that has 
political organization taxable income is required annually to 
file Form 1120-POL (Return of Organization Exempt from Income 
Tax). Section 527 organizations that do not have political 
organization taxable incomebut have gross receipts of $25,000 
or more during the taxable year also are required to file an income tax 
return. The gross receipts requirement does not apply to political 
organizations that are subject to section 527 solely by reason of 
section 527(f)(1) (which makes certain charities subject to section 527 
based on the charity's political activities). The annual return must be 
made available to the public by the organization and by the IRS.

                               house bill

      No provision.

                            senate amendment

      The Senate amendment provides that a political 
organization that is a political committee of a State or local 
candidate is exempt from the requirement to provide notice to 
the Secretary of its formation and purpose.
      In addition, the Senate amendment exempts certain 
political organizations from the requirement provided by 
section 527(j)(2) to file regular reports with the Secretary 
detailing contribution and expenditure information. To be 
exempt from such reporting requirements under the amendment: 
(1) the organization must not be an organization already exempt 
from the reporting requirement under present law (as provided 
by section 527(j)(5)); (2) the organization must not engage in 
any exempt function activities other than activities for the 
purpose of influencing or attempting to influence the 
selection, nomination, election, or appointment of any 
individual to any State or local public office or office in a 
State or local political organization; and (3) no candidate for 
Federal office or individual holding Federal office can control 
or materially participate in the direction of the organization, 
solicit any contributions to the organization, or direct, in 
whole or in part, any expenditure made by the organization. 
Further, during the calendar year, the organization must be 
required to report under State or local law, and must in fact 
report, information regarding each separate expenditure and 
contribution (including information regarding the person who 
makes such contribution or receives such expenditure) that 
otherwise would be required. The agency with which such 
information is filed must make the filed information public and 
available for public inspection. If the minimum amount of a 
contribution or expenditure that triggers disclosure under 
State or local law is more than $100 than the minimum amount 
for disclosure required by the Code, the requirements for 
exemption from reporting will not be met.
      Under the Senate amendment, political organizations 
described in the preceding paragraph are exempt from the 
requirement to file an income tax return if such organization 
does not have political organization taxable income, is not 
subject to section 527 solely by reason of section 527(f)(1) 
(as described above), and has gross receipts of less than 
$100,000 for the taxable year.
      The Senate amendment further provides that the Secretary 
in consultation with the Federal Election Commission shall 
publicize the effects of these changes and the interaction of 
the requirements to file a notification or report under section 
527 and reports under the Federal Election Campaign Act of 
1971.
      Finally, the Senate amendment gives the Secretary the 
authority to waive all or any portion of the penalties imposed 
on an organization for failure to notify the Secretary of the 
organization's establishment or the failure to file a report. 
Such waiver is subject to a showing by the organization that 
the failure was due to reasonable cause and not to willful 
neglect.
      Effective date.--The exemptions from the notification, 
reporting, and return requirements are effective as of July 1, 
2000. The authority to the Secretary to waive penalties is 
effective for any tax assessed or penalty imposed after June 
30, 2000.

                          conference agreement

      The conference agreement does not include the Senate 
amendment provision.

              IX. COMPLIANCE WITH CONGRESSIONAL BUDGET ACT

    (Secs. 111, 211, 311, 451, 581, 695, 711, and 821 of the Senate 
                               Amendment)

                              present law

      Reconciliation is a procedure under the Congressional 
Budget Act of 1974 (the ``Budget Act'') by which Congress 
implements spending and tax policies contained in a budget 
resolution. The Budget Act contains numerous rules enforcing 
the scope of items permitted to be considered under the budget 
reconciliation process. One such rule, the so-called ``Byrd 
rule,'' was incorporated into the Budget Act in 1990. The Byrd 
rule, named after its principal sponsor, Senator Robert C. 
Byrd, is contained in section 313 of the Budget Act. The Byrd 
rule generally permits members to raise a point of order 
against extraneous provisions (those which are unrelated to the 
goals of the reconciliation process) from either a 
reconciliation bill or a conference report on such bill.
      Under the Byrd rule, a provision is considered to be 
extraneous if it falls under one or more of the following six 
definitions:
            (1) It does not produce a change in outlays or 
        revenues;
            (2) It produces an outlay increase or revenue 
        decrease when the instructed committee is not in 
        compliance with its instructions;
            (3) It is outside of the jurisdiction of the 
        committee that submitted the title or provision for 
        inclusion in the reconciliation measure;
            (4) It produces a change in outlays or revenues 
        which is merely incidental to the nonbudgetary 
        components of the provision;
            (5) It would increase the deficit for a fiscal year 
        beyond those covered by the reconciliation measure; and
            (6) It recommends changes in Social Security.

                               house bill

      No provision.

                            senate amendment

Sunset of provisions
      To ensure compliance with the Budget Act, the Senate 
amendment provides that all provisions of, and amendments made 
by, the bill that are in effect on September 30, 2011, shall 
cease to apply as of the close of September 30, 2011.

                          conference agreement

      The conference agreement follows the Senate amendment, 
except that all provisions of, and amendments made by, the bill 
generally do not apply for taxable, plan or limitation years 
beginning after December 31, 2010. With respect to the estate, 
gift, and generation-skipping provisions of the bill, the 
provisions do not apply to estates of decedents dying, gifts 
made, or generation skipping transfers, after December 31, 
2010. The Code and the Employee Retirement Income Security Act 
of 1974 are applied to such years, estates, gifts and transfers 
after December 31, 2010, as if the provisions of and amendments 
made by the bill had never been enacted.

                       X. TAX COMPLEXITY ANALYSIS

      The following tax complexity analysis is provided 
pursuant to section 4022(b) of the Internal Revenue Service 
Reform and Restructuring Act of 1998, which requires the staff 
of the Joint Committee on Taxation (in consultation with the 
Internal Revenue Service (``IRS'') and the Treasury Department) 
to provide a complexity analysis of tax legislation reported by 
the House Committee on Ways and Means, the Senate Committee on 
Finance, or a Conference Report containing tax provisions. The 
complexity analysis is required to report on the complexity and 
administrative issues raised by provisions that directly or 
indirectly amend the Internal Revenue Code and that have 
widespread applicability to individuals or small businesses. 
For each such provision identified by the staff of the Joint 
Committee on Taxation, a summary description of the provision 
is provided along with an estimate of the number and type of 
affected taxpayers, and a discussion regarding the relevant 
complexity and administrative issues.
      Following the analysis of the staff of the Joint 
Committee on Taxation are the comments of the IRS and the 
Treasury Department regarding each of the provisions included 
in the complexity analysis, including a discussion of the 
likely effect on IRS forms and any expected impact on the IRS.
1. Reduction in income tax rates for individuals (sec. 101 of the 
        conference agreement)
Summary description of provision
      The bill creates a new 10-percent regular income tax 
bracket for a portion of the taxable income that is currently 
taxed at 15 percent. The bill reduces the other regular income 
tax rates. By 2006, the present-law individual income tax rates 
of 28 percent, 31 percent, 36 percent, and 39.6 percent are 
lowered to 25 percent, 28 percent, 33 percent, and 35 percent, 
respectively. The bill also provides for acceleration of the 10 
percent income tax rate bracket benefit for 2001, principally 
through advance payment of the credit in the form of checks 
issued to taxpayers by the Department of the Treasury.
Number of affected taxpayers
      It is estimated that the provision will affect 
approximately 100 million individual tax returns.
Discussion
      It is not anticipated that individuals will need to keep 
additional records due to this provision. It should not result 
in an increase in disputes with the IRS, nor will regulatory 
guidance be necessary to implement this provision. It may, 
however, increase the number of questions that taxpayers ask 
the IRS, such as when taxpayers will receive their checks. This 
increased volume of questions could have an adverse impact on 
other elements of IRS' operations, such as the levels of 
taxpayer service. In addition, the provision should not 
increase the tax preparation costs for most individuals.
      The IRS will need to add to the individual income tax 
forms package a new worksheet so that taxpayers can reconcile 
the amount of the check they receive from the Department of the 
Treasury with the credit they are allowed as an acceleration of 
the 10 percent income tax rate bracket benefit for 2001. This 
worksheet should be relatively simple and many taxpayers will 
not need to fill it out completely because they will have 
received the full amount by check.
      The Secretary of the Treasury is expected to make 
appropriate revisions to the wage withholding tables to reflect 
the proposed rate reduction for calendar year 2001 as 
expeditiously as possible. To implement the effects of the rate 
cuts for 2001, employers would be required to use a new 
(second) set of withholding rate tables to determine the 
correct withholding amounts for each employee. Switching to the 
new withholding rate tables during the year can be expected to 
result in a one-time additional burden for employers (or 
additional costs for employers that rely on a bookkeeping or 
payroll service).
2. Standard deduction tax relief (sec. 301 of the conference agreement)
Summary description of provision
      The bill increases the basic standard deduction for 
married taxpayers filing a joint return to twice the basic 
standard deduction for an unmarried individual. The increase is 
phased-in over five years beginning in 2005 and would be fully 
phased-in for 2009 and thereafter.
Number of affected taxpayers
      It is estimated that the provision will affect 
approximately 23 million individual returns.
Discussion
      It is not anticipated that individuals will need to keep 
additional records due to this provision. The higher basic 
standard deduction should not result in an increase in disputes 
with the IRS, nor will regulatory guidance be necessary to 
implement this provision. In addition, the provision should not 
increase individuals' tax preparation costs.
      Some taxpayers who currently itemize deductions may 
respond to the provision by claiming the increased standard 
deduction in lieu of itemizing. According to estimates by the 
staff of the Joint Committee on Taxation, approximately three 
million individual tax returns will realize greater tax savings 
from the increased standard deduction than from itemizing their 
deductions. In addition to the tax savings, such taxpayers will 
no longer have to file Schedule A to Form 1040 and a 
significant number of which will no longer need to engage in 
the record keeping inherent in itemizing below-the-line 
deductions. Moreover, by claiming the standard deduction, such 
taxpayers may qualify to use simpler versions of the Form 1040 
(i.e., Form 1040EZ or Form 1040A) that are not available to 
individuals who itemize their deductions. These forms simplify 
the return preparation process by eliminating from the Form 
1040 those items that do not apply to particular taxpayers.
      This reduction in complexity and record keeping also may 
result in a decline in the number of individuals using a tax 
preparation service or a decline in the cost of using such a 
service. Furthermore, if the provision results in a taxpayer 
qualifying to use one of the simplerversions of the Form 1040, 
the taxpayer may be eligible to file a paperless Federal tax return by 
telephone. The provision also should reduce the number of disputes 
between taxpayers and the IRS regarding substantiation of itemized 
deductions.
3. Expansion of the 15-percent rate bracket (sec. 302 of the conference 
        agreement)
Summary description of provision
      The provision increases the size of the 15-percent 
regular income tax rate bracket for married individuals filing 
a joint return to twice the size of the corresponding rate 
bracket for unmarried individuals. This increase is phased-in 
over four years beginning in 2005. It is fully effective 
beginning in 2008.
Number of affected taxpayers
      It is estimated that the provision will affect 
approximately 20 million individual tax returns.
Discussion
      It is not anticipated that individuals will need to keep 
additional records due to this provision. The increased size of 
the 15-percent regular income tax rate bracket for married 
individuals filing joint returns should not result in an 
increase in disputes with the IRS, nor will regulatory guidance 
be necessary to implement this provision.
4. Increase the child tax credit (sec. 201 of the conference agreement)
Summary description of provision
      The provision increases the child tax credit from $500 to 
$1,000, phased in over an ten-year period beginning in 2001, 
extends refundability of the credit, allows the credit to the 
extent of the full regular tax and alternative minimum tax, and 
repeals the provision that reduces the refundable child credit 
by the individual's alternative minimum tax.
Number of affected taxpayers
      It is estimated that the provisions will affect 
approximately 25 million individual tax returns.
Discussion
      Individuals should not have to keep additional records 
due to this provision, nor will additional regulatory guidance 
be necessary to implement this provision. More taxpayers will 
have to perform the additional calculations necessary to 
determine eligibility for the refundable child credit but this 
should not lead to an increase in disputes with the IRS. For 
taxpayer's with less than two children, however, the provision 
can be expected to increase tax preparation costs and the 
number of individuals using a tax preparation service. (See, 
also, the discussion of the interactive effect of the child 
credit and the individual alternative minimum tax, below.)
5. The effect of the alternative minimum tax rules
      The provisions relating to the rate reductions, increased 
standard deduction, the expanded 15-percent rate bracket, and 
the increased child tax credit are affected by the alternative 
minimum tax rules. Although the bill provides relief from the 
alternative minimum tax, additional individuals will need to 
make the necessary calculations to determine the applicability 
of the alternative minimum tax rules. It is estimated that for 
the year 2010, 18 million additional individual income tax 
returns that will benefit from the rate reductions, increased 
standard deduction, expanded 15-percent rate bracket, and 
increased child tax credit would be affected by the alternative 
minimum tax. For these taxpayers, it could be expected that the 
interaction of the provisions with the alternative minimum tax 
rules would result in an increase in tax preparation costs and 
in the number of individuals using a tax preparation service.
      The bill also provides that the alternative minimum tax 
exemption amount for married individuals filing a joint return 
is increased. This should reduce complexity for affected 
taxpayers. It is estimated that, for the year 2006, the 
provision increasing the alternative minimum tax exemption 
amount will apply to seven million individual income tax 
returns. Some of these taxpayers will no longer be affected by 
the alternative minimum tax.

                        Department of the Treasury,
                                  Internal Revenue Service,
                                      Washington, DC, May 25, 2001.
Ms. Lindy L. Paull,
Chief of Staff, Joint Committee on Taxation, Washington, DC.
      Dear Ms. Paull: Enclosed are the combined comments of the 
Internal Revenue Service and the Treasury Department on the 
provisions of the conference agreement on the ``Economic Growth 
and Tax Relief Reconciliation Act.'' Our comments are based on 
the description of these provisions contained in a brief 
summary of the conference agreement prepared by the staff of 
the Joint Committee on Taxation.
      Due to the short turnaround time, our comments are 
necessarily provisional.
            Sincerely,
                                               Charles O. Rossotti.
      Enclosure.

 Complexity Analysis of Economic Growth and Tax Relief Reconciliation 
                              Act of 2001

    New 10-Percent Rate Bracket and Reduction in Other Rate Brackets

Provision
      Create a new 10-percent regular income tax bracket 
($6,000/$10,000/$12,000 of taxable income in 2001-2007 and 
$7,000/$10,000/$14,000 of taxable income in 2008 and 
thereafter; index in 2009); advance payments would be made to 
taxpayers in 2001.
      Reduce the present-law regular income tax rates of 28, 
31, 36, and 39.6 percent to 25, 28, 33, and 35 percent, 
respectively. The reduction is phased in over 6 years beginning 
July 1, 2001.
IRS and Treasury Comments
      The new tax bracket and the reduced tax rates would be 
incorporated into the tax table and the tax rate schedules 
shown in the instructions for Forms 1040, 1040A, 1040EZ, 
1040NR, 1040NR-EZ, and 1041, and on Forms W-4V and 8814 for 
2001 and later years. Other forms (e.g., Form 8752 and Schedule 
D (Form 1040)) would also be affected. No new forms would be 
required.
      The new tax bracket and the reduced tax rates would also 
be incorporated into the tax rate schedules shown on Form 1040-
ES for 2002 and later years. Subsequent to enactment, the IRS 
would have to advise taxpayers who make estimated tax payments 
for 2001 how they can adjust their estimated tax payments for 
2001 to reflect the reduced rates.
      Programming changes would be required to reflect the new 
tax bracket and rates for tax years 2001 through 2006. 
Currently, the IRS tax computation programs are updated 
annually to incorporate mandated inflation adjustments. 
Programming changes necessitated by the provision would be 
included during that process for 2002 and later years. 
Supplemental programming changes would be required to 
accommodate the new 10-percent tax bracket for 2001.
      New withholding rate tables and schedules will be 
published soon after enactment to update the current Circular E 
for use by employers during the remainder of calendar year 
2001.
      The advance payment of the credit for 2001 would require 
a notice to explain the advance payment amount; programming 
changes to compute the advance payment amount; and resources to 
answer taxpayer questions about the payment.
      The new credit for 2001 would require a new form to 
report to taxpayers the amount of the advance payment made to 
them; one new line to be added to Forms 1040, 1040A, and 1040EZ 
for taxpayers to compute the amount, if any, of their allowable 
credit; programming changes to compute the amount of the 
credit; and script and other changes to enable TeleFile to 
compute the amount of the credit.
      The alternative minimum tax (AMT) is projected to apply 
to an increasing number of taxpayers over time. The provision 
would increase the number of taxpayers, particularly in the 
later years of the budget period (2006-2011), whose liability 
is affected by the AMT, and would also cause additional 
taxpayers to perform AMT calculations to determine whether 
their liability is affected by the AMT.

                            Child Tax Credit

Provision
      Increase the amount of the child tax credit to $600 
(2001-2004), $700 (2005-2008), $800 (2009), and $1,000 (2010).
      Make the child tax credit refundable to the extent of 10 
percent of the taxpayer's earned income in excess of $10,000 
for 2001-2004 (15 percent for 2005 and later). The $10,000 
figure would be indexed beginning in 2002.
      Change the tax liability limitation for the child tax 
credit, including the order in which the credit is claimed, 
beginning in 2002. The child tax credit, but not the other 
personal nonrefundable credits, would be allowed against the 
sum of the regular tax and the alternative minimum tax. Under a 
new ordering rule, the foreign tax credit and the other 
nonrefundable personal credits would be taken into account 
before the child tax credit.
IRS and Treasury Comments
      No new forms would be required as a result of any of the 
above-mentioned child tax credit provisions.
      The increase in the amount of the child tax credit would 
be incorporated in the instructions for Forms 1040, 1040A, and 
1040NR for 2001 and later years. This increase also affects the 
amount of the refundable child tax credit for residents of 
Puerto Rico and would be reflected in the instructions for 
Forms 1040-PR and 1040-SS for 2001 and later years.
      The change in the tax liability limitation for 2002 and 
later years would:
      1. Eliminate two questions from the instructions for 
Forms 1040 and 1040A.
      2. Eliminate the need to refer taxpayers with three or 
more qualifying children and certain other personal 
nonrefundable credits to Publication 972 to compute their child 
tax credit. Such taxpayers will no longer be required to 
complete an additional 10-line worksheet (the ``Line 11 
Worksheet'') in Publication 972.
      3. Add three lines to the child tax credit worksheet in 
the Form 1040 instructions and one line to that worksheet in 
the Form 1040A instructions.
      4. Change the ordering of the credits on Forms 1040, 
1040A, and 1040NR.
      Nine million additional taxpayers would be required to 
file Form 8812 to benefit from the provision that would make 
the child tax credit refundable to the extent of 15 percent of 
earned income in excess of $10,000. Form 8812 would be expanded 
from nine lines to 13 lines, beginning in 2001. (A similar 
change will be necessary on Forms 1040-PR and 1040-SS for 
residents of Puerto Rico.)
      The increase in the amount of the credit would be 
incorporated on Form 1040-ES for 2004, 2007, 2010, and 2011.
      Supplemental programming changes would be required to 
accommodate the changes to the computation of the child tax 
credit for 2001.
      As a result of this change, the number of taxpayers 
affected by the AMT would decrease.

        Standard Deduction for Married Taxpayers Filing Jointly

Provision
      Increase the basic standard deduction for a married 
couple filing a joint return to twice the basic standard 
deduction for an unmarried individual filing a single return, 
phased in over 5 years beginning in 2006.
IRS and Treasury comments
      The increase in the basic standard deduction for married 
taxpayers would be incorporated in the instructions for Forms 
1040, 1040A, 1040EZ, and on Forms1040, 1040A, 1040EZ, and 1040-
ES beginning in 2006. No new forms would be required.
      Programming changes would be required to reflect the 
increased standard deduction for married taxpayers. Currently, 
IRS tax computation programs are updated annally to incorporate 
mandated inflation adjustments. Programming changes 
necessitated by this provision would be included during that 
process.
      Compared with current law, the larger standard deduction 
would reduce the number of taxpayers who itemize deductions.
      As a result of this provision, the number of taxpayers 
affected by the AMT would increase.

      15-Percent Rate Bracket For Married Taxpayers Filing Jointly

Provision
      Increase the width of the 15-percent regular income tax 
rate bracket for a married couple filing a joint return to 
twice the width of the corresponding rate bracket for an 
unmarried individual filing a single return, phased in over 5 
years beginning in 2006.
IRS and Treasury comments
      The increase in the width of the 15-percent rate bracket 
for married taxpayers would be incorporated in the tax tables 
and the tax rate schedules shown in the instructions for Forms 
1040, 1040A, 1040EZ, 1040NR, 1040NR-EZ, and on Form 1040-ES for 
each year during the phase-in period (2006-2010). No new forms 
would be required.
      Programming changes would be required to reflect the 
expanded 15-percent rate bracket. Currently, the IRS tax 
computation programs are updated annually to incorporate 
mandated inflation adjustments. Programming changes 
necessitated by the provision would be included during that 
process.
      As a result of this provision, the number of taxpayers 
affected by the AMT would increase.

[GRAPHIC] [TIFF OMITTED] TR84.001

[GRAPHIC] [TIFF OMITTED] TR84.002

[GRAPHIC] [TIFF OMITTED] TR84.003

[GRAPHIC] [TIFF OMITTED] TR84.004

[GRAPHIC] [TIFF OMITTED] TR84.005

[GRAPHIC] [TIFF OMITTED] TR84.006

[GRAPHIC] [TIFF OMITTED] TR84.007

[GRAPHIC] [TIFF OMITTED] TR84.008

                                   William Thomas,
                                   Dick Armey,
                                 Managers on the Part of the House.

                                   Chuck Grassley,
                                   Orrin Hatch,
                                   Frank H. Murkowski,
                                   Don Nickles,
                                   Phil Gramm,
                                   Max Baucus,
                                   John Breaux,
                                Managers on the Part of the Senate.

                                  
