88 STAT. 954 26 USC 1401. 26 USC 3101. 42 USC 401. 26 USC 1379. Ante, p. 952. 26 USC 401. Repeal. Pub. Law 93-406 126 September 2, 1974 "(iii) that any increase in the rate of accrual, and any increase in the compensation base which may be taken into account, shall, with respect only to such increase, begin a new period of participation in the plan, and "(iv) when appropriate, in the case of periods beginning after December 31, 1977, for adjustments in the applicable percentages based on changes in prevailing interest and mortality rates occurring after 1973. "(4) CERTAIN CONTRIBUTIONS AND BENEFITS MAY NOT BE TAKEN INTO ACCOUNT.-A defined benefit plan which provides contributions or benefits for owner-employees does not satisfy the requirements of this subsection unless such plan meets the requirements of subsection (a) (4) without taking into account contributions or benefits under chapter 2 (relating to tax on selfemployment income), chapter 21 (relating to Federal Insurance Contributions Act), title II of the Social Security Act, or any other Federal or State law. "(5) DEFINITIONS. For purposes of this subsection- "(A) BASIC BENEFIT.-The term 'basic benefit' means a benefit in the form of a straight life annuity commencing at the later of "(i) age 65, or "(ii) the day 5 years after the day the participant's current period of participation began SHAREHOLDER-EMPLOYEE.-The under a plan which provides no ancillary benefits and to which employees do not contribute. "(B) term 'shareholderemployee' has the same meaning as when used in section 1379 (d). (C) COMPENSATION.-The term 'compensation' means "(i) in the case of an employee within the meaning of subsection (c) (1), the earned income of such individual, or "(ii) in the case of a shareholder-employee, the compensation received or accrued by the individual from the electing small business corporation. "(6) SPECIAL RULES.-Section 404 (e) (relating to special limitations for self-employed individuals) and section 1379(b) (relating to taxability of shareholder-employee beneficiaries) do not apply to a trust to which this subsection applies.". (e) REPEAL OF EXISTING TAX TREATMENT OF EXCESS CONTRI BUTIONS. (1) The last sentence of section 401(d) (5) is amended to read as follows: "Subparagraphs (A) and (B) do not apply to contributions described in subsection (e).” (2) Paragraph (8) of section 401 (d) is repealed. (3) Subsection (e) of section 401 is amended to read as follows: "(e) CONTRIBUTIONS FOR PREMIUMS ON ANNUITY, ETC., CONTRACTS.-A contribution by the employer on behalf of an owneremployee is described in this subsection if "(1) under the plan such contribution is required to be applied (directly or through a trustee) to pay premiums or other consideration for one or more annuity, endowment, or life insurance contracts on the life of such owner-employee issued under the plan, "(2) the amount of such contribution exceeds the amount deductible under section 404 with respect to contributions made by the employer on behalf of such owner-employee under the plan, and "(3) the amount of such contribution does not exceed the average of the amounts which were deductible under section 404 with September 2, 1974 · 127 Pub. Law 93-406 88 STAT. 955 respect to contributions made by the employer on behalf of such owner-employee under the plan (or which would have been deductible if such section had been in effect) for the first three taxable years (A) preceding the year in which the last such annuity, endowment, or life insurance contract was issued under the plan, and (B) in which such owner-employee derived earned income from the trade or business with respect to which the plan is established, or for so many of such taxable years as such owneremployee was engaged in such trade or business and derived earned income therefrom. Infra. In the case of any individual on whose behalf contributions described in paragraph (1) are made under more than one plan as an owneremployee during any taxable year, the preceding sentence does not apply if the amount of such contributions under all such plans for all such years exceeds $7,500. Any contribution which is described in this subsection shall, for purposes of section 4972 (b), be taken into account as a contribution made by such owner-employee as an employee to the extent that the amount of such contribution is not deductible under section 404 for the taxable year, but only for the 26 USC 404. purpose of applying section 4972 (b) to other contributions made by such owner-employee as an employee." (4) Clause (ii) of section 401 (a) (10) (A) is amended by strik- 26 USC 401. ing out "subsection (e) (3) (A)" and inserting in lieu thereof "subsection (e)”. (5) Subparagraph (A) of section 72(m) (5) (A) is amended— (B) by striking out the comma at the end of clause (ii) and the word "and" following that comma, and inserting in (C) by striking out clause (iii). (f) TAX ON EXCESS CONTRIBUTIONS.— (1) Chapter 43 (relating to qualified pension, etc., plans) is amended by inserting after section 4971 the following new section: Ante, p. 920. "SEC. 4972. TAX ON EXCESS CONTRIBUTIONS FOR SELF-EMPLOYED INDIVIDUALS. "(a) TAX IMPOSED.-In the case of a plan which provides contributions or benefits for employees some or all of whom are employees within the meaning of section 401 (c) (1), there is imposed, for each taxable year of the employer who maintains such plan, a tax in an amount equal to 6 percent of the amount of the excess contributions under the plan (determined as of the close of the taxable year). The tax imposed by this subsection shall be paid by the employer who maintains the plan. This section applies only to plans which include a trust described in section 401(a), which are described in section 403 (a), or which are described in section 405 (a). "(b) EXCESS CONTRIBUTIONS. "(1) IN GENERAL.--For purposes of this section, the term 'excess contributions' means the sum of the amounts (if any) determined under paragraphs (2), (3), and (4), reduced by the sum of the correcting distributions (as defined in paragraph (5)) made in all prior taxable years beginning after December 31, 1975. For purposes of this subsection the amount of any contribution which is allocable (determined under regulations prescribed by the Secretary or his delegate) to the purchase of life, accident, health, or other insurance shall not be taken into account. "(2) CONTRIBUTIONS BY OWNER-EMPLOYEES.-The amount determined under this paragraph, in the case of a plan which provides contributions or benefits for employees some or all of whom are "Excess contributions.' 88 STAT. 956 26 USC 401. Pub. Law 93-406 - 128 September 2, 1974 owner-employees (within the meaning of section 401 (c) (3)), is the sum of "(A) the excess (if any) of "(i) the amount contributed under the plan by each owner-employee (as an employee) for the taxable year, over "(ii) the amount permitted to be contributed by each owner-employee (as an employee) for such year, and "(B) the amount determined under this paragraph for the preceding taxable year of the employer, reduced by the excess (if any) of the amount described in subparagraph (A) (ii) over the amount described in subparagraph (A) (i). "(3) DEFINED BENEFIT PLANS.-The amount determined under this paragraph, in the case of a defined benefit plan, is the amount contributed under the plan by the employer during the taxable year or any prior taxable year beginning after December 31, 1975, if— "(A) as of the close of the taxable year, the full funding limitation of the plan (determined under section 412(c) (7)) is zero, and "(B) such amount has not been deductible for the taxable year or any prior taxable year. "(4) DEFINED CONTRIBUTION PLANS.- -The amount determined under this paragraph, in the case of a plan other than a defined benefit plan, is the portion of the amounts contributed under the plan by the employer during the taxable year and each prior taxable year beginning after December 31, 1975, which has not been deductible for the taxable year or any prior taxable year. "(5) CORRECTING DISTRIBUTION.-For purposes of this subsection the term 'correcting distribution' means "(A) in the case of a contribution made by an owneremployee as an employee, regardless of the type of plan, the amount determined under paragraph (2) distributed to the owner-employee who contributed such amount, "(B) in the case of a defined benefit plan, the amount determined under paragraph (3) which is distributed from the plan to the employer, and "(C) in the case of a defined contribution plan, the amount determined under paragraph (4) which is distributed from the plan to the employer or to the employee to the account of whom the amount described was contributed. "(c) AMOUNT PERMITTED TO BE CONTRIBUTED BY OWNEREMPLOYEE. For purposes of subsection (b) (2), the amount permitted to be contributed under a plan by an owner-employee (as an employee) for any taxable year is the smallest of the following: “(1) $2,500, 66 (2) 10 percent of the earned income (as defined in section 401 (c) (2)) for such taxable year derived by such owneremployee from the trade or business with respect to which the plan is established, or "(3) the amount of the contribution which would be contributed by the owner-employee (as an employee) if such contribution were made at the rate of contributions permitted to be made by employees other than owner-employees. In any case in which there are no employees other than owneremployees, the amount determined under the preceding sentence shall be zero. September 2, 1974 "(d) CROSS REFERENCE.— 129 Pub. Law 93-406 88 STAT. 957 "For disallowance of deduction for taxes paid under this section, see section 275.”. (2) CLERICAL AMENDMENT.-The table of sections for chapter 43 is amended by inserting after the item relating to section 4971 the following new item: "Sec. 4972. Tax on excess contributions for self-employed individuals.". (g) PREMATURE DISTRIBUTIONS TO OWNER-EMPLOYEES.— (1) IN GENERAL.-Subparagraph (B) of section 72(m) (5) 26 USC 72. (relating to penalties applicable to certain amounts received by owner-employees) is amended to read as follows: "(B) If a person receives an amount to which this paragraph applies, his tax under this chapter for the taxable year in which such amount is received shall be increased by an amount equal to 10 percent of the portion of the amount so received which is includible in his gross income for such taxable year." (2) CONFORMING AMENDMENTS.— (A) Subparagraphs (C), (D), and (E) of section 72 (m) Repeals. (5) are repealed. (B) The second sentence of section 46 (a) (3) and the sec- (C) The third sentence of section 901(a), as amended by (D) Subparagraph (A) of section 56 (a) (2) and paragraph (1) of section 56(c), as each is amended by section 2005 (c) (7) of this Act, are each amended by striking out "402(e)" and inserting in lieu thereof "72 (m) (5) (B), 402 (e)". (E) Section 404 (a) (2) is amended by striking out “(16)” and inserting in lieu thereof "(16), (17), (18)". (F) Clause (ii) of section 404 (a) (9) (B) is amended to read as follows: "(ii) without regard to the second sentence of paragraph (3); and". (h) WITHDRAWAL OF EMPLOYEE CONTRIBUTIONS EMPLOYEES. OF OWNER (1) Section 401 (d) (4) (B) (relating to additional requirements for qualification of trusts and plans benefiting owneremployees) is amended by inserting "in excess of contributions made by an owner-employee as an employee" after "benefits". (2) Paragraph (1) of section 72(m) (relating to certain Repeal. amounts received before annuity starting date) is repealed. (3) Section 72(m) (5) (A) (i) is amended by striking out "(whether or not paid by him)" and inserting in lieu thereof the following: "(other than contributions made by him as an owneremployee)". (i) EFFECTIVE DATES. (1) The amendments made by subsections (a) and (b) apply to taxable years beginning after December 31, 1973. 75-623 74 pt. 1 25 26 USC 404 note. 88 STAT. 958 26 USC 401 note. Ante, p. 952. 26 USC 1379. 26 USC 72 note. 26 USC 211. Pub. Law 93-406 130 September 2, 1974 (2) The amendments made by subsection (c) apply to- (3) The amendments made by subsection (d) apply to taxable years beginning after December 31, 1975. (4) The amendments made by subsections (e) and (f) apply to contributions made in taxable years beginning after December 31, 1975. (5) The amendments made by subsection (g) apply to distributions made in taxable years beginning after December 31, 1975. (6) The amendments made by subsection (h) apply to taxable years ending after the date of enactment of this Act. SEC. 2002. DEDUCTION FOR RETIREMENT SAVINGS. (a) ALLOWANCE OF DEDUCTION.— (1) IN GENERAL.-Part VII of subchapter B of chapter 1 (relating to additional itemized deductions for individuals) is amended by redesignating section 219 as 220 and by inserting after section 218 the following new section: "SEC. 219. RETIREMENT SAVINGS. "(a) DEDUCTION ALLOWED.-In the case of an individual, there is allowed as a deduction amounts paid in cash during the taxable year by or on behalf of such individual for his benefit "(1) to an individual retirement account described in section 408 (a), "(2) for an individual retirement annuity described in section 408 (b), or "(3) for a retirement bond described in section 409 (but only if the bond is not redeemed within 12 months of the date of its issuance). For purposes of this title, any amount paid by an employer to such a "(1) MAXIMUM DEDUCTION.-The amount allowable as a deduction under subsection (a) to an individual for any taxable year may not exceed an amount equal to 15 percent of the compensation includible in his gross income for such taxable year, or $1,500, whichever is less. "(2) COVERED BY CERTAIN OTHER PLANS.-No deduction is allowed under subsection (a) for an individual for the taxable year if for any part of such year "(A) he was an active participant in— "(i) a plan described in section 401 (a) which includes a trust exempt from tax under section 501 (a), "(ii) an annuity plan described in section 403 (a), “(iii) a qualified bond purchase plan described in section 405 (a), or "(iv) a plan established for its employees by the United States, by a State or political division thereof, or |