"(iv) after the employee has become disabled (within "(B) ELECTION OF LUMP SUM TREATMENT.-For purposes "(C) AGGREGATION OF CERTAIN TRUSTS AND PLANS.-For purposes of determining the balance to the credit of an employee under subparagraph (A)—— "(i) all trusts which are part of a plan shall be treated as a single trust, all pension plans maintained by the employer shall be treated as a single plan, all profitsharing plans maintained by the employer shall be treated as a single plan, and all stock bonus plans maintained by the employer shall be treated as a single plan, and "(ii) trusts which are not qualified trusts under section 401(a) and annuity contracts which do not satisfy the requirements of section 404 (a) (2) shall not be taken into account. "(D) TOTAL TAXABLE AMOUNT.-For purposes of this section and section 403, the term 'total taxable amount' means, with respect to a lump sum distribution, the amount of such distribution which exceeds the sum of— "(i) the amounts considered contributed by the "(ii) the net unrealized appreciation attributable to 88 STAT. 989 26 USC 72. 75-623 74 pt. 1 27 88 STAT. 990 26 USC 401. Pub. Law 93-406 - 162 September 2, 1974 respect to a lump sum distribution, so much of the total taxable amount of such distribution as is equal to the product of such total taxable amount multiplied by a fraction "(i) the numerator of which is the number of calendar years of active participation by the employee in such plan after December 31, 1973, and "(ii) the denominator of which is the number of calendar years of active participation by the employee in such plan. "(F) EMPLOYEE.-For purposes of this subsection and subsection (a) (2), except as otherwise provided in subparagraph (A), the term 'employee' includes an individual who is an employee within the meaning of section 401(c)(1) and the employer of such individual is the person treated as his employer under section 401 (c) (4). (G) COMMUNITY PROPERTY LAWS.-The provisions of this subsection, other than paragraph (3), shall be applied without regard to community property laws. "(H) MINIMUM PERIOD OF SERVICE. For purposes of this subsection (but not for purposes of subsection (a) (2) or section 405 (a) (2) (A)), no amount distributed to an employee from or under a plan may be treated as a lump sum distributed under subparagraph (A) unless he has been a participant in the plan for 5 or more taxable years before the taxable year in which such amounts are distributed. "(I) AMOUNTS SUBJECT TO PENALTY.-This subsection shall not apply to amounts described in clause (ii) of subparagraph (A) of section 72 (m) (5) to the extent that section 72 (m) (5) applies to such amounts. (J) UNREALIZED APPRECIATION OF EMPLOYER SECURITIES.-In the case of any distribution including securities of the employer corporation which, without regard to the requirement of subparagraph (H), would be treated as a lump sum distribution under subparagraph (A), there shall be excluded from gross income the net unrealized appreciation attributable to that part of the distribution which consists of securities of the employer corporation so distributed. In the case of any such distribution or any lump sum distribution including securities of the employer corporation, the amount of net unrealized appreciation of such securities and the resulting adjustments to the basis of such securities shall be determined under regulations prescribed by the Secretary or his delegate. "(K) SECURITIES. For purposes of this subsection, the terms 'securities' and 'securities of the employer corporation' have the respective meanings provided by subsection (a) (3).” (b) PHASEOUT OF CAPITAL GAINS TREATMENT. (1) IN GENERAL.-Section 402 (a) (2) (relating to capital gains treatment for certain distributions) is amended to read as follows: "(2) CAPITAL GAINS TREATMENT FOR PORTION OF LUMP SUM DISTRIBUTIONS.—In the case of an employee trust described in section 401(a), which is exempt from tax under section 501(a), so much of the total taxable amount (as defined in subparagraph (D) of subsection (e) (4)) of a lump sum distribution as is equal to the product of such total taxable amount multiplied by a fraction "(A) the numerator of which is the number of calendar years of active participation by the employee in such plan before January 1, 1974, and September 2, 1974 - 163 Pub. Law 93-406 "(B) the denominator of which is the number of calendar years of active participation by the employee in such plan, shall be treated as a gain from the sale or exchange of a capital asset held for more than 6 months. For purposes of computing the fraction described in this paragraph and the fraction under subsection (e) (4) (E), the Secretary or his delegate may prescribe regulations under which plan years may be used in lieu of calendar years. For purposes of this paragraph, in the case of an individual who is an employee without regard to section 401(c) (1), determination of whether or not any distribution is a lump sum distribution shall be made without regard to the requirement that an election be made under subsection (e) (4) (B), but no distribution to any taxpayer other than an individual, estate, or trust may be treated as a lump sum distribution under this paragraph." (2) AMENDMENT OF SECTION 403.-That part of paragraph (2) of section 403 (a) which follows clause (ii) of subparagraph (A) thereof is amended to read as follows: "(iii) a lump sum distribution (as defined in section 402(e) (4) (A)) is paid to the recipient, 88 STAT. 991 Ante, p. 987. so much of the total taxable amount (as defined in section "(B) CROSS REFERENCE.— "For imposition of separate tax on ordinary income portion of lump sum distribution, see section 402(e).”. (c) CONFORMING AMENDMENTS.—— (1) Subparagraph (C) of section 402 (a) (3) is repealed. (2) Paragraph (5) (as in effect on December 31, 1973) of section 402 (a) is repealed. (3) Section 72 is amended by striking out subsection (n) thereof and by redesignating subsections (o) and (p) as (n) and (o), respectively. (4) The second sentence of section 46(a)(3) and the second sentence of section 50A (a)(3) are each amended by inserting after "tax preferences)," the following: "section 402 (e) (relating to tax on lump sum distributions),". (5) The third sentence of section 901 (a) is amended by inserting "against the tax imposed by section 402 (e) (relating to tax on lump sum distributions)," before "against the tax imposed by section 531". (6) Subsection 1304 (b) (2) (relating to special rules) is amended by striking out paragraph (2) and by redesignating paragraphs (3), (4), (5), and (6) as paragraphs (2), (3), (4), and (5), respectively. (7) Subparagraph (A) of section 56 (a) (2) and paragraph (1) of section 56(c) are each amended by inserting before "531" the following: "402 (e),”. Repeals. 88 STAT. 992 26 USC 871, Ante, p. 987. 26 USC 402 note. 26 USC 401 note. Pub. Law 93-406 164 September 2, 1974 (8) Sections 871 (b) (1) and 877 (b) are each amended by inserting", 402 (e) (1)," after "section 1”. (9) Section 62 (defining adjusted gross income), is amended by inserting after paragraph (10) the following new paragraph: "(11) CERTAIN PORTION OF LUMP SUM DISTRIBUTIONS FROM PENSION PLANS TAXED UNDER SECTION 402(e).-The deduction allowed by section 402 (e) (3).” (10) Section 122(b) (2) (relating to consideration for the contract) is amended by striking out "72(o)" and inserting “72(n)”. (11) Section 405 (e) (relating to capital gains treatment and limitation of tax not to apply to bonds distributed by trusts) is amended by striking out "Section 72(n) and section 402 (a) (2)" and inserting "Subsections (a) (2) and (e) of section 402”. (12) Section 406 (c) (relating to termination of status as deemed employee, etc.) is amended by striking out "section 72(n), section 402 (a) (2)" and inserting "subsections (a) (2) and (e) of section 402". (13) Section 407 (c) (relating to termination of status as deemed employee, etc.) is amended by striking out "section 72(n), section 402 (a) (2)" and inserting "subsections (a) (2) and (e) of section 402". (14) Section 1348(b)(1) (relating to earned income) is amended by striking out "72(n), 402(a) (2)” and inserting “402 (a) (2), 402 (e)". (15) Section 101 (b) (2) (B) is amended by striking out "total distributions payable (as defined in section 402 (a) (3)) which are paid to a distributee within one taxable year of the distributee by reason of the employee's death" and inserting in lieu thereof "a lump sum distribution (as defined in section 402 (e) (4))”. (d) EFFECTIVE DATE.-The amendments made by this section shall apply only with respect to distributions or payments made after December 31, 1973, in taxable years beginning after such date. SEC. 2006. SALARY REDUCTION REGULATIONS. (a) INCLUSION OF CERTAIN CONTRIBUTIONS IN INCOME.-Except in the case of plans or arrangements in existence on June 27, 1974, a contribution made before January 1, 1977, to an employees' trust described in section 401(a), 403 (a), or 405 (a) of the Internal Revenue Code of 1954 which is exempt from tax under section 501 (a) of such Code, or under an arrangement which, but for the fact that it was not in existence on June 27, 1974, would be an arrangement described in subsection (b) (2) of this section, shall be treated as a contribution made by an employee if the contribution is made under an arrangement under which the contribution will be made only if the employee elects to receive a reduction in his compensation or to forego an increase in his compensation. (b) ADMINISTRATION IN THE CASE OF CERTAIN QUALIFIED PENSION OR PROFIT-SHARING PLANS, ETC., IN EXISTENCE ON JUNE 27, 1974.— No salary reduction regulations may be issued by the Secretary of the Treasury in final form before January 1, 1977, with respect to an arrangement which was in existence on June 27, 1974, and which, on that date (1) provided for contributions to an employees' trust described in section 401(a), 403 (a), or 405 (a) of the Internal Revenue Code of 1954 which is exempt from tax under section 501(a) of such Code, or (2) was maintained as part of an arrangement under which an September 2, 1974 - 165 Pub. Law 93-406 employee was permitted to elect to receive part of his compensation in one or more alternative forms if one of such forms results in the inclusion of amounts in income under the Internal Revenue Code of 1954. (c) ADMINISTRATION OF LAW WITH RESPECT TO CERTAIN PLANS.(1) ADMINISTRATION IN THE CASE OF PLANS DESCRIBED IN SUBSECTION (b).-Until salary reduction regulations have been issued in final form, the law with respect to plans or arrangements described in subsection (b) shall be administered (A) without regard to the proposed salary reduction regulations (37 FR 25938) and without regard to any other proposed salary reduction regulations, and (B) in the manner in which such law was administered before January 1, 1972. (2) ADMINISTRATION IN THE CASE OF QUALIFIED PROFIT-SHARING PLANS. In the case of plans or arrangements described in subsection (b), in applying this section to the tax treatment of contributions to qualified profit-sharing plans where the contributed amounts are distributable only after a period of deferral, the law shall be administered in a manner consistent with (A) Revenue Ruling 56-497 (1956-2 C.B. 284), (B) Revenue Ruling 63-180 (1963-2 C.B. 189), and (d) LIMITATION ON RETROACTIVITY OF FINAL REGULATIONS.-In the case of any salary reduction regulations which become final after December 31, 1976 88 STAT. 993 (1) for purposes of chapter 1 of the Internal Revenue Code of 1954 (relating to normal taxes and surtaxes), such regulations 26 USC 1. shall not apply before January 1, 1977; and (2) for purposes of chapter 21 of such Code (relating to Fed eral Insurance Contributions Act) and for purposes of chapter 24 26 USC 3101. of such Code (relating to collection of income tax at source on 26 SC 3401. wages), such regulations shall not apply before the day on which such regulations are issued in final form. (e) SALARY REDUCTION REGULATIONS DEFINED. For purposes of this section, the term "salary reduction regulations" means regulations dealing with the includibility in gross income (at the time of contribution) of amounts contributed to a plan which includes a trust that qualifies under section 401(a), or a plan described in section 403 (a) 26 USC 401. or 405 (a), including plans or arrangements described in subsection (b) (2), if the contribution is made under an arrangement under which the contribution will be made only if the employee elects to receive a reduction in his compensation or to forego an increase in his compensation, or under an arrangement under which the employee is permitted to elect to receive part of his compensation in one or more alternative forms (if one of such forms results in the inclusion of amounts in income under the Internal Revenue Code of 1954). SEC. 2008. CERTAIN ARMED FORCES SURVIVOR ANNUITIES. 26 USC 1 et seq. (a) TREATMENT OF CERTAIN PARTICIPANTS IN THE PLAN.-Section 404 (c) (relating to certain negotiated plans) is amended by inserting 26 USC 404. after the first sentence the following new sentences: "For purposes of this chapter and subtitle B, in the case of any individual who before July 1, 1974, was a participant in a plan described in the preceding sentence |