"(4) BENEFICIARY.-The term 'beneficiary' means a beneficiary of the participant, his estate, or any other person whose interest in the plan is derived from the participant.

“(5) INCLUDIBLE COMPENSATION.-The term 'includible compensation' means compensation for service performed for the State which (taking into account the provisions of this section and section 403(b)) is currently includible in gross income.

“(6) COMPENSATION TAKEN INTO ACCOUNT AT PRESENT VALUE.— Compensation shall be taken into account at its present value. “(7) COMMUNITY PROPERTY LAWS.-The amount of includible compensation shall be determined without regard to any community property laws.

"(8) INCOME ATTRIBUTABLE.-Gains from the disposition of property shall be treated as income attributable to such property.

“(9) SECTION TO APPLY TO RURAL ELECTRIC COOPERATIVES.— “(A) IN GENERAL.-This section shall apply with respect to any participant in a plan of a rural electric cooperative in the same manner and to the same extent as if such plan were a plan of a State.

"(B) RURAL ELECTRIC COOPERATIVE DEFINED.-For purposes of subparagraph (A), the term 'rural electric cooperative'

means

"(i) any organization described in section 501(c)(12) which is exempt from tax under section 501(a) and which is engaged primarily in providing electric service, and

"(ii) any organization described in section 501(c)(6) which is exempt from tax under section 501(a) and all the members of which are organizations described in clause (i).

"(e) TAX TREATMENT OF PARTICIPANTS WHERE PLAN OR ARRANGEMENT OF STATE IS NOT ELIGIBLE.—

“(1) IN GENERAL.-In the case of a plan of a State providing for a deferral of compensation, if such plan is not an eligible State deferred compensation plan, then

"(A) the compensation shall be included in the gross income of the participant or beneficiary for the first taxable year in which there is no substantial risk of forfeiture of the rights to such compensation, and

"(B) the tax treatment of any amount made available under the plan to a participant or beneficiary shall be determined under section 72 (relating to annuities, etc.). “(2) EXCEPTIONS.—Paragraph (1) shall not apply to

"(A) a plan described in section 401(a) which includes a trust exempt from tax under section 501(a),

"(B) an annuity plan or contract described in section 403, "(C) a qualified bond purchase plan described in section 405(a),

"(D) that portion of any plan which consists of a transfer of property described in section 83, and

"(E) that portion of any plan which consists of a trust to which section 402(b) applies.

"(3) DEFINITIONS.-For purposes of this subsection

"(A) PLAN INCLUDES ARRANGEMENTS, ETC.-The term 'plan' includes any agreement or arrangement.

"(B) SUBSTANTIAL RISK OF FORFEITURE.—The rights of a person to compensation are subject to a substantial risk of forfeiture if such person's rights to such compensation are conditioned upon the future performance of substantial services by any individual."

(b) CLERICAL AMENDMENT.-The table of sections for such subpart B is amended by adding at the end thereof the following:

"Sec. 457. Deferred compensation plans with respect to service for State and local governments."

(c) EFFECTIVE Date.—

(1) IN GENERAL.-The amendments made by this section shall apply to taxable years beginning after December 31, 1978. (2) TRANSITIONAL RULES.—

(A) IN GENERAL.-In the case of any taxable year beginning after December 31, 1978, and before January 1, 1982— (i) any amount of compensation deferred under a plan of a State providing for a deferral of compensation (other than a plan described in section 457(e)(2) of the Internal Revenue Code of 1954), 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 is paid or otherwise made available to the participant or other beneficiary, but

(ii) the maximum amount of the compensation of any one individual which may be excluded from gross income by reason of clause (i) and by reason of section 457(a) of such Code during any such taxable year shall not exceed the lesser of

(I) $7,500, or

(I) 33% percent of the participant's includible compensation.

(B) APPLICATION OF CATCH-UP PROVISIONS IN CERTAIN CASES.-If, in the case of any participant for any taxable year, all of the plans are eligible State deferred compensation plans, then clause (ii) of subparagraph (A) of this paragraph shall be applied with the modification provided by paragraph (3) of section 457(b) of such Code.

(C) APPLICATIONS OF CERTAIN COORDINATION PROVISIONS.In applying clause (ii) of subparagraph (A) of this paragraph and section 403(b)(2)(A)(ii) of such Code, rules similar to the rules of section 457(c)(2) of such Code shall apply.

(D) MEANING OF TERMS.-Except as otherwise provided in this paragraph, terms used in this paragraph shall have the same meaning as when used in section 457 of such Code. SEC. 132. CERTAIN PRIVATE DEFERRED COMPENSATION PLANS.

(a) GENERAL RULE.-The taxable year of inclusion in gross income of any amount covered by a private deferred compensation plan shall be determined in accordance with the principles set forth in regulations, rulings, and judicial decisions relating to deferred compensation which were in effect on February 1, 1978.

(b) PRIVATE DEFERRED COMPENSATION PLAN DEFINED.—

(1) IN GENERAL.-For purposes of this section, the term "private deferred compensation plan" means a plan, agreement, or arrangement—

(A) where the person for whom the service is performed is not a State (within the meaning of paragraph (1) of section

457(d) of the Internal Revenue Code of 1954) and not an organization which is exempt from tax under section 501 of such Code, and

(B) under which the payment or otherwise making available of compensation is deferred.

(2) CERTAIN PLANS EXCLUDED.-Paragraph (1) shall not apply to

(A) a plan described in section 401(a) of the Internal Revenue Code of 1954 which includes a trust exempt from tax under section 501(a) of such Code,

(B) an annuity plan or contract described in section 403 of such Code,

(C) a qualified bond purchase plan described in section 405(a) of such Code,

(D) that portion of any plan which consists of a transfer of property described in section 83 (determined without regard to subsection (e) thereof) of such Code, and

(E) that portion of any plan which consists of a trust to which section 402(b) of such Code applies.

(c) EFFECTIVE DATE.-This section shall apply to taxable years ending on or after February 1, 1978.

SEC. 133. CLARIFICATION OF DEDUCTIBILITY OF

PAYMENTS OF

DEFERRED COMPENSATION, ETC., ΤΟ INDEPENDENT
CONTRACTORS.

(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 inserting after subsection (c) the following new subsection:

"(d) DEDUCTIBILITY OF PAYMENTS OF DEFERRED COMPENSATION, ETC., TO INDEPENDENT CONTRACTORS.-If a plan would be described in so much of subsection (a) as precedes paragraph (1) thereof (as modified by subsection (b)) but for the fact that there is no employer-employee relationship, the contributions or compensation

"(1) shall not be deductible by the payor thereof under section 162 or 212, but

"(2) shall (if they would be deductible under section 162 or 212 but for paragraph (1)) be deductible under this subsection for the taxable year in which an amount attributable to the contribution or compensation is includible in the gross income of the persons participating in the plan.'

(b) CLARIFICATION OF SECTION 404(b).-Subsection (b) of section 404 (relating to method of contributions, etc., having the effect of a plan) is amended by striking out "similar plan" and inserting in lieu thereof "other plan".

(c) EFFECTIVE DATE.-The amendments made by this section shall apply to deductions for taxable years beginning after December 31, 1978.

SEC. 134. TAX TREATMENT OF CAFETERIA PLANS.

(a) IN GENERAL.-Part III of subchapter B of chapter 1 (relating to items specifically excluded from gross income) is amended by redesignating section 125 as section 126 and by inserting after section 124 the following new section:

"SEC. 125. CAFETERIA PLANS.

"(a) IN GENERAL.-Except as provided in subsection (b), no amount shall be included in the gross income of a participant in a cafeteria

plan solely because, under the plan, the participant may choose among the benefits of the plan.

"(b) EXCEPTION FOR HIGHLY COMPENSATED PARTICIPANTS WHERE PLAN IS DISCRIMINATORY.—

"(1) IN GENERAL.-In the case or a highly compensated participant, subsection (a) shall not apply to any benefit attributable to a plan year for which the plan discriminates in favor of"(A) highly compensated individuals as to eligibility to participate, or

"(B) highly compensated participants as to contributions and benefits.

"(2) YEAR OF INCLUSION.-For purposes of determining the taxable year of inclusion, any benefit described in paragraph (1) shall be treated as received or accrued in the participant's taxable year in which the plan year ends.

"(c) DISCRIMINATION AS TO BENEFITS OR CONTRIBUTIONS.-For purposes of subparagraph (B) of subsection (b)(1), a cafeteria plan does not discriminate where nontaxable benefits and total benefits (or employer contributions allocable to nontaxable benefits and employer contributions for total benefits) do not discriminate in favor of highly compensated participants.

"(d) CAFETERIA PLAN DEFINED.-For purposes of this section“(1) IN GENERAL.-The term 'cafeteria plan' means a written plan under which

"(A) all participants are employees, and

"(B) the participants may choose among two or more benefits.

The benefits which may be chosen may be nontaxable benefits, or cash, property, or other taxable benefits.

"(2) DEFERRED COMPENSATION PLANS EXCLUDED.-The term 'cafeteria plan' does not include any plan which provides for deferred compensation.

"(e) HIGHLY COMPENSATED

PARTICIPANT AND INDIVIDUAL

DEFINED.-For purposes of this section

"(1) HIGHLY COMPENSATED PARTICIPANT.-The term 'highly compensated participant' means a participant who is

"(A) an officer,

"(B) a shareholder owning more than 5 percent of the voting power or value of all classes of stock of the employer, "(C) highly compensated, or

"(D) a spouse or dependent (within the meaning of section 152) of an individual described in subparagraph (A), (B), or (C).

"(2) HIGHLY COMPENSATED INDIVIDUAL.-The term 'highly compensated individual' means an individual who is described in subparagraphs (A), (B), (C), or (D) of paragraph (1).

"(f) NONTAXABLE BENEFIT DEFINED.-For purposes of this section, the term 'nontaxable benefit' means any benefit which, with the application of subsection (a), is not includible in the gross income of the employee.

"(g) SPECIAL RULES.

"(1) COLLECTIVELY BARGAINED PLAN NOT CONSIDERED DISCRIMINATORY.-For purposes of this section, a plan shall not be treated as discriminatory if the plan is maintained under an agreement which the Secretary finds to be a collective bargaining agreement between employee representatives and one or more employers.

"(2) HEALTH BENEFITS.-For purposes of subparagraph (B) of subsection (b)(1), a cafeteria plan which provides health benefits shall not be treated as discriminatory if—

"(A) contributions under the plan on behalf of each participant include an amount which

"(i) equals 100 percent of the cost of the health benefit coverage under the plan of the majority of the highly compensated participants similarly situated, or

"(ii) equals or exceeds 75 percent of the cost of the health benefit coverage of the participant (similarly situated) having the highest cost health benefit coverage under the plan, and

"(B) contributions or benefits under the plan in excess of those described in subparagraph (A) bear a uniform relationship to compensation.

"(3) CERTAIN PARTICIPATION ELIGIBILITY RULES NOT TREATED AS DISCRIMINATORY.-For purposes of subparagraph (A) of subsection (b)(1), a classification shall not be treated as discriminatory if the plan

"(A) benefits a group of employees described in subparagraph (B) of section 410(b)(1), and

"(B) meets the requirements of clauses (i) and (ii):

"(i) No employee is required to complete more than 3 years of employment with the employer or employers maintaining the plan as a condition of participation in the plan, and the service requirement for each employee is the same.

"(ii) Any employee who has satisfied the employment requirement of clause (i) and who is otherwise entitled to participate in the plan commences participation no later than the first day of the first plan year beginning after the date the service requirement was satisfied unless the employee was separated from service before the first day of that plan year.

"(4) CERTAIN CONTROLLED GROUPS.-All employees who are treated as employed by a single employer under subsection (b) or (c) of section 414 shall be treated as employed by a single employer for purposes of this section.

"(h) REGULATIONS.-The Secretary shall prescribe such regulations as may be necessary to carry out the provisions of this section.' (b) CLERICAL Amendment.-The table of sections for part III of subchapter B of chapter 1 is amended by striking out the item relating to section 124 and inserting in lieu thereof the following: "Sec. 125. Cafeteria plans.

"Sec. 126. Cross references to other Acts."

(c) EFFECTIVE DATE.-The amendments made by this section shall apply to taxable years beginning after December 31, 1978.

SEC. 135. CERTAIN CASH OR DEFERRED ARRANGEMENTS.

(a) IN GENERAL.-Section 401 (relating to qualified pension, profitsharing, and stock bonus plans) is amended by redesignating subsection (k) as (1) and by inserting after subsection (j) the following new subsection:

"(k) CASH OR Deferred ARRANGEMENTS.—

"(1) GENERAL RULE.-A profit-sharing or stock bonus plan shall not be considered as not satisfying the requirements of subsec