[124] was no common control before the merger. In other words, the employee will not be forced to give up benefits he has already earned prior to the merger.

If it is determined upon application of the bill formula that the limitations contained in the bill have been exceeded, then the determination as to which plan or plans must be disqualified will be made by the Internal Revenue Service in accordance with regulations. The regulations are to provide that no terminated plan may be disqualified until all other plans have been disqualified (since there might be no recovery of taxes in the case of plans which had terminated in a year for which the statute of limitations had already run). Also, to prevent undue hardship, the regulations are to provide that plans still in existence generally are to be disqualified on a basis which will affect the fewest number of employees.

Additional benefits.-The bill contains a provision which makes it clear that benefits or contributions in addition to those allowable in connection with qualified plans may be paid or accrued on behalf of an employee, so long as this is not done on a tax deferred basis. For example, an employer would be free to provide additional defined benefits under a so-called "pay as you go" plan, which means, in general, that the benefits are paid by the employer as they fall due, and the plan is not funded. Here, the employer would receive his deduction at the time when the employee was required to take the benefits into income.

Similarly, the employer would be free to make defined contributions into a taxable trust or bank account on behalf of the employee and these amounts could be set aside for pension purposes. However, the employer would not be entitled to a deduction (except as provided in sec. 404 (a) (5)) until the employee's rights to these amounts are no longer subject to a substantial risk of forfeiture at which time the employee would be required to take them into income.

Special rule where records are not available.--In the case of existing plans, it may be that the employer will not have adequate records to determine the amount of additions which have been made for his employees under a defined contribution plan. Likewise, the employer may have no way to determine the amount of additions which would have been allowable for his employees under the provisions of the committee bill, had those provisions been in effect for the years in question. Accordingly, the Secretary or his delegate is authorized to prescribe regulations establishing reasonable assumptions which may be used by the employer in determining the amount of additions and allowable additions for years prior to the effective date of these provisions.

Likewise, in the case of plans which may be established in the future, the employer will be aware that no contributions or additions have been made on behalf of his employee, but may not have adequate records to establish the amounts of allowable additions which could have been made. Thus, the Secretary or his delegate is authorized to establish reasonable assumptions which may be used by the employer Effective dates and transition rules

In general, the amendments with respect to H.R. 10 plans, including the provisions increasing the amount of the deductible contributions

[125] which may be made on behalf of the self-employed, are to apply to taxable years beginning after December 31, 1973. However, the rules facilitating the use of defined benefit plans for the self-employed, as well as the rules modifying the treatment of excess contributions under H.R. 10 plans and the rules with respect to the taxation of premature distributions, are to apply to taxable years beginning after December 31, 1975.

The new rules with respect to corporate limitations will apply to contributions made or benefits accrued in years beginning after December 31, 1975.

However, the committee was concerned that the limitations imposed on the bill should not have the effect of cutting back the pension of anyone under the provisions of an existing plan. Accordingly, the bill contains a transition rule for any individual who is, on October 2, 1973, an active participant in a defined benefit plan. Under the terms of this provision, an employee may receive an annual benefit which does not exceed 100 percent of the individual's annual rate of compensation on October 2, 1973 (including bonuses whether or not they were taken into account in the base for benefits under the plan as in effect on that date). However, the benefit may not exceed the annual benefit which would have been payable to the participant on retirement if all the terms and conditions of the plan in effect on October 2, 1973, (without regard to any amendments to the plan actually adopted after that date even though such amendments may, for other purposes, be given retroactive effect) had remained in effect until the employee's retirement, and his compensation taken into account under the plan for any period after October 2, 1973, had not exceeded his annual compensation on that date.

If the plan provides for a postretirement cost of living adjustment on October 2, 1973, such an adjustment may also be taken into consideration in determining the allowable benefits for a participant under the "grandfather" provision. Any future increases in the bill's basic benefit limitation under the bill's cost of living adjustment provision, however, are applicable only to the generally applicable limits and not to the limits under the transitional "grandfather" clause. As a result, in future years many individuals are likely to elect to use the regular benefit limits despite the fact that they are eligible to use the "grandfather" provision, because the adjusted regular limits may permit a higher allowable benefit limit.

Individuals who wish to use these transitional provisions must elect to do so in a time and manner to be prescribed under regulations Generally, the election will be made by the plan administrator in the year in which the employee retires. Once made, the election will he irrevocable.

Revenue effect

By increasing the maximum amount that self-employed persons will be allowed to deduct as contributions to H.R. 10 plans to 15 percent of earned income up to $7,500 a year, a revenue loss is estimated that will amount to $175 million annually. A revenue gain of $10 million is estimated to be the result of the provision that applies certain limitations on the contributions and benefits under retirement plans. The net

[126] result of these two provisions that are designed to equalize tax treatment for pension pians is a revenue loss of $165 million. These estimates assume 1973 levels of income and employment.

F. EMPLOYEE SAVINGS FOR RETIREMENT

1. INDIVIDUAL RETIREMENT ACCOUNTS (SEC. 2002 OF THE BILL AND SECS. 219, 102, 408, 409, 4973, 4974, AND 6693 OF THE CODE)

Present Law

Generally, an employee is not allowed a deduction for amounts contributed from his own funds to a retirement plan. While an employer's qualified plan may allow employees to contribute their own funds to the plan,1 no deduction is allowed for these contributions (except to the extent that tax excludable contributions made in connection with salary reduction plans may be viewed as employee contributions). However, the income earned on employee contributions to an employer's qualified plan is not taxed until it is distributed.2 General reasons for change

While in the case of many millions of employees, provision is made for their retirement out of tax-free dollars by their participation in qualified retirement plans, many other employees do not have the opportunity to participate in qualified plans. Often, plans are not available because an employer is not willing to incur the costs of contributing to a retirement plan since, in general, the employer contributes funds which are in addition to the compensation otherwise paid his employees. Employees who are not covered under a qualified plan are disadvantaged by the fact that earnings on their retirement savings are subject to tax, and grow more slowly than the tax-sheltered earnings on contributions to a qualified plan.

Your committee's bill deals with this problem by making available a special deduction for amounts set aside for retirement by employees who are not covered under a qualified plan (including an H.R. 10 plan), a government plan, or a tax exempt organization annuity plan (sec. 403(b)). Individuals in this status, in computing their income tax, will be permitted to deduct up to $1,500 a year or 20 percent of compensation, whichever is less, for contributions to an individual retirement account. The earnings on this amount will also be tax free. As in the case of H.R. 10 plans, the amounts set aside plus the earnings are to become taxable to the individual generally after he has reached retirement age, when he receives benefits from the account. Explanation of provisions

In general.--Under your committee's bill, a retirement savings deduction is to be allowed individuals for contributions to an individual retirement account, an individual retirement annuity, or a qualified

1 Generally, if the plan allows it, employees may make voluntary contributions to a qualified retirement plan of up to 10 percent of compensation. 1.2.3. Publication 778, p. 14 (Feb., 1972).

At one time, Congress took the position that a contribution to an I.R. ið pian on behalf of a self-employed person was made half by the employer and half by the selfemployed person: no deduction was allowed for haif of the contributions (presumably, that half contributed by" the self-employed person). This imitation (sec. 104 (a) (10)) was repealed for taxable years after December 31, 1967.

[127] retirement bond. The maximum annual deduction is to be $1,500, or 20 percent of compensation, whichever is less. Amounts allowed as a retirement savings deduction are to be deductible from gross income (instead of from adjusted gross income) so that any taxpayer, even a taxpayer who does not itemize but uses the standard deduction, is to be allowed a retirement savings deduction. In this manner, this program will be available to the widest possible group of taxpayers. Individual retirement accounts may be established by individuals, by employers for the benefit of their employees, and by labor unions for the benefit of their members. This will widen the availability of the retirement savings deduction.

If nondeductible contributions are erroneously made to an individual retirement account during the year (e.g., because contributions are larger than the amount deductible), the individual generally will be able to withdraw the excess contribution without penalty. If the excess contribution is not withdrawn, generally it is to be subject to a nondeductible 6 percent excise tax in each year in which it remains in the individual retirement account.

Except in the case of excess contributions, amounts generally are to be withdrawn from an individual retirement account only after reaching retirement age. To encourage an individual to retain these amounts for retirement, the bill generally imposes a penalty tax of 10 percent of the amount received on premature distributions occurring before age 59 or disability. Upon reaching age 5912, however, a participant may withdraw his funds even if he continues to work. In addition, the bill generally requires that funds in a retirement account are to be withdrawn from the account starting no later than the year in which the participant reaches age 7012. If insufficient withdrawals occur from that time on, a nondeductible excise tax is to be imposed on the excess accumulation that should have been withdrawn.

Generally, all amounts received from an individual retirement account will be taxed in full as ordinary income, since neither the contributions nor the earnings thereon will have been subject to tax previously. No capital gains or special lump-sum distribution rules are to apply to receipts from these accounts. However, the individual may use the general five-year averaging provisions (sec. 1301).

Your committee recognizes that individuals may wish to change the assets in which their contributions are invested. To facilitate this, the bill allows a limited tax-free "rollover" between individual retirement accounts. Also, a tax-free rollover is allowed from qualified plans to an individual retirement account.

Deduction for contributions to individual retirement account, etc.Under the bill, an eligible individual is to be allowed a maximum retirement savings deduction of up to $1,500 per year or 20 percent of compensation includible in gross income, whichever is less, for contributions to an individual retirement account, individual retirement annuity or qualified retirement bond. Your committee intends that, for this purpose, compensation generally is to include only compensation for personal services, and is not to include earnings from property (such as interest and dividends). Additionally, since selfemployed persons are to be allowed the retirement savings deduction (if they do not participate in an H.R. 10 plan), compensation in

[128] eludes earned income (as defined in sec. 401 (c) (2)). If the individual's compensation is not includible in his gross income (e.g., as income earned from sources outside the United States) it is not to be treated as compensation for purposes of the retirement savings deduction.

The retirement savings deduction is to be available to each eligible individual. Consequently, an individual's marital status and whether he or she files a joint tax return will not affect contributions for the retirement savings deduction. If both husband and wife are eligible, they can each make contributions to his or her own individual retirement account, etc., and each is to be eligible for a deduction of up to $1,500 (or $3.000 total on a joint return). In addition, the bill also provides that community property laws of a State or other jurisdiction are not to apply with respect to the retirement savings deduction. For example, if husband and wife live in a community property State and the husband earns $7,500, the husband may contribute up to $1,500 (20 percent of $7,500) to an individual retirement account, etc., even though half of the income is owned by the wife under State law. Also, if the husband earns $15,000 and his wife earns no income, only $1,500 may be contributed and deducted by the husband under the retirement savings deduction and no contribution may be made by his wife.

The retirement savings deduction is to be allowed as a deduction from gross income.

For an individual to be allowed a retirement savings deduction, contributions are to be made to an individual retirement account, etc., within the taxable year for which the deduction is claimed. Thus, if a taxpayer is on a calendar year, contributions are to be made no later than December 31 of the year for which he wishes to take a deduction." Contributions must be made in cash (currency, checks, etc.), and contributions in property are not to be deductible.

Deduction not allowed for active participants in qualified, etc., plans. Your committee intends that the deduction for retirement savings (and contributions to individual retirement accounts, etc.) generally is to be available only where an individual does not participate in any other tax-supported retirement plan. Therefore, the retirement savings deduction is to be allowed an individual only if he is not an active participant in a qualified plan (sec. 401(a)), a qualified annuity plan (sec. 403 (a)), a qualified bond purchase plan (sec. 405), a government plan, or a section 403 (b) annuity at any time during the taxable year for which the deduction is claimed.*

Generally, for purposes of the retirement savings deduction, an employee is to be considered an active participant in a plan if, for the year in question, benefits are accrued under the plan on his behalf (as in a defined benefit pension plan), the employer is obligated to

If, at the end of the year, he is not sure of the total amount that he can deduct, the Individual can make a slightly larger contribution than otherwise allowable, and will have until the time for filing his tax return for that year to withdraw the excess without penalty.

An individual who is an active participant in a tax-exempt organization annuity plan (sec. 403(b)) is not to be entitled to a retirement savings deduction. An individual is to be considered an active participant in a section 403(b) annuity plan even if, Juring the period in question, his rights under the annuity contract are forfeitable. Consequently, if contributions are made on behalf of an individual under a section 103(b) annuity contract in anticipation that als rights will later be nonforfeitable, ne cannot make contributions to an individual retirement account, etc., and he is not to be entitled to the retirement savings deduction for the taxaole year in question.