tion or exclusion is allowable), but investment earnings on these contributions are not subject to tax until paid. Amounts saved by an individual for his retirement outside the scope of a qualified plan are not deductible or excludible from gross income, and investment earnings on such amounts are subject to tax currently.

B. PROPOSAL

The effect of existing law relating to saving for retirement purposes is to discriminate substantially against individuals who do not participate in qualified private retirement plans or who participate in plans providing inadequate benefits. Frequently, this situation is the result of a unilateral decision of the employer not to establish a private retirement plan for its employees or not to improve benefits under an existing plan. Many other individuals, because of the nature of their occupations, never have a sufficient period of service with any one employer to accrue adequate retirement benefits.

To remedy this inadequacy in existing law, the proposed bill would allow individuals a deduction in computing adjusted gross income for amounts contributed to individual retirement plans which they have established or to private retirement plans established by their employers. In addition, investment earnings on amounts contributed to individual retirement plans would be excludable from gross income.

In the case of an individual who does not participate in an employerfinanced private retirement plan, the amount deductible would be limited to 20 percent of the first $7,500 of earned income. In the case of a married couple, each spouse would be eligible to claim this deduction, and the limit would be applied separately to each spouse. Thus, if a husband had earned income of $12,000 and his wife had earned income of $7,000, the maximum deduction for him would be $1,500, and the maximum deduction for her would be $1,400, permitting a total deduction of $2,900.

If an individual participates in an employer-financed plan, the 20 percent limitation on the deduction would be reduced to reflect employer contributions to the plan on his behalf. For this purpose, an individual would be permitted to assume that employer contributions on his behalf are 7 percent of his earned income. He could show, however, that a lesser amount had been contributed on his behalf; such amount would be determined in accordance with Treasury Department regulations on the basis of the particular facts and circumstances of his situation. In the case of individuals who have earned income which is not covered by the social security system or the railroad retirement system, the limitation on the deduction would be further reduced by the amount of tax that would be imposed under the Federal Insurance Contributions Act if that income were covered by the social security system. This reflects the fact that taxes imposed on employees under the Federal Insurance Contributions Act are not deductible. 1 Under the proposed bill, an individual would be allowed to invest these amounts in a broad range of assets, including stocks, bonds, mutual fund shares, annunity and other life insurance contracts, faceamount certificates, and savings accounts with financial institutions. While these assets could not be commingled with other property, they

could be held in custodial accounts, and a taxpayer would not be required to establish a trust for this purpose.

To insure that amounts contributed to individual retirement programs and investment earnings on such amounts are used only for retirement purposes, withdrawals before the individual attains age 5912 would not qualify for the general income averaging provided under existing law and would also be subject to an additional penalty tax of 30 percent of the amount withdrawn. This penalty would not apply, however. if the taxpayer has died or has become disabled or if the amount withdrawn is deposited in another individual retirement plan within 60 days. This last exception is designed to permit transfer of individual retirement amounts from one type of investment to another, or from one trustee or custodian to another.

Moreover, withdrawals would be required to begin by the time the taxpayer reaches age 702 and would have to be sufficiently large so that the entire accumulation will be distributed over his life expectancy or the combined life expectancy of the taxpayer and his spouse. If sufficient amounts are not withdrawn to meet these rules after age 702, an annual penalty of 10 percent of the excess accumulation would be imposed.

To insure compliance with the foregoing requirements, trustees, custodians, and other persons having control of amounts deducted under the proposal would be required to submit annual reports to the Internal Revenue Service similar to those which are now required of trustees of plans benefitting self-employed individuals who are owneremployees.

C. EFFECTIVE DATE

This proposal would apply to taxable years ending after the date of enactment of the proposed bill.

6. CONTRIBUTIONS ON BEHALF OF SELF-EMPLOYED INDIVIDUALS AND SHAREHOLDER-EMPLOYEES OF ELECTING SMALL BUSINESS CORPORA

TIONS

A. PRESENT LAW

The Internal Revenue Code now limits the deductible contribution to a qualified private retirement plan on behalf of a self-employed individual to the lesser of 10 percent of earned income or $2,500. In certain circumstances, an additional $2,500 nondeductible contribution may be made. Penalties are imposed if excessive contributions are made and are not returned. With respect to a shareholder-employee of an electing small business corporation, no limit is imposed on the amount that may be contributed on his behalf, but if the contribution exceeds the lesser of 10 percent of compensation or $2,500, the excess is includable in his gross income.

The limitation on contributions on behalf of self-employed individuals has had a number of undesirable effects. In the first place, while the limitation applies by its terms only to contributions on behalf of self-employed individuals, as a matter of practice, it applies as well to their employees with the result that the contributions on their behalf may be a very small percentage of their compensation. Another un

desirable effect of the limitation on contributions on behalf of selfemployed persons is that it has provided an artificial incentive for the incorporation of businesses and professional practices.

B. PROPOSAL

The proposed bill would provide that the rate at which deductible contributions may be made on behalf of self-employed individuals should be the rate at which contributions are made on behalf of other participants (but not more than 15 percent), and that the maximum amount of earned income to which this rate may be applied should be $50,000. As a result, a self-employed individual would be permitted a deduction of as much as $7,500, but only if he contributed 15 percent of compensation for his employees. The maximum rate at which additional nondeductible contributions could be made would be limited to 10 percent of earned income (again considering not more than $50,000 of earned income); ten percent is the limit under existing administrative practice applicable to nondeductible voluntary contributions by any participant in a qualified plan.

The limitation on excludable contributions on behalf of shareholderemployees of electing small business corporations would likewise be the product of the rate at which contributions are made on behalf of other employees (but not more than 15 percent) and the lesser of his compensation or $50,000.

C. EFFECTIVE DATE

These revised limitations would apply to taxable years beginning after December 31, 1972, unless the taxpayer elected to apply them to taxable years ending after December 31, 1971.

92D CONGRESS 1ST SESSION

H. R. 12272

IN THE HOUSE OF REPRESENTATIVES

DECEMBER 14, 1971

Mr. MILLS of Arkansas (for himself and Mr. BYRNES of Wisconsin) introduced the following bill; which was referred to the Committee on Ways and Means

A BILL

To strengthen and improve the private retirement system by establishing minimum standards for participation in and for vesting of benefits under pension and profit-sharing retirement plans, by allowing deductions to individuals for personal savings for retirement, and by increasing contribution limitations for self-employed individuals and shareholder-employees of electing small business corpora

1

tions.

Be it enacted by the Senate and House of Representa2 tives of the United States of America in Congress assembled, 3 SECTION 1. SHORT TITLE, ETC.

4 (a) SHORT TITLE.-This Act may be cited as the "In

5 dividual Retirement Benefits Act of 1971".

6 (b) AMENDMENT OF 1954 CODE.-Except as other

2

1 wise expressly provided, whenever in this Act an amend2 ment is expressed in terms of an amendment to a section or

3 other provision, the reference is to a section or other provi

4 sion of the Internal Revenue Code of 1954.

5

6

7

SEC. 2. MINIMUM STANDARDS RELATING TO ELIGIBILITY

AND VESTING.

(a) IN GENERAL.-Section 401 (a) (relating to 8 requirements for qualification) is amended by adding at the 9 end thereof the following new paragraphs:

"(11) A trust shall not constitute a qualified trust under this section if the plan of which such trust is a part requires, as a condition of participation, that an employee

"(A') have a period of service with the employer in excess of 3 years,

"(B) have attained an age in excess of 30

years, or

"(C) have not attained (as of the first time when he is otherwise eligible to participate) an age

which is less than 5 years less than the earliest age under the plan at which an employee may retire

and receive benefits which are not actuarially reduced.

In the case of any plan in existence on November 30,

1971, this paragraph shall not apply to plan years