§ 4975. — Tax on prohibited transactions.
[Laws in effect as of January 24, 2002]
[Document not affected by Public Laws enacted between
January 24, 2002 and December 19, 2002]
[CITE: 26USC4975]
TITLE 26--INTERNAL REVENUE CODE
Subtitle D--Miscellaneous Excise Taxes
CHAPTER 43--QUALIFIED PENSION, ETC., PLANS
Sec. 4975. Tax on prohibited transactions
(a) Initial taxes on disqualified person
There is hereby imposed a tax on each prohibited transaction. The
rate of tax shall be equal to 15 percent of the amount involved with
respect to the prohibited transaction for each year (or part thereof) in
the taxable period. The tax imposed by this subsection shall be paid by
any disqualified person who participates in the prohibited transaction
(other than a fiduciary acting only as such).
(b) Additional taxes on disqualified person
In any case in which an initial tax is imposed by subsection (a) on
a prohibited transaction and the transaction is not corrected within the
taxable period, there is hereby imposed a tax equal to 100 percent of
the amount involved. The tax imposed by this subsection shall be paid by
any disqualified person who participated in the prohibited transaction
(other than a fiduciary acting only as such).
(c) Prohibited transaction
(1) General rule
For purposes of this section, the term ``prohibited
transaction'' means any direct or indirect--
(A) sale or exchange, or leasing, of any property between a
plan and a disqualified person;
(B) lending of money or other extension of credit between a
plan and a disqualified person;
(C) furnishing of goods, services, or facilities between a
plan and a disqualified person;
(D) transfer to, or use by or for the benefit of, a
disqualified person of the income or assets of a plan;
(E) act by a disqualified person who is a fiduciary whereby
he deals with the income or assets of a plan in his own
interests or for his own account; or
(F) receipt of any consideration for his own personal
account by any disqualified person who is a fiduciary from any
party dealing with the plan in connection with a transaction
involving the income or assets of the plan.
(2) Special exemption
The Secretary shall establish an exemption procedure for
purposes of this subsection. Pursuant to such procedure, he may
grant a conditional or unconditional exemption of any disqualified
person or transaction, orders of disqualified persons or
transactions, from all or part of the restrictions imposed by
paragraph (1) of this subsection. Action under this subparagraph may
be taken only after consultation and coordination with the Secretary
of Labor. The Secretary may not grant an exemption under this
paragraph unless he finds that such exemption is--
(A) administratively feasible,
(B) in the interests of the plan and of its participants and
beneficiaries, and
(C) protective of the rights of participants and
beneficiaries of the plan.
Before granting an exemption under this paragraph, the Secretary
shall require adequate notice to be given to interested persons and
shall publish notice in the Federal Register of the pendency of such
exemption and shall afford interested persons an opportunity to
present views. No exemption may be granted under this paragraph with
respect to a transaction described in subparagraph (E) or (F) of
paragraph (1) unless the Secretary affords an opportunity for a
hearing and makes a determination on the record with respect to the
findings required under subparagraphs (A), (B), and (C) of this
paragraph, except that in lieu of such hearing the Secretary may
accept any record made by the Secretary of Labor with respect to an
application for exemption under section 408(a) of title I of the
Employee Retirement Income Security Act of 1974.
(3) Special rule for individual retirement accounts
An individual for whose benefit an individual retirement account
is established and his beneficiaries shall be exempt from the tax
imposed by this section with respect to any transaction concerning
such account (which would otherwise be taxable under this section)
if, with respect to such transaction, the account ceases to be an
individual retirement account by reason of the application of
section 408(e)(2)(A) or if section 408(e)(4) applies to such
account.
(4) Special rule for Archer MSAs
An individual for whose benefit an Archer MSA (within the
meaning of section 220(d)) is established shall be exempt from the
tax imposed by this section with respect to any transaction
concerning such account (which would otherwise be taxable under this
section) if section 220(e)(2) applies to such transaction.
(5) Special rule for Coverdell education savings accounts
An individual for whose benefit a Coverdell education savings
account is established and any contributor to such account shall be
exempt from the tax imposed by this section with respect to any
transaction concerning such account (which would otherwise be
taxable under this section) if section 530(d) applies with respect
to such transaction.
(d) Exemptions
Except as provided in subsection (f)(6), the prohibitions provided
in subsection (c) shall not apply to--
(1) any loan made by the plan to a disqualified person who is a
participant or beneficiary of the plan if such loan--
(A) is available to all such participants or beneficiaries
on a reasonably equivalent basis,
(B) is not made available to highly compensated employees
(within the meaning of section 414(q)) in an amount greater than
the amount made available to other employees,
(C) is made in accordance with specific provisions regarding
such loans set forth in the plan,
(D) bears a reasonable rate of interest, and
(E) is adequately secured;
(2) any contract, or reasonable arrangement, made with a
disqualified person for office space, or legal, accounting, or other
services necessary for the establishment or operation of the plan,
if no more than reasonable compensation is paid therefor;
(3) any loan to an \1\ leveraged employee stock ownership plan
(as defined in subsection (e)(7)), if--
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\1\ So in original. Probably should be ``a''.
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(A) such loan is primarily for the benefit of participants
and beneficiaries of the plan, and
(B) such loan is at a reasonable rate of interest, and any
collateral which is given to a disqualified person by the plan
consists only of qualifying employer securities (as defined in
subsection (e)(8));
(4) the investment of all or part of a plan's assets in deposits
which bear a reasonable interest rate in a bank or similar financial
institution supervised by the United States or a State, if such bank
or other institution is a fiduciary of such plan and if--
(A) the plan covers only employees of such bank or other
institution and employees of affiliates of such bank or other
institution, or
(B) such investment is expressly authorized by a provision
of the plan or by a fiduciary (other than such bank or
institution or affiliates thereof) who is expressly empowered by
the plan to so instruct the trustee with respect to such
investment;
(5) any contract for life insurance, health insurance, or
annuities with one or more insurers which are qualified to do
business in a State if the plan pays no more than adequate
consideration, and if each such insurer or insurers is--
(A) the employer maintaining the plan, or
(B) a disqualified person which is wholly owned (directly or
indirectly) by the employer establishing the plan, or by any
person which is a disqualified person with respect to the plan,
but only if the total premiums and annuity considerations
written by such insurers for life insurance, health insurance,
or annuities for all plans (and their employers) with respect to
which such insurers are disqualified persons (not including
premiums or annuity considerations written by the employer
maintaining the plan) do not exceed 5 percent of the total
premiums and annuity considerations written for all lines of
insurance in that year by such insurers (not including premiums
or annuity considerations written by the employer maintaining
the plan);
(6) the provision of any ancillary service by a bank or similar
financial institution supervised by the United States or a State, if
such service is provided at not more than reasonable compensation,
if such bank or other institution is a fiduciary of such plan, and
if--
(A) such bank or similar financial institution has adopted
adequate internal safeguards which assure that the provision of
such ancillary service is consistent with sound banking and
financial practice, as determined by Federal or State
supervisory authority, and
(B) the extent to which such ancillary service is provided
is subject to specific guidelines issued by such bank or similar
financial institution (as determined by the Secretary after
consultation with Federal and State supervisory authority), and
under such guidelines the bank or similar financial institution
does not provide such ancillary service--
(i) in an excessive or unreasonable manner, and
(ii) in a manner that would be inconsistent with the
best interests of participants and beneficiaries of employee
benefit plans;
(7) the exercise of a privilege to convert securities, to the
extent provided in regulations of the Secretary but only if the plan
receives no less than adequate consideration pursuant to such
conversion;
(8) any transaction between a plan and a common or collective
trust fund or pooled investment fund maintained by a disqualified
person which is a bank or trust company supervised by a State or
Federal agency or between a plan and a pooled investment fund of an
insurance company qualified to do business in a State if--
(A) the transaction is a sale or purchase of an interest in
the fund,
(B) the bank, trust company, or insurance company receives
not more than a reasonable compensation, and
(C) such transaction is expressly permitted by the
instrument under which the plan is maintained, or by a fiduciary
(other than the bank, trust company, or insurance company, or an
affiliate thereof) who has authority to manage and control the
assets of the plan;
(9) receipt by a disqualified person of any benefit to which he
may be entitled as a participant or beneficiary in the plan, so long
as the benefit is computed and paid on a basis which is consistent
with the terms of the plan as applied to all other participants and
beneficiaries;
(10) receipt by a disqualified person of any reasonable
compensation for services rendered, or for the reimbursement of
expenses properly and actually incurred, in the performance of his
duties with the plan, but no person so serving who already receives
full-time pay from an employer or an association of employers, whose
employees are participants in the plan or from an employee
organization whose members are participants in such plan shall
receive compensation from such fund, except for reimbursement of
expenses properly and actually incurred;
(11) service by a disqualified person as a fiduciary in addition
to being an officer, employee, agent, or other representative of a
disqualified person;
(12) the making by a fiduciary of a distribution of the assets
of the trust in accordance with the terms of the plan if such assets
are distributed in the same manner as provided under section 4044 of
title IV of the Employee Retirement Income Security Act of 1974
(relating to allocation of assets);
(13) any transaction which is exempt from section 406 of such
Act by reason of section 408(e) of such Act (or which would be so
exempt if such section 406 applied to such transaction) or which is
exempt from section 406 of such Act by reason of section 408(b)(12)
of such Act;
(14) any transaction required or permitted under part 1 of
subtitle E of title IV or section 4223 of the Employee Retirement
Income Security Act of 1974, but this paragraph shall not apply with
respect to the application of subsection (c)(1) (E) or (F); or
(15) a merger of multiemployer plans, or the transfer of assets
or liabilities between multiemployer plans, determined by the
Pension Benefit Guaranty Corporation to meet the requirements of
section 4231 of such Act, but this paragraph shall not apply with
respect to the application of subsection (c)(1) (E) or (F).
(e) Definitions
(1) Plan
For purposes of this section, the term ``plan'' means--
(A) a trust described in section 401(a) which forms a part
of a plan, or a plan described in section 403(a), which trust or
plan is exempt from tax under section 501(a),
(B) an individual retirement account described in section
408(a),
(C) an individual retirement annuity described in section
408(b),
(D) an Archer MSA described in section 220(d),
(E) a Coverdell education savings account described in
section 530, or
(F) a trust, plan, account, or annuity which, at any time,
has been determined by the Secretary to be described in any
preceding subparagraph of this paragraph.
(2) Disqualified person
For purposes of this section, the term ``disqualified person''
means a person who is--
(A) a fiduciary;
(B) a person providing services to the plan;
(C) an employer any of whose employees are covered by the
plan;
(D) an employee organization any of whose members are
covered by the plan;
(E) an owner, direct or indirect, of 50 percent or more of--
(i) the combined voting power of all classes of stock
entitled to vote or the total value of shares of all classes
of stock of a corporation,
(ii) the capital interest or the profits interest of a
partnership, or
(iii) the beneficial interest of a trust or
unincorporated enterprise,
which is an employer or an employee organization described in
subparagraph (C) or (D);
(F) a member of the family (as defined in paragraph (6)) of
any individual described in subparagraph (A), (B), (C), or (E);
(G) a corporation, partnership, or trust or estate of which
(or in which) 50 percent or more of--
(i) the combined voting power of all classes of stock
entitled to vote or the total value of shares of all classes
of stock of such corporation,
(ii) the capital interest or profits interest of such
partnership, or
(iii) the beneficial interest of such trust or estate,
is owned directly or indirectly, or held by persons described in
subparagraph (A), (B), (C), (D), or (E);
(H) an officer, director (or an individual having powers or
responsibilities similar to those of officers or directors), a
10 percent or more shareholder, or a highly compensated employee
(earning 10 percent or more of the yearly wages of an employer)
of a person described in subparagraph (C), (D), (E), or (G); or
(I) a 10 percent or more (in capital or profits) partner or
joint venturer of a person described in subparagraph (C), (D),
(E), or (G).
The Secretary, after consultation and coordination with the
Secretary of Labor or his delegate, may by regulation prescribe a
percentage lower than 50 percent for subparagraphs (E) and (G) and
lower than 10 percent for subparagraphs (H) and (I).
(3) Fiduciary
For purposes of this section, the term ``fiduciary'' means any
person who--
(A) exercises any discretionary authority or discretionary
control respecting management of such plan or exercises any
authority or control respecting management or disposition of its
assets,
(B) renders investment advice for a fee or other
compensation, direct or indirect, with respect to any moneys or
other property of such plan, or has any authority or
responsibility to do so, or
(C) has any discretionary authority or discretionary
responsibility in the administration of such plan.
Such term includes any person designated under section 405(c)(1)(B)
of the Employee Retirement Income Security Act of 1974.
(4) Stockholdings
For purposes of paragraphs (2)(E)(i) and (G)(i) there shall be
taken into account indirect stockholdings which would be taken into
account under section 267(c), except that, for purposes of this
paragraph, section 267(c)(4) shall be treated as providing that the
members of the family of an individual are the members within the
meaning of paragraph (6).
(5) Partnerships; trusts
For purposes of paragraphs (2)(E)(ii) and (iii), (G)(ii) and
(iii), and (I) the ownership of profits or beneficial interests
shall be determined in accordance with the rules for constructive
ownership of stock provided in section 267(c) (other than paragraph
(3) thereof), except that section 267(c)(4) shall be treated as
providing that the members of the family of an individual are the
members within the meaning of paragraph (6).
(6) Member of family
For purposes of paragraph (2)(F), the family of any individual
shall include his spouse, ancestor, lineal descendant, and any
spouse of a lineal descendant.
(7) Employee stock ownership plan
The term ``employee stock ownership plan'' means a defined
contribution plan--
(A) which is a stock bonus plan which is qualified, or a
stock bonus and a money purchase plan both of which are
qualified under section 401(a), and which are designed to invest
primarily in qualifying employer securities; and
(B) which is otherwise defined in regulations prescribed by
the Secretary.
A plan shall not be treated as an employee stock ownership plan
unless it meets the requirements of section 409(h), section 409(o),
and, if applicable, section 409(n), section 409(p), and section
664(g) and, if the employer has a registration-type class of
securities (as defined in section 409(e)(4)), it meets the
requirements of section 409(e).
(8) Qualifying employer security
The term ``qualifying employer security'' means any employer
security within the meaning of section 409(l). If any moneys or
other property of a plan are invested in shares of an investment
company registered under the Investment Company Act of 1940, the
investment shall not cause that investment company or that
investment company's investment adviser or principal underwriter to
be treated as a fiduciary or a disqualified person for purposes of
this section, except when an investment company or its investment
adviser or principal underwriter acts in connection with a plan
covering employees of the investment company, its investment
adviser, or its principal underwriter.
(9) Section made applicable to withdrawal liability payment
funds
For purposes of this section--
(A) In general
The term ``plan'' includes a trust described in section
501(c)(22).
(B) Disqualified person
In the case of any trust to which this section applies by
reason of subparagraph (A), the term ``disqualified person''
includes any person who is a disqualified person with respect to
any plan to which such trust is permitted to make payments under
section 4223 of the Employee Retirement Income Security Act of
1974.
(f) Other definitions and special rules
For purposes of this section--
(1) Joint and several liability
If more than one person is liable under subsection (a) or (b)
with respect to any one prohibited transaction, all such persons
shall be jointly and severally liable under such subsection with
respect to such transaction.
(2) Taxable period
The term ``taxable period'' means, with respect to any
prohibited transaction, the period beginning with the date on which
the prohibited transaction occurs and ending on the earliest of--
(A) the date of mailing a notice of deficiency with respect
to the tax imposed by subsection (a) under section 6212,
(B) the date on which the tax imposed by subsection (a) is
assessed, or
(C) the date on which correction of the prohibited
transaction is completed.
(3) Sale or exchange; encumbered property
A transfer or real or personal property by a disqualified person
to a plan shall be treated as a sale or exchange if the property is
subject to a mortgage or similar lien which the plan assumes or if
it is subject to a mortgage or similar lien which a disqualified
person placed on the property within the 10-year period ending on
the date of the transfer.
(4) Amount involved
The term ``amount involved'' means, with respect to a prohibited
transaction, the greater of the amount of money and the fair market
value of the other property given or the amount of money and the
fair market value of the other property received; except that, in
the case of services described in paragraphs (2) and (10) of
subsection (d) the amount involved shall be only the excess
compensation. For purposes of the preceding sentence, the fair
market value--
(A) in the case of the tax imposed by subsection (a), shall
be determined as of the date on which the prohibited transaction
occurs; and
(B) in the case of the tax imposed by subsection (b), shall
be the highest fair market value during the taxable period.
(5) Correction
The terms ``correction'' and ``correct'' mean, with respect to a
prohibited transaction, undoing the transaction to the extent
possible, but in any case placing the plan in a financial position
not worse than that in which it would be if the disqualified person
were acting under the highest fiduciary standards.
(6) Exemptions not to apply to certain transactions
(A) In general
In the case of a trust described in section 401(a) which is
part of a plan providing contributions or benefits for employees
some or all of whom are owner-employees (as defined in section
401(c)(3)), the exemptions provided by subsection (d) (other
than paragraphs (9) and (12)) shall not apply to a transaction
in which the plan directly or indirectly--
(i) lends any part of the corpus or income of the plan
to,
(ii) pays any compensation for personal services
rendered to the plan to, or
(iii) acquires for the plan any property from, or sells
any property to,
any such owner-employee, a member of the family (as defined in
section 267(c)(4)) of any such owner-employee, or any
corporation in which any such owner-employee owns, directly or
indirectly, 50 percent or more of the total combined voting
power of all classes of stock entitled to vote or 50 percent or
more of the total value of shares of all classes of stock of the
corporation.
(B) Special rules for shareholder-employees, etc.
(i) In general
For purposes of subparagraph (A), the following shall be
treated as owner-employees:
(I) A shareholder-employee.
(II) A participant or beneficiary of an individual
retirement plan (as defined in section 7701(a)(37)).
(III) An employer or association of employees which
establishes such an individual retirement plan under
section 408(c).
(ii) Exception for certain transactions involving
shareholder-employees
Subparagraph (A)(iii) shall not apply to a transaction
which consists of a sale of employer securities to an
employee stock ownership plan (as defined in subsection
(e)(7)) by a shareholder-employee, a member of the family
(as defined in section 267(c)(4)) of such shareholder-
employee, or a corporation in which such a shareholder-
employee owns stock representing a 50 percent or greater
interest described in subparagraph (A).
(iii) Loan exception
For purposes of subparagraph (A)(i), the term ``owner-
employee'' shall only include a person described in
subclause (II) or (III) of clause (i).
(C) Shareholder-employee
For purposes of subparagraph (B), the term ``shareholder-
employee'' means an employee or officer of an S corporation who
owns (or is considered as owning within the meaning of section
318(a)(1)) more than 5 percent of the outstanding stock of the
corporation on any day during the taxable year of such
corporation.
(g) Application of section
This section shall not apply--
(1) in the case of a plan to which a guaranteed benefit policy
(as defined in section 401(b)(2)(B) of the Employee Retirement
Income Security Act of 1974) is issued, to any assets of the
insurance company, insurance service, or insurance organization
merely because of its issuance of such policy;
(2) to a governmental plan (within the meaning of section
414(d)); or
(3) to a church plan (within the meaning of section 414(e)) with
respect to which the election provided by section 410(d) has not
been made.
In the case of a plan which invests in any security issued by an
investment company registered under the Investment Company Act of 1940,
the assets of such plan shall be deemed to include such security but
shall not, by reason of such investment, be deemed to include any assets
of such company.
(h) Notification of Secretary of Labor
Before sending a notice of deficiency with respect to the tax
imposed by subsection (a) or (b), the Secretary shall notify the
Secretary of Labor and provide him a reasonable opportunity to obtain a
correction of the prohibited transaction or to comment on the imposition
of such tax.
(i) Cross reference
For provisions concerning coordination procedures between
Secretary of Labor and Secretary of the Treasury with respect to
application of tax imposed by this section and for authority to
waive imposition of the tax imposed by subsection (b), see
section 3003 of the Employee Retirement Income Security Act of
1974.
(Added Pub. L. 93-406, title II, Sec. 2003(a), Sept. 2, 1974, 88 Stat.
971; amended Pub. L. 94-455, title XIX, Sec. 1906(b)(13)(A), Oct. 4,
1976, 90 Stat. 1834; Pub. L. 95-600, title I, Sec. 141(f)(5), (6), Nov.
6, 1978, 92 Stat. 2795; Pub. L. 96-222, title I, Sec. 101(a)(7)(C), (K),
(L)(iv)(III), (v)(XI), Apr. 1, 1980, 94 Stat. 198-201; Pub. L. 96-364,
title II, Secs. 208(b), 209(b), Sept. 26, 1980, 94 Stat. 1289, 1290;
Pub. L. 96-596, Sec. 2(a)(1)(K),(L), (2)(I), (3)(F), Dec. 24, 1980, 94
Stat. 3469, 3471; Pub. L. 97-448, title III, Sec. 305(d)(5), Jan. 12,
1983, 96 Stat. 2400; Pub. L. 98-369, div. A, title IV, Sec. 491(d)(45),
(46), (e)(7), (8), July 18, 1984, 98 Stat. 851-853; Pub. L. 99-514,
title XI, Sec. 1114(b)(15)(A), title XVIII, Secs. 1854(f)(3)(A),
1899A(51), Oct. 22, 1986, 100 Stat. 2452, 2882, 2961; Pub. L. 101-508,
title XI, Sec. 11701(m), Nov. 5, 1990, 104 Stat. 1388-513; Pub. L. 104-
188, title I, Secs. 1453(a), 1702(g)(3), Aug. 20, 1996, 110 Stat. 1817,
1873; Pub. L. 104-191, title III, Sec. 301(f), Aug. 21, 1996, 110 Stat.
2051; Pub. L. 105-34, title II, Sec. 213(b), title X, Sec. 1074(a),
title XV, Secs. 1506(b)(1), 1530(c)(10), title XVI, Sec. 1602(a)(5),
Aug. 5, 1997, 111 Stat. 816, 949, 1065, 1079, 1094; Pub. L. 105-206,
title VI, Sec. 6023(19), July 22, 1998, 112 Stat. 825; Pub. L. 106-554,
Sec. 1(a)(7) [title II, Sec. 202(a)(7), (b)(7), (10)], Dec. 21, 2000,
114 Stat. 2763, 2763A-628, 2763A-629; Pub. L. 107-16, title VI,
Secs. 612(a), 656(b), June 7, 2001, 115 Stat. 100, 134; Pub. L. 107-22,
Sec. 1(b)(1)(D), (3)(D), July 26, 2001, 115 Stat. 197.)
Amendment of Section
For termination of amendment by section 901 of Pub. L. 107-16,
see Effective and Termination Dates of 2001 Amendment note below.
References in Text
The Employee Retirement Income Security Act of 1974, referred to in
subsecs. (c)(2), (d)(12) to (15), (e)(3), (9)(B), (g)(1), and (i) is
Pub. L. 93-406, Sept. 2, 1974, 88 Stat. 829, as amended. Part 1 of
subtitle E of title IV of such Act is classified generally to part 1 (29
U.S.C. 1381 et seq.) of subtitle E of subchapter III of chapter 18 of
Title 29, Labor. Sections 401, 405, 406, 408, 3003, 4044, 4223, and 4231
of such Act are classified to sections 1101, 1105, 1106, 1108, 1203,
1344, 1403, and 1411, respectively, of Title 29. For complete
classification of this Act to the Code, see Short Title note set out
under section 1001 of Title 29 and Tables.
The Investment Company Act of 1940, referred to in subsecs. (e)(8)
and (g), is title I of act Aug. 22, 1940, ch. 686, 54 Stat. 789, as
amended, which is classified generally to subchapter I (Sec. 80a-1 et
seq.) of chapter 2D of Title 15, Commerce and Trade. For complete
classification of this Act to the Code, see section 80a-51 of Title 15
and Tables.
Amendments
2001--Subsec. (c)(5). Pub. L. 107-22, Sec. 1(b)(1)(D), (3)(D), in
heading, substituted ``Coverdell education savings'' for ``education
individual retirement'' and in text, substituted ``a Coverdell education
savings'' for ``an education individual retirement''.
Subsec. (e)(1)(E). Pub. L. 107-22, Sec. 1(b)(1)(D), substituted ``a
Coverdell education savings'' for ``an education individual
retirement''.
Subsec. (e)(7). Pub. L. 107-16, Secs. 656(b), 901, temporarily
inserted ``, section 409(p),'' after ``409(n)'' in concluding
provisions. See Effective and Termination Dates of 2001 Amendment note
below.
Subsec. (f)(6)(B)(iii). Pub. L. 107-16, Secs. 612(a), 901,
temporarily added cl. (iii). See Effective and Termination Dates of 2001
Amendment note below.
2000--Subsec. (c)(4). Pub. L. 106-554, Sec. 1(a)(7) [title II,
Sec. 202(b)(10)], substituted ``an Archer'' for ``a Archer''.
Pub. L. 106-554, Sec. 1(a)(7) [title II, Sec. 202(a)(7), (b)(7)],
substituted ``Archer MSAs'' for ``medical savings accounts'' in heading
and ``Archer MSA'' for ``medical savings account'' in text.
Subsec. (e)(1)(D). Pub. L. 106-554, Sec. 1(a)(7) [title II,
Sec. 202(b)(10)], substituted ``an Archer'' for ``a Archer''.
Pub. L. 106-554, Sec. 1(a)(7) [title II, Sec. 202(a)(7)],
substituted ``Archer MSA'' for ``medical savings account''.
1998--Subsec. (c)(3). Pub. L. 105-206, Sec. 6023(19)(A), substituted
``exempt from the tax'' for ``exempt for the tax''.
Subsec. (i). Pub. L. 105-206, Sec. 6023(19)(B), substituted
``Secretary of the Treasury'' for ``Secretary of Treasury''.
1997--Subsec. (a). Pub. L. 105-34, Sec. 1074(a), substituted ``15
percent'' for ``10 percent''.
Subsec. (c)(4). Pub. L. 105-34, Sec. 1602(a)(5), substituted ``if
section 220(e)(2) applies to such transaction.'' for ``if, with respect
to such transaction, the account ceases to be a medical savings account
by reason of the application of section 220(e)(2) to such account.''
Subsec. (c)(5). Pub. L. 105-34, Sec. 213(b)(2), added par. (5).
Subsec. (d). Pub. L. 105-34, Sec. 1506(b)(1)(B)(ii), struck out
concluding provisions which read as follows: ``The exemptions provided
by this subsection (other than paragraphs (9) and (12)) shall not apply
to any transaction with respect to a trust described in section 401(a)
which is part of a plan providing contributions or benefits for
employees some or all of whom are owner-employees (as defined in section
401(c)(3)) in which a plan directly or indirectly lends any part of the
corpus or income of the plan to, pays any compensation for personal
services rendered to the plan to, or acquires for the plan any property
from or sells any property to, any such owner-employee, a member of the
family (as defined in section 267(c)(4)) of any such owner-employee, or
a corporation controlled by any such owner-employee through the
ownership, directly or indirectly, of 50 percent or more of the total
combined voting power of all classes of stock entitled to vote or 50
percent or more of the total value of shares of all classes of stock of
the corporation. For purposes of the preceding sentence, a shareholder-
employee (as defined in section 1379, as in effect on the day before the
date of the enactment of the Subchapter S Revision Act of 1982), a
participant or beneficiary of an individual retirement account or an
individual retirement annuity (as defined in section 408), and an
employer or association of employees which establishes such an account
or annuity under section 408(c) shall be deemed to be an owner-
employee.''
Pub. L. 105-34, Sec. 1506(b)(1)(B)(i), substituted ``Except as
provided in subsection (f)(6), the prohibitions'' for ``The
prohibitions'' in introductory provisions.
Subsec. (e)(1)(D) to (F). Pub. L. 105-34, Sec. 213(b)(1), struck out
``or'' at end of subpar. (D), added subpar. (E), and redesignated former
subpar. (E) as (F).
Subsec. (e)(7). Pub. L. 105-34, Sec. 1530(c)(10), inserted ``and
section 664(g)'' after ``section 409(n)'' in concluding provisions.
Subsec. (f)(6). Pub. L. 105-34, Sec. 1506(b)(1)(A), added par. (6).
1996--Subsec. (a). Pub. L. 104-188, Sec. 1453(a), substituted ``10
percent'' for ``5 percent''.
Subsec. (c)(4). Pub. L. 104-191, Sec. 301(f)(1), added par. (4).
Subsec. (d)(13). Pub. L. 104-188, Sec. 1702(g)(3), substituted
``408(b)(12)'' for ``408(b)''.
Subsec. (e)(1). Pub. L. 104-191, Sec. 301(f)(2), reenacted heading
without change and amended text generally. Prior to amendment, text read
as follows: ``For purposes of this section, the term `plan' means a
trust described in section 401(a) which forms a part of a plan, or a
plan described in section 403(a), which trust or plan is exempt from tax
under section 501(a), an individual retirement account described in
section 408(a) or an individual retirement annuity described in section
408(b) (or a trust, plan, account, or annuity which, at any time, has
been determined by the Secretary to be such a trust, plan, or
account).''
1990--Subsec. (d)(13). Pub. L. 101-508 inserted before semicolon at
end ``or which is exempt from section 406 of such Act by reason of
section 408(b) of such Act''.
1986--Subsec. (d). Pub. L. 99-514, Sec. 1899A(51), inserted a
closing parenthesis after ``and (12)'' in second sentence.
Subsec. (d)(1)(B). Pub. L. 99-514, Sec. 1114(b)(15)(A), substituted
``highly compensated employees (within the meaning of section 414(q))''
for ``highly compensated employees, officers, or shareholders''.
Subsec. (e)(7). Pub. L. 99-514, Sec. 1854(f)(3)(A), inserted ``,
section 409(o), and, if applicable, section 409(n)'' in last sentence.
1984--Subsec. (d). Pub. L. 98-369, Sec. 491(d)(45), substituted in
provision following par. (15) ``or an individual retirement annuity (as
defined in section 408)'' for ``, individual retirement annuity, or an
individual retirement bond (as defined in section 408 or 409)''.
Subsec. (e)(1). Pub. L. 98-369, Sec. 491(d)(46), struck out ``or
405(a)'' after ``section 403(a)'' and ``or a retirement bond described
in section 409'' after ``section 408(b)'', and substituted ``or
annuity'' for ``annuity, or bond'' and ``or account'' for ``account, or
bond''.
Subsec. (e)(7). Pub. L. 98-369, Sec. 491(e)(7), substituted
``section 409(h)'' for ``section 409A(h)'', ``section 409(e)(4)'' for
``section 409A(e)(4)'', and ``section 409(e)'' for ``section 409A(e)''.
Subsec. (e)(8). Pub. L. 98-369, Sec. 491(e)(8), substituted
``section 409(l)'' for ``section 409A(l)''.
1983--Subsec. (d). Pub. L. 97-448 inserted ``, as in effect on the
day before the date of the enactment of the Subchapter S Revision Act of
1982'' after ``section 1379'' in last sentence.
1980--Subsec. (b). Pub. L. 96-596, Sec. 2(a)(1)(K), substituted
``taxable period'' for ``correction period''.
Subsec. (d)(14), (15). Pub. L. 96-364, Sec. 208(b), added pars. (14)
and (15).
Subsec. (e)(7). Pub. L. 96-222, Sec. 101(a)(7)(K), (L)(iv)(III),
(v)(XI), substituted references to an employee stock ownership plan, for
references to a leveraged employee stock ownership plan wherever
appearing therein, and substituted provisions relating to treatment of a
plan as an employee stock ownership plan, for provisions relating to
treatment of a plan as a leveraged employee stock ownership plan.
Subsec. (e)(8). Pub. L. 96-222, Sec. 101(a)(7)(C), substituted
provisions defining ``qualifying employer security'' within the meaning
of section 409A(l), for provisions defining such term as stock, or
otherwise an equity security, or within the meaning of section 503(e)(1)
to (3).
Subsec. (e)(9). Pub. L. 96-364, Sec. 209(b), added par. (9).
Subsec. (f)(2)(B), (C). Pub. L. 96-596, Sec. 2(a)(2)(I), added
subpar. (B) and redesignated former subpar. (B) as (C).
Subsec. (f)(4)(B). Pub. L. 96-596, Sec. 2(a)(1)(L), substituted
``taxable period'' for ``correction period''.
Subsec. (f)(6). Pub. L. 96-596, Sec. 2(a)(3)(F), struck out par.
(6), which defined correction period, with respect to a prohibited
transaction, as the period beginning on the date on which the prohibited
transaction occurs and ending 90 days after the date of mailing of a
notice of deficiency with respect to the tax imposed by subsec. (b) of
this section under section 6212 of this title, extended by any period in
which a deficiency cannot be assessed under section 6213(a) of this
title and any other period which the Secretary determines is reasonable
and necessary to bring about the correction of the prohibited
transaction.
1978--Subsec. (d)(3). Pub. L. 95-600, Sec. 141(f)(6), substituted
``leveraged employee'' for ``employee''.
Subsec. (e)(7). Pub. L. 95-600, Sec. 141(f)(5), substituted in
heading ``Leveraged employee'' for ``Employee'', and in text,
``leveraged employee'' for ``employee'' and inserted provision that a
plan not be treated as a leveraged employee stock ownership plan unless
it meet the requirements of section 409A(e) and (h).
1976--Subsecs. (c) to (f). Pub. L. 94-455 struck out ``or his
delegate'' after ``Secretary'' wherever appearing.
Effective and Termination Dates of 2001 Amendments
Amendment by Pub. L. 107-22 effective July 26, 2001, see section
1(c) of Pub. L. 107-22, set out as a note under section 26 of this
title.
Pub. L. 107-16, title VI, Sec. 612(c), June 7, 2001, 115 Stat. 100,
provided that: ``The amendment made by this section [amending this
section and section 1108 of Title 29, Labor] shall apply to years
beginning after December 31, 2001.''
Amendment by section 656(b) of Pub. L. 107-16 applicable to plan
years beginning after Dec. 31, 2004, except that in the case of any
employee stock ownership plan established after Mar. 14, 2001, or
established on or before such date if employer securities held by the
plan consist of stock in a corporation with respect to which an election
under section 1362(a) of this title is not in effect on such date,
amendment applicable to plan years ending after Mar. 14, 2001, see
section 656(d) of Pub. L. 107-16, set out as a note under section 409 of
this title.
Amendment by Pub. L. 107-16 inapplicable to taxable, plan, or
limitation years beginning after Dec. 31, 2010, and the Internal Revenue
Code of 1986 to be applied and administered to such years as if such
amendment had never been enacted, see section 901 of Pub. L. 107-16, set
out as a note under section 1 of this title.
Effective Date of 1997 Amendment
Amendment by section 213(b) of Pub. L. 105-34 applicable to taxable
years beginning after Dec. 31, 1997, see section 213(f) of Pub. L. 105-
34, set out as a note under section 26 of this title.
Section 1074(b) of Pub. L. 105-34 provided that: ``The amendment
made by this section [amending this section] shall apply to prohibited
transactions occurring after the date of the enactment of this Act [Aug.
5, 1997].''
Amendment by section 1506(b)(1) of Pub. L. 105-34 applicable to
taxable years beginning after Dec. 31, 1997, see section 1506(c) of Pub.
L. 105-34, set out as a note under section 409 of this title.
Amendment by section 1530(c)(10) of Pub. L. 105-34 applicable to
transfers made by trusts to, or for the use of, an employee stock
ownership plan after Aug. 5, 1997, see section 1530(d) of Pub. L. 105-
34, set out as a note under section 401 of this title.
Amendment by section 1602(a)(5) of Pub. L. 105-34 effective as if
included in the provisions of the Health Insurance Portability and
Accountability Act of 1996, Pub. L. 104-191, to which such amendment
relates, see section 1602(i) of Pub. L. 105-34, set out as a note under
section 26 of this title.
Effective Date of 1996 Amendments
Amendment by Pub. L. 104-191 applicable to taxable years beginning
after Dec. 31, 1996, see section 301(j) of Pub. L. 104-191, set out as a
note under section 62 of this title.
Section 1453(b) of Pub. L. 104-188 provided that: ``The amendment
made by this section [amending this section] shall apply to prohibited
transactions occurring after the date of the enactment of this Act [Aug.
20, 1996].''
Amendment by section 1702(g)(3) of Pub. L. 104-188 effective, except
as otherwise expressly provided, as if included in the provision of the
Revenue Reconciliation Act of 1990, Pub. L. 101-508, title XI, to which
such amendment relates, see section 1702(i) of Pub. L. 104-188, set out
as a note under section 38 of this title.
Effective Date of 1990 Amendment
Amendment by Pub. L. 101-508 effective, except as otherwise
provided, as if included in the provision of the Revenue Reconciliation
Act of 1989, Pub. L. 101-239, title VII, to which such amendment
relates, see section 11701(n) of Pub. L. 101-508, set out as a note
under section 42 of this title.
Effective Date of 1986 Amendment
Amendment by section 1114(b)(15)(A) of Pub. L. 99-514 applicable to
years beginning after Dec. 31, 1988, see section 1114(c)(3) of Pub. L.
99-514, set out as a note under section 414 of this title.
Amendment by section 1854(f)(3)(A) of Pub. L. 99-514 effective Oct.
22, 1986, see section 1854(f)(4)(A) of Pub. L. 99-514, set out as a note
under section 409 of this title.
Effective Date of 1984 Amendment
Amendment by section 491(d)(45), (46) of Pub. L. 98-369 applicable
to obligations issued after Dec. 31, 1983, see section 491(f)(1) of Pub.
L. 98-369, set out as a note under section 62 of this title.
Amendment by section 491(e)(7), (8) of Pub. L. 98-369 effective Jan.
1, 1984, see section 491(f)(3) of Pub. L. 98-369, set out as a note
under section 401 of this title.
Effective Date of 1983 Amendment
Amendment by Pub. L. 97-448 effective on date of enactment of
Subchapter S Revision Act of 1982 [Oct. 19, 1982], see section 311(c)(4)
of Pub. L. 97-448, set out as a note under section 1368 of this title.
Effective Date of 1980 Amendments
For effective date of amendment by Pub. L. 96-596 with respect to
any first tier tax and to any second tier tax, see section 2(d) of Pub.
L. 96-596, set out as an Effective Date note under section 4961 of this
title.
Amendment by section 208(b) of Pub. L. 96-364 effective Sept. 26,
1980, see section 210(a) of Pub. L. 96-364, set out as an Effective Date
note under section 418 of this title.
Amendment by section 209(b) of Pub. L. 96-364 applicable to taxable
years ending after Sept. 26, 1980, see section 210(c) of Pub. L. 96-364,
set out as an Effective Date note under section 418 of this title.
Section 101(b)(1)(C) of Pub. L. 96-222 provided that: ``The
amendment made by subparagraph (C) of subsection (a)(6) [probably should
be `(a)(7)', which amended this section] shall apply to stock acquired
after December 31, 1979.''
Amendment by section 101(a)(7)(K), (L)(iv)(III), (v)(XI) of Pub. L.
96-222 effective, except as otherwise provided, as if it had been
included in the provision of the Revenue Act of 1978, Pub. L. 95-600, to
which such amendment relates, see section 201 of Pub. L. 96-222, set out
as a note under section 32 of this title.
Effective Date of 1978 Amendment
Section 141(h) of Pub. L. 95-600, as added by Pub. L. 96-222, title
I, Sec. 101(a)(7)(B), Apr. 1, 1980, 94 Stat. 197; Pub. L. 99-514,
Sec. 2, Oct. 22, 1986, 100 Stat. 2095, provided that: ``Paragraphs (5)
and (6) of subsection (f) [section 141(f)(5), (6) of Pub. L. 95-600]
shall apply--
``(1) insofar as they make the requirements of subsections (e)
and (h)(1)(B) of section 409A [now section 409] of the Internal
Revenue Code of 1986 [formerly I.R.C. 1954] applicable to section
4975 of such Code, to stock acquired after December 31, 1979, and
``(2) insofar as they make paragraphs (1)(A) and (2) of section
409A(h) [now section 409(h)] of such Code applicable to such section
4975, to distributions after December 31, 1978.''
Effective Date; Savings Provision
Section 2003(c) of Pub. L. 93-406, as amended by Pub. L. 99-514,
Sec. 2, Oct. 22, 1986, 100 Stat. 2095, provided that:
``(1)(A) The amendments made by this section [enacting this section
and amending section 503 of this title] shall take effect on January 1,
1975.
``(B) If, before the amendments made by this section [enacting this
section and amending section 503 of this title] take effect, an
organization described in section 401(a) of the Internal Revenue Code of
1986 [formerly I.R.C. 1954] is denied exemption under section 501(a) of
such Code by reason of section 503 of such Code, the denial of such
exemption shall not apply if the disqualified person elects (in such
manner and at such time as the Secretary or his delegate shall by
regulations prescribe) to pay, with respect to the prohibited
transaction (within the meaning of section 503(b) or (g)) which resulted
in such denial of exemption, a tax in the amount and in the manner
provided with respect to the tax imposed under section 4975 of such
Code. An election made under this subparagraph, once made, shall be
irrevocable. The Secretary of the Treasury or his delegate shall
prescribe such regulations as may be necessary to carry out the purposes
of this subparagraph.
``(2) Section 4975 of the Internal Revenue Code of 1986 (relating to
tax on prohibited transactions) shall not apply to--
``(A) a loan of money or other extension of credit between a
plan and a disqualified person under a binding contract in effect on
July 1, 1974 (or pursuant to renewals of such a contract), until
June 30, 1984, if such loan or other extension of credit remains at
least as favorable to the plan as an arm's-length transaction with
an unrelated party would be, and if the execution of the contract,
the making of the loan, or the extension of credit was not, at the
time of such execution, making, or extension, a prohibited
transaction (within the meaning of section 503(b) of such Code) or
the corresponding provisions of prior law);
``(B) a lease of joint use of property involving the plan and a
disqualified person pursuant to a binding contract in effect on July
1, 1974 (or pursuant to renewals of such a contract), until June 30,
1984, if such lease or joint use remains at least as favorable to
the plan as an arm's-length transaction with an unrelated party
would be and if the execution of the contract was not, at the time
of such execution, a prohibited transaction (within the meaning of
section 503(b) of such Code) or the corresponding provisions of
prior law;
``(C) the sale, exchange, or other disposition of property
described in subparagraph (B) between a plan and a disqualified
person before June 30, 1984, if--
``(i) in the case of a sale, exchange, or other disposition
of the property by the plan to the disqualified person, the plan
receives an amount which is not less than the fair market value
of the property at the time of such disposition; and
``(ii) in the case of the acquisition of the property by the
plan, the plan pays an amount which is not in excess of the fair
market value of the property at the time of such acquisition:
``(D) Until June 30, 1977, the provision of services to which
subparagraphs (A), (B), and (C) do not apply between a plan and a
disqualified person (i) under a binding contract in effect on July
1, 1974 (or pursuant to renewals of such contract), or (ii) if the
disqualified person ordinarily and customarily furnished such
services on June 30, 1974, if such provision of services remains at
least as favorable to the plan as an arm's-length transaction with
an unrelated party would be and if the provision of services was
not, at the time of such provision, a prohibited transaction (within
the meaning of section 503(b) of such Code) or the corresponding
provisions of prior law; or
``(E) the sale, exchange, or other disposition of property which
is owned by a plan on June 30, 1974, and all times thereafter, to a
disqualified person, if such plan is required to dispose of such
property in order to comply with the provisions of section
407(a)(2)(A) (relating to the prohibition against holding excess
employer securities and employer real property) of the Employee
Retirement Income Security Act of 1974 [29 U.S.C. 1107(a)(2)] and if
the plan receives not less than adequate consideration.
For the purposes of this paragraph, the term `disqualified person' has
the meaning provided by section 4975(e)(2) of the Internal Revenue Code
of 1986.''
Regulations
Secretary of the Treasury or his delegate to issue before Feb. 1,
1988, final regulations to carry out amendments made by section 1114 of
Pub. L. 99-514, see section 1141 of Pub. L. 99-514, set out as a note
under section 401 of this title.
Plan Amendments Not Required Until January 1, 1998
For provisions directing that if any amendments made by subtitle D
[Secs. 1401-1465] of title I of Pub. L. 104-188 require an amendment to
any plan or annuity contract, such amendment shall not be required to be
made before the first day of the first plan year beginning on or after
Jan. 1, 1998, see section 1465 of Pub. L. 104-188, set out as a note
under section 401 of this title.
Plan Amendments Not Required Until January 1, 1989
For provisions directing that if any amendments made by subtitle A
or subtitle C of title XI [Secs. 1101-1147 and 1171-1177] or title XVIII
[Secs. 1800-1899A] of Pub. L. 99-514 require an amendment to any plan,
such plan amendment shall not be required to be made before the first
plan year beginning on or after Jan. 1, 1989, see section 1140 of Pub.
L. 99-514, as amended, set out as a note under section 401 of this
title.
Intent of Congress Concerning Employee Stock Ownership Plans
Section 803(h) of Pub. L. 94-455 provided that: ``The Congress, in a
series of laws (the Regional Rail Reorganization Act of 1973, the
Employee Retirement Income Security Act of 1974, the Trade Act of 1974,
and the Tax Reduction Act of 1975) and this Act has made clear its
interest in encouraging employee stock ownership plans as a bold and
innovative method of strengthening the free private enterprise system
which will solve the dual problems of securing capital funds for
necessary capital growth and of bringing about stock ownership by all
corporate employees. The Congress is deeply concerned that the
objectives sought by this series of laws will be made unattainable by
regulations and rulings which treat employee stock ownership plans as
conventional retirement plans, which reduce the freedom of the employee
trusts and employers to take the necessary steps to implement the plans,
and which otherwise block the establishment and success of these plans.
Because of the special purposes for which employee stock ownership plans
are established, it is consistent with the intent of Congress to permit
these plans (whether structured as pension, stock bonus, or profit-
sharing plans) to distribute income on employer securities currently.''
Section Referred to in Other Sections
This section is referred to in sections 401, 404, 408, 409, 411,
414, 415, 420, 503, 512, 514, 664, 674, 856, 1042, 2056, 4943, 4947,
4963, 4978, 4980, 6213, 6501, 6503, 6511, 7422 of this title; title 5
section 8477; title 15 section 632; title 19 sections 2345, 2373; title
29 sections 1054, 1055, 1056, 1101, 1107, 1132, 1203, 1342, 1403; title
45 section 726.
