
From the U.S. Code Online via GPO Access
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[Laws in effect as of January 2, 2001]
[Document affected by Public Law 106-554 Section 1(a)(7)]
[Document affected by Public Law 106-554 Section 1(a)(7)]
[Document affected by Public Law 106-554 Section 1(a)(7)]
[Document affected by Public Law 107-16 Section 612(a)]
[Document affected by Public Law 107-16 Section 656(b)]
[Document affected by Public Law 107-22 Section 1(b)(1)(D)]
[Document affected by Public Law 107-22 Section 1(b)(3)(D)]
[Document affected by Public Law 107-16 Section 612(c)]
[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 education individual retirement 
                                  accounts

        An individual for whose benefit an education individual 
    retirement 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--
---------------------------------------------------------------------------
    \1\ So in original. Probably should be ``a''.
---------------------------------------------------------------------------
            (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) an education individual retirement 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) 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).

        (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.)

                       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

    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 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.
