PUBLIC LAW 104-188—AUG. 20, 1996 110 STAT. 1807 "(i) 3 percent, or "(ii) if the employer makes an election under this subclause, the actual deferral percentage of nonhighly compensated employees determined for such first plan year. ". (2) Paragraph (3) of section 401(m) is amended by adding at the end the following: "Rules similar to the rules of subsection (k)(3)(E) shall apply for purposes of this subsection.", (e) DISTRIBUTION OF EXCESS CONTRIBUTIONS AND EXCESS AGGREGATE CONTRIBUTIONS.— (1) Subparagraph (C) of section 401(k)(8) (relating to arrangement not disqualified if excess contributions distributed) is amended by striking "on the basis of the respective portions of the excess contributions attributable to each of such employ- ees" and inserting "on the basis of the amount of contributions by, or on behalf of, each of such employees". (2) Subparagraph (C) of section 401(m)(6) (relating to method of distributing excess aggregate contributions) is amended by striking "on the basis of the respective portions of such amounts attributable to each of such employees" and inserting "on the basis of the amount of contributions on behalf of, or by, each such employee". if) EFFECTIVE DATES. — 26 USC 40i note. (1) IN GENERAL.— The amendments made by this section shall apply to years beginning after December 31, 1998. (2) EXCEPTIONS.— The amendments made by subsections (c), (d), and (e) shall apply to years beginning after December 31, 1996. SEC. 1434. DEFINITION OF COMPENSATION FOR SECTION 415 PUR- POSES. (a) GENERAL RULE. —Section 415(c)(3) (defining participant's compensation) is amended by adding at the end the following new subparagraph: "(D) CERTAIN DEFERRALS INCLUDED.—The term 'participant's compensation' shall include— "(i) any elective deferral (as defined in section 402(g)(3)), and "(ii) any amount which is contributed or deferred by the employer at the election of the employee and which is not includible in the gross income of the employee by reason of section 125 or 457.". (b) CONFORMING AMENDMENTS.— (1) Section 414(q)(4), as redesignated by section 1431, is amended to read as follows: "(4) COMPENSATION.—For purposes of this subsection, the term 'compensation' has the meaning given such term by section 415(c)(3). ". (2) Section 414(s)(2) is amended by inserting "not" after "elect" in the text and heading thereof. (c) EFFECTIVE DATE.— The amendments made by this section 26 USC 414 note. shall apply to years beginning after December 31, 1997.