Higher Education and Learning Promotion Act

Summary: Higher Education and Learning Promotion Act - Amends the Internal Revenue Code to establish nontaxable education investment accounts which shall permit annual contributions of not more than $1,500 for the account holder's qualified higher education costs.  Subjects account distributions used for nonqualifying purposes to taxation, including an additional ten percent tax.  Sets forth related reporting requirements. 
Makes the employer-provided educational assistance program exclusion permanent. 
Excludes from gross income distributions from a qualified state tuition program used for qualified higher education expenses (including room and board).

SECTION 1. SHORT TITLE; AMENDMENT OF 1986 CODE.

    (a) Short Title.--This Act may be cited as the ``Higher Education 
and Learning Promotion Act''.
    (b) Amendment of 1986 Code.--Except as otherwise expressly 
provided, whenever in this Act an amendment or repeal is expressed in 
terms of an amendment to, or repeal of, a section or other provision, 
the reference shall be considered to be made to a section or other 
provision of the Internal Revenue Code of 1986.

SEC. 2. EDUCATION INVESTMENT ACCOUNTS.

    (a) In General.--Part VIII of subchapter F of chapter 1 (relating 
to qualified State tuition programs) is amended by adding at the end 
the following new section:

``SEC. 530. EDUCATION INVESTMENT ACCOUNTS.

    ``(a) General Rule.--An education investment account (hereafter in 
this section referred to as an `education investment account') shall be 
exempt from taxation under this subtitle. Notwithstanding the preceding 
sentence, the education investment account shall be subject to the 
taxes imposed by section 511 (relating to imposition of tax on 
unrelated business income of charitable organizations).
    ``(b) Limitations on Accounts.--
            ``(1) Account may not be established for benefit of more 
        than 1 individual.--An education investment account may not be 
        established for the benefit of more than 1 individual.
            ``(2) Special rule where more than 1 account.--If, at any 
        time during a calendar year, 2 or more education investment 
        accounts are maintained for the benefit of an individual, only 
        the account first established shall be treated as an education 
        investment account for purposes of this section. This paragraph 
        shall not apply to the extent more than 1 account exists solely 
        by reason of a rollover contribution.
    ``(c) Definitions and Special Rules.--For purposes of this 
section--
            ``(1) Education investment account.--The term `education 
        investment account' means a trust created or organized in the 
        United States exclusively for the purpose of paying the 
        qualified higher education expenses of the account holder, but 
        only if the written governing instrument creating the trust 
        meets the following requirements:
                    ``(A) No contribution will be accepted--
                            ``(i) unless it is in cash or in securities 
                        for which (as of the date of the contribution) 
                        market quotations are readily available on an 
                        established securities market,
                            ``(ii) except in the case of rollover 
                        contributions from another education investment 
                        account, in excess of $1,500 for any calendar 
                        year, and
                            ``(iii) after the date on which the account 
                        holder attains age 18.
                    ``(B) The trustee is a bank (as defined in section 
                408(n)) or another person who demonstrates to the 
                satisfaction of the Secretary that the manner in which 
                that person will administer the trust will be 
                consistent with the requirements of this section.
                    ``(C) No part of the trust assets will be invested 
                in life insurance contracts (other than contracts the 
                beneficiary of which is the trust and the face amount 
                of which does not exceed the amount by which the 
                maximum amount which can be contributed to the 
                education investment account exceeds the sum of the 
                amounts contributed to the account for all taxable 
                years).
                    ``(D) The assets of the trust shall not be 
                commingled with other property except in a common trust 
                fund or common investment fund.
                    ``(E) Any balance in the education investment 
                account on the day after the date on which the 
                individual for whose benefit the trust is established 
                attains age 30 (or, if earlier, the date on which such 
                individual dies) shall be distributed within 30 days of 
                such date to the account holder (or in the case of 
                death, the beneficiary).
            ``(2) Time when contributions deemed made.--A taxpayer 
        shall be deemed to have made a contribution on the last day of 
        the preceding taxable year if the contribution is made on 
        account of such taxable year and is made not later than the 
        time prescribed by law for filing the return for such taxable 
        year (including extensions thereof).
            ``(3) Qualified higher education expenses.--
                    ``(A) In general.--The term `qualified higher 
                education expenses' has the same meaning given such 
                term by section 529(e)(3), except that such expenses 
                shall be reduced by any amount described in section 
                135(d)(1) (relating to certain scholarships and 
                veterans benefits).
                    ``(B) State tuition plans.--Such term shall include 
                amounts paid or incurred to purchase tuition credits or 
                certificates, or to make contributions to an account, 
                under a qualified State tuition program (as defined in 
                section 529(b)).
            ``(4) Eligible educational institution.--The term `eligible 
        educational institution' has the meaning given such term by 
        section 135(c)(3).
            ``(5) Account holder.--The term `account holder' means the 
        individual for whose benefit the education investment account 
        is established.
    ``(d) Tax Treatment of Distributions.--
            ``(1) In general.--Except as otherwise provided in this 
        subsection, any amount paid or distributed out of an education 
        investment account shall be included in gross income of the 
        payee or distributee for the taxable year in the manner 
        prescribed by section 72. For purposes of the preceding 
        sentence, rules similar to the rules of section 408(d)(2) shall 
        apply.
            ``(2) Distribution used to pay educational expenses.--
        Paragraph (1) shall not apply to any payment or distribution 
        out of an education investment account to the extent such 
        payment or distribution is used exclusively to pay 
the qualified higher education expenses of the account holder.
            ``(3) Special rule for applying section 2503.--If any 
        payment or distribution from an education investment account is 
        used exclusively for the payment to an eligible educational 
        institution of the qualified higher education expenses of the 
        account holder, such payment shall be treated as a qualified 
        transfer for purposes of section 2503(e).
            ``(4) Additional tax for distributions not used for 
        educational expenses.--
                    ``(A) In general.--The tax imposed by this chapter 
                for any taxable year on any taxpayer who receives a 
                payment or distribution from an education investment 
                account which is includible in gross income under 
                paragraph (1) shall be increased by 10 percent of the 
                amount which is so includible.
                    ``(B) Exception for disability, death, or 
                scholarship.--Subparagraph (A) shall not apply if the 
                payment or distribution is--
                            ``(i) made on account of the death or 
                        disability of the account holder, or
                            ``(ii) made on account of a scholarship (or 
                        allowance or payment described in section 
                        135(d)(1) (B) or (C)) received by the account 
                        holder to the extent the amount of the payment 
                        or distribution does exceed the amount of the 
                        scholarship, allowance, or payment.
                    ``(C) Excess contributions returned before due date 
                of return.--Subparagraph (A) shall not apply to the 
                distribution to a contributor of any contribution paid 
                during a taxable year to an education investment 
                account to the extent that such contribution, when 
                added to previous contributions to the account during 
                the taxable year, exceeds $1,000 if--
                            ``(i) such distribution is received on or 
                        before the day prescribed by law (including 
                        extensions of time) for filing such 
                        contributor's return for such taxable year, and
                            ``(ii) such distribution is accompanied by 
                        the amount of net income attributable to such 
                        excess contribution.
                Any net income described in clause (ii) shall be 
                included in the gross income of the contributor for the 
                taxable year in which such excess contribution was 
                made.
            ``(5) Rollover contributions.--Paragraph (1) shall not 
        apply to any amount paid or distributed from an education 
        investment account to the extent that the amount received is 
        paid into another education investment account for the benefit 
        of the account holder not later than the 60th day after the day 
        on which the holder receives the payment or distribution. The 
        preceding sentence shall not apply to any payment or 
        distribution if it applied to any prior payment or distribution 
        during the 12-month period ending on the date of the payment or 
        distribution.
            ``(6) Special rules for death and divorce.--Rules similar 
        to the rules of section 220(f) (7) and (8) shall apply.
    ``(e) Tax Treatment of Accounts.--Rules similar to the rules of 
paragraphs (2) and (4) of section 408(e) shall apply to any education 
investment account, and any amount treated as distributed under such 
rules shall be treated as not used to pay qualified higher education 
expenses.
    ``(f) Community Property Laws.--This section shall be applied 
without regard to any community property laws.
    ``(g) Custodial Accounts.--For purposes of this section, a 
custodial account shall be treated as a trust if the assets of such 
account are held by a bank (as defined in section 408(n)) or another 
person who demonstrates, to the satisfaction of the Secretary, that the 
manner in which he will administer the account will be consistent with 
the requirements of this section, and if the custodial account would, 
except for the fact that it is not a trust, constitute an account 
described in subsection (b)(1). For purposes of this title, in the case 
of a custodial account treated as a trust by reason of the preceding 
sentence, the custodian of such account shall be treated as the trustee 
thereof.
    ``(h) Reports.--The trustee of an education investment account 
shall make such reports regarding such account to the Secretary and to 
the account holder with respect to contributions, distributions, and 
such other matters as the Secretary may require under regulations. The 
reports required by this subsection shall be filed at such time and in 
such manner and furnished to such individuals at such time and in such 
manner as may be required by those regulations.''
    (b) Tax on Prohibited Transactions.--Section 4975 (relating to 
prohibited transactions) is amended--
            (1) by adding at the end of subsection (c) the following 
        new paragraph:
            ``(5) Special rule for education investment accounts.--An 
        individual for whose benefit an education investment 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, with respect to such 
        transaction, the account ceases to be an education investment 
        account by reason of the application of section 530 to such 
        account.''; and
            (2) in subsection (e)(1), by striking ``or'' at the end of 
        subparagraph (D), by redesignating subparagraph (E) as 
        subparagraph (F), and by inserting after subparagraph (D) the 
        following new subparagraph:
                    ``(E) a education investment account described in 
                section 530, or''.
    (c) Failure To Provide Reports on Education Investment Accounts.--
Section 6693 (relating to failure to provide reports on individual 
retirement accounts or annuities) is amended--
            (1) by inserting ``or on education investment accounts'' 
        after ``annuities'' in the heading of such section, and
            (2) in subsection (a)(2), by striking ``and'' at the end of 
        subparagraph (A), by striking the period at the end of 
        subparagraph (B) and inserting ``, and'', and by adding at the 
        end the following new subparagraph:
                    ``(C) section 530(h) (relating to education 
                investment accounts).''
    (d) Coordination With Savings Bond Exclusion.--Section 135(d)(1) is 
amended by striking ``or'' at the end of subparagraph (C), by striking 
the period at the end of subparagraph (D) and inserting ``, or'', and 
by inserting at the end the following new subparagraph:
                    ``(E) a payment or distribution from an education 
                investment account (as defined in section 530).''
    (e) Clerical Amendments.--
            (1) The table of sections for part VIII of subchapter F of 
        chapter 1 is amended by adding at the end the following new 
        item:

                              ``Sec. 530. Education investment 
                                        accounts.''
            (2)(A) The heading for part VIII of subchapter F of chapter 
        1 is amended to read as follows:

           ``PART VIII--HIGHER EDUCATION SAVINGS ENTITIES''.

            (B) The table of parts for subchapter F of chapter 1 is 
        amended by striking the item relating to part VIII and 
        inserting:

                              ``Part VIII. Higher education savings 
                                        entities.''
            (3) The table of sections for subchapter B of chapter 68 is 
        amended by striking the item relating to section 6693 and 
        inserting the following new item:

                              ``Sec. 6693. Failure to provide reports 
                                        on individual retirement 
                                        accounts or annuities or on 
                                        education investment 
                                        accounts.''
    (f) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 1996.

SEC. 3. EMPLOYER-PROVIDED EDUCATIONAL ASSISTANCE PROGRAMS.

    (a) Permanent Extension.--Section 127 of the Internal Revenue Code 
of 1986 (relating to exclusion for educational assistance programs) is 
amended by striking subsection (d) and by redesignating subsection (e) 
as subsection (d).
    (b) Effective Dates.--The amendments made by subsection (a) shall 
apply to taxable years beginning after December 31, 1996.

SEC. 4. MODIFICATIONS OF TAX TREATMENT OF QUALIFIED STATE TUITION 
              PROGRAMS.

    (a) Exclusion of Distributions Used for Educational Purposes.--
Subparagraph (B) of section 529(c)(3) is amended to read as follows:
                    ``(B) Distributions for qualified higher education 
                expenses.--Subparagraph (A) shall not apply to any 
                distribution to the extent--
                            ``(i) the distribution is used exclusively 
                        to pay qualified higher education expenses of 
                        the distributee, or
                            ``(ii) the distribution consists of 
                        providing a benefit to the distributee which, 
                        if paid for by the distributee, would 
                        constitute payment of a qualified higher 
                        education expense.''
    (b) Qualified Higher Education Expenses To Include Room and 
Board.--Section 529(e)(3) is amended to read as follows:
            ``(3) Qualified higher education expenses.--The term 
        `qualified higher education expenses' means the cost of 
        attendance (within the meaning of section 472 of the Higher 
        Education Act of 1965 (20 U.S.C. 1087ll), as in effect on the 
        date of the enactment of the Higher Education Learning and 
        Promotion Act) of a designated beneficiary at an eligible 
        educational institution (as defined in section 135(c)(3)).''
    (c) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 1996.