Tuition Account Assistance Act of 1995

Summary: Tuition Account Assistance Act of 1995 - Amends the Internal Revenue Code to exclude from gross income amounts received by reason of education furnished pursuant to a qualified State prepaid tuition program (under which credits for tuition for the undergraduate education of a designated beneficiary may be purchased) or earnings on amounts paid to such a program.

SECTION 1. SHORT TITLE.

    This Act may be cited as the ``Tuition Account Assistance Act of 
1995''.

SEC. 2. TREATMENT OF PARTICIPATION IN STATE PREPAID TUITION PROGRAM.

    (a) In General.--Part III of subchapter B of chapter 1 of the 
Internal Revenue Code of 1986 (relating to items specifically excluded 
from gross income) is amended by redesignating section 137 as section 
138 and by inserting after section 136 the following new section:

``SEC. 137. TREATMENT OF PARTICIPATION IN STATE PREPAID TUITION 
              PROGRAM.

    ``(a) General Rule.--No amount shall be includible in the gross 
income of any person by reason of--
            ``(1) education furnished to a designated beneficiary 
        pursuant to a qualified State prepaid tuition program, or
            ``(2) earnings on any amount paid to such a program for the 
        purchase of tuition credits for a designated beneficiary.
    ``(b) Qualified State Prepaid Tuition Program.--For purposes of 
this section--
            ``(1) In general.--The term `qualified State prepaid 
        tuition program' means a program established and maintained by 
        a State or any agency thereof under which--
                    ``(A) an individual may purchase tuition credits 
                for tuition for the undergraduate education of a 
                designated beneficiary,
                    ``(B) the value of the tuition credits is not 
                limited to the amounts paid for such credits and 
                earnings thereon,
                    ``(C) the individual has no authority to direct the 
                investment of amounts paid to the program, and
                    ``(D) the requirements of paragraph (3) are met 
                with respect to any refund of amounts paid to the 
                program.
        Subparagraph (B) shall not apply to tuition at an institution 
        of higher education which is not required by the laws of such 
        State to participate in such program.
            ``(2) Treatment of excess tuition credits.--A program shall 
        not fail to be treated as a qualified State prepaid tuition 
        program by reason of permitting tuition credits to be used 
        other than for tuition for an undergraduate education if--
                    ``(A) the only other purposes for which such 
                credits may be used are--
                            ``(i) for tuition for a graduate degree 
                        program of the designated beneficiary, or
                            ``(ii) for education expenses (other than 
                        tuition) of such beneficiary, and
                    ``(B) the program provides a significant reduction 
                in the value of such credits if used for such other 
                purposes.
            ``(3) Restrictions on refunds.--A refund meets the 
        requirements of this paragraph if the refund meets the 
        requirements of any of the following subparagraphs.
                    ``(A) Death or disability of designated 
                beneficiary.--A refund meets the requirements of this 
                subparagraph if the refund is made on account of the 
                death or disability of the designated beneficiary.
                    ``(B) Scholarships.--A refund meets the 
                requirements of this subparagraph if the refund is made 
                on account of a scholarship received by the designated 
                beneficiary and the amount of the refund does not 
                exceed the amount of the scholarship which is used for 
                tuition.
                    ``(C) Failure to gain admission.--A refund meets 
                the requirements of this subparagraph if the refund is 
                made on account of the failure of the designated 
                beneficiary to gain admission to an institution of 
                higher education (after making a good faith attempt, as 
                determined by the program, to gain admission) and the 
                amount of the refund does not exceed 90 percent of the 
                value of the designated beneficiary's account.
                    ``(D) Other withdrawals from participation.--A 
                refund meets the requirements of this subparagraph if 
                the refund is made on account of a termination of 
                participation in the qualified State prepaid tuition 
                program (other than for a reason described in any of 
                the preceding subparagraphs) and the amount of the 
                refund does not exceed the lesser of--
                            ``(i) 90 percent of the value of the 
                        designated beneficiary's account, or
                            ``(ii) the aggregate amount paid to such 
                        program for the benefit of the designated 
                        beneficiary.
    ``(c) Other Definitions.--For purposes of this section--
            ``(1) Tuition credit.--The term `tuition credit' means the 
        amount of tuition which is paid by the qualified State prepaid 
        tuition program reason of payments to such program.
            ``(2) Tuition.--The term `tuition' means tuition and 
        related expenses (as defined in section 117(b)(2)).
            ``(3) Designated beneficiary.--The term `designated 
        beneficiary' means the individual designated at the 
        commencement of participation in the qualified State prepaid 
        tuition program (or any substitute beneficiary to the extent 
        provided by the program) as the beneficiary of amounts paid (or 
        to be paid) to the program.
            ``(4) Value of designated beneficiary's account.--The value 
        of a designated beneficiary's account is an amount equal to the 
        sum of--
                    ``(A) the aggregate amount paid to the qualified 
                State prepaid tuition program for the benefit of such 
                designated beneficiary, plus
                    ``(B) such amount's pro rata share of the earnings 
                (if any) on the aggregate amount paid to such program 
                for all designated beneficiaries.
            ``(5) Person.--The term `person' includes a State and any 
        agency of a State.''
    (b) Clerical Amendment.--The table of sections for such part III is 
amended by striking the last item and inserting the following new 
items:

                              ``Sec. 137. Treatment of participation in 
                                        State prepaid tuition program.
                              ``Sec. 138. Cross references to other 
                                        Acts.''
    (c) Effective Date.--The amendments made by this section shall 
apply to taxable years ending after September 30, 1993.