Higher Education Accumulation Program Act of 1994

Summary: Higher Education Accumulation Program Act of 1994 - Amends the Internal Revenue Code to allow a deduction for amounts paid to a Higher Education Accumulation Program (HEAP) account established to accumulate funds to pay the educational expenses of a child of the taxpayer. 
Declares such accounts exempt from tax.  Allows the deduction in arriving at adjusted gross income.  Imposes an excise tax on excess contributions and prohibited transactions.  Imposes a penalty for failure to meet reporting requirements.

SECTION 1. SHORT TITLE.

    This Act may be cited as the ``Higher Education Accumulation 
Program Act of 1994''.

SEC. 2. DEDUCTION FOR CONTRIBUTIONS TO HEAP ACCOUNTS.

    (a) In General.--Part VII of subchapter B of chapter 1 of the 
Internal Revenue Code of 1986 (relating to additional itemized 
deductions for individuals) is amended by redesignating section 220 as 
section 221 and by inserting after section 219 the following new 
section:

``SEC. 220. HIGHER EDUCATION ACCUMULATION PROGRAM (HEAP) ACCOUNTS.

    ``(a) Deduction Allowed.--In the case of an individual, there shall 
be allowed as a deduction an amount equal to the amount paid in cash 
for the taxable year by the taxpayer to a HEAP account established for 
the purpose of accumulating funds to pay the educational expenses of 
any child of the taxpayer.
    ``(b) Limitations.--
            ``(1) Maximum deduction.--The amount allowable as a 
        deduction under subsection (a) to the taxpayer for any taxable 
        year shall not exceed $5,000 ($2,500 in the case of a married 
        individual filing a separate return) for amounts paid for the 
        benefit of each child of the taxpayer. In no event shall the 
        amount allowable as a deduction under subsection (a) to the 
        taxpayer for any taxable year exceed $15,000 ($7,500 in the 
        case of a married individual filing a separate return).
            ``(2) Deduction may not exceed compensation.--The amount 
        allowable as a deduction under subsection (a) shall not exceed 
        the amount of compensation (as defined in section 219(f)) 
        includible in the taxpayer's gross income for the taxable year.
            ``(3) Account may not be established for benefit of more 
        than 1 individual.--A HEAP account may not be established for 
        the benefit of more than 1 individual.
            ``(4) No deduction after beneficiary attains age 18.--No 
        deduction shall be allowed for any payment to a HEAP account 
        established for the benefit of an individual who has attained 
        age 18 before the close of the calendar year in which such 
        payment is made.
    ``(c) Definitions and Special Rules.--For purposes of this 
section--
            ``(1) HEAP account.--The term `HEAP account' means a trust 
        created or organized in the United States exclusively for the 
        purpose of paying the educational expenses of a child of the 
        taxpayer, but only if the written governing instrument creating 
        the trust meets the following requirements:
                    ``(A) No contribution will be accepted unless it is 
                in cash, and contributions will not be accepted for the 
                taxable year in excess of $5,000.
                    ``(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.
                    ``(D) The assets of the trust shall not be 
                commingled with other property except in a common trust 
                fund or common investment fund.
                    ``(E) On the termination date--
                            ``(i) the balance in the account shall be 
                        distributed to the individual for whose benefit 
                        the account is established, or
                            ``(ii) at the election of such individual, 
                        such account shall be treated for purposes of 
                        this title as an individual retirement account.
            ``(2) Child.--The term `child' has the meaning given such 
        term by section 151(c)(3).
            ``(3) Termination date.--The term `termination date' 
        means--
                    ``(A) the date the beneficiary attains age 25,
                    ``(B) if the beneficiary is at least a half-time 
                student on the date referred to in subparagraph (A), 
                the last day of the last school year for which the 
                beneficiary is at least a half-time student, or
                    ``(C) the date of the beneficiary's death.
            ``(4) Educational expenses.--The term `educational 
        expenses' means--
                    ``(A) tuition and fees required for the enrollment 
                or attendance of a student at an eligible educational 
                institution,
                    ``(B) fees, books, supplies, and equipment required 
                for courses of instruction at an eligible educational 
                institution, and
                    ``(C) a reasonable allowance for meals and lodging 
                while attending an eligible educational institution.
            ``(5) Eligible educational institution.--The term `eligible 
        educational institution' means--
                    ``(A) an institution of higher education, or
                    ``(B) a vocational school.
            ``(6) Institution of higher education.--The term 
        `institution of higher education' means the institutions 
        described in section 1201(a) or 481(a) of the Higher Education 
        Act of 1965.
            ``(7) Vocational school.--The term `vocational school' 
        means an area vocational education school as defined in 
        subparagraph (C) or (D) of section 521(4) of the Carl D. 
        Perkins Vocational and Applied Technology Education Act to the 
        extent such school is located within any State (as defined in 
        such section).
            ``(8) 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).
    ``(d) Tax Treatment of Distributions.--
            ``(1) In general.--Except as otherwise provided in this 
        subsection, any amount paid from a HEAP account shall be 
        included in the gross income of the beneficiary of such account 
        for the taxable year in which the payment is received.
            ``(2) Amounts used for education expenses.--If any payment 
        from a HEAP account is used to pay the educational expenses of 
        the beneficiary of such account--
                    ``(A) paragraph (1) shall not apply, but
                    ``(B) \1/10\th of such amount shall be included in 
                gross income of the beneficiary of such account for the 
                taxable year in which the payment is received and for 
                each of the 9 taxable years thereafter.
            ``(3) Excess contributions returned before due date of 
        return.--Paragraph (1) shall not apply to the distribution of 
        any contribution made during a taxable year to a HEAP account 
        to the extent that such contribution exceeds the amount 
        allowable as a deduction under subsection (a) if--
                    ``(A) such distribution is received on or before 
                the day prescribed by law (including extensions of 
                time) for filing such individual's return for such 
                taxable year,
                    ``(B) no deduction is allowed under subsection (a) 
                with respect to such excess contribution, and
                    ``(C) such distribution is accompanied by the 
                amount of net income attributable to such excess 
                contribution.
        Any net income described in subparagraph (C) shall be included 
        in the gross income of the individual for the taxable year in 
        which such excess contribution was made.
            ``(4) Treatment as individual retirement plan not subject 
        to income tax inclusion.--The treatment described in subsection 
        (c)(1)(E) shall not be treated as a distribution for purposes 
        of this subsection or subsection (f).
    ``(e) Tax Treatment of Accounts.--
            ``(1) Exemption from tax.--A HEAP account is exempt from 
        taxation under this subtitle unless such account has ceased to 
        be a HEAP account by reason of paragraph (2) or (3). 
        Notwithstanding the preceding sentence, any such account is 
        subject to the taxes imposed by section 511 (relating to 
        imposition of tax on unrelated business income of charitable, 
        etc. organizations).
            ``(2) Loss of exemption of account where individual engages 
        in prohibited transaction.--
                    ``(A) In general.--If the individual for whose 
                benefit a HEAP account is established or any individual 
                who contributes to such account engages in any 
                transaction prohibited by section 4975 with respect to 
                the account, the account shall cease to be a HEAP 
                account as of the first day of the taxable year (of the 
                individual so engaging in such transaction) during 
                which such transaction occurs.
                    ``(B) Account treated as distributing all its 
                assets.--In any case in which any account ceases to be 
                a HEAP account by reason of subparagraph (A) as of the 
                first day of any taxable year, paragraph (1) of 
                subsection (d) shall apply as if there was a 
                distribution on such first day in an amount equal to 
                the fair market value (on such first day) of all assets 
                in the account (on such first day).
            ``(3) Effect of pledging account as security.--If, during 
        any taxable year, the individual for whose benefit a HEAP 
        account is established, or any individual who contributes to 
        such account, uses the account or any portion thereof as 
        security for a loan, the portion so used shall be treated as 
        distributed to the individual so using such portion.
    ``(f) Additional Tax on Certain Distributions.--
            ``(1) Distribution not used for educational expenses.--If 
        any payment from a HEAP account is used for any purpose other 
        than the payment of the education expenses of the beneficiary 
        of such account, the tax liability under this chapter of such 
        beneficiary for the taxable year in which the payment is 
        received shall be increased by an amount equal to 10 percent of 
        such payment.
            ``(2) Distributions on termination of account.--Paragraph 
        (1) shall be applied by substituting `5 percent' for `10 
        percent' in the case of any distribution made on the 
        termination date (other than by reason of the beneficiary's 
        death).
            ``(3) Disability or death cases.--Paragraphs (1) and (2) 
        shall not apply if the distribution is made after the account 
        beneficiary becomes disabled within the meaning of section 
        72(m)(7) or dies.
            ``(4) Disqualification cases.--Any amount treated under 
        paragraph (2) or (3) of subsection (e) as distributed from a 
        HEAP account shall be treated as a distribution to which the 
        tax imposed by paragraph (1) applies.
    ``(g) Community Property Laws.--This section shall be applied 
without regard to any community property laws.
    ``(h) 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 a HEAP account 
described in subsection (c)(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.
    ``(i) Reports.--The trustee of a HEAP account shall make such 
reports regarding such account to the Secretary and to the individual 
for whose benefit the account is maintained 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) Deduction Allowed in Arriving at Adjusted Gross Income.--
Paragraph (7) of section 62(a) of such Code (relating to retirement 
savings) is amended--
            (1) by inserting ``or education'' after ``retirement'' in 
        the heading of such paragraph, and
            (2) by inserting before the period at the end thereof the 
        following: ``and the deduction allowed by section 220 (relating 
        to HEAP accounts)''.
    (c) Tax on Excess Contributions.--Section 4973 of such Code 
(relating to tax on excess contributions to individual retirement 
accounts, certain section 403(b) contracts, and certain individual 
retirement annuities) is amended--
            (1) by inserting ``heap accounts,'' after ``accounts,'' in 
        the heading of such section,
            (2) by striking out ``or'' at the end of paragraph (1) of 
        subsection (a),
            (3) by redesignating paragraph (2) of subsection (a) as 
        paragraph (3) and by inserting after paragraph (1) the 
        following new paragraph:
            ``(2) a HEAP account (within the meaning of section 
        220(c)(1)), or'', and
            (4) by adding at the end thereof the following new 
        subsection:
    ``(d) Excess Contributions to HEAP Accounts.--For purposes of this 
section, in the case of a HEAP account, the term `excess contributions' 
means the amount by which the amount contributed for the taxable year 
to the account exceeds the amount allowable as a deduction under 
section 220 for such taxable year. For purposes of this subsection, any 
contribution which is distributed out of the HEAP account in a 
distribution to which section 220(d)(3) applies shall be treated as an 
amount not contributed.''
    (d) Tax on Prohibited Transactions.--Section 4975 of such Code 
(relating to prohibited transactions) is amended--
            (1) by adding at the end of subsection (c) the following 
        new paragraph:
            ``(4) Special rule for heap accounts.--An individual for 
        whose benefit a HEAP 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 a HEAP 
        account by reason of the application of section 220(e)(2)(A) to 
        such account.'', and
            (2) by inserting ``, a HEAP account described in section 
        220(c)(1),'' in subsection (e)(1) after ``described in section 
        408(a)''.
    (e) Failure To Provide Reports on HEAP Accounts.--Section 6693 of 
such Code (relating to failure to provide reports on individual 
retirement accounts or annuities) is amended--
            (1) by inserting ``or on heap accounts'' after 
        ``annuities'' in the heading of such section, and
            (2) by adding at the end of subsection (a) the following 
        new sentence: ``The person required by section 220(i) to file a 
        report regarding a HEAP account at the time and in the manner 
        required by such section shall pay a penalty of $50 for each 
        failure, unless it is shown that such failure is due to 
        reasonable cause.''.
    (f) Clerical Amendments.--
            (1) The table of sections for part VII of subchapter B of 
        chapter 1 of such Code is amended by striking out the item 
        relating to section 220 and inserting in lieu thereof the 
        following new items:

                              ``Sec. 220. HEAP accounts.
                              ``Sec. 221. Cross reference.''
            (2) The table of sections for chapter 43 of such Code is 
        amended by striking out the item relating to section 4973 and 
        inserting in lieu thereof the following new item:

                              ``Sec. 4973. Tax on excess contributions 
                                        to individual retirement 
                                        accounts, HEAP accounts, 
                                        certain 403(b) contracts, and 
                                        certain individual retirement 
                                        annuities.''
            (3) The table of sections for subchapter B of chapter 68 of 
        such Code is amended by striking out the item relating to 
        section 6693 and inserting in lieu thereof the following new 
        item:

                              ``Sec. 6693. Failure to provide reports 
                                        on individual retirement 
                                        accounts or annuities or on 
                                        HEAP accounts.''
    (g) Effective Date.--The amendments made by this section shall 
apply to contributions made in taxable years beginning after December 
31, 1994.