I

103D CONGRESS

1ST SESSION H. R. 3449

To amend the Internal Revenue Code of 1986 to provide for the establishment

of, and the deduction of contributions to, education savings accounts.

IN THE HOUSE OF REPRESENTATIVES

NOVEMBER 4, 1993

Mr. GILLMOR (for himself, Mr. BAKER of Louisiana, Mr. BILBRAY, Mr.

ROHRABACHER, Mr. BEREUTER, Mr. BILIRAKIS, Mr. BOEHNER, Mr.

COX, Mr. DOOLITTLE, Mr. DUNCAN, Mr. GOSS, Mr. HOBSON, Ms. ROSLEHTINEN, Mrs. MEYERS of Kansas, Mr. SOLOMON, Mr. SWIFT, Mrs.

VUCANOVICH, Mr. GILCHREST, Mr. LIPINSKI, Mr. MACHTLEY, Mr.

LIGHTFOOT, Mr. PAXON, Mr. LEVY, Mr. SCHAEFFER, Mr. FROST, Mr.

QUINN, Mr. HOEKSTRA, Mr. HANCOCK, and Mr. WALSH) introduced the

following bill; which was referred to the Committee on Ways and Means

A BILL

To amend the Internal Revenue Code of 1986 to provide

for the establishment of, and the deduction of contributions to, education savings accounts.

1 Be it enacted by the Senate and House of Representa2 tives of the United States of America in Congress assembled,

3 SECTION 1. EDUCATION SAVINGS ACCOUNTS.

4 (a) IN GENERAL.—Part VII of subchapter B of chap5 ter 1 of the Internal Revenue Code of 1986 (relating to

6 additional itemized deductions for individuals) is amended
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1 by redesignating section 220 as section 221 and by insert2 ing after section 219 the following new section:

3 ‘‘SEC. 220. EDUCATION SAVINGS ACCOUNTS.

4 ‘‘(a) DEDUCTION ALLOWED.—In the case of an indi5 vidual, there shall be allowed as a deduction the sum of—

6 ‘‘(1) amounts paid in cash, and

7 ‘‘(2) the fair market value at time of transfer

8 of stocks, bonds, or other securities, which are read9 ily tradable on an established securities market,

10 transferred,

11 during the calendar year which ends with or within the

12 taxable year by such individual to an education savings

13 account established for the purpose of accumulating funds

14 to pay the educational expenses of an eligible individual.

15 ‘‘(b) LIMITATIONS.—

16 ‘‘(1) ACCOUNT MAY NOT BE ESTABLISHED FOR

17 BENEFIT OF MORE THAN 1 INDIVIDUAL.—An edu18 cation savings account may not be established for

19 the benefit of more than 1 individual.

20 ‘‘(2) ELIGIBLE INDIVIDUAL TREATED AS ELIGI21 BLE INDIVIDUAL ONLY WITH RESPECT TO 1 AC22 COUNT.—If, at any time during a calendar year, 2

23 or more education savings accounts are maintained

24 for the benefit of an eligible individual, such individ25 ual shall be treated as an eligible individual for the
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1 calendar year only with respect to the first of such

2 accounts.

3 ‘‘(3) MAXIMUM DEDUCTION PER ACCOUNT.—

4 The amount allowable as a deduction under sub5 section (a) to an individual for amounts paid or

6 transferred to an education savings account for any

7 taxable year shall not exceed $1,500.

8 ‘‘(4) NO DEDUCTION AFTER BENEFICIARY AT9 TAINS AGE 19.—No deduction shall be allowed for

10 any contribution to an education savings account es11 tablished for the benefit of an eligible individual who

12 has attained age 19 before the close of the calendar

13 year in which such contribution is made.

14 ‘‘(5) ADJUSTMENT OF DOLLAR AMOUNT LIMI15 TATIONS FOR INFLATION.—

16 ‘‘(A) IN GENERAL.—Not later than

17 October 1 of 1994 and each succeeding cal18 endar year, the Secretary shall determine, and

19 publish in the Federal Register, the amount

20 which shall apply in lieu of the amount of the

21 limitation contained in paragraph (3) and sub22 section (c)(2)(A) with respect to taxable years

23 beginning in the next succeeding calendar year.

24 ‘‘(B) METHOD OF DETERMINING

25 AMOUNT.—The amount of the limitation which
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1 shall apply in lieu of the amount of the limita2 tion contained in paragraph (3) and subsection

3 (c)(2)(A) with respect to taxable years begin4 ning in any calendar year shall be determined

5 by multiplying the amount contained in such

6 subparagraph and such subsection by the infla7 tion adjustment factor.

8 ‘‘(C) INFLATION ADJUSTMENT FACTOR.—

9 For purposes of subparagraph (B), the inflation

10 adjustment factor for any calendar year is a

11 fraction the numerator of which is the average

12 of the Consumer Price Index as of the close of

13 the 12-month period ending on July 31 of the

14 preceding calendar year and the denominator of

15 which is the average of the Consumer Price

16 Index as of the close of the 12-month period

17 ending on July 31, 1993.

18 ‘‘(D) CONSUMER PRICE INDEX.—For pur19 poses of subparagraph (C), the term ‘Consumer

20 Price Index’ has the meaning given such term

21 by section 1(f)(5).

22 ‘‘(c) DEFINITIONS AND SPECIAL RULES.—For pur23 poses of this section—

24 ‘‘(1) ELIGIBLE INDIVIDUAL.—The term ‘eligible

25 individual’ means an individual who is—
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1 ‘‘(A) a child (within the meaning of section

2 153(e)(3)) of the taxpayer or of a brother, sis3 ter, stepbrother, or stepsister of the taxpayer,

4 ‘‘(B) an individual with respect to whom

5 the taxpayer has been appointed guardian by a

6 court of competent jurisdiction, or

7 ‘‘(C) a descendant of a child of the tax8 payer.

9 ‘‘(2) EDUCATION SAVINGS ACCOUNT.—The

10 term ‘education savings account’ means a trust cre11 ated or organized in the United States exclusively

12 for the purpose of paying the educational expenses

13 of an eligible individual, but only if the written gov14 erning instrument creating the trust meets the fol15 lowing requirements:

16 ‘‘(A) No contribution will be accepted un17 less it is in cash, stocks, bonds, or other securi18 ties which are readily tradable on an established

19 securities market, and, except in the case of

20 contributions from another education savings

21 account or an individual retirement plan, con22 tributions will not be accepted for the taxable

23 year in excess of $1,500.

24 ‘‘(B) The trustee is a bank (as defined in

25 section 408(n)) or another person who dem-
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1 onstrates to the satisfaction of the Secretary

2 that the manner in which that person will ad3 minister the trust will be consistent with the re4 quirements of this section.

5 ‘‘(C) No part of the trust assets will be in6 vested in life insurance contracts (other than

7 contracts the beneficiary of which is the trust

8 and the face amount of which does not exceed

9 the amount by which the maximum amount

10 which can be contributed to the account exceeds

11 the sum of the amounts contributed to the ac12 count for all taxable years).

13 ‘‘(D) The assets of the account may be in14 vested in accordance with the direction of the

15 individual contributing to the account, but, if

16 more than one individual has made contribu17 tions to the account, the consent of all such in18 dividuals shall be required for any such direc19 tion.

20 ‘‘(E) The assets of the trust shall not be

21 commingled with other property except in a

22 common trust fund or common investment

23 fund.

24 ‘‘(F) Any balance in the account on the

25 day after the date on which the individual for
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1 whose benefit the trust is established attains

2 age 30 (or, if earlier, the date on which such

3 individual dies) shall be distributed within 30

4 days of such date—

5 ‘‘(i) in accordance with paragraph (5)

6 to each of the individuals who have con7 tributed to the trust, or

8 ‘‘(ii) as directed by such individuals,

9 to another education savings account es10 tablished for the benefit of an eligible indi11 vidual who has not attained age 30 or to

12 an eligible educational institution.

13 ‘‘(3) TIME WHEN CONTRIBUTIONS DEEMED

14 MADE.—A taxpayer shall be deemed to have made a

15 contribution on the last day of the preceding taxable

16 year if the contribution is made on account of such

17 taxable year and is made not later than the time

18 prescribed by law for filing the return for such tax19 able year (including extensions thereof).

20 ‘‘(4) STOCK, ETC., TO BE VALUED AS OF

21 TRANSFER DATE.—The fair market value of stocks,

22 bonds, and other securities shall be determined as of

23 the date on which they are transferred to the ac24 count. If the date of transfer falls on a Saturday,

25 Sunday, or public legal holiday, then the fair market
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1 value shall be determined by reference to the last

2 preceding day on which they could have been traded

3 on an established securities market.

4 ‘‘(5) DISTRIBUTION OF BALANCE IN ACCOUNT

5 TO CONTRIBUTORS.—The Secretary shall prescribe

6 regulations describing the manner in which any bal7 ance in the educational savings account shall be dis8 tributed under paragraph (2)(F)(i) among the con9 tributors to the account. Any division of the balance

10 in the account shall reflect—

11 ‘‘(A) the amount of net income of the ac12 count which is attributable to the contributions

13 of each such individual, and

14 ‘‘(B) a proper allocation of any amounts

15 previously distributed from the account for edu16 cational expenses among the contributions

17 which were made before any such distribution

18 (including the net income of the account which

19 was attributable to such contributions and

20 earned before any such distribution).

21 ‘‘(6) EDUCATIONAL EXPENSES.—The term

22 ‘educational expenses’ means—

23 ‘‘(A) tuition and fees required for the en24 rollment or attendance of a student at an eligi25 ble educational institution,
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1 ‘‘(B) fees, books, supplies, and equipment

2 required for courses of instruction at an eligible

3 educational institution, and

4 ‘‘(C) a reasonable allowance for meals and

5 lodging while attending an eligible educational

6 institution.

7 ‘‘(7) ELIGIBLE EDUCATIONAL INSTITUTION.—

8 The term ‘eligible educational institution’ means—

9 ‘‘(A) an institution of higher education, or

10 ‘‘(B) a vocational school.

11 ‘‘(8) INSTITUTION OF HIGHER EDUCATION.—

12 The term ‘institution of higher education’ means the

13 institutions described in section 1201(a) or 481(a)

14 of the Higher Education Act of 1965.

15 ‘‘(9) VOCATIONAL SCHOOL.—The term ‘voca16 tional school’ means an area vocational education

17 school as defined in subparagraph (C) or (D) of sec18 tion 521(4) of the Carl D. Perkins Vocational and

19 Applied Technology Education Act to the extent

20 such school is located within any State (as defined

21 in section 521(33) of such Act).

22 ‘‘(d) TAX TREATMENT OF DISTRIBUTIONS.—

23 ‘‘(1) IN GENERAL.—Except as otherwise pro24 vided in this subsection, any amount paid or distrib25 uted out of an education savings account shall be in-
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1 cluded in gross income of the payee or distributee

2 for the taxable year in which the payment or dis3 tribution is received to the extent such amount is

4 not the return of a contribution for which no deduc5 tion was allowed under subsection (a).

6 ‘‘(2) DISTRIBUTION USED TO PAY EDU7 CATIONAL EXPENSES.—Paragraph (1) shall not

8 apply to any payment or distribution out of an edu9 cation savings account to the extent such payment

10 or distribution is used exclusively to pay the edu11 cational expenses incurred by the individual for

12 whose benefit the account is established.

13 ‘‘(3) DISTRIBUTIONS TO ANOTHER ACCOUNT OR

14 TO ELIGIBLE EDUCATIONAL INSTITUTION.—Para15 graph (1) shall not apply to any distribution under

16 subsection (c)(2)(F)(ii).

17 ‘‘(4) EXCESS CONTRIBUTIONS RETURNED BE18 FORE DUE DATE OF RETURN.—Paragraph (1) does

19 not apply to the distribution of any contribution paid

20 during a taxable year to an education savings ac21 count to the extent that such contribution exceeds

22 the amount allowable as a deduction under sub23 section (a) if—

24 ‘‘(A) such distribution is received on or be25 fore the day prescribed by law (including exten-
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1 sions of time) for filing such individual’s return

2 for such taxable year,

3 ‘‘(B) no deduction is allowed under sub4 section (a) with respect to such excess contribu5 tion, and

6 ‘‘(C) such distribution is accompanied by

7 the amount of net income attributable to such

8 excess contribution.

9 Any net income described in subparagraph (C) shall

10 be included in the gross income of the individual for

11 the taxable year in which such excess contribution

12 was made.

13 ‘‘(5) DISTRIBUTIONS TO INDIVIDUAL RETIRE14 MENT PLANS.—Paragraph (1) shall not apply to any

15 payment or distribution out of an education savings

16 account if—

17 ‘‘(A) before the close of the 60th day after

18 the day on which the payment or distribution is

19 received, the payment or distribution is contrib20 uted into an individual retirement plan of an in21 dividual who contributed to the education sav22 ings account, and

23 ‘‘(B) the amount of such payment or dis24 tribution (when added to all prior payments or

25 distributions excluded from the gross income of
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1 such individual by reason of this paragraph)

2 does not exceed the aggregate amount contrib3 uted to the education savings account by the in4 dividual from amounts paid or distributed out

5 of an individual retirement plan in accordance

6 with section 408(d)(8).

7 ‘‘(e) TAX TREATMENT OF ACCOUNTS.—

8 ‘‘(1) EXEMPTION FROM TAX.—An education

9 savings account is exempt from taxation under this

10 subtitle unless such account has ceased to be an

11 education savings account by reason of paragraph

12 (2) or (3). Notwithstanding the preceding sentence,

13 any such account is subject to the taxes imposed by

14 section 511 (relating to imposition of tax on unre15 lated business income of charitable, etc. organiza16 tions).

17 ‘‘(2) LOSS OF EXEMPTION OF ACCOUNT WHERE

18 INDIVIDUAL ENGAGES IN PROHIBITED TRANS19 ACTION.—

20 ‘‘(A) IN GENERAL.—If the individual for

21 whose benefit an education savings account is

22 established or any individual who contributes to

23 such account engages in any transaction prohib24 ited by section 4975 with respect to the ac25 count, the account shall cease to be an edu-
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1 cation savings account as of the first day of the

2 taxable year (of the individual so engaging in

3 such transaction) during which such transaction

4 occurs.

5 ‘‘(B) ACCOUNT TREATED AS DISTRIBUTING

6 ALL ITS ASSETS.—In any case in which any ac7 count ceases to be an education savings account

8 by reason of subparagraph (A) as of the first

9 day of any taxable year, paragraph (1) of sub10 section (d) shall apply as if there was a dis11 tribution on such first day in an amount equal

12 to the fair market value (on such first day) of

13 all assets in the account (on such first day).

14 ‘‘(3) EFFECT OF PLEDGING ACCOUNT AS SECU15 RITY.—If, during any taxable year, the individual for

16 whose benefit an education savings account is estab17 lished, or any individual who contributes to such ac18 count, uses the account or any portion thereof as se19 curity for a loan, the portion so used shall be treated

20 as distributed to the individual so using such por21 tion.

22 ‘‘(f) ADDITIONAL TAX ON CERTAIN AMOUNTS IN23 CLUDED IN GROSS INCOME.—

24 ‘‘(1) DISTRIBUTION NOT USED FOR EDU25 CATIONAL EXPENSES.—In the case of any payment
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1 or distribution to which subsection (d)(1) applies,

2 the tax liability of each payee or distributee under

3 this chapter for the taxable year in which the pay4 ment or distribution is received shall be increased by

5 an amount equal to 10 percent of the amount of the

6 distribution which is includible in the gross income

7 of such payee or distributee for such taxable year.

8 ‘‘(2) DISQUALIFICATION CASES.—If an amount

9 is includible in the gross income of an individual for

10 a taxable year because such amount is required to

11 be treated as a distribution under paragraph (2) or

12 (3) of subsection (e), such individual’s tax liability

13 under this chapter for such taxable year shall be in14 creased by an amount equal to 10 percent of such

15 amount required to be treated as a distribution and

16 included in his gross income.

17 ‘‘(3) DISABILITY OR DEATH CASES.—Para18 graphs (1) and (2) shall not apply if the payment

19 or distribution is made after the individual for whose

20 benefit the education savings account becomes dis21 abled within the meaning of section 72(m)(7) or

22 dies.

23 ‘‘(g) COMMUNITY PROPERTY LAWS.—This section

24 shall be applied without regard to any community property

25 laws.
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1 ‘‘(h) CUSTODIAL ACCOUNTS.—For purposes of this

2 section, a custodial account shall be treated as a trust if

3 the assets of such account are held by a bank (as defined

4 in section 408(n)) or another person who demonstrates,

5 to the satisfaction of the Secretary, that the manner in

6 which he will administer the account will be consistent

7 with the requirements of this section, and if the custodial

8 account would, except for the fact that it is not a trust,

9 constitute an education savings account described in sub10 section (c)(2). For purposes of this title, in the case of

11 a custodial account treated as a trust by reason of the

12 preceding sentence, the custodian of such account shall be

13 treated as the trustee thereof.

14 ‘‘(i) REPORTS.—The trustee of an education savings

15 account shall make such reports regarding such account

16 to the Secretary and to the individual for whose benefit

17 the account is maintained with respect to contributions,

18 distributions, and such other matters as the Secretary

19 may require under regulations. The reports required by

20 this subsection shall be filed at such time and in such

21 manner and furnished to such individuals at such time and

22 in such manner as may be required by those regulations.’’

23 (b) DEDUCTION ALLOWED IN ARRIVING AT AD24 JUSTED GROSS INCOME.—Paragraph (7) of section 62(a)
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1 of such Code (relating to retirement savings) is amend2 ed—

3 (1) by inserting ‘‘OR EDUCATION’’ after ‘‘RE4 TIREMENT’’ in the heading of such paragraph, and

5 (2) by inserting before the period at the end the

6 following: ‘‘and the deduction allowed by section 220

7 (relating to education savings accounts)’’.

8 (c) TAX ON EXCESS CONTRIBUTIONS.—Section 4973

9 of such Code (relating to tax on excess contributions to

10 individual retirement accounts, certain section 403(b) con11 tracts, and certain individual retirement annuities) is

12 amended—

13 (1) by inserting ‘‘EDUCATION SAVINGS AC14 COUNTS,’’ after ‘‘ACCOUNTS,’’ in the heading of

15 such section,

16 (2) by striking ‘‘or’’ at the end of paragraph

17 (1) of subsection (a),

18 (3) by redesignating paragraph (2) of sub19 section (a) as paragraph (3) and by inserting after

20 paragraph (1) the following new paragraph:

21 ‘‘(2) an education savings account (within the

22 meaning of section 220(c)(2)), or’’, and

23 (4) by adding at the end the following new sub24 section:
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1 ‘‘(d) EXCESS CONTRIBUTIONS TO EDUCATION SAV2 INGS ACCOUNTS.—For purposes of this section, in the

3 case of an education savings account, the term ‘excess con4 tributions’ means the amount by which the amount con5 tributed for the taxable year to the account exceeds the

6 amount allowable as a deduction under section 220 for

7 such taxable year. For purposes of this subsection, any

8 contribution which is distributed out of the education sav9 ings account in a distribution to which section 220(d)(4)

10 applies shall be treated as an amount not contributed.’’

11 (d) CONTRIBUTION NOT SUBJECT TO GIFT TAX.—

12 Section 2503 of such Code (relating to taxable gifts) is

13 amended by adding at the end the following new sub14 section:

15 ‘‘(h) EDUCATION SAVINGS ACCOUNTS.—Any con16 tribution made by an individual to an education savings

17 account described in section 220(c)(2) which is allowable

18 as a deduction under section 220 shall not be treated as

19 a transfer of property by gift for purposes of this chap20 ter.’’

21 (e) TAX ON PROHIBITED TRANSACTIONS.—Section

22 4975 of such Code (relating to prohibited transactions)

23 is amended—

24 (1) by adding at the end of subsection (c) the

25 following new paragraph:
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1 ‘‘(4) SPECIAL RULE FOR EDUCATION SAVINGS

2 ACCOUNTS.—An individual for whose benefit an edu3 cation savings account is established and any con4 tributor to such account shall be exempt from the

5 tax imposed by this section with respect to any

6 transaction concerning such account (which would

7 otherwise be taxable under this section) if, with re8 spect to such transaction, the account ceases to be

9 an education savings account by reason of the appli10 cation of section 220(e)(2)(A) to such account.’’,

11 and

12 (2) by inserting ‘‘, an education savings account

13 described in section 220(c)(2),’’ in subsection (e)(1)

14 after ‘‘described in section 408(a)’’.

15 (f) FAILURE TO PROVIDE REPORTS ON EDUCATION

16 SAVINGS ACCOUNTS.—Section 6693 of such Code (relat17 ing to failure to provide reports on individual retirement

18 accounts or annuities) is amended—

19 (1) by inserting ‘‘OR ON EDUCATION SAV20 INGS ACCOUNTS’’ after ‘‘ANNUITIES’’ in the

21 heading of such section, and

22 (2) by adding at the end of subsection (a) the

23 following new sentence: ‘‘The person required by sec24 tion 220(i) to file a report regarding an education

25 savings account at the time and in the manner re-
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1 quired by such section shall pay a penalty of $50 for

2 each failure, unless it is shown that such failure is

3 due to reasonable cause.’’

4 (g) SPECIAL RULE FOR DETERMINING AMOUNTS OF

5 SUPPORT FOR DEPENDENT.—Subsection (b) of section

6 152 of such Code (relating to definition of dependent) is

7 amended by adding at the end the following new para8 graph:

9 ‘‘(6) A distribution from an education savings

10 account described in section 220(c)(2) to the individ11 ual for whose benefit such account has been estab12 lished shall not be taken into account in determining

13 support for purposes of this section to the extent

14 such distribution is excluded from gross income of

15 such individual under section 220(d)(2).’’

16 (h) CLERICAL AMENDMENTS.—

17 (1) The table of sections for part VII of sub18 chapter B of chapter 1 of such Code is amended by

19 striking the item relating to section 220 and insert20 ing the following new items:

‘‘Sec. 220. Education savings accounts.

‘‘Sec. 221. Cross reference.’’

21 (2) The table of sections for chapter 43 of such

22 Code is amended by striking the item relating to sec23 tion 4973 and inserting the following new item:
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‘‘Sec. 4973. Tax on excess contributions to individual retirement

accounts, education savings accounts, certain

403(b) contracts, and certain individual retirement

annuities.’’

1 (3) The table of sections for subchapter B of

2 chapter 68 of such Code is amended by striking the

3 item relating to section 6693 and inserting the fol4 lowing new item:

‘‘Sec. 6693. Failure to provide reports on individual retirement

accounts or annuities or on education savings accounts.’’

5 SEC. 2. TRANSFERS BETWEEN INDIVIDUAL RETIREMENT

6 PLANS AND EDUCATION SAVINGS ACCOUNTS.

7 (a) EXEMPTION FROM ANNUAL CONTRIBUTION LIM8 ITATION FOR DISTRIBUTIONS FROM EDUCATION SAVINGS

9 ACCOUNTS INTO IRA’S.—Paragraph (1) of section 408(a)

10 of the Internal Revenue Code of 1986 (relating to defini11 tion of individual retirement account) is amended by in12 serting after ‘‘403(b)(8),’’ the following: ‘‘or in the case

13 of a contribution from an education savings account in ac14 cordance with section 220(d)(5),’’.

15 (b) EXCLUSION FROM GROSS INCOME FOR DIS16 TRIBUTIONS FROM IRA’S INTO EDUCATION SAVINGS AC17 COUNTS.—Subsection (d) of section 408 of such Code (re18 lating to tax treatment of distributions from individual re19 tirement plans) is amended by adding at the end the fol20 lowing new paragraph:
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1 ‘‘(8) DISTRIBUTIONS USED TO MAKE CON2 TRIBUTION TO EDUCATION SAVINGS ACCOUNT.—

3 Paragraph (1) shall not apply to any amount paid

4 or distributed out of an individual retirement plan if,

5 before the close of the 60th day after the day on

6 which the payment or distribution is received, the

7 payment or distribution is contributed into an edu8 cation savings account (as defined in section

9 220(c)(2)).

10 SEC. 3. EFFECTIVE DATE.

11 The amendments made by this Act shall apply to tax12 able years beginning after December 31, 1992.

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