I

103D CONGRESS

2D SESSION H. R. 3722

To amend the Internal Revenue Code of 1986 to provide for the tax-free

treatment of certain education savings accounts, and for other purposes.

IN THE HOUSE OF REPRESENTATIVES

JANUARY 25, 1994

Mr. BARLOW (for himself and Mr. BAESLER) 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 tax-free treatment of certain education savings

accounts, and for other purposes.

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

3 SECTION 1. SHORT TITLE.

4 This Act may be cited as the ‘‘Education Savings As5 sistance Act of 1994’’.

6 SEC. 2. TAX TREATMENT OF STATE EDUCATION SAVINGS

7 ACCOUNTS.

8 (a) IN GENERAL.—Part III of subchapter B of chap9 ter 1 of the Internal Revenue Code of 1986 (relating to

10 items specifically excluded from gross income) is amended
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1 by redesignating section 137 as section 138 and by adding

2 after section 136 the following new section:

3 ‘‘SEC. 137. EDUCATION SAVINGS ACCOUNTS.

4 ‘‘(a) GENERAL RULE.—Gross income shall not in5 clude any qualified education savings account distribution.

6 ‘‘(b) QUALIFIED EDUCATION SAVINGS ACCOUNT

7 DISTRIBUTION.—For purposes of this section—

8 ‘‘(1) IN GENERAL.—The term ‘qualified edu9 cation savings account distribution’ means any

10 amount paid or distributed out of an education sav11 ings account which would otherwise be includible in

12 gross income to the extent such payment or distribu13 tion is used exclusively to pay qualified higher edu14 cation expenses incurred by the designated bene15 ficiary of the account.

16 ‘‘(2) ROLLOVERS.—The term ‘qualified edu17 cation savings account distribution’ includes any

18 transfer from an education savings account of one

19 designated beneficiary to another such account of

20 such beneficiary or to such an account of another

21 designated beneficiary.

22 ‘‘(3) SPECIAL RULES.—The determination

23 under paragraph (1) as to whether an amount is

24 otherwise includible in gross income shall be made in

25 the manner described in section 72, except that—
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1 ‘‘(A) all education savings accounts shall

2 be treated as one contract,

3 ‘‘(B) all distributions during any taxable

4 year shall be treated as one distribution,

5 ‘‘(C) contributions to an account described

6 in subsection (c)(4)(B)(i) shall not be included

7 in the basis of the account, and

8 ‘‘(D) the value of the contract, income on

9 the contract, and investment in the contract

10 shall be computed as of the close of the cal11 endar year in which the taxable year begins.

12 ‘‘(c) EDUCATION SAVINGS ACCOUNT.—For purposes

13 of this section—

14 ‘‘(1) IN GENERAL.—The term ‘education sav15 ings account’ means a trust created or organized in

16 the United States—

17 ‘‘(A) pursuant to a qualified State edu18 cational savings plan, and

19 ‘‘(B) exclusively for the purpose of paying

20 the qualified higher education expenses of the

21 designated beneficiary of the account.

22 ‘‘(2) QUALIFIED STATE EDUCATIONAL SAVINGS

23 PLAN.—The term ‘qualified State educational sav24 ings plan’ means a plan established and maintained

25 by a State or instrumentality thereof under which—
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1 ‘‘(A) participants may save to meet quali2 fied higher education expenses of designated

3 beneficiaries,

4 ‘‘(B) planning and financial information is

5 provided to participants about current and pro6 jected qualified higher education expenses,

7 ‘‘(C) education savings account statements

8 are provided to participants at least quarterly,

9 and

10 ‘‘(D) an audited financial statement is pro11 vided to participants at least annually.

12 ‘‘(3) QUALIFIED HIGHER EDUCATION EX13 PENSES.—The term ‘qualified higher education ex14 penses’ means the cost of attendance (as defined in

15 section 472 of the Higher Education Act of 1965).

16 ‘‘(4) LIMITATIONS.—A trust shall not be treat17 ed as an education savings account unless the follow18 ing requirements are met:

19 ‘‘(A) No contribution will be accepted un20 less it is in cash, stocks, bonds, or other securi21 ties which are readily tradable on an established

22 securities market.

23 ‘‘(B) Contributions will not be accepted for

24 any taxable year in excess of the applicable
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1 limit. The preceding sentence shall not apply

2 to—

3 ‘‘(i) contributions to the qualified

4 State educational savings plan which are

5 allocated to all education savings accounts

6 within the class for which the contribution

7 was made, or

8 ‘‘(ii) rollover contributions described

9 in subsection (b)(2).

10 ‘‘(C) The trust may not be established for

11 the benefit of more than one individual.

12 ‘‘(D) The trustee is the qualified State

13 educational savings plan or person designated

14 by it.

15 ‘‘(E) The assets of the trust may be in16 vested only in accordance with the qualified

17 State educational savings plan.

18 ‘‘(5) APPLICABLE LIMIT.—For purposes of

19 paragraph (4)(B)—

20 ‘‘(A) IN GENERAL.—The applicable limit is

21 $3,000.

22 ‘‘(B) INDEXING.—In the case of taxable

23 years beginning after December 31, 1994, the

24 $3,000 amount under subparagraph (A) shall

25 be increased by the education cost-of-living ad-
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1 justment for the calendar year in which the tax2 able year begins.

3 ‘‘(C) EDUCATION COST-OF-LIVING ADJUST4 MENT.—For purposes of subparagraph (B), the

5 education cost-of-living adjustment for any cal6 endar year is the percentage (if any) by

7 which—

8 ‘‘(i) the higher education cost index

9 for the preceding calendar year, exceeds

10 ‘‘(ii) such index for 1993.

11 ‘‘(D) HIGHER EDUCATION COST INDEX.—

12 For purposes of subparagraph (C), the higher

13 education cost index for any calendar year is

14 the average qualified higher education expenses

15 for undergraduate students at both private and

16 public institutions of higher education for the

17 12-month period ending on August 31 of the

18 calendar year. The Secretary of Education shall

19 provide for the computation and publication of

20 the higher education cost index.

21 ‘‘(d) TAX TREATMENT OF ACCOUNTS AND STATE

22 PLANS.—

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

24 savings account shall be exempt from taxation under

25 this subtitle. Notwithstanding the preceding sen-
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1 tence, any such account or plan shall be subject to

2 the taxes imposed by section 511 (relating to imposi3 tion of tax on unrelated business income of chari4 table, etc. organizations).

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

6 INDIVIDUAL ENGAGES IN PROHIBITED TRANS7 ACTION.—

8 ‘‘(A) IN GENERAL.—If the designated ben9 eficiary of an education savings account is es10 tablished or any individual who contributes to

11 such account engages in any transaction prohib12 ited by section 4975 with respect to the ac13 count, the account shall cease to be an edu14 cation savings account as of the first day of the

15 taxable year (of the individual so engaging in

16 such transaction) during which such transaction

17 occurs.

18 ‘‘(B) ACCOUNT TREATED AS DISTRIBUTING

19 ALL ITS ASSETS.—In any case in which any ac20 count ceases to be an education savings account

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

22 day of any taxable year, an amount equal to the

23 fair market value of all assets in the account

24 shall be treated as having been distributed on

25 such first day.
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1 ‘‘(3) EFFECT OF PLEDGING ACCOUNT AS SECU2 RITY.—If, during any taxable year, the individual for

3 whose benefit an education savings account is estab4 lished, or any individual who contributes to such ac5 count, uses the account or any portion thereof as se6 curity for a loan, the portion so used shall be treated

7 as distributed to the individual so using such por8 tion.

9 ‘‘(e) REPORTS.—The Secretary may require the

10 trustee of an education savings account to make reports

11 regarding such account to the Secretary, to the individual

12 who has established the account, and to the designated

13 beneficiary of the account with respect to contributions,

14 distributions, and such other matters as the Secretary

15 may require. The reports required by this subsection shall

16 be filed at such time and in such manner and furnished

17 to such individuals at such time and in such manner as

18 may be required by those regulations.’’

19 (b) TAX TREATMENT OF QUALIFIED STATE EDU20 CATIONAL SAVINGS PLAN.—

21 (1) TREATMENT AS SECTION 501(C)(3) ORGANI22 ZATION.—Section 501(c)(3) of such Code is amend23 ed by inserting ‘‘or which is a qualified State edu24 cation savings plan (as defined in section

25 137(c)(2)),’’ after ‘‘animals,’’.
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1 (2) CHARITABLE CONTRIBUTIONS.—

2 (A) Subparagraph (B) of section 170(c)(2)

3 of such Code is amended by inserting ‘‘, or

4 which is a qualified State education savings

5 plan (as defined in section 137(c)(2)),’’ after

6 ‘‘animals’’.

7 (B) Section 170(b)(1)(A) of such Code is

8 amended by striking ‘‘or’’ at the end of clause

9 (vii), by inserting ‘‘or’’ at the end of clause

10 (viii) and by inserting after clause (viii) the fol11 lowing new clause:

12 ‘‘(ix) a qualified State educational

13 savings plan (as defined in section

14 137(c)(2)).’’

15 (c) CONTRIBUTION NOT SUBJECT TO GIFT TAX.—

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

17 amended by adding at the end thereof the following new

18 subsection:

19 ‘‘(h) EDUCATION SAVINGS ACCOUNTS.—Any con20 tribution made by an individual to an education savings

21 account described in section 137 shall not be treated as

22 a transfer of property by gift for purposes of this chap23 ter.’’
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1 (d) TAX ON PROHIBITED TRANSACTIONS.—Section

2 4975 of such Code (relating to prohibited transactions)

3 is amended—

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

5 following new paragraph:

6 ‘‘(4) SPECIAL RULE FOR EDUCATION SAVINGS

7 ACCOUNTS.—An individual for whose benefit an edu8 cation savings account is established and any con9 tributor to such account shall be exempt from the

10 tax imposed by this section with respect to any

11 transaction concerning such account (which would

12 otherwise be taxable under this section) if, with re13 spect to such transaction, the account ceases to be

14 an education savings account by reason of the appli15 cation of section 137(d)(2)(A) to such account.’’,

16 and

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

18 described in section 137(c),’’ in subsection (e)(1)

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

20 (e) FAILURE TO PROVIDE REPORTS ON EDUCATION

21 SAVINGS ACCOUNTS.—Section 6693 of such Code (relat22 ing to failure to provide reports on individual retirement

23 accounts or annuities) is amended—
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1 (1) by inserting ‘‘OR ON EDUCATION SAV2 INGS ACCOUNTS’’ after ‘‘ANNUITIES’’ in the

3 heading of such section, and

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

5 following new sentence: ‘‘Any person required by

6 section 137(e) to file a report regarding an edu7 cation savings account who fails to file the report at

8 the time or in the manner required by such section

9 shall pay a penalty of $50 for each failure, unless

10 it is shown that such failure is due to reasonable

11 cause.’’

12 (f) SPECIAL RULE FOR DETERMINING AMOUNTS OF

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

14 152 of such Code (relating to definition of dependent) is

15 amended by adding at the end the following new para16 graph:

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

18 account described in section 137(c) to the individual

19 for whose benefit such account has been established

20 shall not be taken into account in determining sup21 port for purposes of this section to the extent such

22 distribution is excluded from gross income of such

23 individual under section 137.’’

24 (g) CLERICAL AMENDMENTS.—
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1 (1) The table of sections for part III of sub2 chapter B of chapter 1 of such Code is amended by

3 striking out the item relating to section 137 and in4 serting the following new items:

‘‘Sec. 137. Education savings accounts.

‘‘Sec. 138. Cross references to other Acts.’’

5 (2) The table of sections for subchapter B of

6 chapter 68 of such Code is amended by striking out

7 the item relating to section 6693 and inserting the

8 following new item:

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

accounts or annuities or on education savings accounts.’’

9 (h) EFFECTIVE DATE.—The amendments made by

10 this section shall apply to contributions made in taxable

11 years beginning after December 31, 1993.

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